Winding Up of Small Insolvent Companies without reference to the NCLT – By Adv. Gurkamal Hora Arora & Tanya Aggarwal

Winding Up of Small Insolvent Companies without reference to The NCLT

I. Introduction

Pursuant to the statement of the Hon’ble Union Finance Minister, Nirmala Sitharaman, the Government notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. The Ordinance has inserted Section 10A to suspend Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016  (“Code”). As a result, the corporate debtors would not be able to file a petition for insolvency u/s 10 of the Code. However, by notifying the Companies (Winding Up) Rules, 2020 (“Rules”) u/s 361 of the Companies Act, 2013 (“Act”) on 24.01.2020, the Government has granted an exit route of winding-up to a class of companies unable to pay debts to their creditors.

II. Key Elements of the Ordinance

In the wake of the adverse impact of the COVID-19 on the economy, business, and financial markets across the globe and the resultant uncertainty, the Government has considered it expedient to suspend initiation of CIRP to protect corporate debtors. The Ordinance clarifies that no application under the said sections shall ever be filed for default occurring in the prescribed period.

The Ordinance excludes defaults arising on account of this unprecedented situation and hence has set the cut-off date as 25.03.2020 (date the nation-wide lockdown came into force), for six months or such further period not exceeding one year.

The reasons appended were that the corporate debtor must not be pushed into insolvency proceedings on account of distress caused by COVID-19, and it would be difficult to find adequate number of resolution applicants.

Section 66 of the Code which deals with Fraudulent or Wrongful trading has also been amended to exclude any default arising in the period of suspension.

III. Summary Procedure for Winding-Up of Companies under Section 361 of Companies Act

Section 361 of the Act provides a summary procedure for winding-up of small companies, wherein the proceedings for liquidation are carried out by an Official Liquidator appointed by the Central Government.

The key conditions of Section 361 of the Act are:

1. Company has assets of book value not exceeding Rs. 1 crore;
2. Central Government shall prescribe the class/classes of companies to be governed by summary procedure;
3. Central Government shall appoint the Official Liquidator as the liquidator of the company;
4. Official Liquidator shall within 30 days of his appointment, submit a report to the Central Government on his opinion whether any fraud has been committed
   1. in promotion, formation; or
   2. management of the affairs of the company or not
5. On satisfaction of the Central Government, a further investigation into the affairs of the company may be directed by the Central Government, followed by a Report within such time period as prescribed.
6. Upon consideration of such Report, the Central Government may order that winding-up may be proceeded under Part I or Part IV, Chapter XX.

IV. The Companies (Winding Up) Rules, 2020

The Rules, which came into effect from 01.04.2020, provide a detailed procedure for summary winding-up for the liquidation of small Companies in Part V (Rule 190). They provide an alternate mechanism without the requirement to approach National Company Law Tribunal (“NCLT”). Under Rule 190(2), the following companies are to be considered as small firms:

1. Asset size of Rs. 1 crore;
2. Accepted deposits exceeding Rs. 25 lakh;
3. Turnover less than Rs. 50 crores; or
4. The total loan under Rs. 50 lakh.

The Rules specify that wherever the word Tribunal is mentioned under Rules 91 to 99 dealing with “Filing and Audit of Company Liquidator’s Account” and Rules 165 to 167 dealing with “Sale by Company Liquidator”, it shall be read as Central Government.

V. Documents and Details Required

A winding-up petition is to be presented in Form WIN 2 and the documents to be enclosed are:

1. MOA, AOA
2. Latest audited balance sheet
3. Copy of notice calling the meeting in which resolution is passed
4. Copy of Special Resolution Passed as per Section 114 of the Act

A Copy of Statement of Affairs must be presented din Form WIN 4, the details required are:

1. Assets not Specifically Pledged
2. Assets Specifically Pledged
3. Freehold Property
4. Gross Liabilities

VI. Procedure for Summary Liquidation

1. Appointment of Official Liquidator:

Where the Company to be wound up falls within the requirements of Section 361 of the Act as mentioned in the Article, on the petition of the company the Central Government shall appoint the Official Liquidator as the Liquidator of the Company. 

2. Sale of assets and properties:

The Liquidator appointed shall take custody or control of all the assets, effects and actionable claims to which the company is entitled or appears to be entitled. This will include all assets owned by the company and all amount due to the company (Rule 22).

The Liquidator shall dispose of all the assets or property belonging to the company after obtaining the previous approval of the Central Government (Rule 165). Every sale has to be made with the confirmation of the Central Government (Rule 166). For executing a sale of the assets and properties of the company, a liquidator can appoint an agent or auctioneer as approved by the Central Government. The gross sale proceeds shall be paid to the liquidator. Any expenses incurred in connection with the sale shall be paid by the liquidator out of the gross proceeds of the sale (Rule 167).

The monies obtained by the Liquidator shall be paid into the public account of India in the Reserve Bank of India (Section 349) not later than the next working day of the RBI (Rule 190(6)).

3. Payments to creditors: 

The Liquidator has to within thirty days of his appointment call upon the creditors of a company to prove their claims from the company. The Liquidator by way of Advertisement or any other mode has to publish a notice for proving the debts giving notice of 14 days (Rule 100).

Under Section 363 of the Act, the creditors shall prove their claim in the manner prescribed under Rules 100 to 125.

The liquidator shall examine the proof of debt lodged by the creditors. Within 30 days from the expiry of the time allowed for making claims, the liquidator shall file a list of creditors with the Central Government. The liquidator shall then discharge the dues of the creditors (Rules 100-125).

4. Maintenance of Registers and Books of Accounts:

The Company Liquidator shall maintain the Registers and books of accounts in which it shall mention the minutes of all the proceedings and resolutions passed at any meeting of the creditors or contributories and other books under Rule 79 and 80 (Rule 190(3)) .

Any creditor or contributory of the winding-up Company shall be entitled, free of charge, at all the reasonable times to inspect the file of proceedings of the liquidation, and to take copies or extracts from any document therein on payment at the rate of five rupees per page, to be furnished with such copies or extracts.

5. Duties of the Official Liquidator

The Liquidator shall investigate into the affairs of the company and submit a report to the Central Government in the prescribed manner. The report shall mention whether any fraud has been committed in promotion, formation, or management of the affairs of the company. The report should also be made in case the liquidator is of the opinion there is no fraud committed. If on the receipt of the liquidator’s report, the Central Government is satisfied that a fraud has been carried out by the promoters, directors or any other officer of a company, it might direct further investigation into the affairs of the firm and that a report will be submitted within a time frame as may be specified.

6. Official Liquidator’s Accounts:

The Liquidator’s accounts have to be audited and filed as per the procedure laid down under the Rules 91 to 99. The said Account and Auditors report is to be placed before the Central Government by the Liquidator.

7. Winding-up Order

After considering the investigation report u/s 361(5) submitted by the Official Liquidator, the Central Government may order that winding up may be commenced in the same manner in which a company is wound up by the Tribunal.

8. Dissolution Order

If the Official Liquidator is satisfied that the Company is finally wound up, he shall submit a final Report to the Central Government. On receipt of such Report, the Central Government shall order that the company be dissolved. Subsequently the Registrar shall strike off the name of the company from the Register of Companies and publish a notification to this effect (Section 365).

VII. Conclusion

In a present/post Covid-19 scenario when many small companies are not left with any exit option, the government has provided a window, though a limited one to them. The Rules provide a comprehensive mechanism for liquidation and winding-up of small companies and are expected to be of aid in the absence of the Insolvency and Bankruptcy Code ecosystem. The Rules are a substantial step towards ease of doing/exiting business.   

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