Sunteți pe pagina 1din 23

Corporate Insolvency laws in India

Vinod Kothari
1012 Krishna 224 AJC Bose Road Calcutta 700 017 Phone 033-23233863/23233864/2281 1276/22817715/22813742 Fax 91-33-23233863/22811276 Email: vinod@vinodkothari.com; vinodk@vsnl.com

Copyright information

All rights reserved with Vinod Kothari.


The presentation is to be used only for the purpose of the training course/meeting/class for which it is intended and any use of any part of it, other than for distribution at such training course/meeting/class is unauthorized. No rights of any kind have been transferred in soft copy of the presentation, meant only for the purpose of printing. The soft copy should be purged immediately after printing. No copying or distribution of this presentation in any form is allowed except with the express permission of the author.

Corporate insolvency by Vinod Kothari

Scheme of corporate insolvency under Indian law


Individuals going insolvency insolvency laws to apply; consequence: declaration of insolvency and incapacity to contract Corporate insolvency corporate laws to apply; consequence usually, winding up. Fragmented law of corporate insolvency:

Company unable to pay its debt discretionary power with Court to wind up the company [sec 433] Company having become a sick company mandatory reference to BIFR [SICA, proposed to be replaced by sec. 424A of Companies Act] Default in terms of repayment of debentures: appointment of receiverprovision mirroring English law exist in sec. 424, but rarely practiced Quasi-bankruptcy:

Compromise and arrangement sec 391-4: practice evolved includes lot more cases of healthy companies than insolvency companies Reduction of capital sec 100 Striking off the name of a defunct company sec. 560

Corporate insolvency by Vinod Kothari

Basic principles of corporate insolvency


Restoring the company to profitable trading Maximising returns to creditors Fair and equitable system of ranking of claims Identifying causes of insolvency and sanctions against those responsible therefor Placement of the assets of the company under external control Substitution of collective action for individual pursuits Statutory distribution Avoidance of certain transactions and fraudulent conveyances Dissolution and winding up

Corporate insolvency by Vinod Kothari

Scheme of winding up provisions

Circumstances in which company may be compulsorily wound up; meaning of inability to pay debts sec. 433434 Procedural issues in compulsory winding up, consequence of winding up sec. 435-447 Official liquidator, statement of affairs, etc 448-463 Powers of the court 466-480 Dissolution 481 Proof of debt 528 Priority of claims, insolvency rules, preferential payments 529, 529A, 530 Fraudulent preference and avoidance powers sec 531-537 Delinquencies and penalties sec 538-545
Corporate insolvency by Vinod Kothari

Institutional machinery

Winding up handled by District or High Courts; High court is the court of proper jurisdiction:

Power sought to be transferred to NCLT

Official liquidator is the liquidator in compulsory winding up:

currently an officer of the Central govt Amendment to allow for professional firms or bodies corporate to be appointed official liquidators

Creditors committee of inspection may be appointed

Corporate insolvency by Vinod Kothari

Meaning of insolvency

In context of corporate laws, the word insolvency has neither been used nor defined Sec. 433 (e) covers a company which is unable to pay its debts:

Inability to pay debt amplified in sec. 434

A creditor with due of Rs. 500 (amended to Rs 100000, not effective) or more serves a demand by registered post; company neglects to pay, secure or compound the same in 3 weeks; Execution of a decree returned unsatisfied Court is otherwise satisfied company is unable to pay debts Winding up machinery cannot be used as a device to enforce payments: Amalgamated Commercial Traders 35 Comp. Cas 456 (SC):

Test is commercial insolvency, based on prevailing assets and prevailing liabilities; test based on current assets; whether the company can remain a going concern

Analogous to acts of insolvency under the Provincial Insolvency Act.

Corporate insolvency by Vinod Kothari

Steps in compulsory winding up


Petition for winding up [sec 439]

Presentation in chambers [rule 96]; the judge may notify the company before admission.

If petition is admitted, winding up commences [sec 441] Advertisement of petition [rule 96] Power of the court to stay or restrain proceedings against company [sec. 442] (repealed not yet effective) After admission but before final order, court may appoint OL as provisional liquidator [rule 106] Hearing of petition and power on hearing dismissal, adjournment, interim order or order for winding up Communication of the order to Official Liquidator [sec 444] Notice to serve statement of affairs [rule 124] and Filing of statement of affairs with the OL sec 454 Report of the OL on the statement of affairs sec 455 Liquidator to take custody of the property of the company sec 456 Proof of debts: fixation of date by the OL by advertisement; claimants to prove their debt; liquidator to communicate acceptance or rejection of debt rules 147-163 Appeal by creditor against decision of OL rule 164 Proof and list of creditors to be filed in court rule 167 Application of the assets of the company Application of insolvency rules sec 528/529; priority of payments sec 529/529A/ 530 Dissolution of the company sec. 481

Corporate insolvency by Vinod Kothari

How much time does it take to wind up?

Justice Balkrishna Eradi committee revealed data of time taken it may run on an average upto 25 years; Eastern region being the worst Position as on 31.3.1999
0-5 YEARS 5-10 YEARS 130 77 212 184 603 10-15 YEARS 86 83 89 224 482 15-20 YEARS 56 73 68 124 321 20-25 YEARS 47 71 51 82 251 25 YEARS AND ABOVE 66 293 78 36 473 TOTAL

NORTHERN REGION * EASTERN REGION SOUTHERN REGION WESTERN REGION

259 126 325 355 1065

644 723 823 1005 3195

TOTAL

Corporate insolvency by Vinod Kothari

Effect of winding up order


All suits stayed on making of the winding up order [sec. 446] Advertisement of the order [rule 113] Notice of discharge to all employees, except where business is continued sec 445 (3) Board of directors ceases to exist, except for filing of SOA
Undertaking and the assets pass under the control of the liquidator J K (Bombay) (P) Ltd. 40 Comp Cas 689 (SC):

Liquidator does not acquire ownership of the property (as in case of insolvency); he merely gets the custody Amount for which the company is a trustee cannot be regarded as a part of the bankruptcy estate of the company :

Problems may arise in case of commingling of money

10

Corporate insolvency by Vinod Kothari

Pursuit of individual claims

Winding up procedure implies all personal rights be converted into right to prove debt in winding up Sec 446 provides for stay on all suits; the winding up court to decide all suits by and against the company The stay is on suit a secured creditor may enforce security interest without a suit; therefore, real rights of secured creditors protected:

Private sale protected: Ranganathan vs Govt of Madras AIR 1955 SC 604 Appointment of receiver by secured creditor permitted Department circular 16/76 dated 28th June 1976

Criminal proceedings or proceedings against directors or officers are not stayed Income tax proceedings will continue against the liquidator
Corporate insolvency by Vinod Kothari

11

Proof of debts

Right of action jus in personam become right to prove a claim in bankruptcy General rule - insolvency rules are applicable to provable debts, valuation of annuities, future and contingent liabilities etc.

Sec 49 of the PIA provides for mode of proof The court may direct particular creditors to be admitted without proof, e.g. government dues [Rule 149] In case of several workmens claims, a single proof may be filed by foreman etc for several workers By affidavit, supported by vouchers/ agreement, where applicable [Rule 150], Creditor need not appear for investigation unless required

All debts are provable including contingent and future claims:


How is debt proved:

Value of the debt is the value as on the date of winding up Interest, if not specifically stated, may be admitted @ 4% upto the date of winding up

12

Corporate insolvency by Vinod Kothari

Priority rules: secured creditor

Rule about secured creditors and workmen:

Secured creditor may opt to prove his debt: If yes, secured creditors and workmen have pari passu interest in the value of a security proviso to sec. 529 (1):

Workmen defined with reference to Industrial Disputes Act Workmens dues include wages, holiday pay, retrenchment compensation, dues from employee benefit fund maintained by the company

If secured creditor realises his security, he will cede a rateable proportion for workmens claims To the extent of the sacrifice the secured creditor makes for workmens portion, his claim becomes a an overriding preferential claim sec. 529A

Workmens dues, and the claims of secured creditor sacrificed to workmen are over-riding preferential claims sec. 529A
Corporate insolvency by Vinod Kothari

13

The stacking order of priorities

Secured creditors from out of the assets securing their claims, subject to pari passu claim of workmen:

Court rulings holding government claims resulting into a statutory charge amount put govt in position of a secured creditor

Workmen and secured creditors to the extent they sacrificed their interest to the workmen overriding preferential claims Costs and expenses of winding up sec 530 (6) Preferential creditors sec 530 (1) Floating charge holders Unsecured creditors
Corporate insolvency by Vinod Kothari

14

Preferential creditors

The following are defined as preferential creditors:

All revenue, tax, cess and rates due to Central, state or local authority, which have become due and payable within 12 months next before the effective date:

Conflicting and overriding provisions of sec. 178 of the IT Act and other taxing laws Other govt dues do not have preference

Wages and salaries of any employee, for not exceeding 4 months during 12 months prior to effective date: sum not exceeding Rs 20000 per employee Holiday remuneration payable to employees ESI dues Workmens compensation for loss of employment Employee benefit fund dues out of funds with the company Expenses of investigation u/s 235-237

The above shall rank pari passu as amongst themselves


Corporate insolvency by Vinod Kothari

15

Avoidance of fraudulent transfers sec 531

Any transfer of property, delivery of goods, payment, execution or other act within 6 months prior to commencement of winding up:

Is a fraudulent preference if it would have been treated, in case of an individual, a fraudulent preference Law derives principles from sec. 54 of the PI Act: elaborate body of case law under the PI Act applicable here Scope of the section is wide includes payments, transfers and even creation of charges on properties Undue preference is the rule:

Knowledge of imminent bankruptcy makes it a fraudulent preference Burden of proof is on the person alleging a fraudulent preference

6 months time frame need to prefer petition for winding up in proper time to avoid preferences
Corporate insolvency by Vinod Kothari

16

Avoidance of voluntary transfers sec 531A

All transfers of property or delivery of goods, not being:

A)

In ordinary course of business, or In favour of a purchaser in good faith AND for valuable consideration

B) taking place within 12 months prior to commencement of winding up Shall be void against the liquidator

Floating charges created within 12 months prior to commencement of winding up are invalid:

Unless it is proved that the company was solvent immediately after creation of the charge sec. 534

The liquidator may disclaim any onerous property sec 535 Any transfer made after commencement of winding up except with the consent of the liquidator is void sec. 536

17

Corporate insolvency by Vinod Kothari

Delinquent directors/officers

Several offences are punishable with imprisonment upto 5 years, or fine or both sec 538 Falsification of books of a company being wound up sec 539 Penalty for frauds by officers imprisonment upto 2 years : sec. 540 Liability for fraudulent conduct of business: personal liability for debts sec 542; also imprisonment upto 2 years [sec 542 (3)]
Corporate insolvency by Vinod Kothari

18

Proceedings similar to bankruptcy

Reference under SICA

Sick company company whose net worth has been eroded [sec 3 (o) of SICA]:

Difference between winding up and SICA proceedings:


Erosion of net worth is surest proof of inability to pay debts overlap cannot be denied SICA applicable only to industrial undertakings, objective is curative, corrective SICA reference is mandatory on the part of the company sec. 15 BIFR to make enquiry whether the company may be made to turnaround [sec 16]; if so, so make appropriate orders - sec 17; preparation of scheme by the operating agency [sec 18] and its sanction by BIFR [sec 18 (4)] Suspension of legal proceedings against the company sec 22 Provision for potentially sick companies (based on erosion of 50% of net worth reference to Board and referendum to shareholders; power of shareholders to remove a director [sec 23]
Corporate insolvency by Vinod Kothari

20

How successful has BIFR been?

From 1987 to 2003, there were 4748 references of which only 407 cases have been revived, and 260 are under revival. 1301 cases dismissed 1222 cases recommended for winding up See details at http://www.bifr.nic.in

21

Corporate insolvency by Vinod Kothari

Compromise and arrangement


Covers compromise/ arrangement with all creditors/ all members/ class of creditors/ class of members By sec 390, sections 391/393 apply to all companies liable to be wound up under the Act:

Logically should have meant, cases covered by sec. 433; compromise or arrangement is an alternative to winding up However, interpreted in Khandelwal Udyog Ltd 47 Comp Cas 503 (Bom) as including all companies to which winding up provisions apply

The power u/s 391 is to make an arrangement or compromise binding on all, if it is:

Approved by members/creditors representing 75% in value

Court may make orders to enforce the compromise/ arrangement sec 392 Where a meeting is called u/s 391, certain disclosures shall be made sec 393 Court may pass order for transfer of property to another company necessary power to facilitate amalgamation, merger and demerger

22

Corporate insolvency by Vinod Kothari

Reduction of capital

Reduction of capital to the extent the capital is lost, or capital is in surplus, permitted u/s 100 with the approval of the Court

23

Corporate insolvency by Vinod Kothari

S-ar putea să vă placă și