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CHAPTER I: GENERAL FRAMEWORK OF INSOLVENCY LAWS IN INDIA
The need for an insolvency law in India was first articulated in the three Presidency-towns of HISTORICAL BACKGROUND 1
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 Act passed in 1759. 2
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 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 extended its duration upto 1843 and also made certain amendments therein. 3
originally intended to remain in force for a period of four years, but subsequent legislation Viet.c.21) was passed. The Act presumed the distinction between traders and non-traders in
A further step in the development of Insolvency Law was taken when the law in 1848 (11 & 12 certain respects on the lines of the corresponding Bankruptcy statutes, then in force in Court.
England. It continued the Courts for the relief of insolvent debtors established by the Act of 1828 jurisdiction in the Presidency towns was thus transferred from the Supreme Court to the High The Provisions of the Indian Insolvency Act, 1848, were, however, found to be inadequate to an Insolvency Bill for the whole of India modeled on the Bankruptcy Law then in force in
in the Presidency towns and in their place the present High Courts were set up. The insolvency meet the changing conditions. In the eighteen seventies Sir James Fitzjames Stephen proposed
Prepared in the Directorate of Academics and Professional Development, the ICSI J P S Sirohi, Law of Insolvency(1985) 3 See Mulla Law of Insolvency in India(1958), P.16
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 attempt to introduce insolvency law in the rural areas was made in 1877. Some rules were on the district Courts to entertain insolvency petitions and grant orders of discharge, these 1882. full of the amount due to the attaching decree holder seems to have prevailed. The first incorporated in Chapter 20 of the Code of Civil Procedure, 1877, which conferred jurisdiction rules were re-enacted with certain modifications in Chapter 20 of the Code of Civil Procedure,
P3 F P
EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS
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
The Provisions in the Civil Procedure Code of 1859 were described 4 as the "germ and nothing 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 force in the areas other than the Presidency towns. Act of 1907 was repealed by the provincial Insolvency Act, 1920 which is the Act now in CENTRAL AND STATE LEGISLATIONS
more than a germ of an insolvency law." The provisions were limited to cases in which legal
adoption are called the Central Laws/Acts. For Example the Companies Act, 1956, Limited
of the corporate entities). These are called the Central Acts, wherein the Companies/LLPs are
Liability Partnership Act, 2008 (LLP) etc, (this contains the detailed process for the winding up
On January 26, 1950 the Constitution of India came into force. The Laws/Acts enacted after its
See Mulla Law of Insolvency in India (1958), P.16.
insolvency procedures were in operation like the Provisional Insolvency Act, 1920, and the 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 laws/Acts. CURRENT SCHEME OF INSOLVENCY LAWS IN INDIA those Acts are regulated by different States and the States were given the authority to modify 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
However, before the adoption of the Constitution of India, many laws/Acts governing the
required to get themselves registered with the Central Registry known as the Registrar of Companies /LLP in order to become corporate entities.
EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS
require acceptance or assent, from all the States or the States can individually amend these 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, 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. pay its debts", and thus constitutes a ground for winding up of the company. Inability to pay its only include debts, incurred after the legal incorporation of the Company. Inability to pay debts debts would be a case where, a company's entire capital is lost in heavy losses and no accounts Registrar of Companies makes out a case of inability to pay debts. These debts however, would are prepared and filed and no business is done for one year. In such circumstances, the due of Rs. 500 or more serves a demand by registered post and the company neglects to pay, to pay its debts. 5
1920 and Presidency Towns Insolvency Act, 1908 and Corporate Insolvency, whose
However, Section 433 (e) of the Companies Act, 1956 covers a company, which is "unable to
has even been amplified in Section 434 of the Companies Act, 1956 wherein, a creditor with a 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 *******
Sourced from: http://www.legalservicesindia.com/articles/corin.htm
P6F The [I (D & R) A] is an important piece of legislation for the development and regulation of INDUSTRIES DEVELOPMENT AND REGULATION ACT [I (D & R) A]. 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. 1985 (SICA) AND [I (D & R) A] of certain industries. The problem of industrial sickness and its consequential fall out on the nation’s the sick industrial company led to enactment of the Sick Industrial Companies (Special 6 certain industries. to the 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 Provisions) Act.. there was also the problem of industrial capital assets. Mittal 2003 edition 4 . The [I (D & R) A] was enacted for the development and the regulation Act and the SICA is applicable to those very companies having industries as mentioned in the schedule to the [I (D & R) A].e. 1951 7 SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT. The Act Taxman’s new law relating to Sick Companies by D.P. The industrial INTRODUCTION policy resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy. 1985.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER II: A FRAMEWORK FOR REHABILITATION OF COMPANIES India started her quest for industrial development after independence in 1947. During the initial years. Mittal 2003 edition Taxman’s new law relating to Sick Companies by D. and thereafter with the economic and social development there has been shift in the industrial sickness entailing social costs in terms of loss of production and un-employment and waste of policy from the directed and regulated economy in the 1948 and 1956 Policy Resolution. The [I (D & R) A] applies to industries mentioned in the schedule to the appear to be overlapping. the [I (D & R) A] and SICA operate in different fields though they would Chapter III of the [I (D & R) A] contains provisions for the regulation of the industries.P. is more of preventive nature so that the industrial undertakings do not fall sick. Section 15 of 6 7 The two Acts i. P5F free market economy in 1991.
Chapter III A deals with the power of the Central Government to assume management or Government has been authorized to issue directions to the industrial undertaking after EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS make or cause to be made investigation into a company which is to be wound up for the directions have been issued in pursuance of section 16 of the Act has failed to comply with such directions. in the interest of production. 18AA. The Central Government can either decide to Taxman’s new law relating to Sick Companies by D. or the industrial undertaking in respect of which an investigation has been made Under sub-section (2) of section 18A of the Act. There is no such limitation for any scheme under SICA containing measures for Chapter III AC of the [I (D & R) A] dealing with liquidation or reconstruction of companies LIQUIDATION OR RECONSTRUCTION OF COMPANIES UNDER [I (D & R) A] requires the Central Government after the takeover of management of the industrial undertaking or part thereof. is being managed in a manner highly detrimental to the Scheduled Industry concerned or to the public interest. and. a time limit is prescribed within which the management of the industrial undertaking can be taken over by any person or body of persons the proper management of the sick industrial company by change or takeover of the management. 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 18FA of the Act. in particular. Mittal 2003 edition 5 . Under section 16. supply or distribution of articles or classes of articles relatable to the concerned Scheduled Industry.the Act gives power to the Central Government to move to the High Court for permission to purpose of running or restraining an industrial undertaking in the interest of the general public investigation had been made under section 15 of the Act. or receipt of the report from the authorized person. Section 18FD of the Act provides two alternatives to the Central Government in respect of 8 undertaking whose management or control has been taken over under Section 18A. to ensure that the purpose of the takeover is being achieved. 8 P7F so authorized. the Central control of the industrial undertaking in certain cases where the industrial undertaking to which under section 15 of the Act.P.
or In terms of sub-section 2 of section 18FD of the Act the decision to prepare a scheme of 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. It is in the interest of the shareholders. Net worth has been defined as the sum total of the paid up capital and free reserves. if it is satisfied that. • The decision to sell undertaking as a running concern may be taken by the Central Government up by the High Court. and contributories. 9 P8F A sick industrial company means an industrial company (being a company registered for not SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT. its financial conditions and other circumstances are such that it is proceedings for winding up of the company by the High Court should be started • simultaneously. 1985 (SICA) less than five years and employing fifty or above workmen). which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. which is not being wound EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS general public makes it expedient to sell the undertaking as a running concern and also by the High Court. • • • reconstruction of the company owning the industrial undertaking may be ordered by the Such a course of action is necessary to secure the proper management of the company owning the industrial undertaking. 6 . its assets and liabilities are such that in the interests of its creditors In the case of the undertaking concerned owned by a company and is being wound up Central Government. 9 ICSI Module on Economic and Labour Laws. on being satisfied that. or It is in the interest of the general public. not in a position to meet the current liabilities out of its assets and the interest of the In the case of the company owning the industrial undertaking.sell the undertaking as a running concern or it may decide to prepare scheme for reconstruction of the company. the industrial undertaking should be sold as running concern. prior permission of the High Court is to be obtained.
But. Section 5 of the Act envisages constitution of an Appellate Authority to be called orders of the BIFR. 1956. where the BIFR comes to the conclusion that it is not possible to revive the company and that it is just and and may proceed and cause to proceed with the winding up of the sick industrial company in industries declared to be sick under SICA. the Board of Directors of the said company shall. within sixty days after it has formed such an opinion. Section 14 of the Act pronounces that the proceedings before the BIFR or “Appellate Authority for Industrial and Financial Reconstruction” for hearing appeal against the SICA requires that when an industrial company has become a sick industrial company. 11 Reserve Bank of India (RBI) has issued policy guidelines for revival of sick industrial companies Taxman’s new law relating to Sick Companies by D.The scheme of the Act deals with establishment of the Board for Industrial and Financial EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS 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 Appellate Authority are deemed to be judicial proceedings. 10 P9F the Act. 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 determination of the measures to be adopted with respect to the company.P. BIFR to make appropriate measures for revival and rehabilitation of potentially viable equitable that the company should be wound up.legalservicesindia. it shall record and forward its opinion to the concerned High Court. it shall. Mittal 2003 edition http://www. make a reference to the BIFR for Directors has sufficient reasons even before finalisation of accounts to form an opinion that the sick industrial companies and for liquidation of non-viable companies. on the basis of which the Court.htm 11 7 . company has become a sick industrial company.com/articles/corin. may order winding up of the company and the role to be played by lead institutions or Operating Agencies appointed for revival of P10F accordance with the provisions of the Companies Act. If the Board of company has become a sick industrial company. make a reference to the BIFR. 10 SICA is predominantly remedial and ameliorative in so far as it empowers the quasi judicial body.
leading to avoidable delays. to formulate a revival strategy. nor subject to judicial review. frequent appeal to High Courts against There are inherent defects both. which had been conceived. lack of monitoring of sanctioned revival schemes.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS automatic stay of all legal proceedings. necessity of consensus amongst secured creditors before finalisation of revival scheme. excessive protection to sick industries under Section 22 of the Act providing for The functioning of SICA has not been found to be satisfactory as many issues have been ISSUES ARISING OUT OF IMPLEMENTATION OF SICA decisions are taken and communicated. an automatic stay operates against all kind of recovery and distress proceedings MISUSE OF PROTECTION AGAINST RECOVERY PROCEEDINGS against all creditors once the reference filed by the company is registered. 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 Under SICA. erosion of its entire net worth. By the time intervention. Apart from these. This is the principal drawback of the existing legislation as this has led the BIFR to become a haven for defaulting companies. Consideration of the same also takes substantial time since banks and financial resulting in failure of revival schemes even after sanction. The decisions by the banks are also neither transparent. a company can approach the BIFR for adopting steps for its revival. Erring debtors have misused SICA to seek protection and moratorium from recovery proceedings. slow pace of BIFR delay in winding up of sick companies. sometimes by manipulating their accounts to reflect net worth erosion and then able to attract immunity 8 . LACK OF TIMELY COMMENCEMENT OF PROCEEDINGS institutions have their own hierarchy in decision making. and disposal of the cases. the plan. loses its viability Under the existing law. Some of the deficiencies were restrictive definition of “sickness” under the Act and belated cognizance thereof by BIFR. on revived and loses its resilience to restructure and revival. The companies are able to enter easily into the reference. the decisions/ orders of the BIFR was also one of the factors responsible for delay in timely PROCEDURAL DELAYS identified during its implementation. The BIFR takes substantial time to determine whether a company is sick and thereafter. procedural and legal in proceedings before BIFR.
com/articles/corin. There is no fear of reprisal or punitive action [Year Wise Performance of the BIFR as on 31.2009 is placed at Annexure A].in/geninfo. 12 P11F EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS This problem arises due to the fact that unscrupulous promoters enter into the process of for the next year and the cycle goes on endlessly.htm 13 9 .12. take undue benefits arising out of delay in decision against the companies indulging in this malpractice.htm http://www.against the recovery action by the creditors and this benefit is then attempted to be perpetuated.bifr. a fresh reference is filed with respect to accounts ******* 12 http://www. 13 P12F making of BIFR. If the reference is rejected.nic. rehabilitation by manipulating sickness.legalservicesindia.
adjudicatory forum. 2002 With an aim to provide a structured platform to the Banking sector for managing its mounting BACKGROUND Non-Performing Assets (NPAs) stocks and to keep pace with international financial 4T Institutions (FIs) to take possession of securities and sell them. 2002 borrowers have become the first applicants before the Debts Recovery This new Act empowered the lenders to take into their possession the secured assets of their Supreme Court as well as the various High Courts which have paved the way for the DRT to 14 The DRT deals with extraordinary complex commercial laws. 2002 was put in place to allow banks and Financial institutions. manage problems of liquidity. 15 P14F SRFAESI Act.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER III: ASSET RECONSTRUCTION: SARFAESI ACT. the Securitisation and Reconstruction of Financial Assets and Enforcement of of defaulting loans and mounting levels of NPAs of banks and FIs. Over the years the DRTs have evolved into fine bodies with lots of expertise. before their properties could be taken over by the lenders.” Prior to the Act. Initially this brought in a lot of compliance from borrowers and many defaulters coughed up Sourced from: http://www. asset-liability Security Interest (SARFAESI) Act. This led Supreme Court to strike down certain provisions of the Act and allowed the borrowers to have an borrowers just by giving them notices. 14 After the enactment of the Tribunal (DRT).in/Arcil2008/SARFAESI. The the Bank dues. However the tougher ones punched whole in the new Act too. which led to slow recovery P13F P mismatches and improve recovery by taking possession of securities and selling them and “enabled banks and FIs to realise long-term assets.asp Sourced from: http://bankdrt. and by not going through the rigors of Court procedure.net/ 15 10 .co. As stated in the Act. the legal framework relating to commercial transactions lagged behind the rapidly changing commercial practices and financial sector reforms.dnb. There is a plethora of judgments from the adjudicatory forums were the DRT. Earlier only lenders were the applicants. it has reducing their NPAs by adopting measures for recovery or reconstruction.
18 P17F It is the country's first ARC supported by a large number of public sector banks and undertakings. This process relieves the banking system of the methods. 16 P15F EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS ASSET RECONSTRUCTION COMPANIES (ARCs) Asset Reconstruction Companies (ARCs) are established under SARFAESI Act. It strives for a speedier resolution of NPAs with a focus on Micro Small Arcil). India SME Asset Reconstruction Company Ltd (ISARC) 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.isarc. Arcil has recently launched retail NPAs resolution initiative through Arcil-Arms (a division of immediately after enactment of the SARFAESI Act. 2002 as ORIGIN OF ARCS specialized entities for NPAs resolution. State Bank of India and IDBI. As the premier ARC. The ARCs recover illiquid or NPAs from Banks / FIs. 2002.net/ http://www.in/ 18 11 . manage and development of new business opportunities so as to further strengthen the economy. would maximize recovery value with optimal costs through their innovative NPA resolution burden of NPAs and allows them to focus better on their core function of financing and ASSET RECONSTRUCTION COMPANIES 1.com/companies/asset-reconstruction-company-india-ltd. http://www. 17 5T 5T P16F been playing the pioneering role in setting standards for the industry in India. ARCIL is promoted by ICICI Bank.linkedin. 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. Arcil has 16 17 http://bankdrt. It commenced business 2.chart their courses. The Debts Recovery Tribunal of India have become model institutions for many a country to follow. These ARCs are established to acquire.
EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS 3.com/ 12 .rarcl. ******* P18F ADA group (through Reliance Capital Limited). the principal sponsor / shareholder of which is the Reliance Corporation Bank. GIC of India. 19 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. Reliance Asset Reconstruction Company Limited Reliance Asset Reconstruction Company Limited (Reliance ARC) is a premier asset reconstruction company. Dace croft and Blue Ridge. they will have the option to subscribe to the Security Receipts). The other sponsors / shareholders are 19 Sourced from: http://www. Indian Bank.
by decreasing the rates paid when a company is going through financial hardship and is having difficulty in meeting its and increasing the time by which the company has to pay its obligation back. If the troubles are enough to pose a high risk of the company going bankrupt. the lender seeks a The Consultation Process series of consultation sessions with the borrower. Also. During these meetings. It is at this point that all the company's financial The Steps involved in CDR are as follows. however foreign banks are yet to join the platform. • their unmet financial obligations. because it is less expensive and more discreet. by reducing the burden of the debts on the company. In August 2008 systematic process. This allows a by creditors in exchange for an equity position in the company. agencies consider cases referred for restructuring as weak assets. the non-industrial companies can also use CDR mechanism. including non-industrial credit. STEPS IN CORPORATE DEBT RESTRUCTURING Reserve Bank of India’s (RBI’s) revised norms harmonise the prudential norms across all debt restructuring mechanisms.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER IV: CORPORATE DEBT RESTRUCTURING Corporate Debt Restructuring (CDR) means the reorganization of a company's outstanding INTRODUCTION obligations. The need for a CDR often arises negotiate with its creditors to reduce these burdens and increase its chances of avoiding bankruptcy obligations. While banks work on cases with the hope of recovery. some of the debt may be forgiven CDR. is a mechanism for faster disposal of restructuring cases The Reserve Bank of India (RBI) had revamped the norms for restructuring advances. rating involving multiple lenders. CDR also involves a A number of companies are now taking a good look at business debt restructuring to resolve 13 . This is often a preferable solution to bankruptcy probably As business debt restructuring is nothing but an aggregate loan agreement. which was set up in 2002-03. the lender assesses the company's overall financial situation. it can company to increase its ability to meet the obligations. But just like bankruptcy. Now.
small business debt restructuring works differently than that of big corporate restructurings.debtleap. Primarily because of this. the lender then settles an agreement with all the solution as agreed upon. The borrower. by all parties concerned. • borrower's creditors and vendors. agree to the aggregate loan amount and to other details including the monthly payment obligation. the liquidation strategy is only used to get the profitability of the business back.com 14 .obligations are evaluated against the expected regular cash flow. This is the last level of debt help available to the business before a filing for bankruptcy. • The Negotiation Process Once the assessment procedure is finished. The main idea is to arrive at a solution that is acceptable to all the parties involved. there is no other make payments as stipulated. When that is achieved. the interest rate. CDR is a process that has to be critically evaluated to ensure the ultimate fate of the business involved. the business which officially under a debt-restructuring program is expected to ******* 20 Sourced from: http://www. if found to be necessary The liquidation of assets EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS This is the step where the contract is signed and the agreement is enforced. If the lender is not able to cover that. After everything is accounted for. 20 P19F in this case the business. In some cases. But most of the time. and the term of payment. restructuring the existing debt may require a large amount of up front money to be paid. the lender can proceed to implement the The liquidation of the business's assets is the next step in the process. and • The restructuring process choice but to liquidate some of the assets.
This committee also suggested setting up of Special procedure. 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. faced by banks and financial institutions and suggested remedial Debts due to Bank and Financial Institutions Bill.e. Whatever may be.nic.tn. In 1981 a committee had examined the measures including changes in law.pdf 15 . 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 Section 34 of the Act states that the "Act to have overriding effect” i. 1993 is almost more than a decade old. 1993 portion of the funds being blocked. the ousting of the jurisdiction of the Civil Courts. felt to work out suitable mechanism through which the dues. 1993 was introduced in the Parliament and P20F due to the banks and financial institutions.drat. The procedure for recovery of debts after which it was enacted as the Recovery of Debts Due To Banks and Financial Institutions Act. 21 The Recovery of Debts Due to Banks and Financial Institutions Act. the Recovery of legal and other difficulties. therefore. validity of the Act. An urgent need was.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER V: ENFORCING CREDITORS’ RIGHT Banks and financial institutions have been experiencing considerable difficulties in recovering RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT.in/Docu/RDDBFI-Act. Keeping in view the recommendations of the above Committees. to the banks and financial institutions could be realised. the Act has been challenged in various fora including the High Courts for its summary nature. the Act of 1993 was a welcome step taken by the Tribunals for recovery of dues of the banks and financial institutions by following a summary 21 Sourced from: http://www. which was being followed. 1993. – Overriding effect of the Act legislature in ensuring speedy recovery of bank dues. resulted in a significant loans and enforcement of securities charged with them. As with any legislation breaking new ground.
24 P23F The Debt Recovery Tribunal (DRT) is governed by provisions of the Recovery of Debt Due to DEBT RECOVERY TRIBUNAL Banks and Financial Institutions Act. 1948. the State financial EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS The Act has thus an overriding effect over all other legislations except for the ones mentioned in sub-clause (2). However since the Act was enacted after the Companies Act. The court also stated that the Act and the Companies Act is special Act. the Parliament would have certainly in mind the provisions in the earlier special law namely the Companies applications from banks and Financial Institutions against their defaulting borrowers. THE NON-OBSTANTE CLAUSE Corporations Act. and not in Bank of India Act. 1985.com/articles/raju.htm 24 Sourced from: http://bankdrt. Recovery Tribunals and five Debt Recovery Appellate Tribunals across the country. 1984 and the Sick Industrial Companies (special provisions) Act. the Industrial Finance Corporation Act. Vanjinad Leathers 22 P21F where the court opined that Section 18 of the Act creates a bar on jurisdiction of other P authorities and courts except the Supreme Court and High Courts under Articles 226 and 227 of the Constitution. the Debt Recovery Tribunal (Procedure) Rules 1993 have also been framed. 1993. Therefore the latter special law will prevail over the former. the provisions of this Act shall have effect (2) The provisions of this Act or the rules made there under shall be in addition to. 1956. derogation of. For this purpose. the Unit Trust of India Act.(1) Save as provided under sub-section (2).net/ 16 . The object of the DRT is to receive claim Keeping in line with the international trends on helping financial institutions recover their bad debt quickly and efficiently. 1963. the Industrial Reconstruction 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. 1951." 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.legalserviceindia. the Government of India has constituted thirty three Debt 22 23 AIR 1997 Kerala 273 Sourced from: http://www. 23 P22F legislation.
and if the DRT adjudicate the matter and auction off their properties irreparable damage would occur to them. greater powers than do the civil courts.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS different. but their approach is In matters of Recovery of Debts to Due to Banks and Financial Institutions. or their bad debts. Rule 18 of the DRT Act empowers the Tribunals to pass other kinds of orders in the interest of justice. The Debts Recovery Tribunal can pass interim as well as adinterim claims against the lenders were pending in the civil courts. These borrowers were ******* 25 26 Sourced from: http://bankdrt. The Debts Recovery Tribunal deals with two different Acts. but their progress was stunned when it came to large and powerful borrowers. The Recovery Officer of a DRT has even more powers to In a case the Supreme Court has held that the powers of Debts Recovery Tribunal are far wider orders. namely the RDBFI Act as well as the SARFAESI Act. with or without hearing the opposite parties. The only fetter on Debts Recovery Tribunals is that they should follow the Principles of Natural Justice. 26 P25F able to stall the progress in the DRTs on various grounds.net/ 17 . primarily on the ground that their While initially the DRT did perform well and helped the Banks and Financial Institutions LAWS AND PROCEDURE OF DRT IN INDIA recover substantially large parts of their non performing assets. While the aim of both the Acts is one and the same.net/ Sourced from: http://bankdrt. 25 P24F than those of a civil court. the DRT enjoys far THE DRTS HAVE MORE POWERS THAN THE CIVIL COURTS: SUPREME COURT issue a variety of orders for enforcing the Recovery Certificate.
2. Section 433 of the Act. Winding up subject to supervision of the court 18 . the company's name is struck off the register of the companies and its legal personality as a corporation comes to an end. pays debts and finally distributes any surplus among the members in accordance with their rights. is appointed and he takes control of the company. 1956 lays down the provisions and the procedures for winding up operations leading to the dissolution of the company. When the affairs of a company are completely wound up. Winding up by the court. the dissolution of the company takes place. the court means "High Court". lays down the circumstances by which a company may be wound up by WINDING UP BY THE COURT the Court. They are: Members’ Voluntary winding up. the company will have no assets or liabilities. An administrator.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VI: WINDING UP OF COMPANIES 4T Winding up of a company is defined as a process by which the life of a company is brought to an MEANING its assets. The Companies Act. 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. Voluntary winding up. end and its property administered for the benefit of its members and creditors. in which a company may be wound up. Creditors’ Voluntary winding up. At the end of winding up. On dissolution. Winding-up is different from insolvency 1. 3. called the liquidator. o o MODES OF WINDING UP There are three ways. collects and dissolution. Here. Note: 1. 2. Till the Tribunal is constituted the powers in this regard are vested with the Courts.
If the Court is of the opinion that it is just and equitable that the company should be g. h. At any time after presentation of a winding up petition and before a winding up order is made. the security of the State. or any creditor or contributory. friendly relations with foreign States. resolved that the company be wound up by P b. 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. f. apply to the Court in which the suit or proceeding is pending for a 27 Section 433 of the Companies Act. by a Special Resolution. public order. wound up. may• stay of proceedings therein. 2002. morality. or d. h and i have been added by the Companies (Second Amendment) Act. i. If the number of members is reduced below the statutory minimum e. If default is made in delivering the statutory report to the Registrar or in holding the c. suspends its business for a whole year. winding up of Sick Industrial Note: The clauses g. the Court. 1956 19 . Power of Court to Stay or Restrain Proceedings against Company [Section 442] the company. If the company has.e. If the company is unable to pay its debts. statutory meeting. decency or Company. 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.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS The following are the grounds for Compulsory Winding Up or Winding up by the Court 27 P26F a. If the company fails to commence its business within one year of its incorporation. and Where any suit or proceeding against the company is pending in the Supreme Court or in any High Court. i. If the company has acted against the interests of the sovereignty and integrity of India.
as it thinks fit. on such terms as it thinks fit. The Court to which the application is so made may stay or restrain the proceedings The court may pass any one of the following orders on hearing the winding up petition. Make any interim order. Pass an order for winding up of the company with or without costs. In situations of compulsory winding up. The THE OFFICIAL LIQUIDATOR The Official Liquidators are officers appointed by the Central Government under Section 448 of CONTROL OF CENTRAL GOVERNMENT/COURTS OVER THE LIQUIDATOR the Companies Act. 3. Adjourn the hearing conditionally or unconditionally accordingly. Dismiss it. to restrain further proceedings Court. by virtue of his office and the order of the Court. with or without costs that it thinks fit. the liquidator of the Company. to the Court having jurisdiction to wind up the company.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS • Where any suit or proceeding is pending against the company in any other Court. is attached to each High Court. or any other order 2. 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. or 4. the Official Liquidator becomes winding up. The Central Government may also attach one or more deputy or assistant Official Liquidators to assist the Official Liquidator. after passing the winding up order. apply therein. 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 Organizationally. 1956 and are attached to various High Courts. the Official Liquidators are under the administrative charge of the respective Regional Directors. 20 . who are senior field functionaries under the Ministry of Corporate Affairs and duly observe all the requirements imposed on them under the Act or the Rules there under. appoints the liquidator. ORDERS OF THE COURT (SECTION 443) 1. He may however apply to the Court for directions if any required with regard to any matter relating to An Official Liquidator (OL) appointed by the Government.
its liabilities shall be discharged in accordance EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS The court shall order dissolution of the company. Official Liquidators act the supervision and the orders of the Court. 2. when: Dissolution of Company [Section 481] abate in equal proportions. State Government. the official liquidator is unable to carry on the winding up procedure for want of funds. they shall 5. Debts due to secured creditors. cesses and rates due from the company to the Central Government or a An appeal from the decision of Court will lie before that Court. All taxes. 4. provided in the Act is as under: and the OL appointed as Liquidator for a company under liquidation. as also under the directions of the High Courts. 1. which are the subject of adjudication before the Such order or decision. All such debts shall be paid in full. All administrative orders would be an order.and who supervise the functioning of Official Liquidators on behalf of the Central Government. however. If assets are insufficient to meet them. before whom. once the winding up order is passed by the Court the actions of the OL in pursuance of the same with regard to the Company. which is directed to the regulation or 2. The order of priority as 1. further process. one. supervision of matters as distinguished from an order which decides the rights of parties or Court. the affairs of the company are completely wound up. however. appeals lie from Appeal: [SECTION 483] any order or decision of the former Court in cases within its ordinary jurisdiction. 3. must be a judicial and not an administrative or a procedural 21 . All wages and salary of any employee due within four months. When a company is wound up by any mode. Thus. or confers or refuses to confer rights to property. All accrued holiday remuneration becoming payable to any employee. Workman's dues. In the conduct of winding-up of affairs of the companies. take place under Disposal of assets and settlement of claims with the priorities provided in section 529A and 530 of the Act.
the Court may." Here the the winding up proceedings. The court may also appoint the Official Liquidator as a liquidator to fill up any of the company. or. powers as if an order has been made under section 526 of the Act for winding up the company The object of the supervision order is to safeguard the interest of the company. WINDING UP SUBJECT TO SUPERVISION OF COURT* Winding up subject to supervision of court. Resolution for winding up is passed by members in the general meeting. When an order is made for winding up subject to supervision. The court may put up some special terms and conditions also. relief [Section 522]. in addition to those already appointed. by that or any subsequent order. 2002 WINDING UP OF UN-REGISTERED COMPANIES Companies Act. 1956 [section 582]. appoint an additional liquidator or liquidators. 1956. He enjoys the same powers as if the company is being wound-up voluntarily. and such other altogether by court. It is only for some specific reasons. Apart from a company registered under the Companies Act. liberty is granted to creditors. or remove any The court also may exercise powers to enforce calls made by the liquidators. * Note: Omitted by the Companies (Second Amendment) Act. 22 . court only supervises the winding up procedure. that court may supervise The court may also appoint liquidators. An unregistered company cannot be wound up voluntarily. The liquidator is entitled to do all such things and acts as he thinks best in the interest However. contributories or other to apply to court for some such liquidator. an unregistered company is a company which is not registered or covered under provisions of the Companies Act. vacancy. 1956 there are other companies as These companies are:- well the winding up procedure for which is different from a company registered under 1. is different from "Winding up by court. subject to super vision of court. shareholders and creditors. Unregistered Companies [ Section 583] In simple words.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS 2.
556] affect the jurisdiction to make winding up order. are as follows: o o o EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS If the company. In respect of assets and business carried outside India. Pendency of a foreign liquidation does not 2 All. A subsidiary of a Government company is also treated as a Government Company. should be distributed among the shareholders equally in the same proportion. which has been dissolved. in which unregistered company may be wound up. FOREIGN COMPANIES [SECTION 584] wound up.R. A foreign company is a company which is incorporated outside India. is dissolved. the circumstances.However. that it is just and equitable. as the assets to the total issued and paid up capital. Indian courts not take to be in the ownership of the company and can come from any source [(1944) 3. 1956 defines a Government Company as any Even if the company had been dissolved or ceased to exist in the country of its assets in India. after paying the creditors. or has ceased to carry on business. or partly by the Central Government and partly by one or more State Governments. carrying on business in India. 23 .E. the winding up order can be made in India. GOVERNMENT COMPANY company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government. If the company is unable to pay it's debt wound up. and having a place of business in India. as unregistered company. The Assets can be of any nature and do Section 617 of the Companies Act. that the company should be have no jurisdiction. or by any State Government or Governments. may be 2. If the court is of opinion. The surplus assets. or is carrying on business only for the purposes of winding up. Winding up of a foreign company can only be made through Court. it's affairs. Even if a foreign company has been wound up according to foreign law. A foreign company. the courts in India still protect the Indian Creditors. Winding up of such companies is only limited to the extent of it's incorporation.
In case of members’ voluntary winding up. the Liquidator takes necessary steps to liquidate the company and dispose of the company. the process of creditors winding Liquidators and fix his/their remuneration in a general meeting of the shareholders. and gives priority to them. the company is required to appoint one or more Once appointed. or the time period. under section 484 of the Act. EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS 1956. all the powers of the board of directors come to an end except its business or property by sale or any other arrangement approved by a special resolution of 24 . Courts. appointment of the Liquidator. the board of directors has up would be initiated. A company may voluntarily wind itself up in the following two b. However. either through members’ voluntary winding up or creditors’ voluntary winding up. has expired. take public interest into consideration. government company is to provide services to them.Winding up procedure for a Government Company registered under the companies Act. Both types of resolutions must be passed in the general meeting of the company as provided company may be wound up. as the main function of a A company may voluntarily wind up its affairs either by passing an ordinary resolution where VOLUNTARY WINDING UP the purpose for which the company was formed has been achieved. Members voluntary winding up Creditors voluntary winding up which the company was formed. Once voluntary winding up commences. Once the resolution for voluntarily winding up is passed the 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. or by way of special resolution if it is unable to meet its financial obligations. On the where the company or the Liquidator sanctions them to continue. is nearly similar to normal winding up procedure. for modes: a.
2009 Received during the period 1.2008 to 31.03.2009 1 1.04.03.03. 4.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS utilized to pay off the creditors in equal proportion.2009) Sl No.2009 Creditors by Court subject Total of Court Voluntary Voluntary winding up winding up Winding up Winding up supervision to 4764 03 135 - 4899 3 141 - 4758 03 6133 196 ******* 6329 174 6155 25 . proceeds collected are utilized to pay off the liabilities.04. 2. 3.04. Thereafter any money or property left may be distributed among members according to their rights and interests in the company. The proceeds so collected shall be Once the company is fully wound up and assets of the company are sold or distributed.03.2008 to 31. Subject Pending as on 1.03. Members 2 3 1254 112 4 61 1315 112 5 6 33 7 1282 112 Total (Col 3+4) Disposed during the period Pending as on 31.2008 to 31. the Distribution of Property upon Voluntarily Winding Up Distribution of the companies in liquidation by their mode of winding up during 1.2009 (Sourced: 52 nd Annual Report of the Ministry of Corporate Affairs for P P the year ending 31.
2000 states deemed to be a defunct company and the Registrar of Companies (ROC) shall strike off the PROCESS FOR DISSOLUTION OF A DEFUNCT COMPANY (SECTION 560) dissolution is as follows. A company is. private or public. It is only where the latest available balance sheet shows that the company has no assets or has such that if a company. steps are taken to take the company into compulsory liquidation. has failed to meet the paid-up capital norm. a notice will be published in the Official thereto. provides for the dissolution of the defunct companies. The process for Where the registrar has reasonable cause to believe that a company is not carrying on business or in operation.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VII: DEALING WITH DEFUNCT COMPANIES A defunct company means a company which never commenced business or which is not MEANING carrying on business and has either no assets or has such assets as shall not be sufficient to meet the cost of liquidation. If the Registrar does not within one month of sending the letter receive any answer • answer thereto has been received and that. he shall send to the company by post a letter inquiring whether the company is carrying on business or is it in operation. • Section 560 of the Act. and stating that no 26 . 1956. however. The policy which is followed with regard to weeding out the defunct companies is that where it assets as would not be sufficient to meet the cost of liquidations. letter within one month from the date thereof. steps are taken to strike its name off the register of companies under section 560 of the Companies Act. he shall within fourteen days after the expiry of the month. Also sub-section (5) of section 3 introduced by the Companies (Amendment) Act. it shall be name of the company from the register. send to the company by registered post a letter referring to the first letter. appears from the latest available balance sheet of a defunct company that it has adequate realisable assets. not considered defunct if the cessation of business is due to the conduct of winding up. if an answer is not received to the second Gazette with a view to striking the name of the company off the register.
the name of the company mentioned therein will unless cause is EFFECTS OF THE DISSOLUTION Suspended Animation Upon dissolution. which is being revived was proclaimed dissolved by administrative functions of the Registrar without involvement of a third party and position has been desired by the Legislature. is that in the former the Court period is twenty years. Again the The company too could be one of those who may apply for its name to be restored to the animation. the Court can order the dissolved company's revivification in the prescribed circumstances within a period of remedy for resuscitation is also under section 559 of the Act. functionality stops and for all practical purposes corporate activities come to an end.section 6 of section 560 of the Act this rationale behind the distinction is that the Company. the persons in the same position as nearly as they were while the name was struck off. Thus it is not a state of complete extinction but that of a suspended 28 Sourced from: http://www.org/post. Emphasis underlined there was neither winding up nor the superintendence of the Liquidator therein.section 6 of section 560 of the Act. the company by registered post. This clearly indicates that a company in that situation has an existence at least for that purpose. and send to date of that notice. Under Section 559. a notice that at the expiration of three months from the second letter receives any answer. be struck off the register and the company will be dissolved.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS • If the Registrar either receives an answer from the company to the effect that is not carrying on business or in operation. For a company dissolved under section 560 of the Act. the corporate status of an entity ceases to subsist. Hence. A distinction between a rebirth 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 under section 559 and sub. he may publish in the Official Gazette. or does not within one month after sending the shown to the contrary.html?post_id=2936 27 .icai. 28 P27F Register of Companies. the alternative two years of the date of dissolution. whereas under sub.
04.2009) P P Sl No 1 Section of the Companies Act and the subject matter of the application Section 560 striking of Considered during the year (1.2008 to 31. name of the companies in ROC the Register maintained by ******* 28 .2009) 50127 Disposed off during the year 18249 Pending as on 31.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS APPLICATIONS CONSIDERED AND DISPOSED OF BY THE REGIONAL DIRECTORS AND REGISTRAR OF COMPANIES UNDER SECTION 560 OF THE COMPANIES ACT 1956 (Sourced: 52 nd Annual Report of the Ministry of Corporate Affairs for the year ending 31.03.2009 31878 .3.03.
the Companies (Second Amendment) Act. 29 P28F industrial sickness in the public and private sector is one of the major problems before the before the Government primarily because of its adverse impact on the entire Indian economy in the form of loss of production. loss of employment. ineffective by reasons of enormous delays in the disposal of cases and also its misuse by some On the recommendation of Justice Eradi Committee. and its potential threat to stability and peace of society in the form of labor unrest. 1956 was amended by Comparison between Part VI A of the Companies Act and SICA companies draw heavily from the relevant provisions of the SICA. 2002 and repeal of Sick Industrial Companies ( Special Provisions) Act.com/search/articles/ 29 . The problem of Indian economy in the post independence era and so it is a matter of deep and grave concern outs. rehabilitation and winding up of the sick industrial The insertion of Part VI A in the Companies Act.indlaw. 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.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS CHAPTER VIII: REFORMS IN INSOLVENCY LAWS AFFECTING THE CORPORATE SECTOR I. It was. found to be companies with intent of avoiding creditors. however. The Companies Act. strikes. lock- 29 Sourced from: http://employment. 2002 and Part VI A was incorporated. shortage of industrial goods and services. This part containing provisions relating to revival. 1956 through Companies (Second Companies (Second Amendment) 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. However there is a marked distinction between the provisions under SICA and provisions under newly inserted Part VIA. COMPANIES (SECOND AMENDMENT) ACT. etc. 2002 Amendment) Act.
NCLT to act as winding up authority in contrast to BIFR. efficient and time bound The creation of rehabilitation fund for taking care of the workers of sick industrial companies and the investors as per the global standards.e. Thus multiplicity of litigation before Moreover any person aggrieved by an order or decision of the Tribunal may prefer an appeal to merger or amalgamation or winding up will be avoided as all these matters will be heard and the Appellate Tribunal called the National Company Law Appellate Tribunal (NCLAT) under Section 10GF provides that any person aggrieved by any order or decision of the Appellate APPEAL TO SUPREME COURT of such decision or order. High Court will various Courts or Quasi judicial bodies or forums regarding revival of or rehabilitation or decided by the proposed NCLT. But the successful implementation of Part VI A will be the 30 . the constitution of the National Company Law Tribunal (NCLT). incorporated by the Companies (Second within a reasonable period of time. Amendment) Act.The main object of the Companies (Second Amendment) Act. the Company Law Board (CLB) or the Board of Industrial and Financial Reconstruction (BIFR). The now be consolidated and entrusted to the Tribunal. i. would make the new provisions more effective and rational and would provide better mechanism for both revival/rehabilitation as well as winding up of sick industrial company mechanism for handling industrial sickness in the country which is one of the biggest problems plaguing the Indian Economy. so far only Sections 2 and 6 have been notified) aims to provide for a new. The main salient feature of the Act is the provision of EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS powers and jurisdiction presently being exercised by various bodies. doing away with Section 22 of SICA. etc. section 10FQ of the Act. revival/rehabilitation of sick industrial companies and to protect worker’s interest and where consolidation of fora. 2002 is to facilitate or expedite necessary to wind up the companies. inclusion of experts and specialists in operating agency. viz. 2002 (the date of commencement of which is yet to be notified. 1956. CONCLUSION 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 The Part VI A of the Companies Act.
Moreover specific time limits are also prescribed for the completion 30 Sourced from: http://employment. but creditors. INTRODUCTION of contribution by Partners. 2008 II. 30 P29F As a matter of caution.indlaw. 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 and it is hoped that deficiencies noted in the operation of SICA would be taken care of under LIMITED LIABILITY PARTNERSHIP ACT.responsibility of not only the Tribunal and its Appellate Authority but also of the Governments. it must be remembered that BIFR was not the only body responsible for financial institutions were equally responsible as evident from the submissions made before Justice Eradi Committee. banks and all those concerned with restructuring and slow and poor implementation of SICA. financial institutions. LLP is a blend of a general Partnership and a Company. However. 2008. the structure of LLP is that of the limited company. LLP Act and its Rules contain detailed provisions for revival and rehabilitation of LLPs including appointment of LLP Administrator. REVIVAL UNDER LLP terms of conduct of internal affairs. the Government of India of the scheme of revival which makes it effective and efficient. This new provisions under part VI A certainly appear to be a step in right direction this new mechanism. in regime of a partnership. EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS creditors. As an LLP is a corporate entity with liability limited to the extent Keeping in mind the need for the corporate growth regularities.com/search/articles/ 31 . preparing and obtaining approvals for rehabilitation schemes etc. rehabilitation of sick industrial companies. lenders. debtors Governments. banks and promising. the LLP format provides the flexibility and low compliance introduced Limited Liability Partnership (LLP) Act.
winding up petition. then orders for dissolution are to be passed by the Tribunal within sixty days of the receipt of the application from the Liquidator. If Tribunal is satisfied that winding up process is duly followed. on the revival and rehabilitation of LLP’s through LLP In voluntary winding up intervention of Official Liquidator is dispensed with. Administrator. Moreover there is emphasis and process in other Laws. workmen dues and priority claims. The Draft Rules are based on International best practises models suggested by the United Nations Commission on International Trade Law (UNCITRAL). in the first instance. from the commencement of voluntary winding up and within 21 days or extended time Order/interim order/ appointment of Liquidator/ dismissal of petition/ any other Monitoring of LLP Liquidator by the creditors or the partners/ Tribunal and fixed time not exceeding two months from the date of the appointment of Official Liquidator by order to be passed by the Tribunal within ninety days from the date of presentation of • within sixty days from the date of winding up order by the Tribunal. limit within which all the duties are to be completed.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS DRAFT RULES FOR WINDING UP OF LLP Section 65 of the LLP Act empowers the Central Government to make Rules for the Provisions (to be approved by parliament) in relation to winding up and dissolution of LLP. Designated partners and officer in-charge will be responsible to complete the accounts 32 . Concept of ‘Insolvency Practitioners’ is also recognised. efforts for. The Draft LLP winding up Rules have already been placed before the Parliament which • • • • • • All cost of winding up including Liquidator’s fees shall be subject to right of secured Statement of Affairs of LLP shall be prepared and filed with Liquidator within 21 days creditors. The best efforts are made in the Draft Rules to overcome the weaknesses of winding up • Tribunal or from the order of winding up. • • • will be notified shortly.
However over the years. COMPANIES BILL.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS • • by the Tribunal. 2009 which is divided in 28 Chapters consisting of 426 Sections. • • the national and international economy. com over time and by regrouping the scattered provisions relating to specific subjects. But. the Liquidator shall file an application before the Tribunal explaining the reasons and seeking appropriate direction. The proposed Draft intends to complete the winding up process within one year. • • Dissolution may be effective from the date of filing the dissolution order by Liquidator with Registrar. creditors and The main objectives of the Companies Bill. There is a provision for Professional approach both in voluntary winding up and winding up including deposit of balance if any in the Liquidation Account and in the Public Account III. To bring about compactness by deleting the provisions that had become redundant To revise and modify the Companies Act. the Act continues to comprise of certain deficiencies. despite these extensive amendments and incorporates a new framework for mergers and amalgamations of companies and provides an 31 The Act prescribes provisions for protection of the interests of the investors. inter alia. the functioning and operation of the Act brought to light several lacunae and defects in its provisions. comprehensively. 2009 of India. extensive Insolvency Code based on the latest principles recommended by the United Nations P30F The Companies Act. 1956 is the principal landmark legislation that governs companies in India. The Companies Bill. INTRODUCTION amended from time to time. Upon hearing the application of the Liquidator. public at large. the Tribunal may order for resolution If affairs of LLP have not been wound up within one year from the date of winding up order. In order to remove these defects. 2009 are as follows – 31 Lega l Ser vi c e In di a. 1956 in consonance with the changes in 33 . Commission on International Trade Law (UNCITRAL). the Act was alterations.
Various reformatory and contemporary provisions have been proposed in the Companies Bill. 1956. would allow the country to have a modern CONCLUSION legislation for growth and regulation of corporate sector. Moreover certain 32 http://www.taxguru. The nature of the Rehabilitation and Revival Fund proposed in the Companies (Second Amendment) entitlements to draw money in a situation of insolvency. 2009. Incorporates international best practices based on the models suggested by appeal to National Company Law Appellate Tribunal (NCLAT). 32 P31 F flexibility in rule making to enable adaptation to the changing economic and up and liquidation of companies with the process to be completed in a time bound the United Nations Commission on International Trade Law (UNCITRAL). and • • and winding up in the single forum of National Company Law Tribunal (NCLT) with 4T stringent provisions have also been introduced to fill the lacunae under the existing Companies Act. 2002 to be replaced by Insolvency Fund with voluntary contributions linked to A revised framework for regulation of insolvency. ******* The Companies Bill. Consolidation of fora for dealing with rehabilitation of companies. 2009.in/company-law/provisions 34 . including rehabilitation. Act. winding To re-write various provisions of the Act to enable easy interpretation. on its enactment. their liquidation manner.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS • • To delink the procedural aspects from the substantive law and provide greater technical environment.
12. the Year Cases during Cases under Revival Cases Disposed off during the Year Cases Revived Winding up Dismissed Recommended 3b 0 1 1 3 5 7 13 38 25 92 34 21 11 3c 0 12 31 42 47 30 63 77 61 83 81 49 61 3d 8 29 77 45 27 43 59 48 29 25 21 36 72 1 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 311 298 202 151 155 177 152 193 115 97 233 370 413 3a 0 0 0 1 1 3 3 2 6 7 2 5 5 35 .EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS ANNEXURE A: YEAR WISE PERFORMANCE OF THE BOARD FOR INDUSTRIAL & FINANCIAL RECONSTRUCTION (As on 31.2009) Total Year Regd.
2.EMERGING INSOLVENCY IN INDIA: ISSUES & OPTIONS 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL 429 463 559 430 399 180 118 78 57 64 5644 14 20 30 17 11 55 120 174 194 725 1396 37 47 33 40 29 69 83 76 59 77 801 143 109 106 98 51 19 18 16 11 19 1227 157 120 214 195 68 179 290 202 129 123 2196 Note - 1. 3. As a company normally takes 5/7 years to be revived. ******* companies revived in the year in which Net Worth become positive and companies well as those where Net Worth become positive at the inquiry stage itself have 36 . the new format indicates were discharged from the purview of SICA been clubbed together. Figures of Companies revived after the successful implementation of scheme as Above figures are according to Calendar year. Format earlier adopted was indicating cases revived in the year of registration.
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