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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions