Country report on_corporate_insolvency_laws (1)

EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS

CHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS IN INDIA

The need for an insolvency law in India was first articulated in the three Presidency-towns of
HISTORICAL BACKGROUND 1 P0F P

Calcutta, Bombay and Madras. The earliest rudiments of insolvency legislation can be traced
to sections 23 and 24 of the Government of India Act, 1800, which conferred insolvency
jurisdiction on the Supreme Court at Fort William and Madras and the Recorder's Court at
Bombay. These Courts were empowered to make rules and order for granting reliefs to
insolvent debtors on the lines intended by the Act of the British Parliament called the Lord's
Act passed in 1759. 2

The passing of Statute 9 in 1828 (Geo. IV. c. 73), can be said to be the beginning of the
P1F P

special insolvency legislation in India. Under this Act, the first insolvency courts for relief of
insolvent debtors were established in the Presidency-towns. Although the insolvency Court
was presided over by a judge of the Supreme Court, it had a distinct and separate existence.
The Insolvency Court was to sit and dispose of insolvency matters as often as was
necessary. But the Court at Calcutta was to sit at least once a month. The Act of 1828 was
originally intended to remain in force for a period of four years, but subsequent legislation
extended its duration upto 1843 and also made certain amendments therein. 3

A further step in the development of Insolvency Law was taken when the law in 1848 (11 & 12
P 2F

Viet.c.21) was passed. The Act presumed the distinction between traders and non-traders in
certain respects on the lines of the corresponding Bankruptcy statutes, then in force in
England. It continued the Courts for the relief of insolvent debtors established by the Act of 1828
in the Presidency towns and in their place the present High Courts were set up. The insolvency
jurisdiction in the Presidency towns was thus transferred from the Supreme Court to the High
Court.

The Provisions of the Indian Insolvency Act, 1848, were, however, found to be inadequate to
meet the changing conditions. In the eighteen seventies Sir James Fitzjames Stephen proposed
an Insolvency Bill for the whole of India modeled on the Bankruptcy Law then in force in

1
Prepared in the Directorate of Academics and Professional Development, the ICSI
2
J P S Sirohi, Law of Insolvency(1985)
3
See Mulla Law of Insolvency in India(1958), P.16

1


England. But this proposal was dropped, as the conditions in India in general were not
favourable for a compulsive legislation on the subject. The Act of 1848 continued in force in
the Presidency-towns until the enactment in 1909 of the present Presidency-towns Insolvency
Act, 1909.

While there was special insolvency legislation for the Presidency-towns, there was no
insolvency law in the rural areas. The main reason for this difference was the absence of any
flourishing trade and commerce therein. In the rural areas for a considerable period the ordinary
principle of distributing the sale proceeds pronotes among decree-holders after satisfaction in
full of the amount due to the attaching decree holder seems to have prevailed. The first
attempt to introduce insolvency law in the rural areas was made in 1877. Some rules were
incorporated in Chapter 20 of the Code of Civil Procedure, 1877, which conferred jurisdiction
on the district Courts to entertain insolvency petitions and grant orders of discharge, these
rules were re-enacted with certain modifications in Chapter 20 of the Code of Civil Procedure,
1882.

The Provisions in the Civil Procedure Code of 1859 were described 4 as the "germ and nothing
more than a germ of an insolvency law." The provisions were limited to cases in which legal
P3 F P

proceedings were instituted and judgment obtained. Creditors of a debtor were not entitled
to file an insolvency petition. These defects were removed by the provincial Insolvency Act,
1907. This Act created a special Insolvency Jurisdiction laying down the conditions under
which a debtor could be adjudicated on his own petition or on a petition by a creditor. The
Act of 1907 was repealed by the provincial Insolvency Act, 1920 which is the Act now in
force in the areas other than the Presidency towns.

CENTRAL AND STATE LEGISLATIONS

On January 26, 1950 the Constitution of India came into force. The Laws/Acts enacted after its
adoption are called the Central Laws/Acts. For Example the Companies Act, 1956, Limited
Liability Partnership Act, 2008 (LLP) etc, (this contains the detailed process for the winding up
of the corporate entities). These are called the Central Acts, wherein the Companies/LLPs are

4
See Mulla Law of Insolvency in India (1958), P.16.

2


required to get themselves registered with the Central Registry known as the Registrar of
Companies /LLP in order to become corporate entities.

However, before the adoption of the Constitution of India, many laws/Acts governing the
insolvency procedures were in operation like the Provisional Insolvency Act, 1920, and the
Presidency Towns Insolvency Act, 1908. Government of India saved these Acts so that they do
not get repealed and allowed for State Amendments wherein the entities provided for under
those Acts are regulated by different States and the States were given the authority to modify
or make provisions in these Acts. Since, the personal insolvency is a subject matter of State List
over which laws can be made by the State Legislation. Hence any amendment in these Acts will
require acceptance or assent, from all the States or the States can individually amend these
laws/Acts.

CURRENT SCHEME OF INSOLVENCY LAWS IN INDIA

The stream of insolvency laws can be segregated chiefly under two heads: Personal Insolvency,
which deals with individuals and partnership firms governed by Provisional Insolvency Act,
1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose
consequence is winding up of the company under the Companies Act, 1956.

In context of corporate laws, the word "insolvency" has neither been used nor defined in India.
However, Section 433 (e) of the Companies Act, 1956 covers a company, which is "unable to
pay its debts", and thus constitutes a ground for winding up of the company. Inability to pay its
debts would be a case where, a company's entire capital is lost in heavy losses and no accounts
are prepared and filed and no business is done for one year. In such circumstances, the
Registrar of Companies makes out a case of inability to pay debts. These debts however, would
only include debts, incurred after the legal incorporation of the Company. Inability to pay debts
has even been amplified in Section 434 of the Companies Act, 1956 wherein, a creditor with a
due of Rs. 500 or more serves a demand by registered post and the company neglects to pay,
secure or compound the same in three weeks, in cases where the execution of a decree
returned unsatisfied and also where the Court is otherwise satisfied that the company is unable
to pay its debts. 5 P4F

*******

5
Sourced from: http://www.legalservicesindia.com/articles/corin.htm

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CHAPTER II: A FRAMEWORK FOR REHABILITATION OF COMPANIES

India started her quest for industrial development after independence in 1947. The industrial
INTRODUCTION

policy resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy;
and thereafter with the economic and social development there has been shift in the industrial
policy from the directed and regulated economy in the 1948 and 1956 Policy Resolution, to the
free market economy in 1991. During the initial years, there was also the problem of industrial
sickness entailing social costs in terms of loss of production and un-employment and waste of
capital assets. The problem of industrial sickness and its consequential fall out on the nation’s
economy and also the problem faced by financial institutions (which have invested much of the
public funds in such industries) in the matter of recovery of their dues and the rehabilitation of
the sick industrial company led to enactment of the Sick Industrial Companies (Special
Provisions) Act, 1985. 6
P5F

The [I (D & R) A] is an important piece of legislation for the development and regulation of
INDUSTRIES DEVELOPMENT AND REGULATION ACT [I (D & R) A], 1951

certain industries. It contains provisions for the regulation of industries to prevent industrial
undertakings from falling sick and consequently hampering the production of materials
necessary for the economic development of the country. 7
P6F

The two Acts i.e.; the [I (D & R) A] and SICA operate in different fields though they would
SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA) AND [I (D & R) A]

appear to be overlapping. The [I (D & R) A] was enacted for the development and the regulation
of certain industries. The [I (D & R) A] applies to industries mentioned in the schedule to the
Act and the SICA is applicable to those very companies having industries as mentioned in the
schedule to the [I (D & R) A].

Chapter III of the [I (D & R) A] contains provisions for the regulation of the industries. The Act
is more of preventive nature so that the industrial undertakings do not fall sick. Section 15 of

6
Taxman’s new law relating to Sick Companies by D.P. Mittal 2003 edition
7

4


the Act gives power to the Central Government to move to the High Court for permission to
make or cause to be made investigation into a company which is to be wound up for the
purpose of running or restraining an industrial undertaking in the interest of the general public
and, in particular, in the interest of production, supply or distribution of articles or classes of
articles relatable to the concerned Scheduled Industry. Under section 16, the Central
Government has been authorized to issue directions to the industrial undertaking after
investigation had been made under section 15 of the Act.

Chapter III A deals with the power of the Central Government to assume management or
control of the industrial undertaking in certain cases where the industrial undertaking to which
directions have been issued in pursuance of section 16 of the Act has failed to comply with such
directions, or the industrial undertaking in respect of which an investigation has been made
under section 15 of the Act, is being managed in a manner highly detrimental to the Scheduled
Industry concerned or to the public interest.

Under sub-section (2) of section 18A of the Act, a time limit is prescribed within which the
management of the industrial undertaking can be taken over by any person or body of persons
so authorized. There is no such limitation for any scheme under SICA containing measures for
the proper management of the sick industrial company by change or takeover of the
management. 8 P7F

Chapter III AC of the [I (D & R) A] dealing with liquidation or reconstruction of companies
LIQUIDATION OR RECONSTRUCTION OF COMPANIES UNDER [I (D & R) A]

requires the Central Government after the takeover of management of the industrial
undertaking or part thereof, to ensure that the purpose of the takeover is being achieved. It is
for this reason that section 18FC of the Act confers powers on the Central Government to call
upon the authorized person to submit a report on the affairs and working of the industrial
undertaking whose management or control has been taken over under Section 18A, 18AA, or
18FA of the Act.
Section 18FD of the Act provides two alternatives to the Central Government in respect of
receipt of the report from the authorized person. The Central Government can either decide to

8

5


sell the undertaking as a running concern or it may decide to prepare scheme for
reconstruction of the company.

The decision to sell undertaking as a running concern may be taken by the Central Government
on being satisfied that;
In the case of the company owning the industrial undertaking, which is not being wound
up by the High Court, its financial conditions and other circumstances are such that it is
•

not in a position to meet the current liabilities out of its assets and the interest of the
general public makes it expedient to sell the undertaking as a running concern and also
proceedings for winding up of the company by the High Court should be started
simultaneously;
In the case of the undertaking concerned owned by a company and is being wound up
by the High Court, its assets and liabilities are such that in the interests of its creditors
•

and contributories, the industrial undertaking should be sold as running concern.

In terms of sub-section 2 of section 18FD of the Act the decision to prepare a scheme of
reconstruction of the company owning the industrial undertaking may be ordered by the
Central Government, if it is satisfied that;
It is in the interest of the general public, or
It is in the interest of the shareholders, or
•

Such a course of action is necessary to secure the proper management of the company
•

owning the industrial undertaking.
•

In case the scheme of reconstruction is to be prepared in relation to an undertaking owned by a
company being wound up by or under the supervision of the High Court, prior permission of
the High Court is to be obtained. 9 P8F

A sick industrial company means an industrial company (being a company registered for not
SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA)

less than five years and employing fifty or above workmen), which has at the end of any
financial year accumulated losses equal to or exceeding its entire net worth. Net worth has
been defined as the sum total of the paid up capital and free reserves.

9
ICSI Module on Economic and Labour Laws.

6


The scheme of the Act deals with establishment of the Board for Industrial and Financial
Reconstruction (BIFR) by the Central Government to exercise the jurisdiction and powers and
discharge the functions and duties conferred or imposed thereon by or under the provisions of
the Act. Section 5 of the Act envisages constitution of an Appellate Authority to be called
“Appellate Authority for Industrial and Financial Reconstruction” for hearing appeal against the
orders of the BIFR. Section 14 of the Act pronounces that the proceedings before the BIFR or
the Appellate Authority are deemed to be judicial proceedings. 10

SICA requires that when an industrial company has become a sick industrial company, the
P9F

Board of Directors of the said company shall, within sixty days from the date of finalisation of
the duly audited accounts of the company for the financial year as at the end of which a
company has become a sick industrial company, make a reference to the BIFR for
determination of the measures to be adopted with respect to the company. If the Board of
Directors has sufficient reasons even before finalisation of accounts to form an opinion that the
company has become a sick industrial company, it shall, within sixty days after it has formed
such an opinion, make a reference to the BIFR.

SICA is predominantly remedial and ameliorative in so far as it empowers the quasi judicial
body, BIFR to make appropriate measures for revival and rehabilitation of potentially viable
sick industrial companies and for liquidation of non-viable companies. But, where the BIFR
comes to the conclusion that it is not possible to revive the company and that it is just and
equitable that the company should be wound up, it shall record and forward its opinion to the
concerned High Court, on the basis of which the Court, may order winding up of the company
and may proceed and cause to proceed with the winding up of the sick industrial company in
accordance with the provisions of the Companies Act, 1956.

Reserve Bank of India (RBI) has issued policy guidelines for revival of sick industrial companies
and the role to be played by lead institutions or Operating Agencies appointed for revival of
industries declared to be sick under SICA. 11
P10F

10

11
http://www.legalservicesindia.com/articles/corin.htm

7


The functioning of SICA has not been found to be satisfactory as many issues have been
ISSUES ARISING OUT OF IMPLEMENTATION OF SICA

identified during its implementation. Some of the deficiencies were restrictive definition of
“sickness” under the Act and belated cognizance thereof by BIFR, slow pace of BIFR
intervention, excessive protection to sick industries under Section 22 of the Act providing for
automatic stay of all legal proceedings, necessity of consensus amongst secured creditors
before finalisation of revival scheme, lack of monitoring of sanctioned revival schemes, and
delay in winding up of sick companies. Apart from these, frequent appeal to High Courts against
the decisions/ orders of the BIFR was also one of the factors responsible for delay in timely
disposal of the cases.

There are inherent defects both, procedural and legal in proceedings before BIFR. The BIFR
PROCEDURAL DELAYS

takes substantial time to determine whether a company is sick and thereafter, to formulate a
revival strategy. Consideration of the same also takes substantial time since banks and financial
institutions have their own hierarchy in decision making, leading to avoidable delays. The
decisions by the banks are also neither transparent, nor subject to judicial review. By the time
decisions are taken and communicated, the plan, which had been conceived, loses its viability
resulting in failure of revival schemes even after sanction.

Under the existing law, a company can approach the BIFR for adopting steps for its revival, on
LACK OF TIMELY COMMENCEMENT OF PROCEEDINGS

erosion of its entire net worth. The erosion of entire net worth is too late a stage to attempt
restructuring as by the time the net worth is completely eroded the company is too sick to be
revived and loses its resilience to restructure and revival.

Under SICA, an automatic stay operates against all kind of recovery and distress proceedings
MISUSE OF PROTECTION AGAINST RECOVERY PROCEEDINGS

against all creditors once the reference filed by the company is registered. This is the principal
drawback of the existing legislation as this has led the BIFR to become a haven for defaulting
companies. Erring debtors have misused SICA to seek protection and moratorium from
recovery proceedings. The companies are able to enter easily into the reference, sometimes by
manipulating their accounts to reflect net worth erosion and then able to attract immunity

8


against the recovery action by the creditors and this benefit is then attempted to be
perpetuated.

This problem arises due to the fact that unscrupulous promoters enter into the process of
rehabilitation by manipulating sickness; take undue benefits arising out of delay in decision
making of BIFR. If the reference is rejected, a fresh reference is filed with respect to accounts
for the next year and the cycle goes on endlessly. There is no fear of reprisal or punitive action
against the companies indulging in this malpractice. 12 P11F

[Year Wise Performance of the BIFR as on 31.12.2009 is placed at Annexure A]. 13
P12F

*******

12
http://www.legalservicesindia.com/articles/corin.htm
13
http://www.bifr.nic.in/geninfo.htm

9


CHAPTER III: ASSET RECONSTRUCTION: SARFAESI ACT, 2002

With an aim to provide a structured platform to the Banking sector for managing its mounting
BACKGROUND
4T

Non-Performing Assets (NPAs) stocks and to keep pace with international financial
institutions, the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 was put in place to allow banks and Financial
Institutions (FIs) to take possession of securities and sell them. As stated in the Act, it has
“enabled banks and FIs to realise long-term assets, manage problems of liquidity, asset-liability
mismatches and improve recovery by taking possession of securities and selling them and
reducing their NPAs by adopting measures for recovery or reconstruction.”

Prior to the Act, the legal framework relating to commercial transactions lagged behind the
rapidly changing commercial practices and financial sector reforms, which led to slow recovery
of defaulting loans and mounting levels of NPAs of banks and FIs. 14 After the enactment of the
SRFAESI Act, 2002 borrowers have become the first applicants before the Debts Recovery
P13F P

Tribunal (DRT). Earlier only lenders were the applicants. 15

This new Act empowered the lenders to take into their possession the secured assets of their
P14F

borrowers just by giving them notices, and by not going through the rigors of Court procedure.
Initially this brought in a lot of compliance from borrowers and many defaulters coughed up
the Bank dues. However the tougher ones punched whole in the new Act too. This led Supreme
Court to strike down certain provisions of the Act and allowed the borrowers to have an
adjudicatory forum, before their properties could be taken over by the lenders. The
adjudicatory forums were the DRT.

The DRT deals with extraordinary complex commercial laws. Over the years the DRTs have
evolved into fine bodies with lots of expertise. There is a plethora of judgments from the
Supreme Court as well as the various High Courts which have paved the way for the DRT to

14
Sourced from: http://www.dnb.co.in/Arcil2008/SARFAESI.asp
15
Sourced from: http://bankdrt.net/

10


chart their courses. The Debts Recovery Tribunal of India have become model institutions for
many a country to follow. 16 P15F

ASSET RECONSTRUCTION COMPANIES (ARCs)

Asset Reconstruction Companies (ARCs) are established under SARFAESI Act, 2002 as
ORIGIN OF ARCS

specialized entities for NPAs resolution. These ARCs are established to acquire, manage and
recover illiquid or NPAs from Banks / FIs. This process relieves the banking system of the
burden of NPAs and allows them to focus better on their core function of financing and
development of new business opportunities so as to further strengthen the economy. The ARCs
would maximize recovery value with optimal costs through their innovative NPA resolution
methods.

ASSET RECONSTRUCTION COMPANIES

It is the first Asset Reconstruction Company in the country to commence business of
1. Arcil

resolution of NPAs upon acquisition from Indian banks and FIs. It commenced business
immediately after enactment of the SARFAESI Act, 2002. As the premier ARC, Arcil has
been playing the pioneering role in setting standards for the industry in India. Arcil has
recently launched retail NPAs resolution initiative through Arcil-Arms (a division of
Arcil). ARCIL is promoted by ICICI Bank, State Bank of India and IDBI. 17
5T 5T P16F

It is the country's first ARC supported by a large number of public sector banks and
2. India SME Asset Reconstruction Company Ltd (ISARC)

undertakings. It strives for a speedier resolution of NPAs with a focus on Micro Small
and Medium Enterprises (MSME) sector.
ISARC endeavors to unlock the idle NPA assets for productive purposes which facilitates
greater and easier flow of credit from the banking sector to the MSMEs. 18 P17F

16
http://bankdrt.net/
17
http://www.linkedin.com/companies/asset-reconstruction-company-india-ltd.
18
http://www.isarc.in/

11


Reliance Asset Reconstruction Company Limited (Reliance ARC) is a premier asset
3. Reliance Asset Reconstruction Company Limited

reconstruction company, the principal sponsor / shareholder of which is the Reliance
ADA group (through Reliance Capital Limited). The other sponsors / shareholders are
Corporation Bank, Indian Bank, GIC of India, Dace croft and Blue Ridge.

Reliance ARC has adopted a buyer driven model for acquisition of NPAs (individual as
well as portfolio cases) in cash (if selling banks choose to remain invested, they will
have the option to subscribe to the Security Receipts). 19
P18F

*******

19
Sourced from: http://www.rarcl.com/

12


CHAPTER IV: CORPORATE DEBT RESTRUCTURING

Corporate Debt Restructuring (CDR) means the reorganization of a company's outstanding
INTRODUCTION

obligations, by reducing the burden of the debts on the company, by decreasing the rates paid
and increasing the time by which the company has to pay its obligation back. This allows a
company to increase its ability to meet the obligations. Also, some of the debt may be forgiven
by creditors in exchange for an equity position in the company. The need for a CDR often arises
when a company is going through financial hardship and is having difficulty in meeting its
obligations. If the troubles are enough to pose a high risk of the company going bankrupt, it can
negotiate with its creditors to reduce these burdens and increase its chances of avoiding
bankruptcy

CDR, which was set up in 2002-03, is a mechanism for faster disposal of restructuring cases
involving multiple lenders, however foreign banks are yet to join the platform. In August 2008
The Reserve Bank of India (RBI) had revamped the norms for restructuring advances, including
non-industrial credit. Now, the non-industrial companies can also use CDR mechanism.

Reserve Bank of India’s (RBI’s) revised norms harmonise the prudential norms across all debt
restructuring mechanisms. While banks work on cases with the hope of recovery, rating
agencies consider cases referred for restructuring as weak assets.

A number of companies are now taking a good look at business debt restructuring to resolve
STEPS IN CORPORATE DEBT RESTRUCTURING

their unmet financial obligations. This is often a preferable solution to bankruptcy probably
because it is less expensive and more discreet. But just like bankruptcy, CDR also involves a
systematic process.

The Steps involved in CDR are as follows;

As business debt restructuring is nothing but an aggregate loan agreement, the lender seeks a
• The Consultation Process

series of consultation sessions with the borrower. During these meetings, the lender assesses
the company's overall financial situation. It is at this point that all the company's financial

13


obligations are evaluated against the expected regular cash flow. Primarily because of this,
small business debt restructuring works differently than that of big corporate restructurings.

Once the assessment procedure is finished, the lender then settles an agreement with all the
• The Negotiation Process

borrower's creditors and vendors. The main idea is to arrive at a solution that is acceptable to
all the parties involved. When that is achieved, the lender can proceed to implement the
solution as agreed upon.

The liquidation of the business's assets is the next step in the process, if found to be necessary
• The liquidation of assets

by all parties concerned. In some cases, restructuring the existing debt may require a large
amount of up front money to be paid. If the lender is not able to cover that, there is no other
choice but to liquidate some of the assets. But most of the time, the liquidation strategy is only
used to get the profitability of the business back.

This is the step where the contract is signed and the agreement is enforced. The borrower, and
• The restructuring process

in this case the business, agree to the aggregate loan amount and to other details including the
monthly payment obligation, the interest rate, and the term of payment. After everything is
accounted for, the business which officially under a debt-restructuring program is expected to
make payments as stipulated. This is the last level of debt help available to the business before
a filing for bankruptcy. CDR is a process that has to be critically evaluated to ensure the
ultimate fate of the business involved. 20 P19F

*******

20
Sourced from: http://www.debtleap.com

14


CHAPTER V: ENFORCING CREDITORS’ RIGHT

Banks and financial institutions have been experiencing considerable difficulties in recovering
RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993

loans and enforcement of securities charged with them. The procedure for recovery of debts
due to the banks and financial institutions, which was being followed, resulted in a significant
portion of the funds being blocked. The Committee on the Financial System considered the
setting upon the Special Tribunals with special powers for adjudication of such matters and
speedy recovery as critical to the successful implementation of the financial sector reforms.

An urgent need was, therefore, felt to work out suitable mechanism through which the dues, to
the banks and financial institutions could be realised. In 1981 a committee had examined the
legal and other difficulties, faced by banks and financial institutions and suggested remedial
measures including changes in law. This committee also suggested setting up of Special
Tribunals for recovery of dues of the banks and financial institutions by following a summary
procedure. Keeping in view the recommendations of the above Committees, the Recovery of
Debts due to Bank and Financial Institutions Bill, 1993 was introduced in the Parliament and
after which it was enacted as the Recovery of Debts Due To Banks and Financial Institutions
Act, 1993. 21

The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is almost more than a
P20F

decade old. As with any legislation breaking new ground, the Act has been challenged in
various fora including the High Courts for its summary nature, the ousting of the jurisdiction of
the Civil Courts, the provisions which allow borrowers to proceed against the bank or financial
institution in the Debt Recovery Tribunals (DRT) and the latest challenge to the constitutional
validity of the Act. Whatever may be, the Act of 1993 was a welcome step taken by the
legislature in ensuring speedy recovery of bank dues.

Section 34 of the Act states that the "Act to have overriding effect” i.e. –
Overriding effect of the Act

21
Sourced from: http://www.drat.tn.nic.in/Docu/RDDBFI-Act.pdf

15


(1) Save as provided under sub-section (2), the provisions of this Act shall have effect
notwithstanding anything inconsistent therewith contained in any other law for the time
being in force or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made there under shall be in addition to, and not in
derogation of, the Industrial Finance Corporation Act, 1948, the State financial
Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction
Bank of India Act, 1984 and the Sick Industrial Companies (special provisions) Act, 1985."

The Act has thus an overriding effect over all other legislations except for the ones mentioned
in sub-clause (2),

The non obstante clause in the Act and the non obstante clause in the Companies Act were
THE NON-OBSTANTE CLAUSE

considered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad Leathers 22
where the court opined that Section 18 of the Act creates a bar on jurisdiction of other
P21F P

authorities and courts except the Supreme Court and High Courts under Articles 226 and 227
of the Constitution. The court also stated that the Act and the Companies Act is special
legislation. However since the Act was enacted after the Companies Act, 1956, the Parliament
would have certainly in mind the provisions in the earlier special law namely the Companies
Act. Therefore the latter special law will prevail over the former. 23P22F

The Debt Recovery Tribunal (DRT) is governed by provisions of the Recovery of Debt Due to
DEBT RECOVERY TRIBUNAL

Banks and Financial Institutions Act, 1993. The object of the DRT is to receive claim
applications from banks and Financial Institutions against their defaulting borrowers. For this
purpose, the Debt Recovery Tribunal (Procedure) Rules 1993 have also been framed.

Keeping in line with the international trends on helping financial institutions recover their bad
debt quickly and efficiently, the Government of India has constituted thirty three Debt
Recovery Tribunals and five Debt Recovery Appellate Tribunals across the country. 24 P23F

22
AIR 1997 Kerala 273
23
Sourced from: http://www.legalserviceindia.com/articles/raju.htm
24

16


The Debts Recovery Tribunal deals with two different Acts, namely the RDBFI Act as well as the
SARFAESI Act. While the aim of both the Acts is one and the same, but their approach is
different.

In matters of Recovery of Debts to Due to Banks and Financial Institutions, the DRT enjoys far
THE DRTS HAVE MORE POWERS THAN THE CIVIL COURTS: SUPREME COURT

greater powers than do the civil courts. The Recovery Officer of a DRT has even more powers to
issue a variety of orders for enforcing the Recovery Certificate.

In a case the Supreme Court has held that the powers of Debts Recovery Tribunal are far wider
than those of a civil court. The Debts Recovery Tribunal can pass interim as well as adinterim
orders, with or without hearing the opposite parties. The only fetter on Debts Recovery
Tribunals is that they should follow the Principles of Natural Justice. Rule 18 of the DRT Act
empowers the Tribunals to pass other kinds of orders in the interest of justice. 25
P24F

While initially the DRT did perform well and helped the Banks and Financial Institutions
LAWS AND PROCEDURE OF DRT IN INDIA

recover substantially large parts of their non performing assets, or their bad debts, but their
progress was stunned when it came to large and powerful borrowers. These borrowers were
able to stall the progress in the DRTs on various grounds, primarily on the ground that their
claims against the lenders were pending in the civil courts, and if the DRT adjudicate the matter
and auction off their properties irreparable damage would occur to them. 26P25F

*******

25
26

17


CHAPTER VI: WINDING UP OF COMPANIES

Winding up of a company is defined as a process by which the life of a company is brought to an
MEANING
4T

end and its property administered for the benefit of its members and creditors. An
administrator, called the liquidator, is appointed and he takes control of the company, collects
its assets, pays debts and finally distributes any surplus among the members in accordance
with their rights. At the end of winding up, the company will have no assets or liabilities. When
the affairs of a company are completely wound up, the dissolution of the company takes place.
On dissolution, the company's name is struck off the register of the companies and its legal
personality as a corporation comes to an end.

The Companies Act, 1956 lays down the provisions and the procedures for winding up
operations leading to the dissolution of the company. Winding-up is different from insolvency
and dissolution.

There are three ways, in which a company may be wound up. They are:
MODES OF WINDING UP

1. Winding up by the court.
2. Voluntary winding up,
Members’ Voluntary winding up.
Creditors’ Voluntary winding up.
o

3. Winding up subject to supervision of the court
o

Section 433 of the Act, lays down the circumstances by which a company may be wound up by
WINDING UP BY THE COURT

the Court.

Note: 1. Till the Tribunal is constituted the powers in this regard are vested with the Courts. Here,
the court means "High Court".

2. Jurisdiction of Court: the Court having jurisdiction in relation to the place where
registered office of the company concerned is situated will be authority in respect of
ordering winding up.

18


The following are the grounds for Compulsory Winding Up or Winding up by the Court 27

a. If the company has, by a Special Resolution, resolved that the company be wound up by
P26F P

the Court.
b. If default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting.
c. If the company fails to commence its business within one year of its incorporation, or
suspends its business for a whole year.
d. If the number of members is reduced below the statutory minimum
e. If the company is unable to pay its debts.
f. If the Court is of the opinion that it is just and equitable that the company should be
wound up.
g. If the company has made a default in filing with the Registrar its balance sheet and
profit and loss account or annual return for any five consecutive financial years.
h. If the company has acted against the interests of the sovereignty and integrity of India,
the security of the State, friendly relations with foreign States, public order, decency or
morality.
i. It the Court is of the opinion that the company should be wound up under the
circumstances specified in section 424(G) of the Act, i.e. winding up of Sick Industrial
Company.

Note: The clauses g, h and i have been added by the Companies (Second Amendment) Act, 2002.

At any time after presentation of a winding up petition and before a winding up order is made,
Power of Court to Stay or Restrain Proceedings against Company [Section 442]

the company, or any creditor or contributory, may-
Where any suit or proceeding against the company is pending in the Supreme Court or
in any High Court, apply to the Court in which the suit or proceeding is pending for a
•

stay of proceedings therein; and

27
Section 433 of the Companies Act, 1956

19


Where any suit or proceeding is pending against the company in any other Court, apply
to the Court having jurisdiction to wind up the company, to restrain further proceedings
•

therein.

The Court to which the application is so made may stay or restrain the proceedings
accordingly, on such terms as it thinks fit.

The court may pass any one of the following orders on hearing the winding up petition.
ORDERS OF THE COURT (SECTION 443)

1. Dismiss it, with or without costs
2. Adjourn the hearing conditionally or unconditionally
3. Make any interim order, as it thinks fit, or
4. Pass an order for winding up of the company with or without costs, or any other order
that it thinks fit.

An Official Liquidator (OL) appointed by the Government, is attached to each High Court. The
THE OFFICIAL LIQUIDATOR

Court, after passing the winding up order, appoints the liquidator. In situations of compulsory
winding up, by virtue of his office and the order of the Court, the Official Liquidator becomes
the liquidator of the Company. He then takes charge of the affairs of the company and caries out
the process of winding up in accordance with the provisions of section 444 of the Act. He may
however apply to the Court for directions if any required with regard to any matter relating to
winding up.

The Official Liquidators are officers appointed by the Central Government under Section 448 of
CONTROL OF CENTRAL GOVERNMENT/COURTS OVER THE LIQUIDATOR

the Companies Act, 1956 and are attached to various High Courts. The Central Government may
also attach one or more deputy or assistant Official Liquidators to assist the Official Liquidator.
The Central Government has the responsibility under Section 463 of the Act of exercising
overall control over the Official Liquidators to ensure that they faithfully perform their duties
and duly observe all the requirements imposed on them under the Act or the Rules there under.

Organizationally, the Official Liquidators are under the administrative charge of the respective
Regional Directors, who are senior field functionaries under the Ministry of Corporate Affairs

20


and who supervise the functioning of Official Liquidators on behalf of the Central Government.
In the conduct of winding-up of affairs of the companies, however, Official Liquidators act
under the directions of the High Courts. Thus, once the winding up order is passed by the Court
and the OL appointed as Liquidator for a company under liquidation, further process, as also
the actions of the OL in pursuance of the same with regard to the Company, take place under
the supervision and the orders of the Court.

When a company is wound up by any mode, its liabilities shall be discharged in accordance
Disposal of assets and settlement of claims

with the priorities provided in section 529A and 530 of the Act. The order of priority as
provided in the Act is as under:
1. Workman's dues.
2. Debts due to secured creditors.
3. All taxes, cesses and rates due from the company to the Central Government or a
State Government.
4. All wages and salary of any employee due within four months.
5. All accrued holiday remuneration becoming payable to any employee.
All such debts shall be paid in full. If assets are insufficient to meet them, they shall
abate in equal proportions.

The court shall order dissolution of the company, when:
Dissolution of Company [Section 481]

1. the affairs of the company are completely wound up, or
2. the official liquidator is unable to carry on the winding up procedure for want of funds.

An appeal from the decision of Court will lie before that Court, before whom, appeals lie from
Appeal: [SECTION 483]

any order or decision of the former Court in cases within its ordinary jurisdiction.
Such order or decision, however, must be a judicial and not an administrative or a procedural
one. All administrative orders would be an order, which is directed to the regulation or
supervision of matters as distinguished from an order which decides the rights of parties or
confers or refuses to confer rights to property, which are the subject of adjudication before the
Court.

21


2. WINDING UP SUBJECT TO SUPERVISION OF COURT*

Winding up subject to supervision of court, is different from "Winding up by court." Here the
court only supervises the winding up procedure. Resolution for winding up is passed by
members in the general meeting. It is only for some specific reasons, that court may supervise
the winding up proceedings. The court may put up some special terms and conditions also.
However, liberty is granted to creditors, contributories or other to apply to court for some
relief [Section 522].

The court may also appoint liquidators, in addition to those already appointed, or remove any
such liquidator. The court may also appoint the Official Liquidator as a liquidator to fill up any
vacancy. The liquidator is entitled to do all such things and acts as he thinks best in the interest
of the company. He enjoys the same powers as if the company is being wound-up voluntarily.
The court also may exercise powers to enforce calls made by the liquidators, and such other
powers as if an order has been made under section 526 of the Act for winding up the company
altogether by court.

The object of the supervision order is to safeguard the interest of the company, shareholders
and creditors. When an order is made for winding up subject to supervision, the Court may, by
that or any subsequent order, appoint an additional liquidator or liquidators.

* Note: Omitted by the Companies (Second Amendment) Act, 2002

Apart from a company registered under the Companies Act, 1956 there are other companies as
WINDING UP OF UN-REGISTERED COMPANIES

well the winding up procedure for which is different from a company registered under
Companies Act, 1956.
These companies are:-

In simple words, an unregistered company is a company which is not registered or
1. Unregistered Companies [ Section 583]

covered under provisions of the Companies Act, 1956 [section 582].
An unregistered company cannot be wound up voluntarily, or, subject to super vision of
court.

22


However, the circumstances, in which unregistered company may be wound up, are as
follows:
If the company, is dissolved, or has ceased to carry on business, or is carrying on
business only for the purposes of winding up, it's affairs,
o

If the company is unable to pay it's debt
If the court is of opinion, that it is just and equitable, that the company should be
o

wound up.
o

A foreign company, carrying on business in India, which has been dissolved, may be
wound up, as unregistered company.

A foreign company is a company which is incorporated outside India, and having a place
2. FOREIGN COMPANIES [SECTION 584]

of business in India. Winding up of such companies is only limited to the extent of it's
assets in India. In respect of assets and business carried outside India, Indian courts
have no jurisdiction. Winding up of a foreign company can only be made through Court.
Even if the company had been dissolved or ceased to exist in the country of its
incorporation, the winding up order can be made in India.

Even if a foreign company has been wound up according to foreign law, the courts in
India still protect the Indian Creditors. The surplus assets, after paying the creditors,
should be distributed among the shareholders equally in the same proportion, as the
assets to the total issued and paid up capital. Pendency of a foreign liquidation does not
affect the jurisdiction to make winding up order. The Assets can be of any nature and do
not take to be in the ownership of the company and can come from any source [(1944)
2 All.E.R. 556]

Section 617 of the Companies Act, 1956 defines a Government Company as any
3. GOVERNMENT COMPANY

company in which not less than fifty one per cent of the paid-up share capital is held by
the Central Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments. A subsidiary of a
Government company is also treated as a Government Company.

23


Winding up procedure for a Government Company registered under the companies Act,
1956, is nearly similar to normal winding up procedure. However, Courts, take public
interest into consideration, and gives priority to them, as the main function of a
government company is to provide services to them.

A company may voluntarily wind up its affairs either by passing an ordinary resolution where
VOLUNTARY WINDING UP

the purpose for which the company was formed has been achieved; or the time period, for
which the company was formed, has expired; or by way of special resolution if it is unable to
meet its financial obligations. A company may voluntarily wind itself up in the following two
modes:
a. Members voluntary winding up
b. Creditors voluntary winding up

Both types of resolutions must be passed in the general meeting of the company as provided
under section 484 of the Act. Once the resolution for voluntarily winding up is passed the
company may be wound up, either through members’ voluntary winding up or creditors’
voluntary winding up. In case of members’ voluntary winding up, the board of directors has
also to make a declaration to the effect that either the company has no debts or the company is
solvent in terms of provisions of section 488 of the Act. Where the board of directors is not in a
position to give a declaration as to the solvency of company, the process of creditors winding
up would be initiated.

Once voluntary winding up commences, the company is required to appoint one or more
Liquidators and fix his/their remuneration in a general meeting of the shareholders. On the
appointment of the Liquidator, all the powers of the board of directors come to an end except
where the company or the Liquidator sanctions them to continue.

Once appointed, the Liquidator takes necessary steps to liquidate the company and dispose of
its business or property by sale or any other arrangement approved by a special resolution of
the company.

24


Once the company is fully wound up and assets of the company are sold or distributed, the
Distribution of Property upon Voluntarily Winding Up

proceeds collected are utilized to pay off the liabilities. The proceeds so collected shall be
utilized to pay off the creditors in equal proportion. Thereafter any money or property left may
be distributed among members according to their rights and interests in the company.

Distribution of the companies in liquidation by their mode of winding up during
1.04.2008 to 31.03.2009 (Sourced: 52 nd Annual Report of the Ministry of Corporate Affairs for
P P

the year ending 31.03.2009)

Sl No. Subject Pending as Received Total (Col Disposed Pending as
on 1.04.2008 during the 3+4) during on
to period the 31.03.2009
31.03.2009 1.04.2008 to period
31.03.2009

1. Members 1254 61 1315 33 1282
1 2 3 4 5 6 7

Voluntary
winding up
2. Creditors 112 - 112 - 112
Voluntary
winding up
3. Winding up 4764 135 4899 141 4758
by Court
4. Winding up 03 - 3 - 03
subject to
supervision
of Court
Total 6133 196 6329 174 6155

*******

25


CHAPTER VII: DEALING WITH DEFUNCT COMPANIES

A defunct company means a company which never commenced business or which is not
MEANING

carrying on business and has either no assets or has such assets as shall not be sufficient to
meet the cost of liquidation. A company is, however, not considered defunct if the cessation of
business is due to the conduct of winding up.

The policy which is followed with regard to weeding out the defunct companies is that where it
appears from the latest available balance sheet of a defunct company that it has adequate
realisable assets, steps are taken to take the company into compulsory liquidation. It is only
where the latest available balance sheet shows that the company has no assets or has such
assets as would not be sufficient to meet the cost of liquidations; steps are taken to strike its
name off the register of companies under section 560 of the Companies Act, 1956.

Also sub-section (5) of section 3 introduced by the Companies (Amendment) Act, 2000 states
that if a company, private or public, has failed to meet the paid-up capital norm, it shall be
deemed to be a defunct company and the Registrar of Companies (ROC) shall strike off the
name of the company from the register.

PROCESS FOR DISSOLUTION OF A DEFUNCT COMPANY (SECTION 560)

Section 560 of the Act, provides for the dissolution of the defunct companies. The process for
dissolution is as follows;
Where the registrar has reasonable cause to believe that a company is not carrying on
business or in operation, he shall send to the company by post a letter inquiring
•

whether the company is carrying on business or is it in operation.
If the Registrar does not within one month of sending the letter receive any answer
thereto, he shall within fourteen days after the expiry of the month, send to the
•

company by registered post a letter referring to the first letter, and stating that no
answer thereto has been received and that, if an answer is not received to the second
letter within one month from the date thereof, a notice will be published in the Official
Gazette with a view to striking the name of the company off the register.

26


If the Registrar either receives an answer from the company to the effect that is not
carrying on business or in operation, or does not within one month after sending the
•

second letter receives any answer, he may publish in the Official Gazette, and send to
the company by registered post, a notice that at the expiration of three months from the
date of that notice, the name of the company mentioned therein will unless cause is
shown to the contrary, be struck off the register and the company will be dissolved.

EFFECTS OF THE DISSOLUTION
Suspended Animation

Upon dissolution, the corporate status of an entity ceases to subsist; functionality stops and for
all practical purposes corporate activities come to an end. Under Section 559, the Court can
order the dissolved company's revivification in the prescribed circumstances within a period of
two years of the date of dissolution, whereas under sub- section 6 of section 560 of the Act this
period is twenty years. For a company dissolved under section 560 of the Act, the alternative
remedy for resuscitation is also under section 559 of the Act. A distinction between a rebirth
under section 559 and sub- section 6 of section 560 of the Act, is that in the former the Court
has been granted a discretion to make an order as it may think fit, while in the later the Court
has been empowered to issue directions and make orders to place the Company and all other
persons in the same position as nearly as they were while the name was struck off. Again the
rationale behind the distinction is that the Company, which is being revived was proclaimed
dissolved by administrative functions of the Registrar without involvement of a third party and
there was neither winding up nor the superintendence of the Liquidator therein. Hence, the
position has been desired by the Legislature.

The company too could be one of those who may apply for its name to be restored to the
Emphasis underlined

Register of Companies. This clearly indicates that a company in that situation has an existence
at least for that purpose. Thus it is not a state of complete extinction but that of a suspended
animation. 28 P27F

28
Sourced from: http://www.icai.org/post.html?post_id=2936

27


APPLICATIONS CONSIDERED AND DISPOSED OF BY THE REGIONAL DIRECTORS AND
REGISTRAR OF COMPANIES UNDER SECTION 560 OF THE COMPANIES ACT 1956 (Sourced:
52 nd Annual Report of the Ministry of Corporate Affairs for the year ending 31.03.2009)
P P

Sl Section of the Companies Considered during Disposed off Pending as
No Act and the subject matter the year (1.04.2008 to during the on 31.3.2009
of the application 31.03.2009) year

1 Section 560 striking of 50127 18249 31878
. name of the companies in
the Register maintained by
ROC

*******

28


CHAPTER VIII: REFORMS IN INSOLVENCY LAWS AFFECTING THE
CORPORATE SECTOR

I. COMPANIES (SECOND AMENDMENT) ACT, 2002

The main purpose of SICA (as mentioned before) was timely detection of sickness and
BRIEF HISTORY

expeditious determination of remedial measures for its removal. It was, however, found to be
ineffective by reasons of enormous delays in the disposal of cases and also its misuse by some
companies with intent of avoiding creditors.

On the recommendation of Justice Eradi Committee, The Companies Act, 1956 was amended by
Comparison between Part VI A of the Companies Act and SICA

the Companies (Second Amendment) Act, 2002 and Part VI A was incorporated. This part
containing provisions relating to revival, rehabilitation and winding up of the sick industrial
companies draw heavily from the relevant provisions of the SICA. However there is a marked
distinction between the provisions under SICA and provisions under newly inserted Part VIA.

The insertion of Part VI A in the Companies Act, 1956 through Companies (Second
Companies (Second Amendment) Act, 2002

Amendment) Act, 2002 and repeal of Sick Industrial Companies ( Special Provisions) Act, 1985
mark a new era in the restructuring of sick industrial companies and is certainly a right step in
the direction of revival and rehabilitation of sick industrial companies. The problem of
industrial sickness in the public and private sector is one of the major problems before the
Indian economy in the post independence era and so it is a matter of deep and grave concern
before the Government primarily because of its adverse impact on the entire Indian economy
in the form of loss of production, shortage of industrial goods and services, loss of employment,
and its potential threat to stability and peace of society in the form of labor unrest, strikes, lock-
outs, etc. 29P28F

29
Sourced from: http://employment.indlaw.com/search/articles/

29


The main object of the Companies (Second Amendment) Act, 2002 is to facilitate or expedite
revival/rehabilitation of sick industrial companies and to protect worker’s interest and where
necessary to wind up the companies. The main salient feature of the Act is the provision of
consolidation of fora, i.e. the constitution of the National Company Law Tribunal (NCLT). The
powers and jurisdiction presently being exercised by various bodies, viz; the Company Law
Board (CLB) or the Board of Industrial and Financial Reconstruction (BIFR), High Court will
now be consolidated and entrusted to the Tribunal. Thus multiplicity of litigation before
various Courts or Quasi judicial bodies or forums regarding revival of or rehabilitation or
merger or amalgamation or winding up will be avoided as all these matters will be heard and
decided by the proposed NCLT.
Moreover any person aggrieved by an order or decision of the Tribunal may prefer an appeal to
the Appellate Tribunal called the National Company Law Appellate Tribunal (NCLAT) under
section 10FQ of the Act.

Section 10GF provides that any person aggrieved by any order or decision of the Appellate
APPEAL TO SUPREME COURT

Tribunal may file an appeal to the Supreme Court within sixty days (which can be further
extended by the Supreme Court on showing sufficient cause) on any question of law arising out
of such decision or order.

The Part VI A of the Companies Act, 1956, incorporated by the Companies (Second
CONCLUSION

Amendment) Act, 2002 (the date of commencement of which is yet to be notified; so far only
Sections 2 and 6 have been notified) aims to provide for a new, efficient and time bound
mechanism for both revival/rehabilitation as well as winding up of sick industrial company
within a reasonable period of time.
The creation of rehabilitation fund for taking care of the workers of sick industrial companies
and the investors as per the global standards, inclusion of experts and specialists in operating
agency, NCLT to act as winding up authority in contrast to BIFR, doing away with Section 22 of
SICA, etc, would make the new provisions more effective and rational and would provide better
mechanism for handling industrial sickness in the country which is one of the biggest problems
plaguing the Indian Economy. But the successful implementation of Part VI A will be the

30


responsibility of not only the Tribunal and its Appellate Authority but also of the Governments,
creditors, lenders, financial institutions, banks and all those concerned with restructuring and
rehabilitation of sick industrial companies.
As a matter of caution, it must be remembered that BIFR was not the only body responsible for
slow and poor implementation of SICA, but creditors, debtors Governments, banks and
financial institutions were equally responsible as evident from the submissions made before
Justice Eradi Committee. Although the new provisions marked a departure from the old
provisions under SICA as well as are improvement over SICA and it appears to be very
promising. This new provisions under part VI A certainly appear to be a step in right direction
and it is hoped that deficiencies noted in the operation of SICA would be taken care of under
this new mechanism. 30 P29F

II. LIMITED LIABILITY PARTNERSHIP ACT, 2008

INTRODUCTION

Keeping in mind the need for the corporate growth regularities, the Government of India
introduced Limited Liability Partnership (LLP) Act, 2008. LLP is a blend of a general
Partnership and a Company. As an LLP is a corporate entity with liability limited to the extent
of contribution by Partners, the structure of LLP is that of the limited company. However, in
terms of conduct of internal affairs, the LLP format provides the flexibility and low compliance
regime of a partnership.

REVIVAL UNDER LLP

LLP Act and its Rules contain detailed provisions for revival and rehabilitation of LLPs
including appointment of LLP Administrator, preparing and obtaining approvals for
rehabilitation schemes etc. Moreover specific time limits are also prescribed for the completion
of the scheme of revival which makes it effective and efficient.

30
Sourced from: http://employment.indlaw.com/search/articles/

31


DRAFT RULES FOR WINDING UP OF LLP

Section 65 of the LLP Act empowers the Central Government to make Rules for the Provisions
(to be approved by parliament)

in relation to winding up and dissolution of LLP.
The Draft LLP winding up Rules have already been placed before the Parliament which
will be notified shortly.
•

The Draft Rules are based on International best practises models suggested by the
United Nations Commission on International Trade Law (UNCITRAL).
•

Concept of ‘Insolvency Practitioners’ is also recognised. Moreover there is emphasis and
efforts for, in the first instance, on the revival and rehabilitation of LLP’s through LLP
•

Administrator.
The best efforts are made in the Draft Rules to overcome the weaknesses of winding up
process in other Laws.
•

In voluntary winding up intervention of Official Liquidator is dispensed with.
If Tribunal is satisfied that winding up process is duly followed, then orders for
•

dissolution are to be passed by the Tribunal within sixty days of the receipt of the
•

application from the Liquidator.
All cost of winding up including Liquidator’s fees shall be subject to right of secured
creditors, workmen dues and priority claims.
•

Monitoring of LLP Liquidator by the creditors or the partners/ Tribunal and fixed time
limit within which all the duties are to be completed.
•

Statement of Affairs of LLP shall be prepared and filed with Liquidator within 21 days
from the commencement of voluntary winding up and within 21 days or extended time
•

not exceeding two months from the date of the appointment of Official Liquidator by
Tribunal or from the order of winding up.
Order/interim order/ appointment of Liquidator/ dismissal of petition/ any other
order to be passed by the Tribunal within ninety days from the date of presentation of
•

winding up petition.
Designated partners and officer in-charge will be responsible to complete the accounts
within sixty days from the date of winding up order by the Tribunal.
•

32


The proposed Draft intends to complete the winding up process within one year. There
is a provision for Professional approach both in voluntary winding up and winding up
•

by the Tribunal.
If affairs of LLP have not been wound up within one year from the date of winding up
order, the Liquidator shall file an application before the Tribunal explaining the reasons
•

and seeking appropriate direction.
Upon hearing the application of the Liquidator, the Tribunal may order for resolution
including deposit of balance if any in the Liquidation Account and in the Public Account
•

of India.
Dissolution may be effective from the date of filing the dissolution order by Liquidator
with Registrar.
•

III. COMPANIES BILL, 2009

The Companies Act, 1956 is the principal landmark legislation that governs companies in India.
INTRODUCTION

The Act prescribes provisions for protection of the interests of the investors, creditors and
public at large. However over the years, the functioning and operation of the Act brought to
light several lacunae and defects in its provisions. In order to remove these defects, the Act was
amended from time to time, comprehensively. But, despite these extensive amendments and
alterations, the Act continues to comprise of certain deficiencies.

The Companies Bill, 2009 which is divided in 28 Chapters consisting of 426 Sections, inter alia,
incorporates a new framework for mergers and amalgamations of companies and provides an
extensive Insolvency Code based on the latest principles recommended by the United Nations
Commission on International Trade Law (UNCITRAL). 31
P30F

To revise and modify the Companies Act, 1956 in consonance with the changes in
The main objectives of the Companies Bill, 2009 are as follows –

the national and international economy;
•

To bring about compactness by deleting the provisions that had become redundant
over time and by regrouping the scattered provisions relating to specific subjects;
•

31
Lega l Ser vi c e In di a. com

33


To re-write various provisions of the Act to enable easy interpretation; and
To delink the procedural aspects from the substantive law and provide greater
•

flexibility in rule making to enable adaptation to the changing economic and
•

technical environment. 32
A revised framework for regulation of insolvency, including rehabilitation, winding
P31 F

up and liquidation of companies with the process to be completed in a time bound
•

manner. Incorporates international best practices based on the models suggested by
the United Nations Commission on International Trade Law (UNCITRAL).
Consolidation of fora for dealing with rehabilitation of companies, their liquidation
and winding up in the single forum of National Company Law Tribunal (NCLT) with
•

appeal to National Company Law Appellate Tribunal (NCLAT). The nature of the
Rehabilitation and Revival Fund proposed in the Companies (Second Amendment)
Act, 2002 to be replaced by Insolvency Fund with voluntary contributions linked to
entitlements to draw money in a situation of insolvency.

The Companies Bill, 2009, on its enactment, would allow the country to have a modern
CONCLUSION
4T

legislation for growth and regulation of corporate sector. Various reformatory and
contemporary provisions have been proposed in the Companies Bill, 2009. Moreover certain
stringent provisions have also been introduced to fill the lacunae under the existing Companies
Act, 1956.
*******

32
http://www.taxguru.in/company-law/provisions

34


ANNEXURE A: YEAR WISE PERFORMANCE OF THE BOARD FOR
INDUSTRIAL & FINANCIAL RECONSTRUCTION
(As on 31.12.2009)

Total Cases Cases Disposed off during the Year
Year Regd. during
the Year Cases under Cases Revived Winding up Dismissed
Revival Recommended

1 2 3a 3b 3c 3d

1987 311 0 0 0 8

1988 298 0 1 12 29

1989 202 0 1 31 77

1990 151 1 3 42 45

1991 155 1 5 47 27

1992 177 3 7 30 43

1993 152 3 13 63 59

1994 193 2 38 77 48

1995 115 6 25 61 29

1996 97 7 92 83 25

1997 233 2 34 81 21

1998 370 5 21 49 36

1999 413 5 11 61 72

35


2000 429 14 37 143 157

2001 463 20 47 109 120

2002 559 30 33 106 214

2003 430 17 40 98 195

2004 399 11 29 51 68

2005 180 55 69 19 179

2006 118 120 83 18 290

2007 78 174 76 16 202

2008 57 194 59 11 129

2009 64 725 77 19 123

TOTAL 5644 1396 801 1227 2196

Note -

1. Format earlier adopted was indicating cases revived in the year of registration. As
a company normally takes 5/7 years to be revived, the new format indicates
companies revived in the year in which Net Worth become positive and companies
were discharged from the purview of SICA
2. Figures of Companies revived after the successful implementation of scheme as
well as those where Net Worth become positive at the inquiry stage itself have
been clubbed together.
3. Above figures are according to Calendar year.

*******

36

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