Corporate Growth- Insolvency -Ol,AP

8/6/2019 Corporate Growth- Insolvency -Ol,AP

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5/8/2011 1

Corporate Growth Corporate Insolvency: Role of

Ministry of Corporate Affairs: Transmission of

Proceedings from High Court to Tribunal.

BY

D. VIJAYA BHASKAR, ICLS

OFFICIAL LIQUIDATOR, ANDHRA PRADESH,

MINISTRY OF CORPORATE AFFAIRS,

GOVERNMENT OF INDIA


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About Ministry of Corporate

AffairsThe Ministry is primarily concerned with administration of the Companies

Act, 1956, other allied Acts and rules & regulations framed there-undermainly for regulating the functioning of the corporate sector inaccordance with law. The Ministry is also responsible for administeringthe Competition Act, 2002 which will eventually replace the Monopolies

and Restrictive Trade Practices Act, 1969 under which the Monopoliesand Restrictive Trade Practices Commission(MRTPC) is functioning.Besides, it exercises supervision over the three professional bodies,namely, Institute of Chartered Accountants of India(ICAI), Institute ofCompany Secretaries of India(ICSI) and the Institute of Cost and WorksAccountants of India (ICWAI) which are constituted under three separateActs of the Parliament for proper and orderly growth of the professionsconcerned. The Ministry also has the responsibility of carrying out thefunctions of the Central Government relating to administration of

Partnership Act, 1932, the Companies (Donations to National Funds) Act,1951 and Societies Registration Act, 1980. Limited Liability PartnershipAct, 2008.


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Offices under Ministry of

Corporate Affairs MCA Offices

Minister's Office

List of Officials at Head QuarterRegional DirectorsRegistrar ofCompaniesOfficialLiquidatorsCompany Law Board

The Monopolies and Restrictive Trade Practices Commission (MRTPC):Monopolies and Restrictive Trade Practices (MRTPC) An important organ ofthe Department of Company Affairs is the Monopolies and Restrictive TradePractices Commission (MRTP Commission) a quasi-judicial body. TheMRTP Commission established under Section 5 of the Monopolies andRestrictive Trade Practices Act, 1969, discharge functions as per theprovisions of the Act. The main function of the MRTP Commission is toenquire into and take appropriate action in respect of unfair trade practices

and restrictive trade practices. In regard to monopolistic trade practices theCommission is empowered under section 10(b) to inquire into such practices(i) upon a reference made to it by the Central Government or (ii) upon its ownknowledge or information and submit its findings to Central Government forfurther action.

The Director General of Investigation and RegistrationSerious FraudInvestigation Office (SFIO)Competition Commission of India (CCI)Cost

Audit Branch (CAB)


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MINISTRY OF CORPORATE

AFFAIRS

GOVERNMENT OF INDIA


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PRE ONLINE MCA 21 SCENARIO

IN ROC OFFICES


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PRE ONLINE MCA 21- A DUMPING

YARD WITH HEAP OF UNATTENDED

DOCUMENTS


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:PRE ONLINE MCA 21 PRIOR TO 2006ROC OFFICE - A SINKING SHIP STRUCK IN A MASSIVE

GALE WITH OVERLOADED VOLUME OF DOCUMENTS

DESPARATELY WAITING FOR A SAVIOUR

More than 7 lakh companiesregistered with 20 ROCsthroughout India (Now more than8 lakh registered);

Every year receipt of documents

in ROCs offices touches a million; Rough estimates show 45 million

pages maintained in 20 ROCs

Filing of documents in the ROCswas an herculean task and a timeconsuming serpentine queues-unmanageable crowd in peak

filing season ofOCT

to DEC

; Every year, several millions of

corporate representatives used tovisit the ROCs everytransaction was through humaninterface only

Process of registration of documents and consequentialplacing of the documents inrespective Document files of companies a cumbersome

procedure and a dauntingexercise;

Retrieving information / locatingdocument was time consumingand inaccurate;

Inadequate space to storedocuments

Payment of fee was throughCash/DD only.


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Consequences Incidents of manipulation,

replacing, fabricating of physical documents; and

Inadequate manpower tohandle the situation in O/o.ROCs.

In effective governance of theoffices and lack of effectivecontrol and time to concentrateother core areas of work liketechnical scrutiny of documents, identifying and

filing prosecutions; Compliance management was

a difficult task

Resulting in huge number ofdefaulting companies;

Chance for fly by nightoperators;

Scope for unscrupulouselements like defaulters inNBFCs and PlantationCompanies;

Non availability of adequateevidential information/ recordstimely;

Scope for unethical climate inthe offices;

In adequate regulatory/administrative control


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UPHILL TASK FACED TO DEAL

WITH VANISHING COMPANIES Missing documents and

destruction of documentsas per the rules creatednon availability of certain

documents includingshare holders lists etc.

Delay in Identifying thecompanies in right time;

Lack of details of thepromoters/directors andtheir whereabouts inabsence of present MCA21 system

Lack of sufficient materialinformation to prove thedelinquent acts of thedefaulters;

Lack of coordination withother regulators throughthe online from time totime in the absence ofMCA21


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MCA 21 AN OMNIBUS DATA BASE

- AN ANSWER AND A SAVIOUR

First largest e-governance project

and a large scale transmission

project in the Indian History;

Mission Mode Project completedwithin 77 weeks;

Transforms the functions ofROCs

from physical mode to cyber mode -

a paperless system introduced;

Reflects the MCAs goal for21st

Century;

Stakeholders access to the MCA21

at all times and on all occasions

24x7 uninterrupted online service;

Takeover limited computer/piecemeal operations ofROCsfrom the NIC;

Covers 40 field offices, 4 RD and20ROC offices totaling 64

offices; Estimated Budget 345 crore;

45 million documents digitized;

1200 Employees Trained;

More than 3 lakh digital signature

certificates year itself issued inthe first , the largest planneddeployment of DSCs for (an) e-governance project in Indiaand possibly

the world,


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BACK DROP: CORPORATE INSOLVENCY WITH REFERNECE TO

THE PROVISIONS OF COMPANIES ACT, 1956

The Act does not provide any precise definition for the word Corporate Insolvency

Section 433 (e) of the Act only to some extent answer the Insolvency- The companyunable to pay its debt- (i). Debt and (ii). Inability to pay:

Debt is admitted if there is no bonafide dispute;( Seciton 434 is deemingprovision to decide inability to pay debts if due amount is Rs. 500 or more)

Cash Flow Test : Inability to Pay Test Balance Sheet Test: Liability of the Debtor exceeds his assets ash Flow Test

: Inability to Pay Test

Balance Sheet Test: Liability of the Debtor exceeds his assets

The court can hardly exercise any discretion where the company is so hopelesslyinsolvent that there is absolutely no chance of resurrection. A bona fide disputeimplies existence of a substantial ground for the dispute raised. The companies wereunable to pay debts. They could not substantiate their defence. Winding up wasinevitable. Sicom Ltd. v. Shree Panduranga Poultries P. Ltd., (1999) 2 Comp LJ 218:(2001) 103 Com Cases 318 (AP).


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MAIN REASONS FOR CORPORATE INSOLVENCY

Companys entire capital is eroded due to heavy losses:-

Lack of financial management; Inadequate capital investment; Excess percentage of credit borrowing in disproportionate to actual

capital investment; too much reliance on external marketing;

Lack of business skills (risk management); Unpreparedness with thechanges in business scenario;

Diversification of funds; Lack of experience or poor strategies in marketing and customer

service; Lack of harmonious relations with stakeholders as well as among the

management;

Failure to prevent frauds; Circumstantial collapses ( Recession; Unfavorable court verdicts;

Cancellation of Product Licenses; Disturbance in external relations)


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STATUTORY DECLARATION INSOLVENT-I

Companys assets are not sufficient to pay its debts;

A company carrying on business with borrowed money andcarrying forward its losses, in the balance-sheet and a company

whose assets are so locked-up that they cannot be realised forpayment of its debts, these are indications of commercialinsolvency. Ramesh Premchand Shah v. Engineers EnterprisesP. Ltd., (1977) 47 Com Cases 294 (Bom); Concord Finance P.Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156(Del).

Company becomes defunct and it has not been carryingbusiness operations for the last several years.


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STATUTORY DECLARATION INSOLVENT-II

Where the cheques issued by a company inordinary trade transactions were dishonouredthe company was unable to pay its workers'

dues, and did not deposit the contributiontowards Employees' State Insurance andProvident Fund, apart from which there weresuits against the company for recovery of largeamounts as well as substantial liabilities

towards Sales Tax and Central Excise, therewas a clear case of commercial insolvency.Universal Glass Ltd. v. Meerut Bottlers P. Ltd.,(1985) 58Com Cases 68(Del).


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STATUTORY DECLARATION INSOLVENT-III

The shares of a company were accepted bythe stock exchange for listing but subsequentlythe permission was cancelled. The application

money became refundable. There was noprospect of the company doing any businessand there was a complete deadlock among thedirectors. It was doubtful if the creditors werelikely to be paid. It was held to be a case of

commercial insolvency. Deccan Farms &Distilleries Ltd. v. Velabai Laxmidas Bhanji,(1979) 49 Com Cases 321 (Bom) (DB).


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THE PHILOSOPHICAL FOUNDATIONS OF CORPORATE

INSOLVENCY LAW

Corporate Insolvency law has four overriding objectives:

1. to restore the debtor company to profitable trading where this ispracticable;

2. to maximize the return to creditors as a whole where thecompany itself can not be saved;

3. to establish a fair and equitable system for the ranking of claimsand the distribution of assets among creditors, involving alimited redistribution of rights; and

4. to provide a mechanism by which the causes of failure can beidentified and those guilty of mismanagement brought to bookand, where appropriate, deprived of the right to be involved inthe management of the other companies.

To facilitate achievement of these objectives the insolvency law providesa battery of legal and administrative instruments and institutionalstructures.


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OBJECT OF THE LIQUIDATION

For Just Distribution of the Net Assets of

the Company in terms of the Provisions

of the Companies Act, 1956 withreference to the Insolvency Laws;

To bring company in liquidation to alogical end: Termination of Companys

existence i.e., dissolution

7-Dec-09 17


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SCHME OF INSOLVENCY LAWS

Two Kinds of Insolvency Laws:

1. Personal Insolvency, which deals with individuals and

partnership firms governed by Provisional InsolvencyAct, 1920 and Presidency Towns Insolvency Act,

1908; (the process is through the appointment of

Receiver) and

2. Corporate Insolvency It results in winding up of the

company under the Companies Act, 1956. if it is forrevival of the company, the Sick Industrial Companies(Special Provisions) Act,1985 (SICA) deals with it. (theprocess of insolvency through the appointment ofLiquidator


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Process of Liquidation:

All correspondence should clearly indicate that the company is inliquidation (Insolvent);

Tracing out the delinquent directors who have not filed Statementof Affairs under Section 454 of the Companies Act,1956 to compelthem to comply with;

Tracing out assets and their particulars;

Identifying creditors and debtors;

Realization of assets (power to sell)

Contesting in the Litigations if required;

Investigation of the affairs and verification books and records;

Distribution of realization proceeds to creditors (interim or final)

dividends or return of capital; Meeting of the Creditors and other contributories;

Filing Dissolution of Application under section 481 of the Act


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WINDING UP ORDER AND ITS CONSEQUENCES-I

Section 441- Commencement of winding up:- sub-section (2) saysthat: In any other case, the winding-up of a company by the Court shallbe deemed to commence at the time of the presentation of the petitionfor the winding up.

Section 444: order of the winding up order to be communicated to theOL and ROC;

Section 445 (3):Such order shall be deemed to be notice ofdischarge to the officers and employees of the company, except whenthe business of the company is continued.

(Continuity of business for beneficial winding up of a company)

Section 446 Suits stayed on passing of the winding up order

Section448 read with 449`. Appointment ofOfficial Liquidator


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WINDING UP ORDER AND ITS CONSEQUENCES-II

Section 454: Statement ofAffairs to be made to OL;

Section 456- Custody of the companys property

Ownership of companys property vests with the liquidatorthough the title stands in the name of the company. But therights of the company has been divested on the date of winding up order itself.

The Liquidator can take the assistance of the DistrictMagistrate and other revenue staff;(Since the object of winding up proceedings is to put all unsecured

creditors on par and to pay them pari passu, an attachment effectedby the revenue authority on the immovable properties of the companyin respect of dues to the Employees' State Insurance Corporation,Wages Authority and Regional Provident Fund Commissioner, wasineffective and the liquidator could take the properties into his custodyfree from all attachments and realise their value according to windingup procedures. Ananta Mills Ltd. (In Liquidation) v. City DeputyCollector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)).


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POWERS OF LIQUIDATOR

Section 457 certain powers without permission and certain

with the prior permission of High Court;

Section 458- Discretion of Liquidator;

Section 464. Appointment and composition of committee

of inspection;

Section 465 : Constitution of committee of inspection


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PROOFOF RANKING OF CLAIMS

Section 528 (Debts of all descriptions to be admitted to proof), Section 529(Applicatiion of Insolvency rules in winding up of insolvent companies: section 529A(Overriding Preferential Payments and Section 530 Preferential payments)

Sections 541 to 542 _Misfeasance Proceedings against delinquent;

Companies (Court) Rules 1956 Proof of debts: fixation of date by the OL byadvertisement; claimants to prove their debt; liquidator to communicate acceptanceor rejection of debt Rules 147-163

Appeal by creditor against decision of OL Rule 164

Proof and list of creditors to be filed in court Rule 167

Application of the assets of the company Application of Insolvency Rules sec

528/529; Priority of Payments sec 529/529A/ 530

Section 481- Dissolution of company.

Section 560- Defunct company


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ENFORCEMENT OFORDERS OF COURT

Passed Under Companies Act,1956

Section 634 provides that any order made by a court under this Actmay be enforced in the same manner as a decree made by the courtin a suit pending therein.

Order XXI of the Code ofCivil Procedure specifies the procedure for

execution of order and decrees issued by a court.Limitation to Execute Decree: (12 years under Art 136 Sch.I ofLimitation Act,1963 plus grace period under Section 458-A of theCompanies Act,1956

Section 482,634 and 635 relate to the enforcement of the orders of thecompany court. Section 482 empowers the company court of one state

to enforce the orders of a company court of another state. The orderwill be enforced if a certified copy is produced under section 635. Oncethe certified copy is received by the company court, it will havejurisdiction under section 634 to either directly enforce it itself or sendit for execution to a subordinate court in the same manner as its owndecrees are enforced. Kalgara Rama Tulasamma v. SubhadayaPublications Ltd., (1969) 39 Comp. cases 993, 998 (AP).


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Defunct Company Definition

Defunct company means a companyregistered under the Companies Act,

1956 which is not carrying over anybusiness activity or operation on or afterthe 1st April, 2008 and includes acompany which has not raised its paid

up capital as provided in sub sections (3)and (4) of section 3 of the CompaniesAct, 1956. Section 560 deals with.


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CROSS-BORDER INSOLVENCY IN INDIA

There is no mechanism under the Companies Act, 1956;

The question of choice of law arises in all cross-border

transactions due to (1) development of international tradein which inter-country debtor-creditor relations across the

border develops; (2) development of transnational andmultinational institutions through building up trans borderorganizational structure through permanentestablishment, branches or franchises; (3) developmentof organizational relations through chain of organizationstructure of subsidiaries, and joint venture and finally (4)development of complexities in modern businessrelations.


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UNCITRAL MODEL INSOLVENCY LAW STILL UNDER

DISCUSSION

The UNCITRAL came out with a Model Law on Cross-Border Insolvencynegotiated among more than 40 countries representing a broadspectrum of differing legal systems.

The law applies in the following situations where:

(1)assistance is sought in a state by a foreign court or a foreignrepresentative in connection with a proceeding under thedomestic law of a state;

(2) assistance is sought in a foreign state in connection with aproceeding under the domestic law of a state;

(3). a foreign proceeding and a proceeding under the domestic lawof a state in respect of the same debtor are taking placeconcurrently; or

(4) creditors or other interested persons in a foreign state have an

interest in requesting the commencement of, or participating in, a

proceeding under the domestic law of the state.


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REASONS FOR DELAYS IN

LIQUIDATIONS-I Time consumption between the order of BIFR/ AAIFR

under SICA Act and consequential proceedings before theHigh Court prior to passing a winding up order - time takenmore than 5 years- resulting in deterioration of the value of

the properties and destruction of the books of accountsand other important records ;

Statement of Affairs NOT FILED - takes a plea of their resignation/s much prior to the winding up as a pretextUltimately, the liquidator is put to wait for consolidatinginformation so gathered by him in absence of any

cooperation from the ex-management. In certain cases, thedirectors have absconded. To trace them out, the OfficialLiquidator has even gone to the extent of obtaining RedCorner Notice.


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REASONS FOR DELAYS IN

LIQUIDATIONS-II Defective Statement Affairs (SOA);

Inadequate details of properties and failure to furnish documents/titledeeds;

Creation of third parties interests;

Improper valuation reports; Ineffective security protections provided to properties;

Conflicting interests ofRevenue authorities;

Debtors interested in protracted litigations;

Workmen illiteracy/lack of knowledge about liquidations;

lack of cooperation from creditors;

Lack of adequate and skilled manpower in the offices ofO

Ls; Re-adjudication of claims again and again;

Other issues like execution of decrees etc.

Inadequate powers to the Liquidators


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CONSTITUION OF HIGH LEVEL EXPERT COMMITTEES

In the year1999, the Government of India set up a high level

committee headed by V.B. Balakrishna Eradi, J., for remodeling

the existing laws relating to insolvency and winding up of

companies and bringing them in time with the internationalpractices in this field.

In 2001, the Report of the Advisory Group on Bankruptcy Laws,

called the N L Mitra committee, made several

recommendations on bankruptcy law reforms, the first among

which was consolidation of bankruptcy laws into a separate

code. However, no legislative steps have still been taken in this

regard.


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IMPLEMENTION OF JUSTICE ERADI COMMITTEE REPORT ON

LIQUIDATIONS

Companies Act, 1956 has been amended to constitute NCLT

and NCALT Integration of jurisdiction ofCompany Court (High

Court), BIFR/AIFR and CLB:

Object to avoid delays in liquidation of companies from one stage to

other; Simplification of Liquidation procedure;

Integration of expertise;

Introduction of Private Liquidators;

However, the implementation of amended provisions were delayed

due to the reason of pending case before the constitution Bench of

Supreme Court.

Future ofCorporate Insolvency Laws in India- Needed a lot of studyand effort to suggest a comprehensive legislation covering various

deficiencies in the current set up of laws.


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Transmission of Proceedings from

High Court to Tribunal BACK DROP Section 448 of the Act: control of Central Government over

Liquidators - Office of the Official Liquidator attached to the HighCourt of the State.

Central Government retains administrative control but statutory

control is vested with the High Court concerned Section 457/ -Rule 291 of the Companies ( Court) Rules, 1959 mandates theliquidator to collect Central Government Commission on eachand every stage of the liquidation out of the realized assets inrespect of the companies in liquidations.

Interference into the administration of justice: ITAT vs. V.K.

Agarwal, AIR 1999 SC 452: MANU/SC/0807/1999.

*** The Office of the OL will be attached to NCLT on the date of

its establishment


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Necessary amendments to the

Companies Act, 1956 vide

Companies (Amended) Act, 2002

The various provisions ofChapters IB and IC of the Act (sections10FB,

10FD, 10FE, 10FF, 10FL(2), 10FO, 10FR(3), 10FT and 10FX) are

brought on to the statute to establish the NCLT and NCLAT by way of

ordinance and later it became an act basing upon the Justice Eradi

Committee Report but provisions remained ineffective until this date.

Madras Bar Association challenged the enactment challenging the

constitutional validity ofChapters 1B and 1C of the Companies Act,

1956(Act for short) inserted by Companies (Second Amendment)

Act 2002 (Amendment Act for short) providing for the constitution of

National Company Law Tribunal (NCLT or Tribunal) and National

Company Law Appellate Tribunal (NCLAT or Appellate Tribunal) upheld by High Court vide Order dated 30-03-2004 in WP No. 2198/

2003.


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Main object behind the

amendment -I To combine the powers of the CLB under the Companies Act,

1956, BIFR and AAIFR under the Sick Industrial Companies(Special Provisions) Act, 1985 as also the jurisdiction and powersrelating to winding-up presently vested in the High Courts;

Establishment of NCLT and NCLAT will have the followingbeneficial effects:

(i) reduce the pendency of cases and reduce the period ofwinding-up process from 20 to 25 years to about two years;

(ii) avoid multiplicity of litigation before various fora (HighCourts and quasi-judicial Authorities like CLB, BIFR andAAIFR) as all can be heard and decided by NCLT;


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Main object behind the

amendment -II (iii) the appeals will be streamlined with an appeal

provided against the order of the NCLT to an appellate

Tribunal (NCLAT) exclusively dedicated to matters

arising from NCLT, with a further appeal to the SupremeCourt only on points of law, thereby reducing the delay

in appeals; and

(iv) with the pending cases before the Company LawBoard and all winding-up cases pending before the

High Courts being transferred to NCLT, the burden onHigh Courts will be reduced and BIFR and AAIFR could

be abolished.


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Verdict on the formation of NCLT

and NCLAT Supreme Court

Vide Judgment dated 11-05-2010 in Civil Appeal No. 3067 of

2004: Upheld the legislative power of the Parliament to

constitute the NCLT and NCALT while imposing certain

conditions inter alia that:

Independency of Judiciary to be protected;

Eligibility conditions for appointment of Members and

their tenure shall be modified;


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Meaning ofTribunalThe Franks Committee also defined Tribunal rather negatively as

follows:

Tribunals are not ordinary courts, but neither are they

appendages to Government Departments. We consider thatTribunals should properly be regarded as machineryprovided by Parliament for adjudication rather than as part of themachinery of administration. The essential point is that in

all these cases parliament has deliberately provided for adecision outside and independent of the Department concerned,either at first instance, . or an appeal from a decision ofa Minister or an Official in a special statutory position. Although

the relevant statutes do not in all cases expressly enact thatTribunals are to consist entirely of persons outside theGovernment Service, the use of the term tribunal in legislationundoubtedly bears this connotation, and the intention of Parliament to provide for the independence of Tribunal is clearand unmistakable.


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What elders say about the

changes: The science of legislation, is like that a medicine, in

one respect, that it is far more easy to point out whatwill do harm, than what will do good.

C.C.Cotton (1780-1832), Lacon, 1820, Vol.I.DXXIX

Changes in the law come more or less like changesin automobiles, radios or bombers we learn byexperience --by trial or error.

Julius Henry Cohen Rent control, after WorldWar I recollections, New York University LawQuarterly Review, 1946, P. 272.


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THANKS

TO

ALL PARTICIPANTS AND THE

STAFF OF NALSAR

Corporate Growth- Insolvency -Ol,AP

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