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Process for Winding-Up under the Companies Act Revised; Summary Procedure Extended to More Companies

The Ministry of Corporate Affairs, Government of India vide its Notification dated January 24, 2020, has notified the Companies (Winding Up) Rules, 2020 (“Rules”). These Rules are set to take effect from April 1, 2020 and lay down the procedure for winding up on grounds other than inability to pay debts prescribed under Section 271 of the Companies Act, 2013 (“CA2013”). It is pertinent to mention here that the proceedings pertaining to voluntary winding up and winding up on the grounds of inability to pay debts fall within the ambit of Insolvency and Bankruptcy Code 2016 (“IBC”) since its enforcement.

The process set forth in the Rules would need to be followed in case of: (i) passing of special resolution for winding-up by a company; (ii) the company acting against the sovereignty and integrity of India, security of state, friendly relations with foreign states, public order, decency or morality; (iii) the company conducting its affairs in a fraudulent manner; (iv) default in filing of financial statements or annual returns with the Registrar of Companies for immediately preceding 5 (five) financial years; and (v) on just and equitable grounds in the opinion of the National Company Law Tribunal (“Tribunal”).

Section 271 of the CA2013 came into effect from December 15, 2016. However, in absence of the Rules being notified till now, the process required to be followed to achieve the winding-up in the above 5 (five) circumstances was being governed under the Companies (Court) Rules 1959 of the erstwhile Companies Act, 1956.

Interestingly, the first circumstance {i.e., item (i) above} covered under Section 271 of the CA2013 and these Rules, overlaps with the provisions of voluntary liquidation covered under Section 59 of the IBC. However, given the relatively simpler and timebound process of voluntary liquidations provided under the IBC, it seems unlikely that this route of winding-up under the Rules would be preferred (except where eligible for the summary procedure as discussed below) over the process prescribed under the IBC for voluntary liquidation.

Further, the Rules have additionally expanded the scope of summary procedure for winding-up prescribed under Section 361 of the CA2013. This summary procedure entails the appointment of the Official Liquidator as the liquidator of the company by the Central Government. Thereafter, the Official Liquidator is required to immediately take into his custody or control all assets, effects and actionable claims to which the company is or appears to be entitled and submit his report to the Central Government within 30 (thirty) days of his appointment. The Central Government may order the winding-up of the company in view of the aforesaid report. Please note that the Central Government has delegated its authority under this provision to the respective offices of the Regional Directors at Mumbai, Kolkata, Chennai,  New  Delhi,  Ahmedabad,  Hyderabad  and  Shillong).

Prior to notification of these Rules, the aforesaid summary procedure for winding-up of a company was only available to companies which had assets of book value not exceeding ₹ 10,000,000 (Rupees Ten Million). However, with the notification of these Rules, the summary procedure has now been further extended to companies: (i) accepting deposit with total outstanding deposits not exceeding ₹ 2,500,000 (Rupees Two Million and Five Hundred Thousand); (ii) having outstanding loan (including secured loans) not exceeding ₹ 5,000,000 (Rupees Five Million); (iii) having a turnover not exceeding ₹ 500,000,000 (Rupees Five Hundred Million); and (iv) with paid-up capital not exceeding ₹ 10,000,000 (Rupees Ten Million).

The key advantage of the expansion of the scope of coverage of these summary proceedings is that going forward these matters would be adjudicated by the Central Government and not by the overburdened Tribunal, which is reeling under the heavy burden of cases since the advent of the IBC. While this shift certainly looks promising on paper, however, it remains to be seen how the offices of the respective Regional Directors would cope with this newfound responsibility come April 1, 2020.