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EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS

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CHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS IN INDIA

HISTORICAL BACKGROUNDP0F

1P

The need for an insolvency law in India was first articulated in the three Presidency-towns of

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.P1F

2P

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

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. P 2F

3

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

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


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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 describedP3 F

4P as the "germ and nothing

more than a germ of an insolvency law." The provisions were limited to cases in which legal

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.


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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.P4F

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

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


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CHAPTER II: A FRAMEWORK FOR REHABILITATION OF COMPANIES

INTRODUCTION

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

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. P5F

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INDUSTRIES DEVELOPMENT AND REGULATION ACT [I (D & R) A], 1951

The [I (D & R) A] is an important piece of legislation for the development and regulation of

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. P6F

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SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA) AND [I (D & R) A]

The two Acts i.e.; the [I (D & R) A] and SICA operate in different fields though they would

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


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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.P7F

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LIQUIDATION OR RECONSTRUCTION OF COMPANIES UNDER [I (D & R) A]

Chapter III AC of the [I (D & R) A] dealing with liquidation or reconstruction of companies

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


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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.P8F

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SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA)

A sick industrial company means an industrial company (being a company registered for not

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.


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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.P9F

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

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. P10F

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

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


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ISSUES ARISING OUT OF IMPLEMENTATION OF SICA

The functioning of SICA has not been found to be satisfactory as many issues have been

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.

PROCEDURAL DELAYS

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

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.

LACK OF TIMELY COMMENCEMENT OF PROCEEDINGS

Under the existing law, a company can approach the BIFR for adopting steps for its revival, on

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.

MISUSE OF PROTECTION AGAINST RECOVERY PROCEEDINGS

Under SICA, an automatic stay operates against all kind of recovery and distress 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


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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.P11F

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

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


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CHAPTER III: ASSET RECONSTRUCTION: SARFAESI ACT, 2002

4TBACKGROUND

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

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.P13F

14P After the enactment of the

SRFAESI Act, 2002 borrowers have become the first applicants before the Debts Recovery

Tribunal (DRT). Earlier only lenders were the applicants.P14F

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

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

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

15 Sourced from: http://bankdrt.net/


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chart their courses. The Debts Recovery Tribunal of India have become model institutions for

many a country to follow.P15F

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ASSET RECONSTRUCTION COMPANIES (ARCs)

ORIGIN OF ARCS

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

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

1. Arcil

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

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).5T 5TARCIL is promoted by ICICI Bank, State Bank of India and IDBI.P16F

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2. India SME Asset Reconstruction Company Ltd (ISARC)

It is the country's first ARC supported by a large number of public sector banks and

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. P17F

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

18 http://www.isarc.in/


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3. Reliance Asset Reconstruction Company Limited

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

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). P18F

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


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CHAPTER IV: CORPORATE DEBT RESTRUCTURING

INTRODUCTION

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

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.

STEPS IN CORPORATE DEBT RESTRUCTURING

A number of companies are now taking a good look at business debt restructuring to resolve

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;

• The Consultation Process

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

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

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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.

• The Negotiation Process

Once the assessment procedure is finished, the lender then settles an agreement with all the

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 assets

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

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.

• The restructuring process

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

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.P19F

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


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CHAPTER V: ENFORCING CREDITORS’ RIGHT

RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993

Banks and financial institutions have been experiencing considerable difficulties in recovering

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.P20F

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

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.

Overriding effect of the Act

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

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

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(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

The non obstante clause in the Act and the non obstante clause in the Companies Act were

considered in Industrial Credit and Investment Corporation of India Ltd v. Vanjinad LeathersP21F

22P

where the court opined that Section 18 of the Act creates a bar on jurisdiction of other

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.P22F

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DEBT RECOVERY TRIBUNAL

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

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.P23F

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


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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.

THE DRTS HAVE MORE POWERS THAN THE CIVIL COURTS: SUPREME COURT

In matters of Recovery of Debts to Due to Banks and Financial Institutions, the DRT enjoys far

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.P24F

25

LAWS AND PROCEDURE OF DRT IN INDIA

While initially the DRT did perform well and helped the Banks and Financial Institutions

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.P25F

26

*******

25 Sourced from: http://bankdrt.net/ 26 Sourced from: http://bankdrt.net/

http://www.bankdrt.com/nf/judgements/describe.php?id=D10199909101�




18

CHAPTER VI: WINDING UP OF COMPANIES

4TMEANING

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

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.

MODES OF WINDING UP

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

1. Winding up by the court.

2. Voluntary winding up,

o Members’ Voluntary winding up.

o Creditors’ Voluntary winding up.

3. Winding up subject to supervision of the court

WINDING UP BY THE COURT

Section 433 of the Act, lays down the circumstances by which a company may be wound up by

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.


19

The following are the grounds for Compulsory Winding Up or Winding up by the Court P26F

27P

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

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.

Power of Court to Stay or Restrain Proceedings against Company [Section 442]

At any time after presentation of a winding up petition and before a winding up order is made,

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


20

• 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.

ORDERS OF THE COURT (SECTION 443)

The court may pass any one of the following orders on hearing the winding up petition.

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.

THE OFFICIAL LIQUIDATOR

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

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.

CONTROL OF CENTRAL GOVERNMENT/COURTS OVER THE LIQUIDATOR

The Official Liquidators are officers appointed by the Central Government under Section 448 of

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


21

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.

Disposal of assets and settlement of claims

When a company is wound up by any mode, its liabilities shall be discharged in accordance

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.

Dissolution of Company [Section 481]

The court shall order dissolution of the company, when:

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.

Appeal: [SECTION 483]

An appeal from the decision of Court will lie before that Court, before whom, appeals lie from

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.


22

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

WINDING UP OF UN-REGISTERED COMPANIES

Apart from a company registered under the Companies Act, 1956 there are other companies as

well the winding up procedure for which is different from a company registered under

Companies Act, 1956.

These companies are:-

1. Unregistered Companies [ Section 583]

In simple words, an unregistered company is a company which is not registered or

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.


23

However, the circumstances, in which unregistered company may be wound up, are as

follows:

o 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

o If the court is of opinion, that it is just and equitable, that the company should be

wound up.

A foreign company, carrying on business in India, which has been dissolved, may be

wound up, as unregistered company.

2. FOREIGN COMPANIES [SECTION 584]

A foreign company is a company which is incorporated outside India, and having a place

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]

3. GOVERNMENT COMPANY

Section 617 of the Companies Act, 1956 defines a Government Company as any

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.


24

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.

VOLUNTARY WINDING UP

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

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.


25

Distribution of Property upon Voluntarily Winding Up

Once the company is fully wound up and assets of the company are sold or distributed, the

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: 52P

ndP Annual Report of the Ministry of Corporate Affairs for

the year ending 31.03.2009)

Sl No. Subject Pending as

on 1.04.2008

to

31.03.2009

Received

during the

period

1.04.2008 to

31.03.2009

Total (Col

3+4)

Disposed

during

the

period

Pending as

on

31.03.2009

1 2 3 4 5 6 7

1. Members

Voluntary

winding up

1254 61 1315 33 1282

2. Creditors

Voluntary

winding up

112 - 112 - 112

3. Winding up

by Court

4764 135 4899 141 4758

4. Winding up

subject to

supervision

of Court

03 - 3 - 03

Total 6133 196 6329 174 6155

*******


26

CHAPTER VII: DEALING WITH DEFUNCT COMPANIES

MEANING

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

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.


27

• 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.

Emphasis underlined

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

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.P27F

28

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


28

APPLICATIONS CONSIDERED AND DISPOSED OF BY THE REGIONAL DIRECTORS AND

REGISTRAR OF COMPANIES UNDER SECTION 560 OF THE COMPANIES ACT 1956 (Sourced:

52P

ndP Annual Report of the Ministry of Corporate Affairs for the year ending 31.03.2009)

Sl

No

Section of the Companies

Act and the subject matter

of the application

Considered during

the year (1.04.2008 to

31.03.2009)

Disposed off

during the

year

Pending as

on 31.3.2009

1

.

Section 560 striking of

name of the companies in

the Register maintained by

ROC

50127 18249 31878

*******


29

CHAPTER VIII: REFORMS IN INSOLVENCY LAWS AFFECTING THE

CORPORATE SECTOR

I. COMPANIES (SECOND AMENDMENT) ACT, 2002

BRIEF HISTORY

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

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.

Comparison between Part VI A of the Companies Act and SICA

On the recommendation of Justice Eradi Committee, The Companies Act, 1956 was amended by

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.

Companies (Second Amendment) Act, 2002

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

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.P28F

29

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


30

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.

APPEAL TO SUPREME COURT

Section 10GF provides that any person aggrieved by any order or decision of the Appellate

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.

CONCLUSION

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

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


31

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.P29F

30

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/


32

DRAFT RULES FOR WINDING UP OF LLP

(to be approved by parliament)

Section 65 of the LLP Act empowers the Central Government to make Rules for the Provisions

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.


33

• 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

INTRODUCTION

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

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). P30F

31

The main objectives of the Companies Bill, 2009 are as follows –

• To revise and modify the Companies Act, 1956 in consonance with the changes in

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 Legal Service India.com


34

• 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.P31 F

32

• A revised framework for regulation of insolvency, including rehabilitation, winding

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.

4TCONCLUSION

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

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


35

ANNEXURE A: YEAR WISE PERFORMANCE OF THE BOARD FOR

INDUSTRIAL & FINANCIAL RECONSTRUCTION

(As on 31.12.2009)

Year

Total Cases

Regd. during

the Year

Cases Disposed off during the Year

Cases under

Revival

Cases Revived Winding up

Recommended

Dismissed

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


36

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.

*******

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

Documents

CHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS · PDF fileCHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS IN ... The Act presumed the distinction between traders ... up of the company