The term ‘winding up’ has been defined under Section 2(94A) of the Companies Act, 2013 (hereinafter referred as ‘Act’) as, “winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016”. The aforesaid section was added in 2016 by virtue of Section 255 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘IBC’) which amended the Act in accordance with Schedule XI of the IBC.
Presently, the legal suit with respect to voluntary winding up of the company on the ground of inability to pay debts is dealt under the IBC which also provides for the quick dissolution of the company.[i]
Before the enactment of the IBC, the provision regarding winding up of the company on the ground of inability to pay debts was governed under Section 271(2) of the Act which was repealed by Section 255 of the IBC and currently it is governed by Section 7 to 9 of the IBC, being initiation of corporate insolvency resolution process by financial and operational creditors.[ii]
The 124th Law Commission Report of 1988 titled “The High Court Arrears- A Fresh Look” emphasized over the establishment of autonomous tribunal in order to reduce multiple litigations before different courts and forums and also to reduce burden from courts. As a result National Green Tribunal was established for focusing solely upon Environmental Law matters. Following the same path, the government in the year 2015 amended the Companies Act and established National Company Law Tribunal and National Company Law Appellate Tribunal to deal with Company Law and IBC cases. Keeping the same reason of establishing tribunal in mind, government recently notified Companies (Winding Up) Rules, 2020 (hereinafter referred as ‘Rules’).[iii]
On 24th January 2020, the Ministry of Corporate Affairs while exercising its power conferred by Section 468 (1) & (2) and Section 469 (1) & (2) of the Act has notified the Rules which would be effective from 1st April 2020. The rationale behind such a move was mainly to lessen the burden of the National Company Law Tribunal by permitting summary procedures for liquidation to be filed with the Central Government. Section 361 of the Act deals with summary procedure for liquidation of companies which has assets of book value not exceeding one crore rupees and belong to such classes that may be prescribed by the government.
Applicability of Rules
The above-mentioned Rules would be applicable to companies whose total outstanding deposit does not exceed Rs 25 lakh; or companies whose outstanding loan does not exceed Rs 50 lakh; or companies with turnover less than Rs 50 crore; or companies with paid-up capital of less than Rs 1 crore. Therefore in companies falling within the specified threshold will require the approval of the central government rather than that of NCLT for their dissolution. The companies falling outside the threshold limit will not be affected.[iv]
Analysis
The Rules are one of the several steps taken by the government to reduce the burden from NCLT in the past few months. Some of the others include appointing additional members and setting-up of additional courts from time to time. As per the Ministry of Finance, five new benches of NCLT have been set-up during the 2018-19 financial year and the government has recently appointed 28 new members to NCLT and 4 members to NCLAT. Such a step will also result in improving the ease of doing business as it will make the winding up procedure simpler, economical and time-saving. The government has taken several steps for improving the ease of doing business like withdrawing 14000 prosecutions under the Act, decriminalizing several penal provisions under the Act and incorporating the Rules.[v]
The number of cases pending at National Law Company Tribunal as on 30th September 2019 was 19,771, as informed by Hon’ble Minister of State for Finance and Corporate Affairs Mr. Anurag Singh Thakur in a written reply to Rajya Sabha.[vi] This clearly reflects that the burden and pressure upon the NCLT is huge and therefore the government has taken a positive step in permitting summary procedure for liquidation to be filed with central government rather than NCLT. However, it is unclear if the step or process will be fast-tracked by merely shifting the jurisdiction because a significant portion of procedure applicable to regular companies continues to apply to the companies that can choose to go for summary procedure. For instance, where the creditors of the company do not support the winding up but its shareholders want it to be dissolved, in such a situation Rule 116 allows the creditor(s) who is/are aggrieved by the Company Liquidator’s call for winding up, to file an appeal against his decision within 21 days from serving of notice of winding up.
The aim of Rules is not only to reduce the burden from NCLT but also to simplify and fasten the winding up process of the companies. In one of the articles, Vice-President of NCLT Kolkata Bar Association had stated that due to over-burdening of the IBC cases, disposal of company law cases is being slowed down and it is resulting in delay of justice to the companies.[vii]
The Rules mandates that the dissolution of the company will be carried out by an official liquidator (Rule 174 & 175 of Rules), who would be hired by the government and would take charge of the assets of the company that goes into liquidation under various provisions of the law (Rule 22 of Rules). The Rules prescribe that official liquidators would have to manage the resources of the companies going into liquidation under different provisions of law (Rule 130 of Rules) and also the manner of selling assets under the guidance of bankruptcy tribunal.[viii]
Conclusion
The number of cases pending before the Indian courts is enormous. Though the overall ranking of India in Ease of Doing Business Index has considerably improved but India lags behind (154out of 190 countries)[ix] in the area of starting a business due to which a lot of companies do not believe it to be wise to invest in the Indian market. Various steps are being taken by the government and the judiciary for that matter to reduce the pendency of cases and improve the rank. For instance, Parliament also brought in an amendment in the Code of Civil Procedure by introducing, inter-alia, 120 days deadline to file written statement in commercial suits [The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015]. However, it seems that most of these steps are going ineffective given the propensity of misuse of processes. To curb the same, in 2019, the Supreme Court of India, vide its landmark judgment in the case of M/s SCG Contracts India Pvt. Ltd. V/s. K.S. Chamankar Infrastructure Pvt. Ltd. & Ors.[x] held that the 120-day deadline to file the written statement in Commercial Suits is mandatory, thereby, leaving no scope for courts to exercise their discretion to relax the same. The Supreme Court also while emphasizing the legislative intent behind the amendment, ruled that any relaxation if given irrespective of reasons quoted for delay in filing written statement within the prescribed 120 days deadline would nullify the very legislative intent with which the amendment has been brought in. Having said that it will be interesting to see how courts will interpret the Rules to ensure that no relaxation is provided with except where the Rules prescribes otherwise and to further ensure that justice is provided to the aggrieved party while helping in reduction of pendency as well. For the time being, let us just hope that these Rules take a good turn and in the interest of Indian economy.
[i] https://www.thehindubusinessline.com/economy/policy/new-rules-for-fast-track-winding-up-of-firms-may-lighten-nclts-burden/article30685529.ece#
[ii]https://www.lakshmisri.com/insights/articles/winding-uplegal-position-under-companies-act-2013-vis-vis-insolvency-and-bankruptcy-IBC-2016/#
[iii] https://acadpubl.eu/hub/2018-119-17/1/66.pdf
[iv] http://www.mca.gov.in/Ministry/pdf/Rules_28012020.pdf
[v]https://www.financialexpress.com/economy/to-improve-ease-of-doing-business-govt-withdraws-over-14k-prosecutions-under-companies-act/1794517/
[vi]https://economictimes.indiatimes.com/news/economy/policy/10860-cases-under-ibc-pending-before-nclt-at-the-end-of-september-govt/articleshow/72348493.cms
[vii] https://www.thehindubusinessline.com/specials/india-file/cramped-for-justice/article29881448.ece
[viii]https://www.livemint.com/news/india/centre-notifies-rules-for-winding-up-small-firms-without-going-to-tribunal-11580278468155.html
[ix] https://www.doingbusiness.org/en/rankings#
[x] Civil Appeal No. 1638 of 2019 arising out of S.L.P (C) No. 103/2019
This article is written by Piyush Agrawal & Sunil Singh of HNLU, Raipur.
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