51 SECTION I INSOLVENCY LAW REGIME [Note: It would be helpful in this section if, where it is relevant to the answer, the relevant sections or articles of the insolvency law were identified] I1. Underlying Philosophy (a) What is the underlying philosophy of the insolvency law of this economy? (For example is it distributive, rehabilitative or penal?) Corporate insolvency law has overriding objectives: to restore the debtor company to profitable trading where this is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book, and where appropriate, deprived of the right to be involved in the management of other companies. To facilitate achievement of these objectives the Two Acts governing insolvency law, and procedure in India: a) The Provincial Insolvency Act, 1920 b) The Presidency Towns Insolvency Act, 1909, provide a battery of legal and administrative instruments and institutional structures. Therefore it can be said that the underlying philosophy of this country has the following objectives: 1) Rehabilitative 2) Distributive 3) Penal The Companies Act, adopts the rules of insolvency, as laid down in these laws and provides the procedural law for corporate insolvency. (b) Are there elements of more than one philosophy present in the insolvency law of this economy? Yes as already mentioned in (a) elements of more than one philosophy are present in the insolvency law of this country. (c) Briefly describe the relevant elements, and if applicable, any penal sanctions available. The four different elements of the philosophy of the insolvency law have been incorporated in (a) Section 28 of the Provincial Insolvency Act which describes the effect of an order of adjudication. This Section contains all the elements, distributive, rehabilitative etc. The effects of an order of adjudication are: 1. the insolvent to aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors. (Distributive element). 2. The whole of the property of the insolvent shall vest in the Court or its receiver and becomes divisible among the creditors. No creditor shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceedings, except with the leave of the court and on such terms as the court may impose. (Immunity and part rehabilitative element). 3. Under Section 38 of the Provincial Insolvency Act, a composition or Scheme of arrangement can be proposed to the Court dealing with insolvency, for securing rehabilitation of the debtor. 52 4. Part IV titled “Penalties” of the said act details the penalties that can be imposed on the insolvent under certain conditions. According to Section 69 if a debtor, whether before or after the making of an order of adjudication, fails to perform the duties imposed on him by Section 22 or does not cooperate in the delivery and possession of his property to the court or his creditors as the case may be, or fraudulently with intent to conceal the state of his affairs or to defeat the objects of this Act, keeps false books or tampers with the related records and documents and fraudulently with intent to diminish the sum to be divided among his creditors conceals any debts due shall be punishable on conviction with imprisonment, which may extend to one year. Section 22 of the Provincial Insolvency Act requires the insolvent debtor to produce all books of account and give inventories of his property and list all creditors and debtors and debts due to and from them, and submit to examination by the Court or the receiver and execute such instruments or acts as required by the court or receiver. Section 71 provides that where an insolvent has been guilty of any of the offences specified in Section 69, he shall not be exempt from being proceeded against therefore by reason that he has obtained his discharge or that a composition or scheme of arrangement has been accepted or approved. Section 72 provides that an undischarged insolvent obtaining credit to the extent of fifty rupees or up wards from any person without informing such person that he is an undischarged insolvent, shall on convictions by a Magistrate, be punishable with imprisonment for a term which may extent to six months, or with fine or with both. The Presidency Towns Insolvency Act, 1909 also has similar provisions. Section 17 details the effect of order of adjudication. Section 23 contemplates a Scheme of Arrangement or composition being proposed by an insolvent debtor for rehabilitation. Also Section 102 to Section 105 deal with penalties as with Section 69 to 72 of the Provisional Insolvency Act.Under the Companies Act the court established, has the jurisdiction to deal with corporate insolvency. For Schedule I industries under the Industries Development and Regulation Act, the BIFR deals with the distributive and rehabilitative aspects of insolvency. BIFR has also got penal powers. However, if such company is not capable of revival then the company court receives a report from BIFR to commence insolvency in accordance with the Companies Act. Under the Companies Act there are similar provisions as are applicable to personal insolvency under a special part namely Part VII dealing with insolvency. Section 447 prescribes the effect of winding up order which is akin to the Provincial and Presidential Insolvency Laws. Section 446 of the Companies Act, has among other things, barred the commencement of a suit or other legal proceeding against a company in liquidation without the leave of the court. An almost similar legal restriction is found in Section 17 of the Presidency Towns Insolvency Act and Section 28(2) of the Provincial Insolvency act, imposing a ban on creditors, to whom the insolvent is indebted, from commencing any suit or other legal proceeding against the property of the insolvent in respect of the debt except with the leave of the Insolvency Court. The provisions of Section 456 of the Companies Act declare that the custody of the company’s property and its vesting is with the Official Liquidator upon the winding up being ordered. The right to sue and be sued stands transferred to the Official Liquidator. No receiver can be appointed of properties, within the custody of the Liquidator. 53 Punitive provisions are also contained in Sections 531 to 545 of the Companies Act wherein avoidance of fraudulent preference or transfers are stipulated. The shares transfers made after the commencement of winding up can be avoided. Specific provisions for offences by officers of the company in liquidation, offences for falsification of books and frauds are also stipulated. The court has power to assess damages against delinquent directors and prosecute delinquent officers. A rehabilitation scheme or a scheme of arrangement can also be proposed for winding up under the Provisions of Sections 391 to 394 as a compromise arrangement or a reconstruction scheme on principles akin to the law applicable to personal insolvency. I2. Jurisdiction in Insolvency Matters (a) In which judicial category is insolvency law classified in the legal system of this economy? (For example civil, commercial or administrative.) (b) Which Courts, tribunals or administrative bodies in this economy are competent to exercise jurisdiction in insolvency matters? (c) Are any limitations placed on the jurisdiction of any of these bodies? Insolvency jurisdiction is a special jurisdiction. It is essentially civil in nature and there are separate insolvency courts. The District Courts under the Provincial Insolvency Act have jurisdiction to hear insolvency petitions. The High Court where the High Court has original jurisdiction has got insolvency jurisdiction. The High Court in certain presidency towns like Bombay, Calcutta and Chennai have got the insolvency jurisdiction under the Presidency Towns Insolvency Act. The High Courts of Bombay, Calcutta and Chennai under its original side jurisdiction have specific rules made for determining insolvency matters. The District Court Rules under the Provincial Insolvency Act, therefore, stipulate the rules to be adopted for insolvency proceedings. There are no pecuniary jurisdiction limitations on the District Court under the Provincial Insolvency Acts or on the High Courts of Mumbai, Calcutta and Chennai under the Presidency Town Insolvency Act. I3. Types of Insolvency Procedures (a) What types of insolvency procedure are available in the legal system of this economy for the administration of corporate debtors in financial difficulty? (For example bankruptcy, liquidation (winding up), receivership, restructuring or other forms of administration.) (b) Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure. (c) Identify the relevant legislation governing each type of insolvency procedure available for corporate debtors. S.425 of the companies Act lists the methods of winding up of a company. The winding up (liquidation) of company may be either: a) by the Court; or b) voluntary; or c) subject to the supervision of the Court. 54 In such cases all individual members of the corporate are regarded as contributories. If any of such contributories are adjudged insolvent, his assignors in insolvency would represent them for all the purpose of winding up. S. 433 of the Companies Act, describes the circumstances under which a company may be wound by the court: Clause (e) of this section states; “If the company is unable to pay its debts” is a ground for winding up. Inability to pay its debts would be a case like, where a company’s entire capital was lost in heavy losses and no accounts were prepared and filed and no business was done for one year, the Registrar had fully made out a case of inability to pay debts. These debts however, would only include debts, incurred after the legal incorporation of the Company. Winding up of Sick Industries Companies The Sick Industrial Companies (Special provisions) Act, 1985 (1 of the 1986) was enacted to make in the public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertaking, the speedy determination by a Board of experts for adopting the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditions enforcement of the measures so determined and for matters connected therewith or incidental thereto. Under section 4 of the said Act a ‘Board for Industrial and Financial Reconstruction is constituted to exercise the jurisdiction and powers and discharge the functions and duties under the Act. The powers conferred by the Act are very wide and include among other things the power to conduct an enquiry into the working of sick industrial companies, and if it thinks fit record and forward to the High Court its opinion that it is ‘just and equitable’ that the sick industrial company shall be wound up as per section 20 (I). Section 20 (2) provides that the High Court shall on the basis of the opinion of the Board, order winding up of the sick industrial company. In effect the opinion of the Board acts as an order to the High Court to wind up the company. This provision runs counter to the well settled principle of company law that the discretion to wind up a company rests with the Court and that event in cases, where the existence of grounds for making up a winding up order is established. The court need not order winding up, of the company. Winding up proceedings against sick companies were allowed to be continued order the BIFR may express the opinion that the company be wound up, such an opinion of the BIFR can be disputed only by showing that a viable scheme cab en formulated for keeping the company advise. In such, suits, appointment of Court receiver in the usual order. It will not make any difference in this position, if the loan is given by a bank or a nationalized bank and to a sick undertaking. But in such cases courts give proper directions to the receiver as to the steps to be taken by him for running the mortgage factory or for managing the other assets of the corporate debtor. According to Section 434 of the Companies Act, a company shall be deemed to beunable to pay its debts when (a) if a creditor, by assignment or otherwise to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company have 55 for there weeks thereafter neglected to pay the sum , or to secure or compound for it to the reasonable satisfaction of the creditor. (b) If execution or other process insured on a decree or order of any court in favour of a creditor of the company shall be returned unsatisfactioned in whole or in part, or (c) if it is proceed to the satisfaction of the Court that the company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company. Under the abovementioned clauses, before a corporate can be sent to liquidation, it must be “unable to pay its debts”. This presupposes that there exists a debt and the company is unable to pay it. Prima facie this must relate to the solvency of the company. So far as the creditor is concerned, who cannot obtain payment of his debts, he is entitled as between himself and the corporate ex-debits justifier to an order for winding up, if he brings his case within the Act. But he must first of all establish that there is a debt owed and secondly, must satisfy the court that the company is unable to pay the same, several creditors can also join hands in filing a winding up petition but not when their causes of action are different. The procedure for winding up is described by the following section of the Companies Act. Section 441. Commencement of winding up by the Court: (1) Where, before the presentation of a petition for the winding up of a company by the Court a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the revolution, and under the court, on proof of fraud or mistake thinks fit to describe winding up shall be deemed to have been validly taken. (2) In any other case, the winding up of a Company by the shall be deemed to commence at the time of the presentation of the petition for the winding up. S.443 Powers of Court on hearing petition – On hearing a winding up petition, the Court may: a) dismisses it, with or without costs, or b) adjourn the hearing conditionally or unconditionally; or c) make any, interim order that it thinks fit, d) make an order for winding up the company with or any other order that it thinks fit. The Court may also refuse to order winding up altogether, if some other alternative remedy is available to the creditors and they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. Section 444. Order for winding up to be communicated to official liquidator and registrar—where the Court makes an order for the winding up of a company the Court shall forthwith cause intimation thereof to be rent to the official liquidator and the registrar. The object of this provision in to present an interregnum and to present a break in the proceedings. It provides for the communication of the winding up order forth with to the official liquidator so that he may take up the administration forth with. Under the scheme of the Companies Act, the official liquidator is the only liquidator that can be appointed in winding up proceedings by Court. As explained above bankruptcy law is essentially relatable to personal insolvencies of natural persons. Winding up procedures are applicable to corporates under the Companies Act. Other forms like cooperative societies or statutory corporations are subject 56 to winding up or liquidation in accordance with their statutes of incorporation which may be different from the Companies Act. Receivership is a procedure available under the Provincial Insolvency Act and the Presidency Towns Insolvency Act. The appointment of a receiver is regulated by the original side rules of the High Court or by the Civil Procedure Code (order 40). Schemes of restructuring are the subject matter of insolvency courts or the company court dealing with insolvency. The procedure for initiating the insolvency is as detailed above in the sections referred above. The two legislations namely the Companies Act and the Sick Industrial Companies (Special Provisions) Act have been identified above. The procedure for winding up however is limited to the provisions of the Companies Act alone as the Board for Industrial and Financial Reconstruction does not deal with the actual winding up of a company. It has powers to only recommend the winding up in the event of failure of any form of rehabilitation under the rehabilitation measures prescribed under Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985. I4. Commencement of Insolvency Procedures (a) Is it usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced? No. It is not usual or customary in respect of a corporate debtor, which is insolvent to attempt to negotiate an informal administration before formal insolvency proceedings are commenced. A regulated method of informal administration as envisaged by Chapter 11, under the American Insolvency Law, does not happen and is not provided for in India. Even the English Insolvency law has similar provisions. Part 1 of the English Insolvency Act 1986 contains provisions to enable a company including one for which an administration order is in force or which is being wound up, to enter into a voluntary arrangement with its creditors. But in India, this does not happen because there is a breakdown of relationships on the occasion of bankruptcy and insolvency. If there are few creditors then it is possible for an informal administration to be worked out with the consent of such creditors provided, the creditors believe in the veracity of the submissions of an insolvent debtor and are able to secure assets which are liquid or capable of generating income which could be steadily applied in disposing of the creditors claims. These situations are rare in India. Normally, creditors try and obtain an attachment before judgement or an injunction or receivership so as to prevent a frittering away of the assets of an insolvent. (b) In relation to each type of insolvency procedure available in the legal system of this economy, who may commence the procedure? (For example the corporate debtor, secured creditors, unsecured creditors, directors, shareholders, the State.) If a company is insolvent, either in the absolute sense, or in the sense of being unable to meet its liabilities as they fall due, the winding up procedure is usually resorted to as the means of bringing about its orderly liquidation and dissolution. S.425 of the Companies act, describes the modes of winding up. “The winding up of a company may be either (a) by the Court; or (b) voluntary; or (c) subject to the supervision of the Court. 57 The commencement of the procedure for winding up by the Court is described by S. 439: (a) by the company; or (b) by any creditor or creditors, including any contingent or prospective creditor or creditors; or (c) by any contributory or contributories; or (d) By all or any of the specified in clauses (a), (b) and (c) whether together or separately; or (e) by the Registrar; or (f) in a case falling under S.243 by any person authorized by the Central Government in that behalf. S. 484 of the Act, deals with the process of voluntary winding up. The winding up procedure can be commenced with a resolution passed at the general meeting. S. 522 of the Act, deals with the winding up under the supervision of the Court. Even this winding up is commenced by the resolution passed by the company. A voluntary winding up is commenced either by the shareholders only when the corporate purpose of the company has failed and there is no scope or need to proceed with the functions of the company. The Registrar has rights to wind up a company if there are no corporate filings and a mere shelf life of a company is sought to be maintained without any business. (c) On what basis may each type of insolvency procedure be commenced, or what requirements must be satisfied before the procedure may be commenced? (For example non-payment of debts; balance sheet/cash flow insolvency; trading losses; resolution by directors to enter insolvency procedure.) (1) S.433. Circumstances in which company may be wound up by the Court: (a) if the company has, by special resolution, resolved that the company may 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 does not commence its business within one year from its incorporation, or suspends its business for a whole year; (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two; (e) if the company is unable to pay its debts; (f) if the Court is of opinion that it is just and equitable that the company should be wound up. Each of the grounds namely non-payment of debts, cash flow insolvency, trading losses or the resolution of the company to enter insolvency are good grounds for commencing corporate insolvency procedures. (2) In voluntary winding up the winding up proceedings can be commenced when the period, if any, fixed for the duration of the company by the articles has expired, or the event, if any, has occurred, on the occurrence of which the articles provide that the company is to be dissolved, or a resolution of shareholders is passed as a resolution to wind up the company (Section 484 of the Companies Act). The company should otherwise be solvent enough to discharge its debts (Section 488). 58 (d) How is each type of insolvency procedure commenced? (For example by application to the Court, by administrative act, by written notice to the business organization.) This question has been answered in (b) and (c). (e) What is the usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor? The usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor is usually one day to four months (this is a statement based on experience). (f) How effective is the judicial or court system (or administrative system) in relation to the handling of formal insolvency proceedings? Each high court which has a company court has an official liquidator attached to the court and has a formal organization to support the procedures of insolvency. Insolvency proceedings by the company court are quite effective though the detailed procedures of insolvency are too time consuming and need to be shortened. The recommendations have been made in the new Companies Bill for short or fast track insolvency procedures. I5. Effect of Insolvency Procedures (a) In relation to each type of insolvency procedure available in the legal system of this economy, what is the effect on the corporate debtor, its constituent parts and its business relationships of initiation of the relevant insolvency procedure? (b) If another insolvency procedure has already been initiated in relation to the corporate debtor, how does the initiation of a second procedure affect the first? As explained above an insolvency of a company has the same effect as an insolvency of a natural person and suspends the rights of the directors or the company in dealing with its assets other than with the regulation of the court. Fraudulent preferences or transfers made during the insolvency or transfer of shares are voided. Only the official liquidator can enter into fresh legal contracts on behalf of the company. The official liquidator has to be bought on record in each legal proceeding pending with leave of the court. The decree will have to be passed against the official liquidator and in the event of an unsecured claim only proofs in insolvency are the appropriate remedy as unsecured creditors shall have to participate in insolvency. Only secured creditors can prove against the official liquidator outside of the procedure of the insolvency law in normal civil proceedings. Remedies of persons in contractual relationships are also only available with leave of the court as no execution distress or warrant can be issued or executed against the company without the leave of the court. When more than one insolvency actions are initiated since the official liquidator is an officer of the court or is a corporation sole, all liquidation matters are determined by proofs of insolvency before the official liquidator regulated by the company court. Multiple insolvency matters are effectively consolidated in a single winding up action or procedure.
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