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Sick industrial unit is defined as a unit or a company (having been in existence for not less than five years) which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth. The net worth is calculated as sum total of paid up capital and free reserves of a company less the provisions and expenses, as may be prescribed. An industrial unit is also regarded as potentially sick or weak unit if at the end of any financial year, it has accumulated losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on demand made in writing for such repayment. The two basic factors which may result in sickness of an industrial unit are:-

• Internal factors are those which arise within an organisation. They include:-
• Mismanagement in various functional areas of a company like finance, production, marketing and personnel;
• Wrong location of a unit;
• Overestimation of demand and wrong dividend policy;
• Poor implementation of projects which may be due to improper planning or managerial inefficiency;
• Poor inventory management in respect of finished goods as well as inputs;
• Unwarranted expansion and diversion of resources such as personal extravagances, excessive overheads, acquisition of unproductive fixed assets,etc.;
• Failure to modernise the productive apparatus, change the product mix and other elements of marketing mix to suit the changing environment;
• Poor labour-management relationship and associated low workers' morale and low productivity,strikes,lockouts, etc.

• External factors are those which take place outside an organisation. They include:-
• Energy crisis arising out of power cuts or shortage of coal or oil;
• Failure to achieve optimum capacity due to shortage of raw materials as a result of production set-backs in the supply industries, poor agricultural output because of natural reasons,changes in the import conditions,etc.
• Infrastructural problems like transport bottlenecks;
• Credit squeeze;
• Situations like market recession, changes in technology,etc;
• International pressures or circumstances, etc.

Industrial sickness may be caused by a combination of all such factors. It has several adverse consequences on the economy as a whole. Some of which may be enumerated as follows:-

• It leads to loss of substantial revenue to the Government and enhances its public expenditure;
• It locks up necessary resources and funds in the sick unit. This also increases the non-performing assets (NPAs) of banks and financial institutions;
• It leads to loss of production and productivity in the economy;
• It aggravates the problem of unemployment in the economy;
• It vitiates the industrial atmosphere and leads to worker-management disputes,strikes,lock-outs,etc;
• It undermines the public confidence in the functioning of the organised sector in the country which in turn affects the overall investment climate of the economy.

In the light of the above consequences of sickness and its growing incidence by size, region and industry followed by its far-reaching adverse socio-economic effects, the Government has been taking many steps and remedial measures in order to tackle this problem in India. The most significant measure has been the enactment of the Sick Industrial Companies (Special Provisions) Act,1985 (SICA).