Download as pdf or txt
Download as pdf or txt
You are on page 1of 50

lOMoARcPSD|5220526

Unit 5 company law

Company Law (Karnataka State Law University)

StuDocu is not sponsored or endorsed by any college or university


Downloaded by Aakash Anish (aakashanish.95@gmail.com)
lOMoARcPSD|5220526

Unit 5

Reconstruction and Amalgamation

The company wished to avoid being wound up and negotiated a scheme in which the
existing shareholdings in the company would be transferred to a new company which would
take over the company’s undertaking and assets as well as its debts. This was to be effected
by a scheme for reconstruction which would result in the old company’s shareholders holding
four per cent of the shares in the new company.

Notwithstanding the heritage of schemes of arrangement which can be traced back to the
United Kingdom in the 1860s, and the common origins of schemes in Australia and
Singapore and an established body of legal principles, there is a notable degree of
inconsistency in the line of judicial authorities on the nature of schemes of arrangements.

In particular, there is some controversy as to whether a scheme of arrangement derives its


efficacy from an order of court or from the statute. Australian courts favour the former view.
English courts, in contrast, take the position that a scheme of arrangement which has been
approved by the requisite majority of the company’s creditors derives its efficacy from statute
and therefore operates as a statutory contract.

An arrangement embraces such diverse schemes as conversion of debt into equity,


subordination of secured or unsecured debt, conversion of secured claims into unsecured
claims and vice versa, increase or reduction of share capital and other forms of reconstruction
and amalgamation.

According to Halsbury’s Laws of England:

“Neither ‘reconstruction nor amalgamation’ has a precise legal meaning. Where an


undertaking is being carried on by a company and is in substance transferred, not to an
outsider, but to another company consisting substantially of the same shareholders with a
view to its being continued by the transferee company, there is a reconstruction. It is none the
less a reconstruction because all the assets do not pass to the new company, or all the
shareholders of the transferor company are not shareholders in the transferee company, or the
liabilities of the transferor company are not taken over by the transferee company.
‘Amalgamation’ is a blending of two or more existing undertakings into one undertaking, the
shareholders of each blending company becoming substantially the shareholders in the
company which is to carry on the blended undertakings. There may be amalgamation either
by the transfer of two or more undertakings to a new company or by the transfer of one or
more undertakings to existing companies.”

Mergers, Amalgamation and Demergers of Companies under the Companies Act 1956 are
governed by sections 391 to 396 Companies Act 1956.

1|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

It requires companies to make application to the court under section 391, which empowers
the court to sanction the compromise or arrangement proposed by the companies. Section 392
further empowers the High Court to enforce a compromise or arrangement ordered by the
court under section 391 of the Companies Act. Section 393 provides supporting provisions
for compliance with the provisions or directions given by the court. Sections 395, 396 and
396A are supplementary provisions relating to amalgamation. Section 395 deals with the
power to amalgamate without going through the procedure of the court.

Amendment in the Companies Act, 1956 in year 2002 gave powers to National Company
Law Tribunal to review and to allow any compromise or arrangement, which is proposed
between a company and its creditors or any class of them or between a company and its
members or any class of them. However, because of non formation of National Company
Law Tribunal, these powers still lie with High Courts and the parties concerned can make
applications to high courts.

Reconstruction and amalgamation by Voluntary Winding Up

A compromise involves a settlement of a dispute. An arrangement, in contrast, is broader and


has been held to be of wide import. It can cover any lawful arrangement that touches or
concerns the rights and obligations of the company and its shareholders or creditors, Section
494 of the Companies Act 1956, which similar to section 287 of the Companies Act 1948
givers power a company to reconstruct or amalgamate by means of voluntary liquidation
wherein the liquidator transfers the assets of the company in exchange for shares or other
shares of the transferee company.

· Effect on Shareholders

The effect on share holders is that the resolution is valid and the arrangement is binding upon
them. Nevertheless, any shareholder may, in specific circumstances, dissent from the sale or
arrangement.

The dissenting shareholder is required under sub section (3) of this section to give notice of
his dissent to the liquidator in writing within seven days after passing of the special
resolution. A legal representative of deceased shareholder is also entitled to dissent.
However, it is open for the liquidator to waive such notice.

The share holder who neither agrees to the scheme nor challenges it but refuses to accept
shares in transferee company (especially if they are not fully paid) to avoid further liability ,
on these shares , shall be deemed to have permitted the liquidator to sell the new shares and
pay him the net proceeds. The liquidator shall recover the expenses incurred on such sale
from the proceeds of that sale. If there is more than one such shareholder, net proceeds shall
be distributed proportionately.

· Effect on creditors.

The scheme does not expressly state that any arrangement under this section is binding on the
creditors yet it can be deducted from subsection (5) that the arrangement is binding on

2|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

creditors as well unless they move the court / Tribunal within one year after passing of
resolution of winding up and challenge the arrangement.

Nevertheless, an arrangement sanctioned by the special resolution does not relieve the
liquidator of the old company is dissolved. To leave every thing to the new company is a
“gross dereliction” of duty by the liquidator.

Consent of the shareholders

The Companies Act, 1956, prescribes varying requirements for decisions to attain binding
force on the company and with sound and profound reasons. As is evident from a reading of
sections 189 and190 of the Act, some decisions are efficacious on receiving the assent of a
simple majority whilst others require that there must be not less than three times the number
of votes cast in favour of a Resolution than those opposed to it. Section 391 of the Act, which
deals with compromises and arrangements, contemplates the consent of three-fourths in value
of the affected persons for the decision to be binding on the remainder. Chapter VI,
comprising sections 397 to 409of the Act, protects the rights of persons constituting a
minority, holding not less than ten per cent of the members. Section 395 of the Act is
logically at the end of this spectrum, and envisages and permits, within a defined arena, the
drastic dilution of the rights of a class consisting of members constituting less than ten per
cent. Although this dilution has been seen and termed even as an ‘expropriation’, jural
interference was nonetheless found to be unnecessary only on this ground. The question that
arises is whether there is any rationale in the prescribed percentages, dependent upon the
gravity of theme assures to be effected. In my opinion, it is not legally odious to expect a
minuscule group to fall in line with the dictates of an overwhelming majority comprising
ninety per cent of the group. Usually, there is wisdom in the strength of members. There is
every possibility that where nine persons are willing to accept a particular offer, the
remaining single person may be standing a part from the others for motives which are not
mercantile or commercial. While considering provisions analogous to section 395 of the Act,
Maugham, J. had expressed the following opinion which has stood the test of time, thus

however, the view of the Legislature is that where not less than nine-tenths of the
shareholders in the transfer or company approve the scheme or accept the offer prima facie, at
any rate, the offer must be taken to be a proper one, and in default of an application by the
dissenting shareholders, which includes those who do not assent, the shares of the
dissentients may be acquired on the original terms by the transferee company. Accordingly,
Ithink it is manifest that the reasons for inducing the court to ‘order otherwise’ are reasons
which must be supplied by the dissentients who take the step of making an application to the
court, and that the onus is on them of giving a reason why their shares should not be acquired
by the transferee company.

One conclusion which draw from that fact is that the mere circumstance that the sale or
exchange is compulsory is one which ought not to influence the court. It has been called an
expropriation, but do not regard that phrase as being very apt in the circumstances of thecase.
The other conclusion draw is this, that again prima facie the court ought to regard the scheme
as a fair one in as much as it seems to me impossible to suppose that the court, in the absence
3|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

of very strong grounds, is to be entitled to set up its own view of the fairness of the scheme in
opposition to so very large a majority of the shareholders who are concerned. Accordingly,
without expressing a final opinion on the matter, because there maybe special circumstances
in special cases, I am unable to see that I have any right to order otherwise insuch a case as I
have before me, it is affirmatively established that, notwithstanding the viewsof a very large
majority of shareholders the scheme is unfair.”

Tek Chand, J. has in Benarsi Das Sara/ v. Dalmia Dadri Cement Ltd. opined that the"
principle underlying section 395 is that where a company obtains 90 per cent of the shares or
class of shares under a scheme of arrangement, it can compel the dissentient minority to
partwith its shares. Conversely the dissenting shareholders are also entitled to compel the
company to acquire their shares as well as and on the same terms. Section 395 of the
Companies Act, 1956, corresponds to section 209 of the English Companies Act,1948, which
reproduces with amendments section 155 of the English Act of 1929.”final on account of
pending appeals.

Though no protection is available to any dissenting minority shareholders on this issue, the
Courts, while approving the scheme, follow a judicious approach of publishing a notice in the
newspapers, inviting objections, if any, against the scheme from the stakeholders. Any
interested person, including a minority shareholder may appear before the Court.

The Companies Act, 2013 (2013 Act) has seen the light of day and replaced the 1956 Act
with some sweeping changes including those in relation to mergers and acquisitions(M&A).

The new Act has been lauded by corporate organizations for its business-friendly corporate
regulations, enhanced disclosure norms and providing protection to investors and minorities,
among other factors, thereby making M&A smooth and efficient. Its recognition of interse
shareholder rights takes the law one step forward to an investor-friendly regime. The 2013
Act seeks to simplify the overall process of acquisitions, mergers and restructuring, facilitate
domestic and cross-border mergers and acquisitions, and thereby, make Indian firms
relatively more attractive to PE investors.

The term ‘merger’ is not defined under the Companies Act, 1956 (“CA 1956”), and under
Income Tax Act, 1961 (“ITA”). However, the Companies Act, 2013 (“CA 2013”) without
strictly defining the term explains the concept. A ‘merger’ is a combination of two or more
entities into one; the desired effect being not just the accumulation of assets and liabilities of
the distinct entities, but organization of such entity into one business.

On 7th November, 2016 Central Government issued a notification for enforcement of section
230-233, 235-240, 270-288 etc w.e.f. 15th December, 2016. But still rules were not available
till date for CAA.

MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016. These rules will be
effective from 15th December, 2016. Consequently, w.e.f. 15.12.2016 all the matters relating
to Compromises, Arrangements, and Amalgamations (hereafter read as “CAA”) will be dealt

4|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

as per provisions of Companies Act, 2013 and The Companies (Compromises, Arrangements,
and Amalgamations) Rules, 2016.

Where a compromise or arrangement is proposed for the purposes of or in connection with


scheme for the reconstruction of any company or companies, or for the amalgamation of any
two or more companies, the petition shall pray for appropriate orders and directions under
section 230 read with section 232 of the Act.

Section relating to Merger & Amalgamation Section 230 & 232.

In this article COMPROMISE & ARRANGEMENT (C&A) will be read in relation to


Merger & Amalgamation only.

In Case of application filing u/s 230 for Compromise & Arrangement in relation to
reconstruction of the Company or companies involving merger or the amalgamation of any
two or more companies should specify the purpose of the scheme.

REASON OF M&A TERMS


· Expansion and Diversification
Amalgamation – means combination of two
· Optimum Economic Benefit or more independent business corporations
into a single enterprise
· De-risking Strategy
Demerger– means transfer and vesting of an
· Scaling up of operation for undertaking of a company into another
competitive advantages company
· Increase the Market capitalization Reconstruction- means re-organization of
· Cost reduction by reducing overheads share capital in any manner; varying the
rights of shareholders and/or creditors
· Increasing the efficiencies of
operations Arrangement- All modes of reorganizing
the share capital, including interference with
· Tax benefits preferential and other special rights attached
to shares

5|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

· Access foreign markets

Who can file the application for Merger & Amalgamation propose: Section 230(1)

An application for Merger & Amalgamation can be file with Tribunal (NCLT). Both
the transferor and the transferee company shall make an application in the form of petition to
the Tribunal under section 230-232 of the Companies Act, 2013 for the puspose of
sanctioning the scheme of amalgamation.

Joint Application: Rule 3(2)

Where more than one company is involved in a scheme, such application may, at the
discretion of such companies, be filed as a joint-application.

However, where the registered office of the Companies are in different states, there will be
two Tribunals having the jurisdiction over those, companies, hence separate petition will have
to be filed.

Process

 It must be ensure that the companies under amalgamation should have the power in
the object clause of their Memorandum of Association to undergo amalgamation
though the absence may not be an impediment, but this will make matters smooth.

 A draft scheme of amalgamation shall be prepared for getting it approved in Board


meeting of each company.

1. Format of Application

Application to the tribunal for Merger & Amalgamation will be submitted in form
no. NCLT-1 along with following documents: Rule 3(1)

a) A notice of admission in Form No. NCLT-2

b) An affidavit in form no. NCLT-6

c) A copy of Scheme of C&A (Merger & Amalgmation)

d) A disclosure in form of affidavit including following points Section 230(2)

– All material facts relating to the company, such as

i. the latest financial position of the company,

ii. the latest auditor’s report on the accounts of the company and

iii. the pendency of any investigation or proceedings against the company

– Reduction of share capital of the company, if any, included in the compromise or


arrangement

6|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

e) Any scheme of Corporate Debt Restructuring consented to by not less than seventy five
per cent. of the secured creditors in value, including

i. A Creditor’s Responsibility statement in the form No. CAA-1.

ii. safeguards for the protection of other secured and unsecured creditors;

iii. report by the auditor that the fund requirements of the company after the corporate debt
restructuring as approved shall conform to the liquidity test based upon the estimates
provided to them by the Board;

iv. where the company proposes to adopt the corporate debt restructuring guidelines specified
by the Reserve Bank of India, a statement to that effect; and

v. a valuation report in respect of the shares and the property and all assets, tangible and
intangible, movable and immovable, of the company by a registered valuer.

f) The applicant shall also disclose to the Tribunal in the application, the basis on which each
class of members or creditors has been identified for the purposes of approval of the scheme.

2. Calling of Meeting by Tribunal:

Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismiss
the application, give such directions / order as it may think necessary in respect meeting of
the creditors or class of creditors, or of the members or class of members, as the case may be,
to be called, held and conducted in such manner as prescribed in rule 5 of CAA Rules, 2016 as follow:

i. Fixing the time and place of the meeting or meetings;

ii. Appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the
case may be and fixing the terms of his appointment including remuneration;

iii. Fixing the quorum and the procedure to be followed at the meeting or meetings, including
voting in person or by proxy or by postal ballot or by voting through electronic means;

iv. Determining the values of the creditors or the members, or the creditors or members of
any class, as the case may be, whose meetings have to be held;

v. Notice to be given of the meeting or meetings and the advertisement of such notice.

vi. Notice to be given to sectoral regulators or authorities as required under sub-section (5) of
section 230;

vii. The time within which the chairperson of the meeting is required to report the result of
the meeting to the Tribunal; and

viii. Such other matters as the Tribunal may deem necessary.

3. Notice of Meeting: The Notice of the meeting pursuant to the order of tribunal to be give
in Form No. CAA-2. Rule 6

7|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Person entitled to receive the notice The notice shall be sent individually to each of the
Creditors or Members and the debenture-holders at the address registered with the
company. Section 230(3)

Person authorized to send the notice:

 Chairman of the Company, or

 If tribunal so direct- by the Company or its liquidator or by any other person

Modes of Sending of notice:

 By Registered post, or by Speed post, orby courier, or

 By e-mail, or by hand delivery, or by any other mode as directed by the tribunal

Documents to be send along with notice: The notice of meeting send with (i) Copy of
Scheme of C&A and (ii) Following below mentioned details of C&A if not included in the
said scheme:

a. Details of the order of the Tribunal directing the calling, convening and conducting of the
meeting:-

 Date of the Order;

 Date, time and venue of the meeting.

b. Details of the company including:

 Corporate Identification Number (CIN) or Global Location Number (GLN) of the


company;

 Permanent Account Number (PAN);

 Name of the company;

 Date of incorporation;

 Type of the company (whether public or private or one person company);

 Registered office address and e-mail address;

 Summary of main object as per the memorandum of association; and main business
carried on by the company;

 Details of change of name, registered office and objects of the company during the
last five years;

 Name of the stock exchange (s) where securities of the company are listed, if
applicable;

8|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 Details of the capital structure of the company including authorised, issued,


subscribed and paid up share capital; and

 Names of the promoters and directors along with their addresses.

c. Relationship in case of Combined Application: if the scheme of compromise or


arrangement relates to more than one company, then the fact and details of any relationship
subsisting between such companies who are parties to such scheme of compromise or
arrangement, including holding, subsidiary or of associate companies.

d. Disclosure about effect of M&A on material interests of directors, Key Managerial


Personnel (KMP) and debenture trustee

e. Details of Board Meeting:

 The date of the board meeting at which the scheme was approved by the board of
directors

 The name of the directors who voted in favour of the resolution,

 The name of the directors who voted against the resolution and

 The name of the directors who did not vote or participate on such resolution

f. Explanatory Statement disclosing details of the scheme of compromise or arrangement


including:

 Parties involved in such compromise or arrangement;

 Appointed date, effective date, share exchange ratio (if applicable) and other
considerations, if any;

 Summary of valuation report (if applicable) including basis of valuation and fairness
opinion of the registered valuer, if any, and the declaration that the valuation report is
available for inspection at the registered office of the company;

 Details of capital or debt restructuring, if any;

 Rationale for the compromise or arrangement;

 Benefits of the compromise or arrangement as perceived by the Board of directors to


the company, members, creditors and others (as applicable);

 Amount due to unsecured creditors.

g. Disclosure about the effect of the Merger & Amalgamation (C&A) on: Section 230(3)

 Key Managerial Personnel;

 Directors;

9|Page

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 Promoters;

 Non-Promoter Members;

 Depositors;

 Creditors;

 Debenture holders;

 Deposit trustee and debenture trustee;

 Employees of the company:

 Share holders of the Company

h. A report adopted by the directors of the merging companies explaining effect of


compromise on each class of shareholders, key managerial personnel, promoters and non-
promoter shareholders laying out in particular the share exchange ratio, specifying any
special valuation difficulties;

i. Below Mentioned Details: Following below mentioned details

 Investigation or proceedings, if any, pending against the company under the Act.

 Details of approvals, sanctions or no-objection(s), if any, from regulatory or any other


governmental authorities required, received or pending for the proposed scheme of
compromise or arrangement

 A statement to the effect that the persons to whom the notice is sent may vote in the
meeting either in person or by proxies, or where applicable, by voting through
electronic means

 A copy of the valuation report, if any Section 230(3)

j. Details of avaibility of documents: Details of the availability of the following documents


for obtaining extract from or for making or obtaining copies of or for inspection by the
members and creditors, namely

 Latest audited financial statements of the company including consolidated financial


statements;

 Copy of the order of Tribunal in pursuance of which the meeting is to be convened or


has been dispensed with;

 copy of scheme of Merger & Amalgamation ( C&A);

 Contracts or agreements material to the Merger & Amalgamation ( C&A);

 The certificate issued by Auditor of the company to the effect that the accounting
treatment, if any,

10 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 Proposed in the scheme of Merger & Amalgamation ( C&A) is in conformity with the
Accounting Standards prescribed under Section 133 of the Companies Act, 2013; and

 Such other information or documents as the Board or Management believes necessary


and relevant for making decision for or against the scheme;

k. Some Other documents: Where an order has been made by the Tribunal under section
232(1), merging companies or the companies in respect of which a division is proposed, shall
also be required to circulate the following:

 The draft of the proposed terms of the scheme drawn up and adopted by the directors
of the merging company;

 Confirmation that a copy of the draft scheme has been filed with the Registrar;

 The report of the expert with regard to valuation, if any;

In the case of Kirloskar Electricals Co. Ltd., the Court held that various clauses of Section
394(1) of the Companies Act suggest that both the transferor and the transfer company shall
make an application to the Court and under section 391-394 of the Companies Act, 1956 for
sanction of the scheme of Compromise or arrangement involving amalgamation of the
Companies.

In the case of Mohan Exports Ltd. V/s Tarun Overseas Pvt. Ltd., it was held that if both the
Companies are under the jurisdiction of the same High Court, Joint petition may be made.

Scheme of Corporate Debt restructuring as referred in section 230(2)(c) means “a scheme


that restructures or varies the debt obligation of a company toward its creditors”.

It is hereby clarified that the service of notice of meeting shall be deemed to have been
effected in case ofdelivery by post, at the expiration of forty eight hours after the letter
containing the same is posted

Explanation – For the purposes of these rules it is clarified that-

(a) the term ‘interest’ extends beyond an interest in the shares of the company, and is with
reference to the proposed scheme of compromise or arrangement.

(b) the valuation report shall be made by a registered valuer, and till the registration of
persons as valuers is prescribed under section 247 of the Act, the valuation report shall be
made by an independent merchant banker who is registered with the Securities and Exchange
Board or an independent chartered accountant in practice having a minimum experience of
ten years.

the valuation report shall be made by a registered valuer, and till the registration of persons
as valuers is prescribed under section 247 of the Act, the valuation report shall be made by an
independent merchant banker who is registered with the Securities and Exchange Board or an
independent chartered accountant in practice having a minimum experience of ten years.

11 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

National Company Law Tribunal

India has had a range of Company Laws starting from 1600, The East India Company
under the Royal Charter, the Joint Stock Company Act, 1857, Companies Act passed in the
year 1866 followed by Indian Companies Act, 1913. The Indian Companies Act, 1913 was
replaced by Indian Companies Act, 1956 and saw various amendments in the years to come.
In the recent year, 2015, the Supreme Court issued the National Company Law
Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as valid. This
decree thus formed the foundation of the constitutionalized NCLT & NCLAT, by the Central
Government on June 1st, 2016.

NCLT, National Company Law Tribunal, is a quasi-judicial structure to regulate and


resolve civil corporate disputes. Whereas, NCLAT is the higher forum where appeals from
the Tribunal are dealt with, i.e. Appellate Tribunal. The power to establish NCLT and
NCLAT has been derived from Article 245 of the Constitution of India.

The Tribunal, the outcome of the Eradi Committee, is institutionalized under the
Constitution and practices both authority and power like that of the court of law. At its centre,
the Tribunal is required to be objective and pass orders based on natural justice by close
scrutiny of facts provided in the cases that are heard.

The transfer of authority from CLB to NCLT was the first among the many steps
towards the independent jurisdiction of the latter. Further procedures to forward the transfer
included the pending cases under the CLB to be shifted to the NCLT, under Section 434 of
the Companies Act. The Central Government passed legal proceedings by which the powers
of the High Court, the Appellate Authority for Industrial and Financial Reconstruction
(AAIFR) and Board of Industrial and Financial Reconstruction (BIFR) to be vested upon the
Tribunal along with other new powers and functions. Thereby encompassing the governance
of every company registered under the Companies Act, except for banking institutions. Thus
NCLT became legally active on June 1st, 2016 with ten benches and one principle bench.

Jurisdiction of the NCLT

Both the Tribunal and Appellate Tribunal follow the Code of Civil Procedure and are
subject to any rules formed by the Central Government. The former two entities hold the
authority to direct and make-do their own procedural methods.

The jurisdiction of NCLT includes the following:

Class Action

Class Action comes under Section 245 of the Indian Companies Act, takes action
against frauds and improprieties where the shareholders and depositors are the main victims.
There has been a long chain of cheating where the companies registered under the law drain
dry the investments and savings of their investors and shareholders. The Companies Act,
2013 has presented measures to effectively bring down the offenders by subjecting the guilty

12 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

to punishment, wherein they ought to give compensations to the victims for the losses on
account of the fraudulent practices

One or more plaintiffs can file a lawsuit on behalf of a large group and accelerate the
procedure. Thereby representing a whole group of, perhaps, geologically dispersed class of
people: shareholders or depositors, who are being wronged. Section 245 has brought great
relief to the investors, protecting their assets and safeguarding their rights. Class Action can
be filed against both private and public run companies with an exception for banking
companies.

Refusal to Transfer Shares

Under Sections 58 and 59, if a company refuses to register a transfer or does any
malpractices leading to dissatisfactory of the transferor or transferee, the latter is entitled to
appeal to the National Company Law Tribunal, after a period of two months. The
two Sections, in effect, give importance to contracts or arrangements for transferring
securities entered into by two or more people with respect to valid conditions.

Oppression and Management

Under Section 397 of the Companies Act, 1956 a member could file a complaint only
about ongoing instances of oppression and mismanagement. Unlike its predecessor, the
Tribunal, under Section 241 grants any member permission to find justice for past and present
instances of oppression and mismanagement. Thus, setting forth remedies for any member or
ex-member of a company or Central Government subjected to the crime under scrutiny.

A member can file an application to the Tribunal upon the grounds that the affairs of
the company are run in a way prejudicial to public interest, prejudicial and oppressive
towards members of the company or prejudicial to the very interest of the company. Section
397permits the dissolving of the eligibility criteria the condoning of the Tribunal, thus a
member not within the eligibility criteria can apply in deserving cases.

Reopening of Accounts and Revision of Financial Statements

The one too many cases of falsification of books of accounts in plain sight during the
Companies Act, 1956 led to the addition of several procedures to counter this malfunctioning
in the Companies Act, 2013. Section 130 and 131 read along with Section 447 and 448 in the
new Act is a measure taken against this menace. These Sections act as provisions that refrain
companies from suo muto opening their accounts and revising their financial
statements. Section 130 gives the Tribunal power to hold the authority to direct a particular
company to reopen its accounts under certain given circumstances. The company is allowed
to revise its financial statement under Section 131 but not allowed the reopening of any
accounts.

Deregistration of Companies

13 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Section 7(7) under the new Act preserves power upon the Tribunal to deregister or
dissolve companies that are found to have attained ‘registered’ status through illegal and
wrongful manner. In essence, the procedural errors of registration of companies can be
investigated or questioned by the Tribunal, if found suspicious. Also, the court can declare
the liability of members unlimited.

Deposits

Deposits under the Companies Act, 2013 includes any receipt of money in the form of
loan or deposit in any other form by a company. It is also to be noticed that deposits are not
inclusive of such categories of amounts that may be prescribed in consultation with the
Reserve Bank of India (RBI). Chapter V of the 2013 Act and the Companies (Acceptance of
Deposits) Rules, 2014 deals with deposits and defines the regulations of deposits. Deposit
Rules provide aggrieved depositors with the remedy of class actions so that they can seek
justice for the omissions of the companies which hurt their depositor rights.

Power to Investigate

Chapter XIV of the Companies Act, 2013 instils upon the Tribunal the power of
investigation. The Tribunal can authorize an investigation into the affairs of any company if
or when an application is filed against the particular company by 100 members. The
investigation can be extended to the ownership of companies. Also, if a person outside the
company is able to provide conditions acceptable to NCLT, the latter holds power to
authorize an investigation. The court can in course of action freeze company assets under
given conditions and place restriction orders on securities, unlike before.

Conversion of Public Company to Private Company

The Tribunal in accordance with Section 13-18 has a say in the conversion of public
companies to private companies. This authority not only includes the consent and
confirmation for the conversion, it goes further. Section 459 of the Act maintains that NCLT
can impose certain terms and restrictions or grand approval along with certain conditions.

Tribunal Convened General Meetings

‘Annual general meetings’ (AGM) or ‘extraordinary general meetings’ (EOGM) are


to be held to revise the opinions of shareholders and provide a general outline of the company
workings. These meetings ought to follow procedures provided under the Companies Act,
2013. If for some extraordinary reasons the AGM or EOGM cannot be called, the Tribunal
under the provisions of Sections 97 and 98 is empowered to convene a general meeting.

Financial Year

NCLT exercises power to change the financial year of companies registered in India.
UnderSection 2 (41) the companies in existence should have a uniform financial year ending
on 3ist of March.

Jurisdiction of NCLAT

14 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

The National Company Law Appellate Tribunal is headed by the Chairperson and
consists of not more than eleven members. It is a higher law governing forum than NCLT.
The Appellate Tribunal hears appeals filed against the Tribunal court orders. The appeal can
be placed within 45 days from the date on which NCLT announces its decisions. The
Appellate Tribunal court goes through the evidence transferred from the Tribunal, making
changes or confirming the order given by the latter. This process happens within a time span
of six months.

Dissatisfaction with Tribunal Orders

If a group or an individual is to be dissatisfied with the orders passed by the Tribunal


Court it is obvious to move on to the next, only, option, that is filing an appeal to the
Appellate Court where the decisions of NCLT are reviewed and checked from the point of
law and facts. The Tribunal Court is in charge of finding and gathering evidence while the
Appellate Court decides cases based on the already collected evidence. If the outcome is not
satisfactory even then, one should approach the Supreme Court.

The National Company Law Tribunal was setup by the Central Government in 2016 under
Section 408 of the Companies Act, 2013. The National Company Law Tribunal has been
setup as a quasi-judicial body to govern the companies registered in India and is a successor
to the Company Law Board. In this article, we look at the National Company Law Tribunal,
its functions and powers in detail.

Scope of National Company Law Tribunal

The National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of the
Company Law Board, Board for Industrial and Financial Reconstruction (BIFR), The
Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and the powers
relating to winding up or restructuring and other provisions, vested in High Courts. Hence,
the National Company Law Tribunal will consolidate all powers to govern the companies
registered in India. With the establishment of the NCLT and NCLAT, the Company Law
Board under the Companies Act, 1956 has now been dissolved.

Advantages for National Company Law Tribunal

 NCLT is a specialized court only for Corporates, i.e., companies registered in India.

 This will be no more than a Tribunal for the Corporate Members.

 NCLT will reduce the multiplicity of litigation before different forums and courts.

 NCLT has multiple branches and is able to provide justice at a close range.

 NCLT consists of both judicial and technical members while deciding on matters.

 The time taken to windup a company is reduced.

15 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 Speedy disposal of cases will help reduce the number of cases.

 NCLT & NCLAT have exclusive jurisdiction.

Jurisdiction of National Company Law Tribunal

The following are the National Company Law Tribunal benches and its respective
jurisdictions:

NCLT, Principal Bench and NCLT, New Delhi Bench

Address: NCLT, New Delhi Bench. Block No. 3, Ground Floor, 6th,7th & 8th Floor, CGO
Complex, Lodhi Road, New Delhi-110003
Jurisdiction: Union Territory of Delhi, State of Rajasthan, State of Haryana

NCLT, Ahmedabad Bench

Address: Anand House, Ground Floor, 1st & 2nd Floor, SG Highway, Thaltej, Ahmedabad-
380054
Jurisdiction: State of Gujarat, State of Madhya Pradesh, Union Territory of Dadra and Nagar
Haveli, Union Territory of Daman and Diu

NCLT, Allahabad Bench

Address: 9th Floor, Sangam Place, Civil Lines Allahbad – 211001


Jurisdiction: State of Uttar Pradesh, State of Uttrakhand

NCLT, Bengaluru Bench

Address: Corporate Bhawan, 12th Floor, Raheja Towers, M.G., Road, Benguluru – 160019
Jurisdiction: State of Karnataka

NCLT, Chandigarh Bench

Address: Ground Floor, Corporate Bhawan, Sector-27 B, Madhya Marg, Chandigarh-160019


Jurisdiction: State of Himachal Pradesh, State of Jammu and Kashmir, State of Punjab, Union
Territory of Chandigarh

NCLT, Chennai Bench

Address: Corporate Bhawan (UTI Building), 3rd Floor, No. 29 Rajaji Salai, Chennai-600001
Jurisdiction: State of Kerala, State of Tamil Nadu, Union Territory of Lakshadweep, Union
Territory of Puducherry

NCLT Guahati Bench

Address: 4th Floor, Prithvi Planet Behind Hanuman Mandir, G.S. Road, Guahati-781007
Jurisdiction: State of Arunchal Pradesh, State of Assam, State of Manipur, State of
Mizoram, State of Meghalaya, State of Nagaland, State of Sikkim, State of Tripura

16 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

NCLT Hyderabad Bench

Address: Corporate Bhawan, Bandlaguda Tattiannaram Village, Hayatnagar Mandal,


Rangareddy District, Hyderabad-500068
Jurisdiction: State of Andhra Pradesh, State of Telangana

NCLT Kolkata Bench

Address: 5, Esplanade Row (West), Town Hall Ground and 1st Floor Kolkata-700001
Jurisdiction: State of Bihar, State of Jharkhand, State of Odisha, State of West Bengal,
Union Territory of Andaman and Nicobar Island

NCLT Mumbai Bench

Address: 6th Floor, Fountain Telecom Building No.1, Near Central Telegraph, M.G. Road,
Mumbai – 400001
Jurisdiction: State of Chhattisgarh, State of Maharashtra, State of Goa

Powers of National Company Law Tribunal (NCLT)

The Tribunal and the Appellate Tribunal is bound by the rules laid down in the Code of Civil
Procedure and is guided by the principles of natural justice, subject to the other provisions of
this Act and of any rules that are made by the Central Government. The Tribunal and the
Appellate Tribunal has the power to control its own procedure.

Further, no civil court has the jurisdiction to consider any suit or proceeding with reference to
any matter which the Tribunal or the Appellate Tribunal is empowered to decide.

National Company Law Tribunal enjoys a wide range of powers. Its powers include:

 Power to seek assistance of Chief Metropolitan Magistrate.

 De-registration of Companies.

 Declare the liability of members unlimited.

 De-registration of companies in certain circumstances when there is registration of


companies is obtained in an illegal or wrongful manner.

 Remedy of oppression and mismanagement.

 Power to hear grievance of refusal of companies to transfer securities and rectification


of register of members.

 Protection of the interest of various stakeholders, especially non-promoter


shareholders and depositors.

 Power to provide relief to the investors against a large set of wrongful actions
committed by the company management or other consultants and advisors who are
associated with the company.

17 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 Aggrieved depositors have the remedy of class actions for seeking redressal for the
acts/omissions of the company which hurt their rights as depositors.

 Powers to direct the company to reopen its accounts or allow the company to revise
its financial statement but do not permit reopening of accounts. The company can
itself also approach the Tribunal through its director for revision of its financial
statement.

 Power to investigate or for initiating investigation proceedings. An investigation can


be conducted even abroad. Provisions are provided to assist investigation agencies
and courts of other countries with respect to investigation proceedings.

 Power to investigate into the ownership of the company.

 Power to freeze assets of the company.

 Power to impose restriction on any securities of the company.

 Conversion of public limited company into private limited company.

 If the company cannot or has not held an Annual General Meeting as required under
the Companies Act or a required Extraordinary General Meeting, then the
Tribunal has powers to call for a General Meetings.

 Power to alter the financial year of a company registered in India.

National Company Law Appellate Tribunal (NCLAT)

Appeal from order of Tribunal can be raised to the National Company Law Appellate
Tribunal (NCLAT). Appeals can be made by any person aggrieved by an order or decision of
the NCLT, within a period of 45 days from the date on which a copy of the order or decision
of the Tribunal.

On the receipt of an appeal from an aggrieved person, the Appellate Tribunal would pass
such orders, after giving an opportunity of being heard, as it considers fit, confirming,
changing or setting aside the order that is appealed against.The Appellate Tribunal is required
to dispose the appeal within a period of six months from the date of the receipt of the appeal

National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT) were established due to the notification w.e.f. June 01, 2016, published by Ministry
of corporate affairs. Both the tribunals were conferred with the powers under section 408 and
section 410 of companies act, 2013 respectively.

The said notification was published with the objective to bring specialized justice system for
corporates and to provide for a fast track recourse to the society to proceed against the
corporates. The setting up of NCLT and NCLAT is an effort to move towards faster
resolution in corporate disputes, thus improving the ease of doing business in India.

18 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Apart from the general objectives and intentions behind setting up of NCLT and NCLAT,
they have been brought up to effectively and efficiently implement the Insolvency and
Bankruptcy Code, 2016 (IBC).

Procedure before the tribunal

1. NCLT and NCLAT are vested with the powers of civil courts.

2. They shall not be bound to follow the procedure laid down in Civil Procedure Code
but shall be guided by the principle of natural justice.

3. The orders passed shall have the same effect as decree delivered by the court.

4. As per section 422 of Companies act, 2013 the tribunal is supposed to expeditiously
dispose of the matter within 3 months including the extension of 90 days as the case
may be.

Power of Review

NCLT can review its own orders and make the necessary corrections apparent from the
record. The time period within which review of the order is allowed is 2 years and not beyond
that.

Appeall

Anyone who is aggrieved by the order of NCLT shall approach or file an appeal against the
impugned order before NCLAT. The person has to file the appeal within the time period of
45 days from the date of receiving the order. Also, the extension period of 45 days is allowed
to the aggrieved while filing an appeal before the NCLAT.

Anyone aggrieved from the orders of NCLAT has to approach the Supreme Court filing an
appeal against the impugned order.

NCLT and IBC

Insolvency applications against the corporate persons who owes a debt to some creditors and
defaults in making the payment to the creditors (financial or operational) shall be filed in the
NCLT.

According to section 61 any aggrieved person can file an appeal before the NCLAT with 30
days of receiving the order.

JURISDICTION OF NCLT

Territorial

The NCLT before which the application under IBC is to be filed depends upon the location of
registered office of the corporate debtor against which the insolvency application has to be
filed. Therefore, the application to initiate the insolvency resolution process shall be filed in

19 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

the territorial jurisdiction of that NCLT within whose jurisdiction the registered office of the
corporate debtor is situated.

NCLAT

Any appeal against the order of all the NCLT benches shall be filed at NCLAT situated at
New Delhi.

Monetary Jurisdiction

Every NCLT is constituted of a Principal Bench and other benches.

NCLT, Principal Bench- Over the companies having the paid up share capital of more than

Rs. 50 Lakhs or for any other matter which shall be notified by the Hon’ble president of the
NCLT.

NCLT, New Delhi Bench- If the paid up share capital of company is upto Rs. 50 lakhs, then
the other benches shall have the jurisdiction or any other matter which shall be authorized by
the Hon’ble president by passing a general or specific order.

National Company Law Tribunal is the outcome of the Eradi Committee. NCLT was
intended to be introduced in the Indian legal system in 2002 under the framework of
Companies Act, 1956 however, due to the litigation with respect to the constitutional validity
of NCLT which went for over 10 years, therefore, it was notified under the Companies Act,
2013. It is a quasi-judicial authority incorporated for dealing with corporate disputes that are
of civil nature arising under the Companies Act. However, a difference could be witnessed in
the powers and functions of NCLT under the previous Companies Act and the 2013 Act. The
constitutional validity of the NCLT and specified allied provisions contained in the Act were
re-challenged. Supreme Court had preserved the constitutional validity of the NCLT,
however, specific provisions were rendered as a violation of the constitutional principles.

NCLT works on the lines of a normal Court of law in the country and is obliged to fairly and
without any biases determine the facts of each case and decide with matters in accordance
with principles of natural justice and in the continuance of such decisions, offer conclusions
from decisions in the form of orders. The orders so formed by NCLT could assist in resolving
a situation, rectifying a wrong done by any corporate or levying penalties and costs and might
alter the rights, obligations, duties or privileges of the concerned parties. The Tribunal isn’t
required to adhere to the severe rules with respect to appreciation of any evidence or
procedural law

Freezing assets of a company

The NCLT isn’t just empowered to freezing the assets of a company for using them at a later
stage when such company comes under investigation or scrutiny, such investigation could
also be ordered on the request of others in specific conditions.

Converting a public limited company into a private limited company

20 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Sections 13-18 of the Companies Act, 2013 read with rules control the conversion of a Public
limited company into the Private limited company, such conversion needs an erstwhile
confirmation from the NCLT. NCLT has the power under section 459 of the Act, for
imposing specific conditions or restrictions and might subject granting approvals to such
conditions.

Minority Interests

Balance to be struck between the rule of the majority and the rights of the minority

1. The fundamental principle defining operation of shareholders democracy is that the rule of
majority shall prevail. However, it is also necessary to ensure that this power of the majority
is placed within reasonable bounds and does not result in oppression of the minority and mis-
management of the company. The minority interests, therefore, have to be given a voice to
make their opinions known at the decision making levels. The law should provide for such a
mechanism. If necessary, in cases where minority has been unfairly treated in violation of the
law, the avenue to approach an appropriate body for protecting their interests and those of the
company should be provided for. The law must balance the need for effective decision
making on corporate matters on the basis of consensus without permitting persons in control
of the company, i.e., the majority, to stifle action for redressal arising out of their own wrong
doing.

Minority and ‘Minority Interest’ should be specified in the substantive Law

At present, in case of a company having share capital, not less than 100 members or not less
than 1/10th of total number of members, whichever is less or any member or members
holding not less than 1/10th of issued share capital have the right to apply to CLB/NCLT in
case of oppression and mismanagement. In case of companies not having share capital, not
less than 1/5th of total number of members have the right to apply.

To reflect the interest of the “Minority”, a 10% criteria in case of companies having share
capital and a 20% criteria in the case of other companies is provided for in the existing Act.
In Section 395 of the Act, the dissenting shareholders have been put at the limit of 10% of
shares. Thus Minority could be defined as holding not more than 10% shares for the limited
purpose of agitating their rights before the appropriate forum.

Oppression is defined in section 397(2). It is defined as conducting the company’s affairs in


a manner prejudicial to public interest or in a manner oppressive to any member or members.
Mis-management has been defined in section 398(1) of the Act, as conducting the affairs of
the company in a manner prejudicial to public interest or in a manner prejudicial to the
interests of the company.

The Committee on examination of the existing provisions felt that a reasonable framework
could be enabled through specific provisions to be brought in the new Act to define
“Minority” (on the lines of clause (2.2) above) and the “Minority Interest “ (on the lines of
clause (2.3) above).

21 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Representation of minority interests

3. While the Committee feels that the concept of independent directors would provide an
objective scrutiny of management, operations and decision making, the Boards of the
companies could also incorporate the concept of representation of specific minority
shareholders group. It was observed that the existing Act provided an option to company to
adopt proportionate representation for the appointment of directors but this option was rarely
used. A view was expressed that the applicability of the provisions of Section 265 (existing
Act) could be made mandatory. The specific minority appointed director/independent director
could also play an important role in investor protection. The Committee view was that the
existing option may be retained.

Right of share holders to be informed through correct disclosures

4. The risks of investors can be reduced / minimized through adequate transparency and
disclosures. The law should indicate in clear terms the rights of members of the company to
get all information to which they are entitled in a timely manner. The financial information
and disclosures to be provided to shareholders should not be in excessively technical format
but should be simple to understand. This will enhance the credibility of the company and will
help the shareholders to take an informed and conscious decision in respect of their
investments. Besides, statutory information, which would be regulated through law, the
information could also be made available through other means like print, electronic media,
company website etc. A regime of stringent disclosure norms should be provided for in case
of companies accessing funds through public offers. There should be adequate and deterrent
penalties in law against wrong disclosures.

Right of minority to be heard

5. Once the principle of protection of “Minority Interest” is recognized in the Act, there
would also be a need to put in place an appropriate mechanism for ensuring that such
provisions relating to “Minority Interest” do not obstruct the Board or the management from
performing their functions genuinely in interests of the company. The Board and the
management should, therefore, be protected from undue and unjustified interference from
unscrupulous shareholders acting in the guise of investors’ rights.

Rights of minority shareholders during meetings of the company

6. Sometimes, the meetings of the company are so organized so as to deprive the minority of
an effective hearing. The procedures to be prescribed under the Act should safeguard against
such behaviour by the company. There should be extensive use of postal ballot including
electronic media to enable shareholders to participate in meetings.

Rights in case of Oppression and Mismanagement

7. There are adequate provisions in the existing Act to prevent Oppression and
Mismanagement. Minority, represented by specified number of members or members holding
requisite percentage of equity capital are entitled to approach Courts/Tribunals for protection

22 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

of their interests. The quasi-judicial body is empowered to order a number of remedial


measures for regulation of the conduct of company’s affairs. These measures, inter-alia,
include purchase of shares or interests of any members of company by other members;
termination, setting aside or modification of agreements relating to managerial personnel;
setting aside of transactions relating to transfer, delivery of goods etc, or any other matter for
which Court/Tribunal feels that provisions should be made. The Court/Tribunal is also
empowered to appoint such number of persons as necessary to effectively safeguard interest
of the company.

Rights of minority shareholders during mergers/ amalgamations/ takeovers

As per existing provisions of the Act, approval of High Court / Tribunal is required in case
of corporate restructuring (which, inter-alia, includes, mergers/amalgamations etc.) by a
company. The Scheme is also required to be approved by shareholders, before it is filed with
the High Court. The scheme is circulated to all shareholders along with statutory notice of the
court convened meeting and the explanatory statement u/s 393 of the Act for approving the
scheme by shareholders.

Though there may not be any protection to any dissenting minority shareholders on this
issue, the Courts, while approving the scheme, follow judicious approach by mandating
publicity about the proposed scheme in newspaper to seek objections, if any, against the
scheme from the shareholders. Any interested person (including a minority shareholder) may
appear before the Court. There have been, however, occasions when shareholders holding
miniscule shareholdings, have made frivolous objections against the scheme, just with the
objective of stalling or deferring the implementation of the scheme. The courts have, on a
number of occasions, overruled their objections.

It is, therefore, felt that there should be specific provision in the Act to put a limit (either
according to a minimum number of persons or according to a minimum percentage of
shareholding) for entitling any body to object such a scheme. It would also be appropriate to
provide for acquisition of remaining 10% shares in a company, of which 90% has been
acquired by an acquirer. Such acquisition of 10% shares should be as per Rules to be framed
by Central Government. The Committee has also made recommendations separately in para
19 of Chapter X, concerning a threshold limit for maintainability of objections by barring
minority shareholders with insignificant stake from obstructing schemes of arrangement.
8.4 In case of Takeovers, as per SEBI (Substantial Acquisition of Shares and Takeover)
Regulations, 1997, SEBI has powers to appoint investigating officer to undertake
investigation, in case complaints are received from the investors, intermediaries or any other
person on any matter having a bearing on the allegations of substantial acquisition of shares
and takeovers. SEBI may also carry out such investigation suo moto upon its own knowledge
or information about any breach of these regulations. Under section 395 of the Act, a
transferee company, which has acquired 90% shares of a transferor company through a
scheme or contract, is entitled to acquire shares of remaining 10% shareholders. Dissenting
shareholders have been provided with an opportunity to approach Court/Tribunal. This
scheme of things appears to be fair and should be continued. In sum :- a) In order to object a

23 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

scheme of amalgamation by investors, a limit shall be determined either according to the


minimum number of members or according to the minimum percentage of shareholding; b)
The provision of section 395A which were incorporated in the Companies (Amendment) Bill,
2003 for acquisition of remaining shares may be considered as a basis for developing an
appropriate framework in this regard.

Fair valuation as a means of safeguarding minority interests

There should be recognition of principle of valuation of shares of a company through an


independent valuation mechanism as means of safeguarding minority interests. The
independent valuer should be appointed by Audit Committee where such a Committee is
mandated or by the Board in other cases. The shareholders should have the right to approach
the Court / Tribunal if they perceive the process to be unfair. In such cases, the Tribunal
should be empowered to appoint an independent valuer. These principles for valuation of
shares could also applied in case of companies that have delisted and have a shareholder base
of 1000 or more.

Further, this Committee has recommended that a company that has delisted from all the
Stock Exchanges in India and has a shareholder / depositor base of 1000 or more should be
mandated to give one buy-back offer within a period of three years of delisting. The
Committee feels that such an offer, taken in the background of the recommendations of
ensuring fair valuations of shares, would also serve to protect minority interests.

Class Action/Derivative suits

In case of fraud on the minority by wrongdoers, who are in control and prevent the company
itself bringing an action in its own name, derivative actions in respect of such wrong non-
ratifiable decisions, have been allowed by courts. Such derivative actions are brought out by
shareholder(s) on behalf of the company, and not in their personal capacity (ies), in respect of
wrong done to the company. Similarly the principle of “Class/Representative Action” by one
shareholder on behalf of one or more of the shareholders of the same kind have been allowed
by courts on the grounds of persons having same locus standi.

Though these principles have been upheld by courts on many occasions, these are yet to be
reflected in Law. The Committee expresses the need for recognition of these principles.

INTRODUCTION

The entire procedure for bringing a lawful end to life of company is divided into two stages.
These two stages are winding up and dissolution. Winding up of company is defined as a
process by which the life of a company is brought to an end and its property administered for
benefit of its members and creditors. It is the last stage, putting an end to life of a company.
The main purpose of winding up is to realize the assets and make the payments of company’s
debts fairly. Thus, winding up is the process by which management of a company’s affairs is
taken out of its directors, its assets are realized by a liquidator and its debts are discharged out
of proceeds of realization.

24 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Difference between winding up and dissolution

WINDING UP
DISSOLUTION

Winding up is a proceeding by means of which


company is dissolved and in course of dissolution, The legal existence of company is brought to an
assets are realized, liabilities are paid off and end by dissolution
surplus is distributed among members.

It is the final stage where the existence of company


Winding up precedes the dissolution.
is withdrawn by law.

The liquidator can present the company in winding Once the order of dissolution is made by the Court,
up proceeding. liquidator cannot represent the company.

Winding up proceeding can be started without the For the dissolution of the company, order of the
intervention of the court. court is essential.

Any person can proceed against the company No proceedings can be started against the company
which is being wound up. which has been dissolved.

Difference between winding up and insolvency

Winding up Insolvency

It is a process by which company is dissolved. The It is inability of a debtor to pay debts as they fall
assets are collected, liabilities are paid off out of due. A person is said to be insolvent when his
assets or from contributions by members and if liabilities exceeds his assets and against whom
surplus left, it is distributed among members Court makes order of adjudication.

A company cannot be adjudged as insolvent An individual can be adjudged as insolvent

A company can be wound up even if it financially A person can be adjudged as insolvent when he is
sound. unable to pay his liabilities.

During winding up proceeding, the property is In insolvency proceedings, the assets of person are
vested in the Company. vested in Official Receiver.

After completion of proceedings, the Company is After completion of proceedings, the insolvent
dissolved. person is discharged from liabilities.

On winding up, the company does not cease to exist as such except when it is dissolved. The
administrative machinery of the company gets changed as the administration is transferred in
the hands of liquidator. Even after commencement of winding-up, the assets of the company

25 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

belong to the company until dissolution takes place. The company ceases to exist as a
separate entity on dissolution and becomes incapable of keeping its own property, suing and
being sued. Thus, the legal status of the company continues to exist between the period of
winding-up and dissolution.

In Pierce Leslie & Co. Ltd. V. Violet Ouchterlony the Supreme Court held that winding-up
precedes the dissolution. There is no statutory provision vesting the properties of dissolved
company in a trustee or having the effect of abrogating. The shareholders or creditors of a
dissolved company cannot be regarded as its heirs and successors. On dissolution, its
properties, if any, vest in the government.

WINDING UP AS PER COMPANIES ACT, 1956

There were three modes of winding up of the Companies registered under Companies Act,
1956.

Winding up by the Court

Winding up by the court or compulsory winding up is initiated by application by way of


petition to appropriate Court for a winding up order. Section 10 of the Companies Act, 1956
deals with the jurisdiction of for entertaining winding up petition.

The High court has jurisdiction in relation to the place at which the registered office of the
company is situated, or

The District Court in which jurisdiction has been vested either by the Act or by notification of
Central Government.

26 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

GTC Industries Ltd v. Parasrampuria Trading, it was held that only High Court where the
registered office is situated has jurisdiction in winding up, even if there was agreement
between parties will be resolved before High Court where registered office is not situated.

CIRCUMSTANCES IN WHICH COMPANY MAY BE WOUND UP BY THE COURT

Section 433 of the Companies Act, 1956 provides for the circumstances in which company
can be wound up-

 If the company has resolved that the company be wound up by the Court by passing
special resolution; or

 If the company has defaulted in delivering the statutory report to the Registrar or in
holding the statutory meeting; or

 If the company does not commence its business within a year from its incorporation,
or suspends its business for a whole year; or

 The number of its members in public company is reduced below seven and in private
company below two; or

 The company is not able to pay the debts; or

 The Court is of the opinion that company should be wound up on just and equitable
grounds; or

 The company has defaulted in filing balance sheet or annual return with the Registrar
for any 5 consecutive years; or

 If the act of the company goes against the interests of sovereignty, integrity and
security of India, friendly relation with foreign states, public order, decency or
morality; or

Inability to pay debts – A company shall be deemed to be unable to pay its debts when the
creditor has served on the company a demand in writing for payment of the debt, which is
more than Rs. 500 and company has within three weeks thereafter, neglected to pay or secure
or compound for it to the reasonable satisfaction of the court.

Just & Equitable Grounds – Court has complete discretion to decide just & equitable
grounds for winding up of a company. Some of the grounds on which court ordered the
winding up of company under this clause,

 When the object of the company was fraudulent,

 When substratum of the company has disappeared i.e original object become
impossible to attain;

 The object for which the company is formed is illegal or becomes illegal by change in
law;

27 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 The object for which company was incorporated has been completed;

 Deadlock in management due to differences among rival group and disagreement


cannot be resolved in general or board meeting;

 There has been mismanagement and misapplication of funds by directors of private


company.

Who may file petition for winding up

Section 439 of Companies Act, 1956 deals with the persons who can file the petition for
winding up of a company,

 The directors can make a petition in the name of the company with the sanction of
general meeting by way of special resolution.

 The creditors can make a petition if the company is unable to pay the debts. The
creditors include assignee of debt, a decree holder, a secure creditor, a debenture
holder or trustee of debenture holders.

 A contributory can present winding up petition if number of members in case of


public company is reduced below 7 and below 2, in case of private company.

 The Registrar of companies, after obtaining prior sanction of the central government,
can present a petition on winding up of company

VOLUNTARY WINDING UP (Section 488 of Companies Act, 1956)

The company and its creditors may apply to court for directions or orders but usually they are
left to settle their affairs within themselves. There are two kinds of voluntary winding
up, Member’s Voluntary winding up and Creditor’s voluntary winding up.

Resolution for Voluntary winding up

Voluntary winding up can be passed with an Ordinary Resolution (When the time span fixed
in the AoA has expired) else with a Special Resolution (In all other cases).

Members’ Voluntary Winding up

When the company is able to pay its debts, its Board of Directors makes a Declaration of
solvency stating that company would be able to pay debts within three years from the date of
commencement. Any false declaration made by director will be punishable up to 6 months or
fine up to Rs. 50000 or both. In Shri Raja Mohan Manucha v. Lakshminath Saigal it was
held that where the declaration of solvency is not made the resolution for winding up and all
subsequent proceedings will be null and void. Such a declaration msut be made within five
weeks immediately preceding the date of passing of resolution for winding up of company
and be delivered to Registrar before that date. The declaration must be accompanied with
auditor’s report on balance sheet and profit and loss account as at latest practicable date.

28 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Creditors’ Voluntary Winding up

When declaration of solvency is not made and delivered to the Registrar, it is case of
creditors’ voluntary winding up.

Date of commencement of winding up-Section 441 of the Companies Act, 1956 lays the
provision for the date of commencement of winding up

The winding up of a company by a court is deemed to commence at the time of the presentation of
petition for winding up.

Where a resolution has been passed by the company, for voluntary winding up, the winding up shall be
deemed to have commenced at the time of passing of the resolution.

Rishabh Agro Industries Ltd. V. PNB Capital, it was held that the words “shall be deemed to
have commenced” shows the intention of the legislature that although the winding up of
company does not in fact commence at time of presentation itself, but it shall be presumed to
commence from that stage

Distinction between Members’ voluntary winding up and creditors’ voluntary winding


up

Members’ Voluntary Winding up Creditors Voluntary Winding up

Where a company is solvent & declaration of Where a company is solvent, the declaration of
solvency is made by the directors, it is called solvency is not made by the directors, it is called as
members’ voluntary winding up the creditors’ voluntary winding up.

Dominant control remains in the hands of the In creditors’ winding up, dominant control remains
members of the company. in hands of the creditors.

In creditors’ winding up, meetings of creditors


There is no meeting of creditors and the liquidator
have to be called at the beginning and subsequently
is appointed by the company.
the liquidator is appointed by the creditors.

The liquidator can exercise some of his powers The liquidator can do so with the sanction of the
with the sanction of a special resolution of the court or the Committee of inspection or of meeting
company. of creditors.

Winding up subject to supervision of the Court (Omitted)

In this winding up process, court can only supervise the procedure. In a general meeting, the
resolution for winding up is passed and court may put some general terms. It must be proved
by petitioner that winding up cannot continue with fairness and then an additional liquidator
along with existing liquidator may be appointed by the Court. A report regarding the progress
of liquidation must be filed every 3 months with the Registrar by the Liquidator. The court

29 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

has power to appoint and remove the liquidator. The court also has the power to enforce calls
made by Liquidator as if order for winding up the company has been made by court itself.
The Liquidator can do all such acts as he thinks best in the interest of the company.

WINDING UP UNDER COMPANIES ACT, 2013

There are two modes of winding up under the Companies Act, 2013 provides for the
provisions relating to commencement of winding up.

Winding up by Tribunal

 National Company Law Tribunal can be initiated by an application by way of petition


for winding up order.

 It should be resorted to only when other means of healing an ailing company are of
absolutely no avail.

 Remedies are provided by the statute on matters concerning the management and
running of the company.

 It is primarily the NCLT which has jurisdiction to wind up companies under the
Companies Act, 2013.

 There must be strong reasons to order winding up as it is a last resort to be adopted.

Grounds on which a Company may be wound up by the Tribunal

Under Section 271 a company may be wound up by the tribunal if-

 Company is unable to pay the debts;

 If the company has, by special resolution, resolved that the company be wound up by
the Tribunal;

 If the company has acted against the interests of sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order;

 If the Tribunal has ordered the winding up of the company under Chapter XIX;

 If on an application made by the Registrar or any other person authorized by the


Central Government by notification under this Act, the tribunal is of opinion that
affairs of the company have been conducted in a fraudulent manner or the company
was formed for fraudulent or unlawful purpose or the persons concerned in formation
misfeasance or misconduct in connection therewith and that it is proper that company
be wound up;

 If the company has made default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years;

30 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

 If the tribunal is of the opinion that it is just and equitable that the company should be
wound up.

Inability to pay debts – A company is deemed to be unable to pay the debts under Section
271 (2) of the Companies Act, 2013 if a creditor to whom company has to pay an amount
exceeding Rs. 1 lakh has served a notice at the registered office of the company by registered
post or otherwise, which requires the company to pay the due amount and the company has
failed to pay the sum within 21 days or If any execution or other process issued by decree of
court or order in creditor’s favour is returned unsatisfied in whole or in part or if the tribunal
is satisfied that the company is unable to pay its debts and the Tribunal shall take into account
the contingent and prospective liabilities of the company while determining whether the
company is unable to pay its debts.

Who may file petition for winding up

A petition for winding up may be presented by any of the following persons under Section
272 of The Companies Act, 2013-

 The company; or

 Any creditor or creditors, including any contingent or prospective creditor or


creditors; or

 Any contributory; or

 All or any of the above three specified parties; or

 The Registrar; or

 Any person authorised by Central Government in this behalf;

 By the Central Government or State Government in case of Company acting aginst


the interest of sovereignty and integrity of India.

As per Section 272 of the Companies Act, 2013, within the meaning of creditor comes a
secured creditor, holder of debentures, trustee for holder of debentures.

A contributory can present the petition of winding up of company even if he may be holder of
fully paid up shares or that company may have no assets or no surplus to distribute among
shareholders after the satisfaction of its liabilities and some shares were originally allotted to
him or have been held by him and registered in his name for 6 months during immediately
preceding 18 months before commencement of winding up.

A petition for winding up shall be admitted by the Tribunal only if it is accompanied by


statement of affairs in such form and in such manner as may be prescribed.

Under this section, a copy of the petition shall also be filed with the Registrar who shall
submit his views to the Tribunal within 60 days of receipt of petition.

31 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Powers & Functions of the Tribunal

As per Section 274 of the Companies Act, 2013 on the filing of petition for winding up by
any person other than the company, if the tribunal is satisfied, it shall direct the company by
an order to file objections along with statement of affairs within 30 days, which could get
extended by another 30 days in special circumstances.

As per Section 275 of the Companies Act, 2013 an official liquidator or a liquidator from
panel shall be appointed by the Tribunal at the time of passing of winding up order. A panel
consisting of CS/CS/Advocates and other notified professionals with at least 10 years
experience in company matters is maintained by the Central Government.

As per Section 281 of the Companies Act, 2013, a report shall be submitted by Liquidator
within 60 days to the Tribunal, containing details such as-

Nature and details of assets of company with their location and value; amount of capital
issued, subscribed & paid up; the existing and contingent liabilities of the company including
names and other details; the debts due to company and names, address; list of contributories
with amount details; details of trademark, intellectual properties, if owned by company;
details of contracts, joint ventures and collaborations, if any; details of holding and subsidiary
company, if any; details of legal cases filed by or against the company; any information
which the tribunal may direct or liquidator may consider necessary.

On consideration of the report of Liquidator, Tribunal shall fix the time limit within which
entire proceedings shall be completed and company be dissolved. The Tribunal may also
order a sale of Company as a going concern or its assets or part thereof. After passing of
winding up order by the Tribunal, the Tribunal shall settle list of contributories, cause
rectification of register of members in all cases where required and shall cause assets of the
company to be applied to discharge its liability.

Voluntary Winding up

In voluntary winding up, Company and its creditors settle their affairs without going to Court.
One or more liquidators are appointed by company in general meeting for purpose of winding
up. A voluntary winding up commences from date of passing of resolution for voluntary
winding up, a petition is presented for winding up by the Court. Section 304 deals with the
circumstances in which a company may be wound up voluntarily-

32 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

CHANGES IN WINDING UP AFTER THE INSOLVENCY AND BANKRUPTCY CODE,


2016

The Insolvency & Bankruptcy Code, 2016 consolidate and amend the laws relating to
insolvency of companies, partnership firms, limited liability partnership into a single
legislation. It aims to provide time bound resolution and empowered the creditors to initiate
the insolvency resolution process if default occurs.

After the MCA wide notification no. S.O. 3453 E of November 15 th, 2016, section 255 of
Insolvency & Bankruptcy Code, 2016 amended following sections of the Companies Act,
2013

In the definition of Winding up, new insertion was made which makes it as winding up
means winding up under this Act or liquidation under the Insolvency & Bankruptcy Code,
2016 as applicable.

Section 270 of the Companies Act, 2013 regarding the Modes of winding up, has been
deleted after the enforcement of this Code. It has been substituted by Winding up by Tribunal

Section 271, companies Act, 2013 which deals with Circumstances in which company may
be wound up by Tribunal has been substituted namely- A company may be wound up by the
Tribunal, on petition under Section 272, if the company has resolved by special resolution
that company be wound up by the Tribunal; if the company has acted against sovereignty,
integrity, security of India friendly relations with foreign states, public order, decency,
morality; if the tribunal is of opinion that acts of the company are fraudulent or the object for
which it was formed was fraudulent or unlawful or persons concerned in formation and
management have been held guilty of fraud, misconduct and it would be proper for it to be
wound up; if the company defaulted in filing financial statement for the immediately
preceding last financial years with the Registrar; if Tribunal is of opinion that company
should be wound up on just and equitable grounds.

33 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

The sub-section has been substituted in Section 275 of the Companies Act, 2013 as Section
275(2) which deals with Company Liquidators and their appointment as per which Tribunal
shall appoint the provisional or the Company Liquidator from amongst the insolvency
professionals registered under the Insolvency & Bankruptcy Code, 2016.

Section 304 of the Companies Act, 2013 that deals with the circumstances in which company
may be wound up voluntarily has been omitted by the Insolvency & Bankruptcy Code, 2016
along with other sections relating to voluntarily winding up under the Act

Transfer of proceedings – On December 7th, 2016, the MCA issued Companies (Transfer of
Pending Proceedings) Rules, 2016 for transfer of pending legal proceedings from High Court
to National Company Law Tribunal bench

Subject Matter Transferred to NCLT Retained with High Court

Winding up under supervision of


No Yes
court

New cases to be filed with NCLT


w.e.f 1st April, 2017
For cases filed up to 31st March,
Voluntary Winding up Provisions relating to voluntary 2017
winding up under Companies
Act, 2013 has been omitted.

Where petition has not been


Where petition has been served
Winding up for inability to pay served, it has to be treated as an
on the Respondent.
application under IBC.

Only those cases where petition


Where petition has been served
Winding up by the Court has not been served on
on Respondent.
Respondent

On March 31st, 2017the Insolvency and Bankruptcy Board of India has notified the
Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations,
2017. The voluntary winding up of companies was governed by Companies Act, 1956 as the
mentioned provisions in Companies Act, 2013 had never been notified. Now the Voluntary
Liquidation in both the Companies Act 1956 and Companies Act, 2013 has been repealed by
Government.

Chapter V of Part II of the Insolvency and Bankruptcy Code contains Section 59 that deals
with voluntary liquidation. Moreover, the distinction between members’ voluntary winding
up and creditors’ voluntary winding up has been eliminated.

As per Section 59 of the Code, the voluntary liquidation process can only be initiated by a
corporate person, which has not committed any default. Default here includes those debts that

34 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

are not repaid and has become due and payable. The compliances of some requirements are
necessary.

 Declaration by directors that winding up is not to defraud any person;

 Liquidator can be insolvency professional who fulfils criteria under the regulations;

 Registers to be maintained and preserved in prescribed manner;

 Liquidators to receive claims of stakeholders only in specified forms;

 Within twelve months from commencement of voluntary winding up, the affairs of
corporate person to be wound up;

 Reports by Liquidator to be submitted to corporate person, Registrar of Companies


and Insolvency and Bankruptcy Board of India.

 The time period to comply the requirements has also been reduced to expedite the
process.

PROCEDURE FOR WINDING UP UNDER NEW REGULATIONS

STEP 1: One has to submit a declaration to Registrar of Companies, stating that company
will pay its dues and liquidation is not to defraud any person;

STEP 2: Within 4 weeks of such declaration, special resolution has to be passed for approval
of proposal of voluntary liquidation and appointment of liquidator;

STEP 3: Within 5 days of such approval, public announcement in newspaper and website of
company has to be made for inviting claims of stakeholders;

STEP 4: Within 7 days of such approval, intimation should be given to ROC and Board;

STEP 5: Submission of preliminary report containing capital structure, estimates of assets


and liabilities, proposed plan of action within 45 days to a corporate person;

STEP 6: Verification of claims within 30 days and preparation of list of stakeholders within
45 days from the last date of receipt of claims;

STEP 7: For receipt of money due to corporate person, bank account needs to be open in
name of corporate person having words ‘in voluntary liquidation’ after its name.

STEP 8: Sale of assets and recovery of due money, uncalled capital is realised;

STEP 9: The proceeds from realization to be distributed within 6 months from receipt of
amount to the stakeholders;

STEP 10: The final report by the liquidator has to be submitted to corporate person, ROC, the
Board and application to NCLT.

35 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

STEP 11: The order of NCLT regarding dissolution to be submitted within 14 days of receipt
of order.

Conclusion

In the year 1999, as per Justice Eradi Committee Report, 473 winding up cases were pending
for more than 25 years and in 2015, there were 1479 winding up cases pending for more than
20 years, as per data furnished by the Department of Financial Services. The Insolvency and
Bankruptcy Code, 2016 was passed to ensure time bound settlement of insolvency which
would in turn help in solving India’s bad debt problem.

To expedite the process of voluntary winding up, Government had introduced New
Regulations as the procedure of voluntary winding up under Companies Act, 1956 was time
consuming and there was no prescribed qualification for liquidator. The Code mandates that
insolvency professionals are to be appointed as Liquidators, such a move is welcome by
corporates and professionals.

The Code and Regulations provide a favourable framework for companies and limited
liability partnerships. Though the process remains almost similar to previous regime, but the
major change has taken place in initiation of winding up process. Earlier, company or any of
its creditors could file a voluntary winding up petition but now company, directors,
designated partners or persons responsible for exercising its corporate powers can initiate the
winding up process. Moreover, approval of creditors representing two thirds of corporate debt
is mandatory under the Code for initiating voluntary winding up proceeding.

To sum it up, now every company who proposes to wind up is required to follow Insolvency
and Bankruptcy Code, 2016. The Code is quite comprehensive and wider as against
Companies Act, 1956. It is expected that Code would help in overcoming delays and
complexities involved in the process due to presence of four adjudicating authorities, High
Court, Company Law Board, Board for Industrial and Financial Reconstruction and Debt
Recovery Tribunal. It would also lessen the burden on courts as all the litigation will be filed
under the Code.

Role of a Liquidator in the Insolvency Process?

The role of a liquidator in the insolvency process is primarily designed to ensure a fair
distribution of an insolvent company’s assets for the benefit of its creditors. In many cases,
the insolvency practitioner (an individual who is authorised to act in relation to an insolvent
company) will try to rescue the business if they believe this will produce a better return for
the creditors. If a company rescue is not viable, the official receiver may act as the company
liquidator if the case is relatively straightforward. In more complex cases, they will usually
appoint a private sector insolvency practitioner, usually an accountant or solicitor, to
complete the liquidation.

Company officers, both current and former, have a duty to co-operate with the official
receiver and private liquidators. Under the Insolvency Act 1986, failure to do so could lead to
jail time.

36 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

How is an Insolvency Practitioner Appointed?

An insolvency practitioner is appointed at a creditor’s meeting or by the Secretary of State for


Business, Innovation and Skills. This will usually occur within four months of the winding-
up order, and in complex cases, more than one liquidator can be appointed to act jointly.

The role of a liquidator becomes officially recognised when appointed by a meeting of


creditors; this must be advertised in the Gazette. If the appointment is made by the Secretary
of State, each creditor must be informed individually.

What are the Duties of an Liquidator?

Once appointed, the liquidator is responsible for:

 Realising the assets of the insolvent company and achieving the best possible price;

 Address outstanding claims against the limited company and satisfy the claims as
set-out by law;

 Distributing the returns to the company’s creditors in order of priority;

 Acting in the best interests of the creditors (not the directors).

Maximising the return for creditors

Maximising the return for creditors is the liquidator’s primary responsibility. As part of this
duty, they may apply to the court to restore property that has been disposed of in an unfair
way. For example, assets may have been sold to a connected business for less than their
market value.

Investigating the Possibility of Wrongful or Fraudulent Trading

A liquidator can also take action against current or previous company directors who did not
act in the best interests of creditors (Section 214). For example, if the company continued to
trade and make further losses after becoming insolvent, the directors can be made personally
liable for the debts.

What is a Provisional Liquidator?

Occasionally, when a winding up petition is presented to court, the judge will deem it too
risky for the company to continue trading. This may be because the assets are in some way at
risk and, in these instances, the court will appoint a provisional liquidator to safeguard the
company until the full petition is heard. This can be done either with or without notice to the
the company, the former meaning an official letter will be sent to company directors
informing them of the appointment of the Official Receiver as provisional liquidator.
‘Without Notice’ means that it is only the Official Receiver who is aware of the situation, and
this is usually due to a fear that company assets may disappear in some way, if the company
finds out about it, or that it is demonstrably in the public interest.

37 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Appointing a Creditors’ Committee

In some cases, the company’s creditors will choose to appoint a creditors’ committee to
protect and promote their best interests. Between three and five members can be elected to
the committee. It is better to have either three or five member, rather than four, to avoid
deadlocks in committee votes. The liquidator must then report to the committee on the
progress of the liquidation and account for any costs and expenses.

How is the Liquidator paid?

A liquidator is paid for the work that they do. Their payment can be in the form of a pre-
agreed fixed sum, an hourly rate, or as a percentage of the assets they realise. This payment
should be agreed at the creditors’ meeting or with the creditors’ committee.

The level of payment the liquidator receives should be based on:

• The complexity of the case

• How effectively they carry out their duties

• Any extra responsibility the liquidator takes on

• The value and nature of the assets

A full estimate of the liquidator’s fee should be provided in advance of the work they
complete. Their payment claim should be made along with evidence of any expenses and the
progress that has been made. There should also be a breakdown of the time spent on the case
if the liquidator is receiving an hourly rate. This should be in keeping with the principles set
out in The Statement of Insolvency Practice (SIP) 9.

Payments are Made When Company Assets are Realised

The insolvency practitioner is the first to be paid from the money raised when a company’s
assets are realised. Payments are then made to creditors in the following order:

1. Claims from preferential creditors such as employees for unpaid wages and holiday pay.

2. Floating charge holders are then paid from the proceeds of the sale of assets over which a
‘floating charge’ is held.

3. Next to be paid are the unsecured creditors, which includes trade and expense creditors. If
there is insufficient money to pay the unsecured creditors in full, they are paid in proportion
to the amount they are owed.

4. If the debts of preferential and unsecured creditors have been paid in full, they are then
entitled to interest for the late payment of their debts. Interest payments are paid from the
date of the winding-up order.

5. In the unlikely event that there is money left over after the expenses of the liquidation have
been paid, this is returned to the shareholders of the company.
38 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

Is there anything I should be aware of before engaging an insolvency practitioner (IP)?

If you are considering engaging an insolvency practitioner with a view to becoming your
company liquidator be aware what you say pre-engagement is not privileged. The reason is
simple the liquidator acts for the creditors, not you the director. They do have a duty of care
where personal guarantees are concerned, but this can be easily overlooked in the heat of a
company closure. As a lot of directors have learnt to their cost answer honestly but remember
who the IP represents.

You also need to be aware the IP cannot (or at least should not) be providing advice on your
personal guarantees and how to negotiate with the bank, or other creditors. The reason is
simple they would have a direct conflict of interest as they represent the bank. We are
company rescue consultants so act on the director’s behalf having due care for the creditors –
the exact opposite of the liquidator.

Completion of the Procedure

Once the company liquidation procedure has been completed and the assets have been
distributed, the liquidator will hold a final meeting with the creditors. They will report on the
insolvency and provide a summary of their receipts and payments. At this point, they will
seek to be released from office, and the liquidation will be concluded.

Role of the Liquidator in CVL

On appointment, the liquidator will manage the liquidation process by dealing with creditors
and organising creditors’ meetings where necessary. He or she will sell the company’s assets,
and the proceeds will be used to pay creditors after agreed costs and fees have been deducted.

The liquidator will complete and file all the required paperwork. It is also his or her role to
investigate the conduct of the company directors for the last three years before the
liquidation. He or she has a duty to report any evidence of criminal activity to the relevant
authorities.

Insolvency Practitioners’ Role Compulsory Liquidation

A compulsory liquidation arises when a creditor petitions the Court for the compulsory
winding up of a company. If the petition is successful, the company is wound up by the
Court, and an official receiver (OR) is appointed as liquidator. Once the insolvent company is
in compulsory liquidation, the directors are no longer in control of the business or its assets.
The role of the liquidator is to take control of the business, sell the company’s assets and
distribute the proceeds to its creditors.

The official receiver will frequently pass the liquidation process to an insolvency practitioner
(IP). However, on occasion when the OR deals with the compulsory liquidation, he or she
will manage the paperwork, sell the assets to repay creditors, and investigate director conduct
and report on director conduct to the relevant authorities.

Members’ Voluntary Liquidation (MVL)

39 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

In sharp contrast, this process is used to close down a business that is solvent. The MVL is
initiated voluntarily by the company’s directors and can only be used in the cases where
insolvency isn’t an issue. As part of the process, shareholders must make a statutory
declaration of solvency, which states that the business is solvent and can repay its creditors
within 12 months.

The company appoints a liquidator to sell the company’s assets and ensure the company’s
debts are settled with the proceeds. He or she will collect all monies owed to the business and
settle any legal disputes. The shareholders will also receive their share capital from the
liquidator.

The role also encompasses contracts, and he or she also makes certain that all contracts are
completed, ended or transferred fully in line with the law as well as deregistering the
company for VAT purposes. Finally, the liquidator files the latest company accounts up to the
date that the business ceased trading.

9 Main Duties of Liquidator in Winding Up a Company in India are given below:

1. To conduct proceedings in winding up:

The liquidator shall conduct the proceedings in winding up the company and perform such
duties in reference thereto as the court may impose. The acts of the liquidator shall be valid,
notwithstanding any defect that may afterwards be discovered in his appointment or
qualifications (Sec. 457).

2. To submit preliminary report:

Immediately on the receipt of the Statement of Affairs from the directors and within six
months after the date of the winding up order, liquidator shall submit to the court a
preliminary report with regard to capital issued, subscribed and paid, the estimated amount of
assets and liabilities, causes of the failure of the company and whether in his opinion, fraud
and punishable offence have been committed by directors and other officers of the company
(Sec. 455).

3. Collection and distribution of company’s property:

Immediately after the winding up order is made by the court, all the property and assets of the
company shall vest in the liquidator. He shall have the rights to enjoy control on all the
properties of the company.

He shall collect all the assets of the company, prepare schedules of creditors and
contributories and distribute proportionately the total realisations made by him amongst the
creditors (Sec. 456).

4. To obey the order of the court:

Throughout the performance of his duties, Official Liquidator shall not only obey the orders
and carry out the advice and directions of the court but shall also care to see that his actions

40 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

do not come out to be ultra vires the provisions of the company law. He shall carry out his
duties most honestly and faithfully. He shall also take into account the directions given to him
by the resolutions of the creditors or contributories.

5. Meetings of creditors and contributories:

The liquidator may call the meetings of creditors and contributories whenever he may deem
fit for the purposes of ascertaining their wishes. But he shall have to summon such meetings
at such times as the creditors or contributories may by resolution direct or whenever
requested in writing to do so [Sec. 460 (3)].

6. To maintain proper books:

The liquidator shall keep, in the manner prescribed, proper books in which he shall cause
entries or minutes to be made of the proceedings at meetings and of such other matters as
may be prescribed. Any creditor or contributory may, subject to the control of the court,
inspect any books personally or by his agent (Sec. 461).

7. To account for money received by him:

Official Liquidator shall pay all cash collections made by him into the public account of India
in the Reserve Bank of India. He shall present to the court twice a year an account of his
receipts and payments as liquidator.

The account shall be in prescribed form and shall also be verified by a declaration in the
prescribed form. The court shall cause the account to be audited in a manner as it thinks fit

8. Appointment of committee of inspection:

The liquidator will have to appoint a Committee of Inspection to assist him if the court so
directs. He should convene a meeting of the creditors within two months from the date of the
court’s direction for the purpose of determining who are to be the members of the committee.

He should also within fourteen days of the creditors’ meeting, convene a meeting of the
contributories to consider the decision of the creditors’ meeting with respect to the
membership of the committee. In case the contributories do not accept die decision of the
creditors’ meeting in its entirety, the liquidator should apply to the court for directions
regarding the composition of the committee (Sec. 464).

9. Information as to pending liquidation:

If the winding up of a company is not completed within one year after its commencement, the
liquidator shall within two months of the expiry of such year and thereafter until the winding
up is concluded at intervals of not more than one year, file a statement in the prescribed form
and containing the prescribed particulars regarding proceedings in and position of liquidation.
The statement should be duly audited by a person qualified to act as an auditor of the
company.

41 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

rights and duties of the auditor of a company in India

According to section 227 (1) of the Companies Act, 1956, a company auditor has the
following rights:

1. Right of Access to Books of Accounts:

Every auditor of a Company has a right of access at all times to the books of accounts and
vouchers of the company whether kept at the head office of the company or elsewhere.

Thus, the auditor may consult all the books, vouchers and documents whenever he so likes.
This is his statutory right. He may pay a surprise visit without informing the Directors in
advance but in practice, the auditors inform the Directors before they pay their visits.

2. Right to obtain Information and Explanations:

He has a right to obtain from the Directors and officers of the company any information and
explanation as he thinks necessary for the performance of his duties as an auditor.

This is another important power in the hands of the auditor. He will, however, decide as to
which information or explanations he thinks necessary to obtain. It the Directors or officers
of the company refuse to supply some information on the ground that in their opinion it is not
necessary to furnish it, he has a right to mention the fact in his report.

3. Right to Correct any Wrong Statement:

The auditor is required to make a report to the members of the company on the accounts
examined by him and on every Balance Sheet and Profit and Loss Account and on every
other document declared by this Act to be part of or annexed to the Balance Sheet or Profit
and Loss Account which are laid before the company in General Meeting during his tenure of
office. The Directors have a duty to prepare them and present them to the auditor.

The auditor cannot require but advise the Directors to amend their system of maintaining
accounts if it is faulty. If his suggestions are not carried out, he has a right to refer the matter
to the members. If the method of accounting is inadequate, he must state the fact in his report
that proper books of accounts have not been kept by the company.

4. Right to visit Branches:

According to section 228, if a company has a branch office, the accounts of the office shall be
audited by the company’s auditor appointed under section 224 or by a person qualified for
appointment as auditor of the company under section 226.

Where the Branch Accounts are not audited by a duly qualified auditor, the auditor has a right
of access at all time to the books, accounts and vouchers of the company and thus, may visit
the branch, if he deems it necessary.

5. Right to Signature on Audit Report: Under section 229, only the person appointed as
auditor of the company, or where a firm is so appointed, only a partner in the firm practicing

42 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

in India, may sign the auditor’s report, or sign or authenticate any other document of the
company required by law to be signed or authenticated by the auditor.

6. Right to receive Notice and other Communications relating to General Meeting and
attend them:

Under section 231 an auditor of a company has a right to receive notices and other
communications relating to General Meeting in the same way as a member of the company.
He is also entitled to attend any General Meeting which he attends or any part of the business
which concerns him as an auditor.

According to the power of the auditor, he may make any statement or explanation with regard
to the accounts as he may desire. He need not, however, answer any questions.

Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will be
good for him to attend meetings in the following circumstances:

(a) When his report contains important qualifications directly affecting the management, so
that his remarks may not be misunderstood or misinterpreted.

(b) When he has received a notice from the company that someone else is going to be
proposed for appointment as auditor of the company at the Annual General Meeting.

(c) When he has been specially asked by the management to be present.

7. Right of being indemnified:

Under section 633, an auditor (being an officer of a company), has a right to be indemnified
out of the assets of the company against any liability incurred by him defending himself
against any civil and criminal proceedings by the company if it is proved that the auditor has
acted honestly or the judgement delivered is in his favour.

8. Right to have Legal and Technical Advice:

He has a right to seek the opinion of the experts and, thus, take legal and technical advice.
This is necessary to give his opinion in his report. (Re. London and General Bank Case,
1895).

He has a right to receive his remuneration provided he has completed the work which he
undertook to do.

Duties of an Auditor:

I. According to the Companies Act:

1. To Enquire:

The duties of an auditor have been extended by the insertion of sub-section (1A) of section
227 under the Companies (Amendment) Act 1965 which is reproduced below:

43 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

With prejudice to the provision of sub-section (1), the auditor shall enquire:

(a) Whether loans and advances made by a company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial to
the interests of the company or its members.

(b) Whether transactions of the company which are represented merely by book entries are
not prejudicial to the interests of the company.

(c) Where the company is not an investment company within the meaning of section 372 or a
banking company, whether so much of the assets of the company, as consists of shares,
debentures and other securities have been sold at a price less than at within they were
purchased by the company.

(d) Whether loans and advances made by the company have been shown as deposits.

(e) Whether personal expenses have been charged to revenue account.

(f) Whether it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and if
no cash has actually been so received, whether the position as stated in account books and the
Balance sheet is correct, regular and not misleading.

2. Under section 227 (2, 3, 4 and 5), the duties of the auditor which relate to his report are
given hereunder:

The Report:

The auditor shall report to the shareholders on the accounts examined by him. The report so
submitted shall contain the following:

(a) Whether, in his opinion, the Profit and Loss Account referred to in his report exhibits a
true and fair view of the profit or loss.

(b) Whether, in his opinion, the Balance Sheet referred to in his report is properly drawn up
so as to exhibit a true and fair view of the state of affairs of the business according to the best
of the information and explanations given to him as shown by the books of accounts.

(c) Whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit.

(d) Whether, in his opinion, proper books of accounts as required by law have been kept by
the company so far as appears from his examination of those books, and proper returns
adequate for the purpose of his audit have been received from branches not visited by him.

(e) Whether the report on the accounts of any branch office audited under section 228 by a
person other than the company’s auditor has been forwarded to him as required by (c) of sub-
section (3) of that Section and how he had dealt with the same in preparing the auditor’s
report.

44 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

(f) Whether the company’s Balance Sheet and Profit and Loss Account dealt with by the
report are in agreement with the books of accounts and returns.

Where any of the matters referred to above is answered in the negative or with a
qualification, the auditor’s report shall state the reason for the answer.

Under section 227 (4A), the Central Government may, by general or special order, direct that,
in the case of such class or description of companies as may by specified in the order, the
Auditor’s Report shall also include a statement on such matters as may be specified therein.

The Central Government before making any such order may consult the Institute of Chartered
Accountants of India constituted under the Chartered Accountants Act, 1949, in regard to the
class or description of companies, if the Government thinks it necessary.

In exercise of the powers conferred by sub-section (4A) of section 227 of the Companies Act,
1956, the Central Government has issued the Manufacturing and other Companies (Auditor’s
Report) Order, 1975 which applies to every company which is engaged in one or more of the
following activities:

(1) Manufacturing, mining or processing,

(2) Supplying and rendering services,

(3) Trading, and

(4) The business of financing investment, Chit Fund, Nidhi or mutual benefit societies.

The order will not apply to banks. The order requires that the Auditor’s Report on the
accounts of every company examined by him to whom this order applies, for any financial
year ending on a day on or after January 1, 1976, should contain matters specified in
paragraphs 4 and 5 of the order.

The Company Law Board has now issued a fresh order viz. the Manufacturing and other
companies (Auditor’s Report) order, 1988 which has superseded the previous order of 1975.

Other Statutory Duties:

3. Under section 229, it is the duty of an auditor to sign the report prepared by him. Only a
partner in the firm practicing in India may sign the Auditor’s Report or authenticate any other
document.

4. Under section 56(1), the Prospectus issued by an existing company shall contain a report
from the auditor of the company regarding:

(i) Profits and losses;

(ii) Assets and liabilities of the company and its subsidiaries; and

(iii) Rates of dividends paid by the company for each of the five it is auditor’s duty to submit
his report.
45 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

5. According to section 165 (4), the auditors of the company shall, in so far as the statutory
report relates to the shares allotted by the company, the cash received in respect of shares and
the receipts and payments of the company, certify it as correct after the same has been
certified as correct by not less than two Directors of the company, one of whom shall be a
Managing Director.

(Every company shall within a period of not less than one month and not more than six
months from the date from which the company is entitled to commence business, hold a
General Meeting of the members which shall be called the statutory Meeting.)

6. When a company goes into its voluntary winding up and a declaration of solvency is made
by its Directors under section 488 (I), such a declaration is to be accompanied by the report of
the auditors of the company under section 488(2). It is the duty of the auditors to make such a
report.

7. Under section 240, it is the duty of an auditor “to preserve and to produce to an inspector
or any person authorized by him in this behalf with the previous approval of the Central
Government, all books and papers of, or relating to the other body corporate which are in
their custody or poser and otherwise to give to the Inspector all assistance in connection with
the investigation which they are reasonably able to give “.

Under section 240(6), the auditor is treated as an agent of the company for the purpose of this
section.

II. Under the Legal Decisions

(1) Re: London & General Bank (1895):

“The auditor’s business is to ascertain and state the true financial position of the company at
the time of the audit, and his duty is confined to that. But then comes the question: How is he
to ascertain such position? The answer is: By examining the books of the company

He must take reasonable care to ascertain that they do. Unless he does this, his duty will be
worse than a farce the auditor, however, is not bound to do more than exercise reasonable
care and skill in making the enquiries and investigations. He is not an insurer; he does not
guarantee that the books do correctly show the true position of the company’s affairs……. He
must be honest….. “

2. Re: Allen, Craig & Co. (London) Ltd. (1934):

“It is not duty of an auditor to see that his report has been sent or placed in the hands of the
shareholders. After having signed his report and the Balance Sheet and having sent it to the
Secretary of the company, his duty is over.”

3. Spaceman vs. Evans (1868) (already quoted earlier):

“An auditor is appointed to keep a check on the Directors and therefore he has to send his
report to the members even though he might have been appointed by the Directors; He is the

46 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

agent of the shareholders to examine the accounts maintained and supervised by the Directors
and to report to them whether the Directors have properly maintained the accounts.”

4. Cuff vs. London and Country Land & Building Company Ltd. (1912):

“The Court would not interfere with the Director’s decisions not to allow the auditor access
to the books and vouchers of the company on the ground of negligence, but the usual practice
would be to direct the calling of a General Meeting to ascertain the view of the shareholders.”

5. Re: Kingston Cotton Mills Ltd. (1896):

“The auditor is not an insurer and all that he is required to do is to exercise reasonable care
and skill. This reasonable care depends on the particular circumstances of each case….”

6. Scarborough Harbour Commissioners vs. Thomas Whitewood & Others (1934):

“It is not the duty of an auditor to give advice to the Director or other persons as to how the
business should be run.”

Other Duties based on Case Laws

1. An auditor should correspond in writing with the previous auditor:

He should see that for his appointment, the Articles of Association brave been complied with
or not.”

2. It is the duty of an auditor that he should not adopt foul means over the shareholders to get
himself appointed as an auditor and maintain his office at two places to defraud others.

3. The auditor should inform the shareholders about the violation of the provisions of the
Sections of the Companies Act.

4. It is the duty of an auditor not to practice as an auditor unless he is a member of the


Institute and holds a Certificate of Practice granted by the Council of the Institute.

6. While auditing the accounts of a company, it becomes the duty of an auditor to scrutinize
debentures in detail and examine properly the rules in the Debenture Trust Deed.

7. An auditor, who fails to verify cash in hand and to draw the attention of the shareholders to
the unsatisfactory condition of the bank which he audits and fails to bring to bear on his work
that skill and diligence in the performance of his duties which were required of him, is guilty
of professional misconduct punishable under section 20(2) and 21(3) of the Chartered
Accountants Act, 1949.

8. It is the duty of an auditor that he should verify investments himself while certifying such
investments.

9. An auditor should check properly the stock and the accounts.

47 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

10. That it is the duty of a company’s auditor in general to satisfy himself that the securities
of the company in fact exist and are in the safe custody, cannot be gainsaid.

The appointments, audit fees, rights and duties of the auditor of a Government
Company in India

the auditor of a Government Company shall be appointed or re-appointed by the Central


Government on the advice of the Comptroller and Auditor-General of India.

It is clear, therefore, that the Comptroller and Auditor-General of India have got the right to
give advice to the Government regarding the appointment of the auditor of a Government
Company.

Thus, the Government is the appointing authority but practically, auditors are nominees of the
Comptroller and Auditor-General of India. Further, under sec. 619(3), the Comptroller and
Auditor-General of India has power to issue directions to the auditor of a Government
Company with regard to any matter relating to his functions and also to conduct any
supplementary or test audit through any person authorised by him in this behalf.

The limits specified in Sub-Sec. (1-1B) and (1-C) of Sec. 224 shall also apply in relation to
the appointment or reappointment of the auditors of the Government Companies.

It is to be noted that the overall responsibility of conducting audit, in respect of the following
Corporations which are wholly owned and controlled by the Central Government, has been
entrusted to the Comptroller and Auditor-General of India :

(i) Life Insurance Corporation of India.

(ii) General Insurance Corporation of India.

(iii) All the Nationalised Banks of India.

(iv) Industrial Finance Corporation.

(v) I. D. B. I.

(vi) I. C. I. C. I.

Fixation of Audit Fees:

There is no provision in Sec. 619 of the Companies Act, regarding the fixation of audit fees
to be paid to the auditors of Government Companies. The remuneration of these auditors is
solely decided by the Company Law Board on the basis of the recommendations made by the
Board of Directors of the company and in the light of factual merits of each case.

To avoid complaint regarding the inadequacy of the remuneration, it has been considered
necessary to issue guidelines for Government Companies regarding fixation of auditors’
remuneration which is determined in accordance with the norms specified therein and the

48 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)


lOMoARcPSD|5220526

necessary recommendation is sent to the Company Law Board for consideration as and when
the occasion arises.

While recommending the remuneration of the auditors, the Board of Directors of the
Company concerned should take a comparative view of the affairs of the company so as to
assess whether there has been any significant growth in its activities since the preceding year.

Where, however, the same Tee has been continued to be paid to the auditors during the past
few years, the comparative view of the activities may be taken into account since the period
when the fees were last fixed or revised.

It is to be ensured that the remuneration proposed by the company is commensurate to the


work done or to be done by the auditors and the increase in the fee is reasonable and fully
justified.

The Department of Company Affairs has issued in 1984 a letter which it has been stated that
while fixing the remuneration of auditors in Government companies, the factor of inflation
should also be taken into account.

49 | P a g e

Downloaded by Aakash Anish (aakashanish.95@gmail.com)

You might also like