Slow Process of Winding up of Companies

Slow Process of Winding up of Companies Dr. J. P. Sharma, FCS, Department of Commerce (sdc), Faculty of Commerce & Business, Delhi School of Economics, Delhi. Amrita Singh, Lecturer, Jagan Institute of Management (JIMS), New Delhi. Winding up of companies is indeed a time consuming and complex process and compulsory winding up by the court takes ten to fifteen years. This article based on a study undertaken by the authors seeks to identify the reasons for the long delays. INTRODUCTION A company comes into existence by a legal process and when it desires to end its existence it must again go through the legal process of winding up of its affairs. Winding up of company is the process whereby its life is extinguished and its property administered for the benefit of its creditors and members. An administrator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes the surplus if any among the members in accordance with their rights. Thus winding up is the last stage in the life of a company. The Companies Act, 1956 provides a mechanism for winding up of companies. There are three modes of winding up under the Act. A company may be wound up by an order of the Court that is called compulsory winding up or winding up by the Court. Winding up by the creditors or members without any intervention of the Court is called voluntary winding up. In voluntary winding up, the company and its creditors are left free to settle their affairs without going to the Court. In the case of voluntary winding up, the creditors or members may apply to the Court for directions or orders. Such a winding up is known as winding up subject to the supervision of the Court. Winding up of a company is a time consuming process. In the Indian context the process is very slow and a large number of petitions are pending before the office of Official Liquidators appointed by the Court. As per the data provided by the Minister of Company Affairs (now Minister of Corporate Affairs) there were 6259 winding up petitions pending before different Courts in the country as on March 31st, 2005 1. As the entire process of winding-up currently takes, in some cases, even more than 15 years as compared to only few (2 to 3) years in most of the developed countries, it is imperative that the Indian law be remodeled on international lines. In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna Eradi 2. This Committee was asked to examine and make recommendations with regard to the desirability of changes in existing law relating to winding up of companies so as to achieve more transparency and avoid delays in the final liquidation of the companies; the mechanism through which the management of companies will be conducted after the winding up of order is issued and the authority which will supervise timely completion of proceedings; the rules of winding up and adjudication of insolvency of companies; the manner in which the assets of the companies are brought to sale and the proceeds are distributed efficiently and a self-contained note on winding up of companies having regard to the Sick Industrial Companies (Special Provisions) Act, 1985 and the Securities Contracts (Regulation) Act, 1956 with a view to creating confidence in the mind of investors, creditors, labour and other shareholders. The committee presented its Report to the Government on 31st August 2000. The committee 3 highlighted the problems regarding winding up of a company that were causing delays like delay in filing of statement of affairs, delay in handing over updated books of account and records, delay in finalization of list of creditors and debtors, inadequate power and staff given to Official Liquidator, non availability of funds etc. The reason for delays was also the multiplicity of litigation before various Courts or quasi-judicial bodies. To enable the process of winding up to be completed in a time bound manner the Eradi

Committee recommended that the provisions of Part VII of the Companies Act, 1956, be amended to include the provisions for setting up of a National Tribunal which will have the jurisdiction and power presently exercised by Company Law Board under the Companies Act, 1956; the power to consider rehabilitation and revival of companies, a mandate presently entrusted to BIFR/AAFIR under SICA and the jurisdiction and power relating to winding up of companies presently vested in the High Courts. In view of above recommendations Article 323B of the Constitution was advised to be amended to set up National Tribunal, SICA be repealed and the Companies Act, 1956 be amended. Accordingly the Companies Act, 1956 was amended by the Companies (Second Amendment) Act, 2002. The amendment provided for establishment of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) to handle the winding up of companies. However, the constitution of NCLT/NCLAT has been held up due to a legal challenge and the matter is pending before the Supreme Court. 4 HISTORY OF WINDING UP LAWS The law of company winding up India is the cherished child of English parents born and brought up in England. Such laws enacted in India from time to time have been following the English provisions with, minor changes here and there. Therefore, a brief resume of the origin and growth of winding up laws in England is essential for logical understanding of winding up laws in India. Four phases are discernible in the course of this development viz., - the first covers the period up to 1844; the second phase relates to the period between 1844 and 1856; the third which may be regarded as the period modeled on English Provisions, commences with the passing of the Joint Stock Companies Act, 1846, and extends to 1956 and the final phase that starts from 1956 and extends to the present day is known as the era of modern company law. In England, prior to 1844, there was no distinct body of legal principles that could be regarded as the law of company liquidation. All companies, except those that enjoyed the privilege of incorporation by statute, or charter, were of the settlement deed type, and were treated as enlarged partnerships. To their winding up, therefore, the law of partnership applied. The liability of the members of a company, like partners, was unlimited. Secondly, no satisfactory procedure existed for compulsory winding up at the instance of contributories. Thus, a need was felt for a simple form of procedure for making company s assets available for the payment of debts, as well as some means by which the members could bring an unsuccessful venture to an end, and also fix a limit to the extent of their liabilities. To achieve these objects, various Acts were passed from 1844 to 1856, which were known as winding up Acts. These Acts had some defects, such as no provision was made to limit the liability of shareholders. While corporate assets constituted the primary fund out of which liabilities were to be satisfied, any deficiency could be made good by resorting to the members private property. Secondly no attempt was made to limit the remedies of creditors as to levy execution on the personal property of the shareholders. The Companies Act of 1856 removed these defects. With the passing of this Act, a single system of winding up, which could be set in motion by any contributory, creditor, or by the company itself, was introduced. The Act also provided for the limited liabilities of shareholders as to the nominal value of their respective shares. A procedure for enabling voluntary winding up subject to court s supervision was introduced by the Act of 1857, and extended in the following year. These Acts were repealed by the Companies Act of 1862 providing for three modes of winding up - winding up by the court; voluntary winding up; and voluntary winding up subject to supervision of the court, The Act of 1890 and the Rules there under introduced a procedure for winding up. These provisions subsequently were reproduced by the English Companies Act of 1948, which now constitutes the existing legislation, and also governs the company liquidation in England today. In India, following the English Act of 1844, an Act was passed in 1850 containing similar provisions of company liquidation. Another Act was passed in 1860 on the lines of the English Act of 1856 and 1857. After enacting various amending Acts between 1882 and 1913, the Act of 1913 came into force that modified

the winding up provisions to a great extent. Gradually, the Companies Act, 1956, amending the law and procedure relating to compulsory winding up, came into operation and is operational till date. METHODOLOGY Winding up of the company is the process by which the management of a company s affairs is taken from the directors hands, its assets realized by a Liquidator, and its debts paid out of the proceeds of realization. It is conducted in accordance with the rules laid down in the Companies Act. Due to the lengthy process of winding up various cases are lying before High Courts in the country. This article based on a study attempts to study the reasons for slow winding up of the companies. LIMITATIONS OF THE STUDY Apart from the basic limitation of inadequacy of time and resources needed for conducting a study of this type, following were some of the other limitations of the study. They have been identified in the course of conducting this study and need to be kept in mind while examining the conclusions emerging out of this study. 1. The study only concentrates on compulsory winding up by the Court and does not cover other modes of winding up i.e. members voluntary winding up and creditors voluntary winding up. 2. Although in-depth interviews were conducted with various government Officials linked with the process of winding up for obtaining valuable inputs, it was felt during the course of interview that many issues were kept hidden. 3. As is common with most of the work related with behavioral sciences, some degree of subjectiveness has a tendency to creep in. However; careful efforts were made to prevent these from affecting the findings. RESULTS On studying the process of winding up it can be easily concluded that it is relatively easy to incorporate a company in India, but it is a time and money consuming process to wind up a company. The problems that emerged out of the study mainly relate to delay in filing of statement of affairs, delay in handing over updated books of account and records, delay in finalization of list of creditors and debtors, inadequate power and supportive staff given to the Official Liquidator, non availability of funds etc. Under the current provisions of the Companies Act, on specified matters, powers of decision are reserved either for the Central Government itself or available to CLB or High Court. There is a need to consolidate and entrust to a single body like the one introduced in the Companies Act, 2002 called the Tribunal (NCLT) the powers and jurisdiction presently being exercised by various bodies. The NCLT shall serve as a single window settlement of cases, related to the corporate affairs. The multiplicity of litigation before multiple quasi judicial bodies like the Company Law Board, BIFR and High Courts causes delay in winding up proceedings. The establishment of NCLT/NCLAT will prove to be of great help to the corporate world by speeding-up the entire process of winding up. Civil courts under the amended provisions have also been barred from granting injunctions which would avoid unnecessary long-drawn civil suits. The study also suggests that every company should file its statement of affairs synchronous with the petition for winding up or while opposing a petition for its winding up. The statement shall be filed along with the names and addresses of the directors, creditors and debtors of the company and the location of assets and

their values and such other information as ordered by the Tribunal. This provision will reduce the delay that occurs in making of statement of affairs of the company. To tackle the problem of paucity of funds it has been proposed to put in place Revival and Rehabilitation Fund through collection of a cess which will be levied at the rate of.005% -1% on the annual turnover or the gross receipts of the company. This proposed fund will take care of the interim payment of wages to the workers, protection of assets and for other rehabilitation measures. Further, the Official Liquidator should also be entrusted with wide powers such as appointment of Chartered Surveyors and Chartered Accountants to value the assets of the Company. JUDICIAL PRONOUNCEMENTS Winding up in India is conducted in accordance with the rules laid down in the Companies Act, 1956. As per section 10 of the Act, the High Court has been given the jurisdiction to deal with the company affairs and its winding up. Due to the lengthy process of winding up of the companies, cases are pending before various High Courts in the country. The succeeding paragraphs tend to analyse the probable reasons for delay in winding up proceedings and also the problems faced by the petitioners during the process. An analysis of some judicial pronouncements on winding up cases has also been done to give support to the study. I. L.R.Rangaier and Sons v. Coffee Board and others, AIR 1999 (Kerela) 258. The appellant company was incorporated in 1954 with a paid up share capital of Rs. 4,75,000. Winding up petition was filed by two creditors in 1990 to wind up the company under sections 433 and 434 of the Companies Act, 1956 and soon a provisional liquidator was appointed by the company Court. When the Coffee Board, which was a prime supplier of coffee to the company, came to know of the initiation of the liquidation proceedings it got impleaded in the company petition and obtained permission from the court to remove the coffee kept in-the godown of the company. In view of the objection from the workers against the removal of coffee, an Advocate Commissioner was appointed for supervising the curing operation. When the Advocate Commissioner inspected the godown it was revealed that 17 tons of coffee kept in the godown worth Rs.43, 52,977.64 was found missing. Thereafter the Coffee Board filed a petition to be substituted as original petitioner and to prosecute the winding up proceedings at the instance of the coffee board by substituting it in the place of the petitioners in Company Petition. The company made a plea saying that it was a case of disputed debt as there were certain counter claims from the coffee board. The case went on for nine years after which the petition was accepted and the company was ordered winding up. II. Garodia Hardware Store v. Nimodia Plantations and Industries Pvt. Ltd. AIR 1998 (Gau). Nimodia Plantations and Industries Pvt. Ltd was a Pvt. Ltd. Company incorporated under the Companies Act 1956. The Company owned and possessed a tea garden, namely, Hautley Tea Estate within the Sub Division of Gloaghat, in Assam. The petitioners were a partnership firm registered under Indian Partnership Act. The firms filed petition under Section 433 (e) and (f). According to the petitioner firms the company was not in a position to meet the liabilities and was running at a loss and there was no chance to make profit. The petition filed by the creditors of the company on the ground of inability of the company to pay debts even after regular reminders and evidence showing the inability of the company to pay wages to workers. On the other hand the company filed an affidavit in opposition saying that they had sold the undertaking to another company but the sale deed was not completed. A suit for injunction had been obtained against the property of the company and thus the company was not in a position to pay the debts. The company also pleaded that they were not served any notice in this regard. The court though admitted this fact, but as the company was facing financial difficulties and was unable to pay its debts ordered the winding up of the company in 1996 i.e. after almost nine years after filing of petition. III.Karam Chand Thapar and Bros. (Coal) Sales Ltd. v. Acme Paper Ltd. AIR 1994 (Delhi) 1. The

petition was filed by the creditors of the company in 1987 on ground of non-payment of the money due to them. The petitioner had sent regular reminders to the company but when no response was received they filed a petition for winding up. The plea of the respondent company in this regard was on two grounds. Firstly as per the company as the creditors had offered to take back the goods, there was novation of the earlier contract and thus no amount was due to them. The second plea of the company was that a suit had also been filed with the civil court and hence winding up could not be ordered. However, the plea of the company was rejected. The company was ordered to be wound up in 1998. Thus it took almost eleven years for the court to decide a simple case of inability to pay debt by a company. IV.Andhra Steel Corporation Ltd. v. Bank of Baroda, AIR 1995 (Cal) 367. In this case, the bank had certain dues from the company and hence it filed a petition in 1986 for winding up the company. The court did not order winding up but directed the company to make payment to the bank in instalments. The company however failed to pay even the instalments on time and thus the petitioner requested the court for winding up of the company. However, the company pleaded that the court could not order winding up by virtue of the Recovery of Debts due to Banks and Financial Institutions Act, 1993. As per this Act the banks and financial institutions are required to file cases with the Tribunal set for the purpose under the Act of 1993. The plea was rejected as it was submitted that the Tribunal had no authority to decide the winding up as this right was reserved with the High Court. Thus the company was ordered to be wound up in the year 1994 taking about nine years for the case to be decided. V. Shri Sham Lal Gupta v. Hamco Industries Pvt. Ltd. AIR 1995 (P&H) 6. The petitioner, filed this petition for winding up of M/s Hamco Industries Pvt. Ltd., on the ground that it was unable to pay its debts. As per the facts of the case the company wanted to float some shares with a view to increase its capital. The petitioner, who along with his family members was shareholder of the company applied for allotment of 110 shares in his name and sent the share application form duly filed to the company along with a sum of Rs. 1.10 lacs in 1982, but the company did not float any fresh shares and, therefore, none was allotted to the petitioner. According to the petitioner, the share money paid by him continued to remain in deposit with the company for a couple of years. In the year 1990 the petitioner demanded the return of his money and wrote some letters to the company in this regard. The petition for winding up was made in 1990, eight years after depositing the money. However as per the company version the payment had already been made to the petitioner in 1988. The petitioner pleaded that the amount paid to him in 1988 was not related with the share application money; rather it was for settlement of the shares transferred by the petitioner to his brother who was a shareholder in the company. On analyzing the facts of the case the company admitted the claim of the petitioner but because the amount had become time barred their plea was rejected. The court took almost eight years to decide the petition. VI.SBI Mutual Fund v. Vikas WSP Ltd. AIR 2006 (P & H) 368. SBI Mutual Fund, the petitioner, filed a petition under sections 433(e) and 433(f) seeking winding-up of the respondent-company, alleging that the respondent, after having declared dividend for the year 2000-01, failed to remit the said amount. The petitioner filed the petition before the High Court of Punjab and Haryana in the year 2001. As per the petitioner the company had declared the dividend but failed to pay the amount. The petitioners had sent regular reminders to the company but they received no response. On the other hand the respondent company contended that they had dispatched the dividend vouchers and later on made a statement that the dividend warrant got burnt and hence could not pay the amount. The company however pleaded that they had deposited the money in a bank under current account but did not name the bank. Thus it was submitted that the claim of the petitioners was admissible and the company was ordered winding up taking about six years for the court to decide. CONCLUSION The Ministry of Corporate Affairs has since introduced online registration of companies in the country. The first such company registered online was in south India (Coimbatore) in the summer of 2006, when the

Ministry of Corporate Affairs launched its new web site www.mca.gov.in. Around 18000 companies 5 have been incorporated on line up-to November 2006. With the launch of MCA 21, companies in the country can be formed in less than an hour. But, when it comes to closing a company, as revealed by the present study, the process in many cases has taken more than 10 years and in some cases even more than 15 years. The findings of this study have been supported by one another recent study, which revealed that it takes just 35 days to register a business in India, but when it comes to winding up a company, it can drag to as long as 10 years 6. Acknowledging the unduly slow process of winding of companies in the country, the Minister of Company Affairs (now Minister of Corporate Affairs) in the Rajya Sabha on 12th December 2006 stated that there were 6259 winding up petitions filed pending before different courts of the country as on 31st March, 2005. Such companies are undergoing the lengthy process to wind up their businesses. There is an urgent need to take the process of liberalization a step further and recognize that so long as a company is acting in the interest of shareholders and otherwise observing the law of the land it should have the freedom to manage its affairs, merge, amalgamate, restructure and reorganize or plan its affairs as it considers best in the interest of the stakeholders. The process of winding up should be simplified and the interference by the Government or Court or any other authority should only be in the event of any detriment to the interest of shareholders. Ministry of Corporate Affairs is on the job and once the NCLT/NCLAT are made functional, the problems faced by companies and other petitioners may be solved to a greater extent. FOOTNOTES: e-mail: drjps40@hotmail.com 1. Answer to a question raised by Shri Jai Prakash Aggarwal, Rajya Sabha and answered by the Minister of Company Affairs, (unstarred question no. 2133, 12th December 06.) 2. The Government had constituted on 22.10.99 a Committee consisting of experts to examine the existing law relating to winding up proceedings of companies in order to re-model it in line with the latest developments and innovations in the corporate law and governance and to suggest reforms in the procedure at various stages followed in the insolvency proceedings of companies to avoid unnecessary delays in tune with the international practice in this field. 3. The Eradi Committee had also visited Offices of Official Liquidators, Ministry of Company Affairs (MCA) at a few Metropolitan Centres to actually see the difficulties faced by them. It had also constituted a Sub-Group to study the Insolvency Laws of other countries including UK, Singapore etc. 4. Replying to a question of a Member of Parliament, raised in the Rajya Sabha on 8th August, 2006, the Minister of Company Affairs Mr. Prem Chand Gupta stated that the Company Law Board (CLB) is functional currently and both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have not been constituted as yet. The reason given is, the provisions of the Companies Act, 1956 relating to setting up of NCLT/NCLAT faced a legal challenge, and the matter is sub-judice on account of a Special Leave Petition (SLP) filed by the Central Government in the Supreme Court, following a ruling by the Madras High Court in the matter. As the NCLT has not yet been constituted by the Central Government, the Company Law Board (CLB), the Board for Industrial and Financial Reconstruction (BIFR) and the High Courts continue to discharge their function as before. 5. News statement of the Minister of Company Affairs Mr. Prem Chand Gupta published in the Indian Express (business page) of 11th November 2006. 6. "Doing Business in South Asia 2007", World Bank Report.