India: Summary Procedure For Liquidation: Companies Act, 2013

According to Professor Gower, “Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its members & creditors. An administrator, called liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”¹ Thus, winding up of a company involves dissolution of the company, after the assets of the company are collected, the debts are paid off, and any excess has been distributed amongst its members, finally bringing about the end of the existence of the company and the name of the company being struck off from the register of companies.

The procedure for winding up of a company due to its inability to pay its debts and voluntary winding up of a company has been enumerated in the Insolvency and Bankruptcy Code, 2016. On the other hand, the Companies Act, 2013 (“Act“) (Chapter XX) elaborates the provisions for winding up a company for reasons other than the inability of the company to repay its debts. It is worth noting that though the provisions for winding up under the Act were notified in December 2016, the Rules have only recently been framed. On January 24, 2020, the Companies (Winding Up) Rules, 2020 (“Rules“) were notified by the Ministry of Corporate Affairs detailing the procedure for winding up of companies under the Act. The Rules shall be effective from April 1^st, 2020.

The Rules have set forth the method for winding up by the National Company Law Tribunal (“Tribunal“) and have also prescribed certain forms that are required to be filed for the same. The Rules have also set forth the mode of filing petitions and the procedure to be followed after filing the petition, including the appointment of the liquidator and the powers and duties to be performed by the liquidator.

For summary procedure for liquidation, the Act provides the criteria of companies eligible for the summary procedure for liquidation as also the appointment of the official liquidator as the liquidator of the company by the Central Government. The official liquidator shall take into his custody or control all assets, effects and actionable claims to which the company is or appears to be entitled, and shall submit a report to the Central Government within 30 (thirty) days of his appointment. Upon receipt of the report, the Central Government may order the winding up of the company.

One important aspect that the Rules enumerate is the summary procedure for liquidation of companies. While Section 361 of the Act provided companies the option to apply for a summary procedure for liquidation, there were no rules drafted to supplement such provisions. Prior to the notification of the Rules, under the Act, only companies having assets of book value not exceeding Rs. 1,00,00,000/- (Rupees One Crore) and such class of companies as may be prescribed by the Central Government were permitted to apply for the summary procedure of winding up. The Rules have now further expanded the class of companies that are applicable for the summary procedure of liquidation, thus aiming to ensure a faster and more streamlined process for a wider scope of companies to be wound up.

In accordance with the Rules the following companies are now applicable to apply for such winding up procedures –

Another pertinent facet of the Rules is that under the summary procedure, in order to simplify and expedite winding up, the Central Government, replacing the Tribunal, will have jurisdiction over the cases and shall issue necessary directions and orders for winding up of companies.

Under the Rules, the official liquidator is required to maintain a record book in which it shall enter minutes of all the proceedings and resolutions passed in any meetings of the creditors or contributories or of the advisory committee. A detailed list of registers and books of accounts has also been noted which the official liquidator shall maintain in respect of winding up of the company.

The Rules have elaborated the procedure for filing and audit of the official liquidator’s accounts. The official liquidator shall file the half yearly accounts within the period prescribed under the Rules and shall also file the final accounts of the company once the affairs of the company have been fully wound up. Under the summary procedure, the filing shall be done to the Central Government and not the Tribunal. The official liquidator shall prepare the form of account in accordance with the format as prescribed under the Rules. Further, the provision for a nil account and procedure for the registry to send a copy of the account to the auditor has also been detailed. The Central Government will also be the authority which will oversee the audit of the company liquidator’s accounts, filing of the audit certificate, fixing of audit fees, inspection of the account and certificate of the audit. The statement of account and the auditor’s certificate shall also be placed before the Central Government.

The Rules note the provisions for sale of the assets of the company with the modification that the Central Government, in place of the Tribunal, shall issue orders and give sanctions for the sale. The Central Government will further supervise the procedure to be followed for the sale which would be by public auction or by inviting sealed tenders or by electronic bidding, and the manner in which the official liquidator shall collect the gross proceeds of the sale and pay the charges and expenses of the auctioneer or agent, if so appointed.

The Rules have given the time period within which the official liquidator shall deposit the monies received by him in the public account of India in the Reserve Bank of India, being not later than the next working day of the Reserve Bank of India.

The Rules have also detailed the procedure for settlement of claims of creditors by the official liquidator detailing the manner in which the creditors shall have to prove their claims. Hereto, the Central Government and not the Tribunal shall pass the necessary directions and orders for enabling the speedy settlement of the claims.

Therefore, the Rules have set forth the procedure for summary winding up of companies and by replacing the Tribunal with the Central Government, the Rules aim to reduce the burden on the Tribunal and ensure that the winding up procedure of a larger class of companies, as defined under the Rules, is simplified and expedited. What remains to be seen is whether these Rules will be successful in reducing the burden and will the Central Government be able to expediently adjudicate over the winding up of companies.

Footnote

1. Modern Company Law, 4^th edition

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