NATIONAL INSTITUTE OF DEVELOPMENT ADMINISTRATION

BANGKOK, THAILAND

INTERNATIONAL CONFERENCE FOR TEACHING CASE STUDIES

ON DEVELOPMENT ADMINISTRATION

TEACHING CASE STUDY TITLED:

A Study On Liquidation Of Companies Under Companies Act Compared With Liquidation Of

Companies Under Insolvency And Bankruptcy Code.

1
DR. SAMINATHAN R
PRINCIPAL
BHARATHIDASAN UNIVERSITY CONSTITUENT COLLEGE,
LALGUDI, THIRUCHIRAPPALLI
TAMILNADU, INDIA
E-MAIL ID: drrsaminathan@gmail.com
Mob: 91-9443564010

2
DARSHAN S
ASSISTSANT PROFESSOR
KLE SOCIETY’S DEGREE COLLEGE,
BANGALORE, KARNATAKA
INDIA
E-MAIL ID: darshan.darshu2@gmail.com
Mob: 91-9738215263

3
MADHANKUMAR R
ASSISTSANT PROFESSOR
KLE SOCIETY’S DEGREE COLLEGE,
BANGALORE, KARNATAKA
INDIA
E-MAIL ID: madhan17anitha@gmail.com
Mob: 91-9036340208
ABSTRACT:
Companies in India is governed and managed by the companies Act of 1956 and amended Act
of 2013. Sometime it has become necessary to liquidate the companies for various
circumstances.

Liquidation is a process by which the companies’ legal position is brought to an end.

Companies get liquidated for various reasons but one of the major reasons is that the companies
fail to keep up their promise to repay the debts borrowed from financial creditors, operational
creditors and other creditors.

Previously liquidation process is made according to the provision of the company’s act of 1956
and 2013. The major drawback of this provision is that the lengthy time period for liquidation
and proper justification was not given to the creditors of the company. Hence to mitigate the
lengthy process of liquidation and to provide justice to the creditors Insolvency and Bankruptcy
Code of 2016 was introduced to overcome the above said issues.

The Principal Objective of this case study is to bring out the difference between procedural
aspect of liquidation of companies as per Companies act and Insolvency and Bankruptcy act
of 2016. To state with the secondary objective that contribution made by IBC 2016 in
development of effective administration system in the economy.

This case study is based on the companies liquidated as per Companies Act compared with
IBC. Data collected from the various published sources of finance and accounting articles and
Journals. Here we will take up various live case studies of companies who are still in the process
of liquidation as per the companies act and compared with those cases who have already been
liquidated as per Insolvency and Bankruptcy Code 2016 by providing justification to the
creditors within the time bound manner for maximization of the value of assets of such persons,
to promote entrepreneurship, availability of credit and balance the interests of all the
stakeholders.

Keywords: Companies Act, Insolvency and Bankruptcy Code and liquidation.

INTRODUCTION
The transformation of the Indian from being a license-raj regime to the present business-
friendly destination of foreign investment has been an arduous one. Central to this success story
is the sweeping changes made in the regulatory space with the new Goods and Services Tax
and the Insolvency and Bankruptcy Code (hereafter code) as the hallmark of such efforts. These
path-breaking legislations have been key in significantly changing India’s perception globally
as a business-friendly environment.1

The Code is a comprehensive legislation “to consolidate and amend the laws relating to
reorganization and insolvency resolution of corporate person, partnership firms and
individuals in a time bound manner”2, hence bringing it into force would naturally be difficult
endeavour. The government has chosen to proceed in a cautious manner to implement it,
notifying provisions in a phased manner along with the relevant rules and regulations, and even
seeking stakeholder’ participation for suggestions. In this manner, while the Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA) has been repealed entirely, the relevant
provisions dealing with winding up in the companies Act, 2013 have dealt with differently.
Certain chapters have been entirely omitted, while others have substantially amended, even
reduced to a skeletal fashion.

Till the advent of Code, 2016, winding up of companies was completely under the purview of
the erstwhile companies Act, 1956 and later Companies Act, 2013. However, with the
enactment of IBC, 2016, a company can be wound up either under the Companies Act, 2013
or under IBC, 2016 depending on the facts and circumstances of each case. Section 230-231
and 270-365 of the companies Act, 2013 and Section 33 to 54 and Section 59 of IBC, 2016
deals with the issue of winding up of the companies.
Earlier, it is the companies Act which alone dealt with the issues from incorporation to
dissolution of the companies. The Companies Act, 1956 provided for three modes of winding
up of companies, namely:
• Winding up by the court or compulsory winding up
• Voluntary winding up...
• Winding up subject to the supervision of the court.
The issue of “inability to pay debts” was covered under the mode of winding up by the court
and generally the creditors would always press this button for recovery of their debts in
summary procedure and as a fast track solution. In this mode, if after receipt of the 21 days
statutory notice, if the company failed and neglected to pay its debts, the company was deemed
to be insolvent and the winding up proceedings would commence. Of course existence of the
dispute with regard to the said payments of debts was one the main grounds for the company
court to refuse the order of winding up but after declaration that the company is insolvent the
court would pass an order for winding up of the company as per the companies act 1956, and
amended act of 2013. In this situations creditors may not get their claims back from the
company and causes the injustice to the creditors. To overcome this Indian Bankruptcy Code
of 2016 came into existence.

OBJECTIVES OF THE STUDY

• To bring out the difference between the liquidation process as per companies act and
IBC.
• To know the lag period taken by company to liquidate under companies act and IBC.
• To know the period of settlement of claims to creditors under companies act and IBC.
• To know the different types of creditors in IBC.
• To know the liquidation powers vested in the hands of IBC.
• To know the companies liquidated as per the IBC.

INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE OF INDIA

The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha on 21 December
2015 by Finance Minister, Arun Jaitley. The Code was referred to a Joint Committee of
Parliament on 23 December 2015, and recommended by the Committee on 28 April 2016. The
Code was passed by the Lok Sabha on 5 May 2016 and by the Rajya Sabha on 11 May 2016.
The Code received assent from President Pranab Mukherjee on 28 May, and was notified in The
Gazette of India on 28 May 2016.

The Code was passed by parliament in May 2016 and became effective in December 2016. It
aimed to repeal the Presidency Towns Insolvency Act, 1909 and Sick Industrial Companies (Special
Provisions) Repeal Act, 2003, among others.

KEY FEATUES OF IBC

Insolvency Resolution: The Code outlines separate insolvency resolution processes for
individuals, companies and partnership firms. The process may be initiated by either the debtor
or the creditors. A maximum time limit, for completion of the insolvency resolution process,
has been set for corporate and individuals. For companies, the process will have to be
completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
For start ups (other than partnership firms), small companies and other companies (with asset
less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of
request which may be extended by 45 days.

Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to
oversee the insolvency proceedings in the country and regulate the entities registered under it.
The Board will have 10 members, including representatives from the Ministries of Finance and
Law, and the Reserve Bank of India.

Insolvency professionals: The insolvency process will be managed by licensed professionals.

These professionals will also control the assets of the debtor during the insolvency process.

Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to
oversee the process of insolvency resolution, for individuals and companies: (i) the National
Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the
Debt Recovery Tribunal for individuals and partnerships.

NEED FOR A NEW BANKRUPTCY CODE

Insolvency laws is a must for developing the credit markets. To address the same, Ministry of
Finance set-up the Bankruptcy Law Reform Committee (BLRC) in 2014 under the
chairmanship of Shri T. K. Vishwanathan. The prime objective of the BLRC was to come up
with a new bankruptcy framework that would replace the existing framework.

BANKRUPTCY AND ITS GENESIS IN INDIA

All businesses are started with inherent risk and that is the key reason for the pay-off / profit
that they make. Some of them may inevitably fail due to the idea which may have been
misconceived or the failure in the execution of an adept business plan. But in general, every
business, in spite of being well conceived, has a degree of risk to fail. Insolvency is a situation
when a firm is unable to meet its financial obligations which are due to its creditors and when
it is declared so by the court of law, it is called bankruptcy. The existing framework with
regards to bankruptcy and insolvency in India are as follows:
• The Presidency Towns Insolvency Act, 1909.
• The Provincial Insolvency Act, 1920.
• Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act.
 • Recovery of Debts due to Bank and Financial Institutions Act, 1993.
• Companies Act, 2013.
• Sick Industrial Companies (Special Provisions) Act, 1985.

PROCESS OF LIQUIDATION UNDER IBC

DEFAULT COMPANY

Application before National Company Tribunal

(NCLT) with proof and name of proposed
Resolution Professional

Rejection of Application (14 days from Admission of Application (14 days from the
the date of receipt of application) date of receipt of application)

Declaration of moratorium and appointment of

Interim Resolution Professional (IRP)

Vesting of powers of Board and Management

of affairs by IRP

Collection of all claims and constitutions of

committee of creditors

Appointment of RP and Vesting of Powers in

RP

Preparation of Information Memorandum

Formation and submission of Resolution Plan

MERITS OF THE INDIAN BANKRUPTCY CODE

 • The Secured creditors and the workmen wages for a period of 24 months has been given
the higher priority even over the Government Claims which was not the case in
Companies Act, 1956.
• All the creditors now have concrete mechanism in place that overrides all the previous
mechanisms which could be sought when needed. This will increase the Financial
Discipline amongst the borrowers as they cannot escape the law and the resolution
mechanism under the IBC is also time bound.
• The non-financial creditors who did not have any mechanism in place, now has a set of
well laid procedures which could help them recover their dues.
• The Banks can no more hide the stress in the system as there can be instances where
the nonfinancial creditors might have approached the forum way before the Banks
classify a particular borrower as an NPA. This will improve the transparency in the
system.
• The normal time taking for a company to file bankruptcy and go for liquidation or take
over is approx. 4.3 years in India according to World Bank’s Ease of Doing Business
rankings. The human capital and the enterprise knowledge would be lost and it will be
really difficult to turn up the company and to put in the growth path. With the new
Bankruptcy Code’s definite time line of 180 days to maximum of 270 days, the human
capital and the enterprise knowledge can be preserved.
• The value of the firm deteriorates once it becomes non-performing and when it comes
to liquidation after a period of 4.3 years, it will fetch only a stressed price which will
be much less in value. With the new Bankruptcy Code and the stringent timelines for
liquidation, the value the assets fetch will be much higher.

INSOLVENCY CASE STUDY - SYNERGY – AN EXPLOSIVE CONTERVERSIAL

BEGINNING

The country’s first corporate resolution plan under the new Insolvency and Bankruptcy Code
(IBC) has caused a ripple in the banking and finance industry, with the National Company Law
Tribunal (NCLT) permitting Synergies-Dooray Automotive to settle a minuscule amount of its
liabilities.

Synergies-Dooray Automotive used to manufacture and supply aluminium alloy wheels to

global carmakers.
The resolution plan states that the acquirer, Synergies Castings, would pay Rs 54 crore to
its creditors of its total dues of over Rs 900 crore, and that, too, at attractive terms. Of the Rs
54 crore, Rs 20-odd crore would be paid upfront and the remaining over five years, sources
aware of the insolvency proceedings said.

The principal amount of the debt was Rs 215 crore, the source said. The remaining Rs 685
crore includes interest, statutory dues and payments to other creditors.

“If the assets of the company were to be liquidated, creditors would have barely received an
eighth of what they have got (about Rs 7 crore) in the current restructuring process,” the person
said.

Kolkata-based Mamta Binani, who was the resolution professional for the case, had received
plans from three entities — S.M.B. Ashes Industries, Synergies Castings and Suias Industries.
The resolution professional recommended Synergies Castings’ plan to the NCLT, which was
accepted by the Hyderabad bench of the tribunal earlier this month. Synergies Castings is a
company related to Synergies-Dooray Automotive.

Burden of debt

• Of total dues of Rs 900 crores, the principal amount of debt was Rs 215 crores

• Remaining Rs 685 crores was interest, statutory dues and payments to other creditors

• Synergies Dooray owes Rs 89.26 crores to Synergies Castings, Rs 122.06 crores to

Alchemist ARC, Rs 86.92 crores to Edelweiss ARC and Rs 673.91 crores to
Millennium Finance

• Synergies-Dooray was one of the 93,000 cases pending with the BIFR

• Synergies-Dooray’s case was one of the early cases to be filed with the NCLT

Synergies-Dooray Automotive owes Rs 89.26 crore to Synergies Castings, Rs 122.06 crore to

Alchemist Asset Reconstruction Company (ARC), Rs 86.92 crore to Edelweiss ARC and Rs
673.91 crore to Millennium Finance.

Edelweiss ARC had taken over the debt from EXIM Bank, which had earlier pursued legal
remedies to recover its loan from the company. Each of these lenders would take a 94 per cent
haircut.
However, Edelweiss ARC has issues with the resolution plan. It had raised the issues with
the NCLT earlier and said that Millennium Finance was wrongly included in the committee of
creditors, and that it was a related party. Under the IBC, obligations and dues of related parties
should not be considered in a resolution plan.

Edelweiss ARC is now planning to approach the National Company Law Appellate Tribunal
challenging the NCLT order. An Edelweiss ARC executive was not available for comment.

Synergies-Dooray is one of the 93,000 cases that were pending with the Board for Industrial
and Financial Restructuring (BIFR) and transferred to the NCLT under the IBC.

Synergies-Dooray’s case was one of the early cases to be filed with the NCLT under the code.
The IBC allows a company to restructure itself in a time-bound fashion.

INSOLVENCY CASE STUDY – BHUSHAN STEEL TAKENOVER BY TATA STEEL

Tata Steel has formally taken control of Bhushan Steel, settling about Rs. 35,200 crore, or
nearly two-thirds, of the loans the bankrupt steelmaker owed to lenders and appointing three
nominees of its board.

Bhushan Steel is the first to emerge successful from insolvency and bankruptcy process among
the initial dozen big defaulters that the central bank referred for resolution under a law enacted
for quick recovery and settlement of stressed assets.

Banks, which though have taken a more than 37% haircut on their outstanding loans of Rs
56,079 crore to Bhushan Steel, can now classify the assets as standard, reducing their bad
loan burden. They are likely to reverse the provisions they had made against the account,
significantly boosting their first-quarter results. State Bank of India had the highest exposure
of Rs 12,872 crore to Bhushan Steel, followed by Punjab National Bank at Rs 4,904 crore
and ICICI Bank at Rs 2,449 crore.

As per the deal, Bamnipal Steel, a wholly owned subsidiary of Tata Steel, will get a 72.65%
stake in Bhushan Steel, while lenders will own 12.27% in it and the balance will be held by
existing shareholders.

A statement issued by Tata Steel said the investment from Bamnipal Steel in Bhushan Steel
has been done through a combination of equity of Rs 158.8 crore and intercorporate loans of
Rs 34,973.6 crore. Bamnipal has paid another Rs 100 crore to creditors of Bhushan Steel.
Further, as per the terms of their resolution plan, Rs 1,200 crore would be paid to operational
creditors over a period of 12 months.

The acquisition of Bhushan Steel is being financed through a combination of external bridge
loan of Rs 16,500 crore availed of by Bamnipal Steel and the balance amount through
investment by Tata Steel.

The acquisition of Bhushan Steel is being financed through a combination of external bridge
loan of Rs 16,500 crore availed of by Bamnipal Steel and the balance amount through
investment by Tata Steel. The bridge loan will be replaced by longer-term debt over a period
of time.

ANALYSIS OF DEBT RECOVERIS BY INSOLVENCY BANKRUPTCY OF INDIA

With almost two years since the introduction of the Insolvency and Bankruptcy Code, 2016
("IBC" and"Code"), there have been various challenges in the effective implementation of the
Code. However, constructive interpretation by the judiciary coupled with effective
amendments to the Code have helped in eliminating many of these teething issues. The
Insolvency and Bankruptcy Board of India ("IBBI") which is the regulatory and supervisory
body in charge of the IBC, has done a commendable job in proactively spreading awareness
and regulating the space. Many important judgments were pronounced throughout the year,
including certain landmark cases, where the Supreme Court has tried to ensure that the spirit
of the Code is given primacy over procedural requirements. With multiple assets on sale,
strategic investors have been first off the mark, with billion dollar conglomerates trying to
outbid each other and add coveted companies to their inventories. The interest shown by
corporate India in turning around loss making industries is extremely encouraging for the
economy as well as the NPA laden banking system.

The threat of promoters losing control of their company or a protracted legal proceedings under
the new Insolvency and Bankruptcy Code (IBC) is forcing many corporate defaulters to pay
off their debt even before the insolvency proceeding can be started.
Loan defaults worth Rs 1.2 lakh crore have been resolved by the Insolvency and Bankruptcy
Code (IBC) in the past two years without even the need for the code to kick in. This was
informed by corporate affairs secretary Injeti Srinivas recently in an IBC conference organised
by industry body FICCI.
"Out of 9,000 cases (that came to NCLT for initiation of insolvency proceedings), 4,400 cases
have been disposed off, and rest of them are pending. Bulk of the cases (80-85 per cent), have
been disposed off even prior to admission. More than 3,500 cases have been resolved pre-
admission resulting in claims amounting to Rs 1.2 lakh crore getting settled," Most of these
cases are from the operational creditors, who have been using IBC as a recovery tool to get
their dues paid. The IBC allows a lender to initiate insolvency proceeding for default on
payment of as low as Rs 1 lakh. This allows many operational creditors, who are mostly SMEs
and small vendors, to use it as a tool of recovery.
Promoters of companies also do not want cases of small defaults getting dragged into IBC
proceedings primarily because, one, they want to avoid the legal rigmarole and second they
don't want to lose control of their businesses.
Section 29A of IBC bars promoters from bidding for their business once insolvency
proceedings start against their company.
Overall, the IBC has been able to resolve cases involving debt of Rs 3 lakh crore in the last two
years including the Rs 1.2 lakh crore of debt settled through 60 resolved cases so far, said the
corporate affairs secretary.

A recent report by the Reserve Bank of India on the trends and progress of banking in India
2018-19, has shown an interesting comparison on the efficacy of the IBC in improving the
recovery rate and in providing the lenders with a better realization in comparison to the
erstwhile regime of recovery.

RECOVERIES MADE THROUGH VARIOUS MECHANISMS COMPARED WITH

IBC
PERCENTAGE OF REVOVERY BY VARIOUS RECOVERY BY
YEARS
SOURCES IBC
2007-2008 50 NIL
2008-2009 36.6 NIL
2009-2010 24 NIL
2010-2011 31.4 NIL
2011-2012 23.6 NIL
2012-2013 22 NIL
2013-2014 18.4 NIL
2014-2015 12.4 NIL
2015-2016 10.3 NIL
2016-2017 13.8 NIL
2017-2018 12.4 41.3
2018-2019 NIL 46.1
The above indicates that the IBC is an evolving legislation, which has shown results in 2 years,
especially in comparison to the erstwhile recovery and distress resolution framework. The
realization proceeds under the corporate resolution framework of the IBC has also proven to
be higher in comparison to the realization value under the previous framework (the graph above
shows that the recovery percentage under the previous framework for the year 2017-18 was
12.4 % approx. whilst it has been at approx. 41.3% under the IBC).

CONCLUSION
The New Bankruptcy Code is, indeed, a welcome step in terms of bankruptcy process in India.
We have addressed one of the key parameters in the Ease of Doing Business Index where we
were lacking for years.
If implemented properly and if the Code evolves according to the changing economic climate,
it will be highly beneficial for the lenders, borrowers, regulators and the Government at the end
of the day. It improves the confidence in our system. The dirty dozen companies will be reduced
in the economy and there will a long way for the players in the Indian system to behaviourally
evolve and accept the concept of Bankruptcy, but when it is done, it will significantly improve
the transparency in the system.
The time lag taken by the IBC is maximum of 270 days to settle the claims of the creditors of
the default companies. By this we can expect the financial stability in the economy.
Once the system starts utilizing the IBC, after a year or so we may study the actual number of
the recovery rates of the banks and we may compare it with the period before which would tell
us the exact significance and the impact of IBC.

References
All the information made available in the report are taken from the public domain

• Data Base of Indian Economy website

• News Paper Reports
• Indian Bankruptcy code as published in the Gazettee.
• The Journal of Indian Institute of Banking and Finance (October - December 2017)
• Companies Act of 2013
• Ministry of Corporate Affairs
• Economic times
• www.indiatimes.com
• www.livemint.com
• www.mondaq.com
• www.businesstoday.in
• www.bloombergquint.com
• www.business-standard.com
• www.taxguru.in
• www.ibbi.gov.in
• www.iibf.org.in
• www.mca.gov.in