India: Insolvency Laws For Corporate Persons: Position Under Companies Act, 2013 Vis-À-Vis Insolvency & Bankruptcy Code, 2016

Section 255 of the Insolvency and Bankruptcy Code, 2016 (hereinafter "the Code") has been notified with effect from November 15, 2016 and by virtue of Section 255 of the Code, the Companies Act, 2013 (herein after referred to as "2013 Act") stands amended in accordance with Schedule XI of the Code. The aforesaid Schedule XI now defines the term "winding up" by introducing a new Section 2(94A) to the 2013 Act as "winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016." Thus, certain winding up proceedings will now be governed by the provisions of 2013 Act and certain under the Code. The other significant changes introduced by the Code include removal of provisions of 'voluntary winding up' and winding up on the ground of 'inability to pay debts' from the 2013 Act as these proceedings are now to dealt with under the Code.

Subsequent to the notification of Section 255 of the Code, the Ministry of Corporate Affairs (hereinafter "MCA"), through its Notification dated December 07, 2016, has notified the provisions of Chapter XX of the 2013 Act with effect from December 15, 2016. These provisions address winding up of companies on any ground 'other than inability to pay debts', enlisted under Section 271(a) to (e) of the 2013 Act.

Corporate Insolvency Procedure: Position prior to and after November 15, 2016

The provisions for winding up in the 2013 Act were provided for in Chapter XX, engineering two modes of winding up of a company. Part I dealt with winding up by the National Company Law Tribunal and part II contained provisions for voluntary winding up; with detailed provisions in part III applicable to both modes of winding up. Under the erstwhile regime, winding up applications could be made on account of "inability to pay debts", i.e. when the existing assets of the company became insufficient to repay liabilities.

As mentioned above, Section 255 of the Code has effectively omitted the application of the insolvency procedure under the 2013 Act and replaced it with Sections 7 to 9 of the Code, being initiation of Corporate Insolvency Resolution Process by financial and operational creditors. An application to the Adjudication Authority for initiation of Corporate Insolvency Resolution Process can be made only when there is an occurrence of "default" in payment of debt by a corporate debtor. The Code creates a deeming fiction such that a corporate debtor which defaults in payment shall be considered insolvent for the purpose of the Code. The legal effect of such deeming provision is that the treatment of 'inability to pay' and 'failure to pay' is alike. This a hallmark difference from the erstwhile regime wherein 'inability to pay debts' stood for commercial insolvency.

Once the application is accepted by the adjudicating authority, an insolvency professional is appointed for conducting the 'insolvency resolution process'. The resolution process will have to be completed within a maximum period of 180 days from the date of registration of the case. This period may be extended by 90 days if 75% of the financial creditors agree. The process will involve negotiations between the debtor and creditors to draft a resolution plan which finally needs an accord from Adjudicating Authority. In the event that such corporate insolvency plan is not executed within the aforesaid timeline, the adjudicating authority may pass an order for liquidation of the corporate person in relation to whom the application was made.

The Code also bears a contrast from the 2013 Act by allowing all creditors, whether secured or unsecured, to initiate the process. Although, financial creditors may assumes a dominant role later on, being on the committee of creditors.

The circumstances under which a company can be wound up by Tribunal, other than inability to pay debts,  have been enlisted under Section 271 as follows :  (a) passing of special resolution to that effect; (b) acting against the sovereignty and integrity of India, security of state, friendly relations with foreign states, public order, decency or morality; (c) conducting affairs in a fraudulent manner; (d) default in filing of financial statements or annual returns with the Registrar for immediately preceding five financial years; and (e) on just and equitable grounds in the opinion of Tribunal. These provisions were notified with effect from December 15, 2016, therefore the winding up applications on any of the aforementioned grounds will be made to the Tribunal in accordance with the provisions of 2013 Act.

Voluntary Winding up

As per Section 59 of the Code read with the Regulations, any corporate entity may initiate a voluntary liquidation proceeding if it satisfies the following conditions:

  • it has not committed any default;
  • if majority of the directors or designated partners of the corporate person make a declaration verified by an affidavit to the effect that (i) the corporate person has no debt or it will be able to pay its debts in full out of the sale proceeds of its assets under the proposed liquidation; and (ii) liquidation is not initiated to defraud any person;
  • such declaration is accompanied by the audited financial statements and valuation report of the corporate person;
  • within 4 (four) weeks of such declaration, a special resolution is passed by the contributories requiring the corporate person to be liquidated and appointing an insolvency professional as a liquidator (Contributories' Resolution); and
  • creditor(s) representing two-thirds in value of the total debt owed by the corporate person, approve the Contributories' Resolution within 7 days of its passage

The provisions under the 2013 Act were not notified before the commencement of the Code, thereby meaning that voluntary winding up continued to be governed by the 1956 Act before the notification on Section 59 of the Code on 30 March, 2017. The Insolvency and Bankruptcy Board of India has also, vide its notification dated 31 March 2017, notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (Regulations) with effect from 1 April 2017. This has set out the process for the voluntary liquidation of a corporate person under the Code, which includes companies, limited liability partnerships and any other persons incorporated with limited liability. 

Transfer of winding up proceedings from High Court to Tribunal:

Proceedings pending before the High Courts on December 15, 2016, and the notice of which have not been served on the respondent, for both winding up on inability to pay debts and winding up on grounds other than inability to pay debts will be transferred to Tribunal. Although the former category will be governed by the provisions of the Code, the latter category will be governed by the provisions of 2013 Act. The proceedings shall be transferred to the respective Bench of the Tribunal exercising territorial jurisdiction over the concerned State and shall be dealt in accordance with the provisions of the Code. Along with the Notification dated December 07, 2016, MCA on the same date issued the Companies (Transfer of Pending Proceedings) Rules, 2016 ("Rules") for clarifying the ambiguities relating to transfer of pending proceedings from a High Court to the Tribunal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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