Meaning Of Sick Unit

A sick unit is one that does not earn a reasonable return on capital employed and that does not perform its normal functions and activities of production of goods and services at a reasonable rate of profit on a sustained basis. The Sick Industrial Companies Act, 1985 defines sickness on the basis of continuous losses and complete erosion of the equity base of the nit. According to this Act, “A sick unit is one which has at the end of any financial year accumulated losses equal to or exceeding its entire worth. The unit must have been registered for not less then five years.

A sick unit is one which is unable to perform its normal functions and activities of production of goods and services at a reasonable profit on a sustained basis. A few important features of sickness include: (i) failure to generate internal surpluses on a continuous basis, (ii) over-dependence on periodic infusion of funds from outside, (iii) depletion of working capital to meet current commitments, (iv) current ratio being less than 1;1, (v) drying up of cash inflow sources, (vi) pilling up of losses exceeding capital and reserves, (vii) failure to meet interest liabilities, (viii) worsening debt-equity ratio and so on.

Industrial sickness does not attack a unit suddenly. It sets in and gradually debilitates the normal functioning of the unit over a period of time. The setting in of sickness can be diagnosed on the basis of such danger signals or symptoms as: slow-down in production and sales cycle, erosion of net working capital, frequent resort to outside sources of funds for meeting short-term needs, difficulty in housing bills and loans payable as also taxes, interest and even wage and salary payment commitments, problems in replenishing raw materials inventory, excessive stock of finished goods and so on.

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