Sick companies

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nooruddin (Querist)
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22 August 2011 Dear Expert,

Can Any one guide me that what are the essentials to be reported in the annual accounts as disclosed under Companies Act for a sick company????

As it is the first year in which the accumulated losses of the company exceeding the Net Worth of the company....

Can you also highlight the points that have to be checked while doing Audit of A Sick Company.....

Please revert ASAP.....

CA Sumat Singhal

CA Sumat Singhal (Expert)
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22 August 2011 Apart from mentioning in CARO it is required to mention in notes to account about whether going concern assumptions are suitable or not so check points with repect to that.

nooruddin

nooruddin (Querist)
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25 August 2011 can u please elaborate.......

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 Certainly! When a company becomes **"sick"**, meaning its **accumulated losses exceed its net worth**, specific disclosures and audit considerations become necessary under the **Companies Act, 2013**, as well as under **Accounting Standards** and **auditing guidelines** issued by ICAI.

Let’s break this into two parts for clarity:

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## 🟩 PART 1: **Disclosures in Annual Accounts of a Sick Company**

Though the **term "Sick Company"** under the **SICA (Sick Industrial Companies Act, 1985)** was repealed, similar principles still apply under the Companies Act, 2013 and IBC.

### 📌 Key Disclosures to be made in the Financial Statements:

1. **Accumulated Losses Exceeding Net Worth**:

* Clearly state in the Notes to Accounts that the company’s **net worth is eroded**.
* Mention impact on **going concern** assumption, if any.

2. **Going Concern Assessment**:

* Management must evaluate whether the company can continue as a going concern.
* If yes, disclose the assumptions and support for it.
* If no, financials must be prepared on a liquidation basis (not going concern).

3. **Contingent Liabilities and Defaults**:

* Disclose any **defaults in repayment of loans, interest**, or other dues.
* Contingent liabilities, if material, must be detailed.

4. **Related Party Transactions**:

* In distress situations, related party transactions often come under scrutiny.
* Ensure full disclosure as per **AS-18 / Ind AS-24**.

5. **Loans & Advances**:

* Highlight any significant or non-recoverable loans given.

6. **Provision for Doubtful Debts/Assets**:

* Assets must be reviewed for impairment under **AS-28 / Ind AS-36**.

7. **Disclosure under Schedule III** of Companies Act:

* Clearly state any **defaults, guarantees invoked, pending litigations**, etc.

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## 🟨 PART 2: **Audit Considerations for a Sick Company**

As an auditor, there are **specific risk areas** and **audit procedures** to be carried out:

### ✅ 1. **Going Concern Review**:

* Evaluate management's **going concern assertion**.
* Examine cash flow projections, funding arrangements, and plans for revival.
* Consider whether an **Emphasis of Matter** or **Modified Opinion** is required.

### ✅ 2. **Valuation of Assets**:

* High risk of **asset overstatement**.
* Reassess useful lives, recoverable value, and impairment testing.

### ✅ 3. **Verification of Liabilities**:

* Confirm all **loan accounts, creditors, outstanding statutory dues**.
* Ensure correct classification of current vs. non-current liabilities.

### ✅ 4. **Compliance Check**:

* Check whether the company has complied with:

* Annual ROC filings
* Income tax and GST filings
* Employee dues (PF/ESI), if applicable

### ✅ 5. **Disclosures in Audit Report**:

* Include references to financial distress in:

* **CARO Report** (under Companies Auditor’s Report Order)
* **Notes to Accounts**
* **Main Audit Report**, if concern on going concern or misstatement arises

### ✅ 6. **Management Representation Letter**:

* Obtain clear representation about:

* Intention and ability to continue operations
* Non-withdrawal of support (in case of holding company)
* Completeness of liabilities

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## 🟦 Quick Definitions:

* **Net Worth = Share Capital + Reserves – Accumulated Losses**
* If Accumulated Losses > Net Worth ⇒ **Erosion of Net Worth** ⇒ Company is “financially sick”
* Under IBC (2016), a company can be taken to **CIRP** (Corporate Insolvency Resolution Process) if it defaults on debts of ₹1 crore or more.

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## 📝 Summary:

| Area | Required Action |
| ---------------------- | ------------------------------------------------ |
| **Balance Sheet Note** | Disclose erosion of net worth and its impact |
| **Going Concern** | Confirm with management; highlight risk in audit |
| **Asset Valuation** | Check for impairment |
| **Compliance Checks** | ROC, tax filings, statutory dues |
| **Audit Reporting** | CARO, Emphasis of Matter or Qualification |
| **IBC Applicability** | If default ≥ ₹1 crore, legal action possible |

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If you need templates for **notes to accounts** or **audit reports** with such disclosures, I can provide samples.

Let me know your role (auditor vs. management), and I’ll tailor the guidance accordingly.

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