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Evolution of Corporate Insolvency
The Black Law Dictionary (1997) clearly defines insolvency as surrender of all his goods by debtors for the benefit of his creditor in return for immunity from process.
The insolvency is not a newly evolved term but is ancient Roman concept. The basis of insolvency laws in India are based on the popular principle of CESSIO-BONARUM . Prior to the enactment of The Insolvency And Bankruptcy Code 2016, the major law governing insolvency were The Presidency Insolvency Act 1909(presidency towns) and The Provincial Insolvency Act 1920(moufsil), which were based on the lines of English laws of that time.
The major object for enactment of Act 1909 and 1920 was justify to safeguard debtor from arrest or detention of any debt as per any statute and secondly to give relief to debtor from any pressure of creditor . The purpose behind the insolvency laws at that time was to ascertain he debt owed by the debtor, take possession of all his assets and distribute amongst all his creditors according to the law for satisfaction of their claims equitably . But the code 2016 has a rationale behind to consolidate the laws related to Bankruptcy in INDIA. The multiplicity of laws and lengthy procedure which is cumbersome and expensive. The IBC 2016 was thus enacted with some amendment in pre existing law so simplify the bankruptcy in INDIA as well as cross border insolvency proceedings.
The Act of 1909 and 1920 were having limited scope over the resident of INDIA but the bankruptcy code is applicable to all corporate entities and natural persons who operate in INDIA. The century old bankruptcy laws only talked about companies and natural persons insolvency but the new code 2016 includes the bankruptcy for single person, limited liability partnership and Joint stock companies.
Here we are going to deal with change in procedure of bankruptcy and Insolvency in Companies. The recovery procedure was highly dependent on the nature of the Creditor. The Debt if is due on business conduct which involve many payable for good purchased and services here, the competent courts to be evoked. The debt if is due in form of govt. tax then it could be recover under schedule 2 of the IT act as arrears and is penalized in form of penalties prescribed for tax evasions, if the debt is due in form of the loan from bank it can be recovered by DRT under the recovery of debts due to banks & financial institutions act 1993. Under sec 19(22) of RDBA’93, the bank recovers it’s amount under DRT within 30 days but this act wasn’t so efficient and was replaced by SARFAESI. The section 5 read along with sec. 13 of SARFAESI dealt with banks power to recover its due amount either by asset reconstruction or securitization of the assets of the company. When these different authorities conclude that there is no more money which could be extracted , they call for winding up of the company.
The Companies are artificial person born by law and can only relinquish life by law. So under section 270 of the Companies’ Act 2013, the company can be winded up (i) Compulsory winding up by order of the tribunal and (ii) Voluntary winding up by member or creditor.
Winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditor and members, An administrator by name of official liquidator is appointed and he takes control of the company ,collects its assets ,pays its debt and finally distribute surplus to its member in accordance to their rights
Winding up of a company is different from insolvency of an individual in as much as a company can’t be insolvent under such insolvency law. The company is not dissolves immediately at the commencement of winding up , its corporate status and power continues.
Winding up proceeds dissolutions .The section 271(2), tribunal in its discretion to order the winding up of a company when it is unable to pay its debt.
• There is firstly serving of a statutory notice, if a creditor to whom a company owns a sum exceeding 1,00,000 rupees has served on the company, demand requiring the company to pay the amount so due and a company fail to pay within 21 days or to provide adequate security, reconstruction or compound debt to reasonable satisfaction of the creditor. Failure to pay after several communications includes service of statutory notice was held to be negligent and unable. The debt must be presently payable and the title of the petition demanding it should be complete. The debt must be really due , where a company fails to pay debt winding up was to be ordered.
• A company shall be deemed to be unable to pay its debt if execution and other process issued on decree or other order of any court is favour of a creditor of the company if returned unsatisfied in whole or in part. even in the cases of decrial debt, question of bonafide dispute may be raised and the court may, instead of passing winding up order, allow the petition too stand over on an undertaking of a company to file a suit for setting aside the decree. Subject to the consideration, a decree holder is entitled to press for winding of a legitimate mode for the execution of his decree and is not bound first to resort on execution process.
• Lastly if it is proved to be satisfaction of a tribunal that company is unable to pay his debt it can be winded up.
The commercial insolvency should be proved prima facie and not in technical sense but plainly and commercially insolvent that is to say that it’s assests are as such and existing liabilities are as such to make reasonably certain as to make the court or tribunal feel satisfied that assests are insufficient to pay or meet up the liabilities
The tribunal can order the winding up proceeding if the debtor company falls in sick nature under section 253.The company deem to be sick when demand of secured creditor represent 51% of outstanding debt ,The company fails to pay the same withien 30 days of serving of such notice. There is an application served after 120 days before tribunal to determine sickness of company on reference of Central, State Government, RBI ,or Scheduled Bank. The company if declared sick by tribunal it may order in writing as deem fit to repay all debts subject to restriction and conditions prevalent.
As per section 272, Following can file application before the Company Law Tribunal
• The company can itself through managing director as per decision of general meeting can file for application of winding up . Any application by person not authorized by board to do so be deem to be incompetent .
• The creditor may apply for winding up proceeding .The creditor include secure creditor, debenture holder and trustee for debentures. . The unsecured creditor is as much as entitled to file for petition as that of secured.
• The contributory i.e. Shareholder may present a petition for winding up provided he is a registered share holder for at least 6 months and during 18 month prior to commencement of winding up proceeding .
• Other than the above mentioned Registrar of Company , Central Government and State Government on grounds of issue affecting public interest at large.
The new enactment i.e Code 2016 provides a single roof solution i.e, NCLT instead of running to various authorities like Income Tax Tribunals and DRT. The company is not immediately wound up but there is a two step procedure, there is a resolution process passed within 180 days of application filing so that a failing trade can be bought by other market players. Instead of directly slacking company, a chance is given, so better managerial persons can revive the company in better leadership but if there is a business failure, so on end of 180 days resolution process period, the company is wound up as per the above mentioned provisions of Company Law.
As per Section 6 & 7 of IBC, the debtor himself, the financial creditors and operation creditor can file for insolvency application for the default.
The winding up procedure has been altered in terms of the distribution of the acquired debts Under Section 327 of The Companies Act, the government debts (tax) were to be paid in priority and in full before any distribution of any amount but the code of 2016 put government payments after the payment of the insolvency professional, remuneration, secured creditors, and employers dues. These were previously paid after government debts. The basic idea to put government tax at this position is the purpose of securing one’s debt, is a form to ensure and acquire preferential rights at time of winding up(creditors) and to get security of payment(employee and IPs) over unsecured creditors.
The Company Liquidator is replaced by Insolvency Professional and there is a separate provision of Information Utilities which provide pool of data about working of company, IP’s and other related parties . The Statistics show that INDIA has bad debts of 11% of total lending and the corporate debt amount 56% of bad debts of public financing. To resolve the problem and make bankruptcy as a easy process , the IBC was enacted. It is often seen that the litigation and procedure to close the business is very lengthy and expensive and this Code ensures that company who is suffering from mismanagement of finance do not have to face such problems. The code is an attempt to put insolvency proceedings under one roof by consolidating laws related to insolvency at one place and has repealed century old bankruptcy law.
The Code though is facing the teething problems and procedural deterrents but the oil of rules, regulations and ordinances lubricating the process of corporate insolvency. The code is a magnificent effort toward easing the bankruptcy process and is currently on evolution of time.
By :- Anukriti Mathur and Keshika Jain