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Saturday, August 28, 2010

Company Law - Company Law Tribunal and Company Law Insolvency: An Insight

Chapter 1


The Companies (Second Amendment) Act, 2002 provides for a new Insolvency Law intended to expedite both rehabilitation and winding up of sick companies within a timeframe of a maximum of two years as against the existing system, which takes about 18 to 26 years and India’s corporate, insolvency laws have been rewritten. A spanking new judicial apparatus for company insolvency called the National Company Law Tribunal (NCLT) with its own appellate body headed by a retired chief justice or a Supreme Court judge has been put together by this Act.
The new Insolvency Law has provided for a time bound expeditious and efficient winding up procedure for sick companies in tune with modern global standards under the WTO regimen so that workers promoters and other investors do not have to suffer for a longer period. The existing procedure delays the liquidation of companies. Some of the important reasons for delay are elaborate procedural requirements non-cooperation by ex-directors of the companies, non-filing of statement of affairs by ex-directors to enable Official Liquidators to proceed further and non-service of the notices of complaints filed by the Official Liquidators in courts for filing statement of affairs by ex-directors non-service of notices on debtors even after getting ex-parte decree difficulties facing in tracing the debtors and execution of decree by attachment. Besides considerable time is taken in realization of dues and settlement of claims including claims of tax authorities workmen and others.
The high level committee on law relating to insolvency and winding up of companies headed by Justice V. Balakrishna Eradi and consisting of experts, was constituted by the Government to examine the laws relating to winding up proceedings of companies in order to re-model it in line with the latest developments and innovations in the corporate law and governance and to suggest reforms in the procedure at various stages followed in the insolvency proceedings of companies to avoid unnecessary delays in tune with the international practice in this field.
The National Company Law tribunal with power and jurisdiction presently exercised by Company Law Board (CLB)/BIFR/AAIFR/High Courts repeal of the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) enunciation of principles under Orderly and Effective Procedures proposed by International Monetary Fund (IMF) application of UNCITRAL Model Law as adopted by the United Nations to cases of cross border insolvency encouraging voluntary winding up of companies with a minimum capital of rupees ten lakh only to be eligible for submitting winding up petitions basis of voluntary winding up and for revival of companies to the national company law tribunal with a debt default to creditors exceeding rupees one lakh and erosion of 50 per cent of net worth pari-pasu ranking of claims of employees and secured creditors of company strengthening and modernization of offices of the Official Liquidators creation of a fund for revival rehabilitation of companies, preservation and protection of the assets of companies under the control of Central Government completion of winding up steps within a maximum time frame of two years adoption of administrative order procedure prevalent in the United Kingdom to expedite winding up and appointment of professionals as liquidators through a panel of such professionals to be prepared by the Government.
This project aims at studying the new mechanism  of company  law tribunal and the   enhanced provisions lying therein with regard to the company insolvency and finally analyzing the efficacy of this institution.

Chapter 2

Before the Companies (Second Amendment) Act, 2002, Companies were required to apply to High Courts for proceedings such as merger/amalgamation, reduction of capital and winding up of companies. But the High Courts being over burdened with other matters, used to take very long time to dispose of these matters, and as a result of which the society was not able to derive the intended benefits out of such decision. Even the Winding Up petitions before the various High Courts have been pending for a very long time. Similarly various matters before the Company Law Board (CLB), Board for Industrial and Financial Reconstruction[1] (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR)have been pending for a very long period.
It is however noted that many of the Companies, which were referred to BIFR, had their natural death for want of timely help and assistance from BIFR and as such, resulted into wastage of scarce natural resources. Therefore it was desired in place of various bodies presently looking into different matters like merger/amalgamation, acquisition and reconstruction, revival and rehabilitation and winding up of Companies, a body should be constituted to handle all these matters and to dispose of all pending matters as well as fast disposal of new matters which might be referred to it in the future. Hence the Government constituted a Committee under the Chairmanship of Justice V. Balakrishna Eradi, a retired Supreme Court Judge, to review the law relating to insolvency and Winding Up of Companies and other laws like The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) etc.
The Committee made various recommendations with the main objective of expatiating the revival/rehabilitation of a sick Company and protection of workers’ interest, which were incorporated in the Companies (Amendment) Bill, 2001, which was subsequently passed by both the Houses of the Parliament and finally got the assent of the President of India on 13th January,2002 and became the Companies (Amendment)Act,2002. Consistent with the underlying objectives, as aforesaid, and in the backdrop of the experience of administration of SICA and winding up process, the Companies (Second Amendment) Act, 2002 provides for setting up of the National Company Law Tribunal (NCLT) and on setting up of NCLT.[2]


The Central Government shall constitute NCLT on the basis of recommendations of The Selection Committee, which will be consisting of the Chief Justice of India or his nominee as Chairman of the Committee and Secretaries of the Ministry of Finance and Company Affairs, Labour Law &Justice as members of the Committee. The NCLT will be headed by its President who has been a Judge of the High Court or is eligible to be appointed as a Judge of a High Court and such number of judicial and technical members but not exceeding.

The Tribunal will consist of Judicial and Technical members. Persons who have been working as Judiciary, Advocate, and Member of the Indian Company Law Service and Member of Indian Legal Service shall be considered for the appointment as Judicial Member, and the members of Indian Company Law Service (Accounts Branch), Chartered Accountant, Cost Accountant, Company Secretary shall be considered for the post of Technical Members. In addition to this, length of service in their particular nature of work will also be taken into consideration[3].
The tenure of office of President and Members shall be for 3 years from the date on which they enter upon the office and they shall be eligible for reappointment. The age of retirement or superannuating for the President is 67 years, and in case of other members, it is 65 years. The President or a Member of the Tribunal may resign his office by giving notice to the Central Government. However, the President or a Member shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of the term of office, whatever is the earliest [4]

The powers of the Tribunal may be exercised by Benches, constituted by the President of the Tribunal having two members (Judicial and Technical). There shall be constituted such number of Benches as may be notified by the Central Government. The President of Tribunal can refer or transfer any matter to the Bench, as he deems fit. If the Members of a Bench differ in opinion on any point or points, it shall be decided according to the majority, if there is a majority, but if the Members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Tribunal for hearing on such points or points by one or more of the other Members of the Tribunal and such point or points shall be decided according to the opinion of the majority of Members of the Tribunal who have heard the case, including those who first heard it
There shall be a Principal Bench at New Delhi presided over by the President of the Tribunal having powers of transfer of proceedings from one Bench to another Bench of the Tribunal in the event of inability of any Bench from hearing any such proceedings for any reason.


  • Tribunal shall have power to review its own order.[5]
  • The Tribunal, after giving reasonable opportunity of being heard is empowered to pass such an order as it thinks fit. It can also, within a period of two years from the date of order, rectify any mistake and shall make amendment in the order passed by it and shall make such amendment if the mistake is brought to its notice by the parties[6].
  • Tribunal may delegate its powers and duties subject to specified conditions and limitations to any member or officer or other employee of the Tribunal to manage any industrial company or industrial undertaking or any operating agency under this Act as it may deem necessary.
  • The Tribunal/any operating agency, on being directed by the Tribunal may seek an assistance of Chief Metropolitan Magistrate and District Magistrate within whose jurisdiction, any property, books of accent or any other document of Sick Industrial Company be situate or be found, to take into custody or to take possession thereof.

The Central Government shall by a Notification in the Official Gazette, constitute an Appellate Tribunal, which will be called as The National Company Law Appellate Tribunal (NCLAT). The NCLAT will consist of a Chairperson and not more than two Members. The Chairperson shall be a person who has been a Judge of the Supreme Court or Chief Justice of a High Court. A member of the NCLAT shall be a person of ability, integrity and standing having special knowledge of and professional experience of not less than 25 years in science, technology, economics, banking, industry, law, matters relating to labour, industrial finance, industrial management, industrial reconstruction, administration investment, accountancy, marketing, or any other matter the special knowledge of, or professional experience which, would be in the opinion of the Central Government useful to the Appellate Tribunal. Interestingly, no specific qualification has been prescribed to become a Member of the Appellate Tribunal as in case of a Judicial as well as Technical Member of the NCLT although a Member of the NCLAT will be superior to the member of NCLT to review the orders passed by NCLT. The procedure for resignation/removal and filling up of a casual vacancy are more or less the same as in the case of the President/Members of the NCLT.
Any person aggrieved by an order of the NCLT may prefer an appeal before the NCLAT within a period of 45 days from the date of receiving the order or within such extended time as may be allowed by the NCLAT.

Any person aggrieved by any decision or order of the Appellate Tribunal may file an Appeal to the Supreme Court within 60 days from the date of communication of the order of the Appellate Tribunal to him, only on any question of law arising out of such decision or order. The Supreme Court may grant an extension of time for filing an Appeal if it is satisfied that the Appellant was prevented by sufficient cause from filing the Appeal within the said period, but the extension period has been limited to a further period of 60 days.

Appeal Procedure

Supreme Court

                                                                                                                                      60 Days

45 Days

National Company Law



1.      SICA provided for a moratorium period of five years for a newly setup Company and as such no reference was required to be made to BIFR in the first five years of the registration of the Company. This moratorium has been withdrawn by the Amendment Act and now the Company may become sick even in the second or the third year of its registration itself.
2.      SICA provided for suspension of all legal proceedings when a Company filed its case in BIFR and the enquiry was pending or the scheme was under preparation or implementation with the BIFR or an appeal was pending with the AAIFR and as such the Sick Industrial Company was protected against any suit for recovery of money, execution against property of the Company or Winding Up proceedings but this provision of SICA was greatly misused by many of the Companies[7]. This protection has not been provided in The Companies (Second Amendment) Act, 2002 and there- fore, pending the proceedings for Revival and Rehabilitation of a Sick Industrial Company before the NCLT the Creditors of the Sick Industrial Company may file a suit for recovery of debts. This provision will create hardship to Companies genuinely interested in revival, because, before the scheme is approved by the NCLT and grant is received if a creditor files a suit against the Company and takes away the property/assets of the Company, what is left to be revived. However, Winding Up proceedings by any Creditor have been kept pending as the jurisdiction over the same is of that of the NCLT.
3.      As per Section 32(1) of SICA the provisions of SICA prevailed over all other laws except FEMA and Urban Land Ceiling Act. In the absence of such overriding powers even if the scheme of revival is approved by the NCLT formalities and procedures as required under the Companies Act and other laws will be required to be completed.
4.      The definition of an Industrial Company seems to be faulty because by strict interpretation it covers only an ancillary undertaking, which indeed cannot be the correct intention of the lawmakers.
5.      The Definition of a Sick Industrial Company has been tightened. A Company having accumulated losses in any financial year equal to 50%or more of its average net worth during four years immediately preceding such financial year and which has failed to pay its creditors for 3 consecutive quarters will be a Sick Industrial Company. The Net worth has now been defined to mean the sum total of the paid up capital and free reserves, after deducting the provisions or expenses as may be prescribed. Previously, The Companies Act did not define the net worth and as per Section 3(1)(g)(a) of SICA which defined the net worth the words ‘after deducting provisions and expenses as may be prescribed, were not there, and as such, companies were not deducting preliminary expenses or development expenses while calculating its net worth.
6.      Now the burden of preparing the scheme for revival of a sick company is on the Company itself, which was earlier on the BIFR.
7.      The Application for reference to the NCLT by a company should be accompanied with a Certificate by the Auditor from the approved panel as to the reasons for erosion in the net worth of the Company or default in repayment of debt by the company.
8.      Previously no cess was payable. Now all companies have to pay cess @0.005%to 0.1%of its gross receipts or turnover to the Central Government towards the rehabilitation and revival fund to be used for rehabilitation and revival of sick companies.
9.    The quantum of dues unpaid has been increased from Rs.500 to Rs.1 Lakh in the case of a winding up.

Chapter -03

Companies Act, 1956 (1956 Act) inter alia deals with the winding up or liquidation of the companies incorporated under the said Act. The winding up of a company under the 1956 Act can be by an order of court or voluntary.

Cases in which a company may be wound up by the court
The court may wind up a company[8]
  1. If the company has by special resolution resolved that it be wound up;
  2. If the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
  3. If it is unable to pay its debts[9]
  4. If a default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
  5. If the number of members is reduced in the case of a public company below seven and in the case of a private company below two;
  6. If the court is of the opinion that it is just and equitable that the company should be wound up.

Who can present the petition for winding up?
An application to the court for the winding up   can be by way of a petition presented[10]
  • by the company ;
  • by any creditor or creditors including contingent or prospective ;
  • by any contributory or contributories;
  • by the Registrar of Companies;
  • in a case falling under Section 243 of the Companies Act,1956, by any person authorized by the central government in that behalf.[11]


Power of court on hearing petition

On hearing a petition, the court may dismiss it or adjourn it conditionally/unconditionally or make any order of winding up or pass any interim order or make any other order as it may deem fit, including appointment of Provisional Liquidator[12].

Appointment of Official Liquidator

An Official Liquidator (OL) appointed by the Central Government shall be attached to each High Court who shall be a whole time officer unless the Central Government considers that there will not be sufficient work for a whole time officer in which case, a part time officer may be appointed[13].

Custody of company’s property

Where a winding up order has been made or where a Provisional Liquidator has been appointed, the Liquidator shall take into his custody or under his control all the property, effects and actionable claims to which the company is or appears to be entitled. All the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order for the winding up of the company[14].

Voluntary winding up
A company may be wound up voluntarily when the period if any, fixed for the duration of the company by the Articles has expired or the event, if any, has occurred on the occurrence of which the Articles provide that the company is to be dissolved and the company in general meeting passes a resolution requiring the company to be wound up voluntarily or if the company passes a special resolution that the company be wound up voluntarily.

Application of insolvency rules in winding up of insolvent companies

In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to debts provable; the valuation of annuities and future and contingent liabilities; and the respective rights of secured and unsecured creditors as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent provided that the security of every creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen’s portion therein and where a secured creditor instead of relinquishing his security and proving his debt opts to realise his security, the Liquidator shall be entitled to represent the workmen and enforce such charge.

Stay of legal proceedings on winding up order

When a winding up order has been made or the OL has been appointed as Provisional Liquidator, no suit or legal proceeding can be commenced, or if pending at the date of the winding up order, can be proceeded with against the company except by leave of the court and subject to such terms as the court may impose.[15] The court, which is winding up the company shall have jurisdiction to entertain or dispose of any suit or proceeding by or against the company; any claim made by or against the company. Secured creditors however, can choose to stay outside the winding up proceedings. Any suit or proceeding by or against the company which is pending in any court other than in which the winding up of the company is proceeding may be transferred to and disposed of by that court.

Preferential payments
Section 446 of Companies Act, 1956.In the winding up of a company, workmen’s dues and debts due to secured creditors to the extent such debts rank parri passu with such dues, shall be paid in priority to all other debts. The debts payable shall be paid in full unless the assets are insufficient to meet them in which case they shall abate in equal proportions[16].
Chapter 4

Considering the criticisms of the working of the BIFR under SICA, the SICA was repealed, but the ameliorative, revival and reconstruction procedures obtaining under it were reintegrated in a suitably amended form in the structure of Company Law. These procedures are however similar to the measures for Administration Order Procedure and winding-up which are now provided integrally as part of U.K. Insolvency Act, 1986.

By the Amendment act on the recommendations of the Justice Eradi Committee, the provisions of Part VII of the Companies Act, 1956 have been suitably amended by incorporating a non-obstante clause to restore the order of priority of payments to be made to claimants in insolvency of companies as provided in the Act, 1956[17]. Such a change in the law was necessary to override the effect of the Supreme Court decisions to which we have already referred. The law should provide for notice to all claimants for proving their debts and for classification of the debts to facilitate determination of inter se order of priority in a fair and equitable manner.


There can be two-part test to determine insolvency:
§  if according to the company’s balance sheet, its liabilities including contingent liabilities, exceed the assets. This test known as the balance sheet test would also embrace companies, which even though they manage to pay their debts as and when they fall due are to be deemed to be insolvent if in the balance sheet their liabilities exceed their assets.
§  Secondly, if the company fails to pay an undisputed debt exceeding an amount specified in the Statute.
It is the duty of the directors to protect the interests of creditors and others and failure to do so may trigger insolvency


The Committee has considered the point made before it that erosion of entire net worth of a company is not a satisfactory criterion for triggering action for revival of a sick company as provided for at present under SICA. The Committee therefore recommends that the proposed company insolvency law may provide for a two-way test:
(i) Debt Default Criterion: Where the company is unable to pay its debts in the manner provided for in Section 434(1) of the Companies Act. The existing limit of 500 Rupees is far too low and unrealistic and it’s raised to Rs. 1 Lakh. Apart from this debt default criterion as determined under Section 434, the other grounds as envisaged in Section 433 has been retained.
(ii) Incipient Sickness: Erosion in the net worth to the extent of 50% or more should be recognized as a ground for recommending revival and reconstruction procedures and if they prove to be unavailing, the company should be ordered to be wound-up on just and equitable ground.[18]
The Committee formed[19], however, was unable to agree that the definition of debt default should be based on the concept of Non Performing Assets (NPA) as defined in the report of the National Task Force Committee. The NPA can also arise due to some temporary liquidity crunch. Moreover, a NPA related debt default criterion may no doubt protect the interests of secured creditors but not those of unsecured creditors and labour. Further, the priority of Government dues also requires to be kept in view while ordering winding-up of a company.

By the Amendment of the Company’s Act, the widely perceived necessity to bring Indian law on corporate Insolvency in tune with globally acceptable practices and procedures have been paid special interest to and moreover the basic aims of corporate insolvency law is :-
a.       To protect creditors and allow them to enforce their claims against the company;
b.      Balance the interests of competing groups e.g creditors, shareholders, labour and the state;
c.       Control or punish directors and officers in default responsible for collapse of the company and financial as well as other types of mismanagement; and
d.      To promote the rescue of a company which is capable of being revived and rehabilitated with the pass of an administration Order?

The UK law on the subject envisages recourse to Administration Order Procedure (AOP) in cases where a company, otherwise liable to be wound up, may be revived and rehabilitated by timely intervention. In practice, however, this procedure should be made available to companies which are likely to lapse into commercial insolvency.

The Cork Committee in UK had recommended that U.K. Law should acknowledge the benefits which may flow from adoption of AOP designed more for corporate rescue rather than for mere assets realization.[20]

Considering that India’s economy is based on labour intensive technologies and there is politico-economic environment, which militates against sudden exit policy for corporate sector, the amended act visualised that objectives and methods of corporate insolvency should not be confined to assets realisation only. Therefore law of insolvency should aim first at rehabilitation; failing which only the winding up of a company should be ordered by the Tribunal.

It is therefore, processed that the Tribunal has the power to direct that during the period when the AOP is in force, the affairs business and the properties of the company shall be managed by an Administrator appointed by the Tribunal. The AOP should be triggered on a petition by creditors (including Financial Institutions) or directors - (pursuant to a resolution duly passed at a general meeting of the Company). In case of creditors the criterion should be that they should represent the creditors to whom the company owes more than 50% of its liabilities under same category. The petitioner-creditor must deposit prescribed amount of security to avoid misuse of this facility. Where there is an extant winding up petition, the petitioners must also be served a notice of application for AOP. Tribunal on hearing such an application should have power to order the appointment of an interim Administrator.

Petitions for AOP should be taken up for hearing immediately and Tribunal should endeavour to dispose of such petitions as early as possible. In respect of pending winding up cases as on the date of commencement of the new Act, notice of application of AOP should be served on petitioner by the applicant. Duties of Administrators should include convening meeting of creditors for discussing and approving of the plan for company administration and execute approved plan in minimum time frame and in accordance with the appointment order issued by the Tribunal. Administrator shall have power to attempt corporate rescue that presupposes to selling the assets of the company in an efficient manner. If need be, he can seek for an order of the Tribunal to give effect to the scheme. In case of failure of the scheme, Administrator shall report to Tribunal to consider passing of a winding up order of the company.


To tackle the paucity of funds the proposed Amendment Act envisages to put in place Revival and Rehabilitation Fund funded by the collection of cess which will be levied at the rate of .005% -1% on the annual turn over or the gross receipts of the company. This  fund will take care of the interim payment of wages to the workers protection of assets and for other rehabilitation works. These are formed for the purposes of rehabilitation or revival or protection of assets of a sick industrial company[21].
The Fund shall be applied by the Tribunal for the purpose of—
(a) making interim payment of workmen’s dues pending the revival or rehabilitation
of the sick industrial company; or
(b) payment of workmen’s dues due to the workmen, of the sick industrial company; or
(c) protection of assets of sick industrial company; or
(d) revival or rehabilitation of sick industrial company;
which in the opinion of the Tribunal are necessary or expedient for the said purposes[22]


The Act also provides for:
  • Official Liquidator to be appointed from a panel of professional firms of Chartered Accountants or a body corporate consisting of professionals or whole time or part time officers appointed by Central Government.
  • their Remuneration to be approved by Tribunal.
  • the creditor or contributory may appoint professionals or legal practitioner entitled to appear before the Tribunal.[23]





The attempt in providing a solution by amending the 1956 Act is in a wrong direction. In the fast changing scenario of growing cross-border investment, trade and commerce, cross-border insolvency problems are bound to increase and a comprehensive Bankruptcy Code alone can address such issues taking into consideration international practices. It does not introduce the required road map of the bankruptcy proceedings viz. application for initiating bankruptcy proceedings; appointment of Trustee: empowerment of the Trustee; operational and functional independence; accountability to the court, including the power of the court to remove Trustee in case of mismanagement; relationship with current management; monitoring or substitution; day-to-day operation, etc; time bound restructuring/recognition plan: who should submit; procedure of acceptance; mechanism to sell off; pro-active initiative of the Trustee; number of time-bound attempts for restructuring: decision to go for insolvency and winding up; and strategies for realisation and distribution.

Tribunalisation of Justice
Though tribunalisation of justice is now a recognised trend, the Indian experiment with Tribunals has been nothing to boast about. They have largely failed to serve the purpose with which they are set up.
Over Burden
Flowing from such diverse dimensions of judicial functions, NCLT would be burdened with workload of enormous magnitude and in the process would be likely to lose focus on revival and rehabilitation of sick entities. Change in eligibility criterion for making a reference would itself generate greater workload. In the process, the objective of expedient disposal of the matter may become casualty; leave aside matters, which NCLT would have to decide relating to its other two functional roles. Though the number of Members has been fixed at sixty two, past performance has shown that even under SICA, with the number of Members fixed at fifteen (including the Chairman) the BIFR has never worked with a full contingent of Members and even now is functioning with less than 50% strength for the last two years.
Time frame for filing reference
In the earlier existing provisions of SICA, it was experienced that the entry level for seeking ameliorative measures by the sick unit was too late owing to the criterion of hundred percent erosion of net worth. Under the proposed Bill fifty per cent of erosion in average net worth for the last four years of the reference year or three successive defaults in paying installments to the creditors becomes the deciding factor for entry-level eligibility of a sick unit. However, the objective of bringing into purview of NCLT, a case of incipient sickness would be defeated considering the period of 180 days and a further extension by a further time period of 90 days being provided for filing a reference.

Definition of net worth and sick industrial company
Redefining net worth is a very good development though the proposed definition may also suffer from the same problem which besets the present legislation and that is to prevent and curb the flair for creative accounting by changing the accounting policies to feign sickness. This could have been curbed by making the definition of “erosion of net worth” and “accumulated losses” more clear and unambiguous. The new dispensation could have provided for a water tight definition, which could be linked to delegating the powers to the judicial forum put into place to implement the rescue legislation, to notify the accounting policies on the basis of which net worth/accumulated losses would be worked out for determining sickness.

Certificate by Auditors
The new provision for establishing a panel of Auditors to give certificate with regard to the parameters of sickness is a good move. However, it may turn out to be a duplication as under the present dispensation the Statutory Auditors are required to give their opinion on sickness of a company under the Manufacturing and other Companies (Auditors Report) Order, 1988. It is not clear as to how this duplication would help as the Auditors on the panel will come from the same stream of Chartered Accountants and may be liable to the same failings as the Statutory Auditors of the Company.

Lack of severe penal consequences
Lastly, the misuse of the said forum in making an entry by manipulating/feigning sickness must be curbed by strict penal consequences for such misuse, which should be demonstrably used to ensure that no entity attempts to misuse these provisions. However, this aspect and solution to this problem has to be found out in the proposed legislation.

Suspension of proceedings
In order to do away with the mischief of Section 22 like provision, the amendment act  takes away the provisions of suspension of recovery proceedings against sick companies and the guarantors which is not a good development as suspension of proceedings is a part of any good restructuring system. In any case, if these cured creditors feel that the moratorium protection is being misused, a pending reference before BIFR can always be frustrated if seventy five percent of secured creditors initiate action under the Securitisation Ordinance.
The Government should also consider appointment of Trustees by the court from empanelled professional chartered accountant firms, law firms, consultants, financial institutions etc for managing the company as a going concern; initiating the process of negotiation for time-based restructuring of the company, and failing which, initiate insolvency proceedings to wind up the company. Trustee can be empowered to appoint financial advisers, managers, liquidators, and auctioneers etc, to help the trustee in its functions with Trustees having to bear their remuneration.

Bankruptcy proceeding for banks and financial institutions
Bankruptcy proceedings against banks and financial institutions have a very special significance as it affects the domain of the monetary system and management and financial stability. In several developed countries there is a separate bankruptcy code for banks and financial institutions. In India, this is primarily a responsibility of Reserve Bank of India. The new law and procedure should be structured to handle the bankruptcy proceedings in the case of banks and financial institutions in consultation with the Reserve Bank of India.

International insolvency in India
Indian insolvency laws do not have any extra-territorial jurisdiction, nor do they recognise the jurisdiction of foreign courts in respect of branches of foreign banks operating in India. Therefore, if a foreign company is taken into liquidation outside India, its Indian business will be treated as a separate matter and will not be automatically affected unless an application is filed before an insolvency Court for winding up of its branches in India. At present, the Government is considering the adoption of UNCITRAL Model Law on Cross-Border Insolvency to meet the demands of globalisation of economy and to deal with international insolvency.

This will radically change the orientation of Indian law and make it suitable for dealing with the challenges arising from globalisation and increasing integration of Indian economy with the world economy. While drafting the substantive and procedural rules of bankruptcy, international standards for both national and cross-border insolvency should be taken into consideration which, based on Indian situation, should be suitably incorporated.

Chapter 6

The earlier existing Indian law lacks a specific comprehensive Bankruptcy Code to deal with corporate bankruptcy, which encompasses in itself the corporate restructuring possibilities preceding insolvency and winding up. The bankruptcy proceeding needs to be based on the fundamental objective of assets value maximization, and hence the law has to facilitate protection of assets against all risks of further diversion, decay and destruction. A self-contained Bankruptcy Code facilitates corporate restructuring and fast track winding up on insolvency. In the fast changing scenario of growing cross-border investment, trade and commerce, cross-border insolvency problems are bound to increase and a comprehensive Bankruptcy Code alone can address such issues taking into consideration international practices. There is a need to introduce the road map of the bankruptcy proceedings viz. application for initiating bankruptcy proceedings; appointment of Trustee: empowerment of the Trustee; operational and functional independence; accountability to the court, including the power of the court to remove Trustee in case of mismanagement; relationship with current management; monitoring or substitution; day-to-day operation, etc; time bound restructuring/recognition plan: who should submit; procedure of acceptance; mechanism to sell off; pro-active initiative of the Trustee; number of time-bound attempts for restructuring: decision to go for insolvency and winding up; and strategies for realisation and distribution.

The establishment of NCLT with power and jurisdiction of Company Law Board, Board for Industrial and Financial Reconstruction Appellate Authority for Industrial and Financial Reconstruction and of the High Court relating to company law matters,  has taken place only a year back, and more so it seems to have proven to be a great help to the corporate world as now there are special benches at principal seats of the High Court and the companies don't have to come to Delhi every time for the revival and rehabilitation proceedings.

Furthermore with the change in definition of a Sick Company a lot more companies can come under the ambit of a Sick Company and thereby can get the needful attention on time. With the establishment of fund and change in definition of Sick Company and winding up procedures, the time period for revival and winding up will reduce. In all efforts are being made by the central government to achieve its proposed objectives through this bill i.e. to avoid multiplicity of suits, protection of rights of the workers and to reduce the time period for winding up of a Sick Company.

The establishment of the fund to deal with the problem of paucity of funds was  new concept introduced by the Act and Under the new law a corpus fund is to be created, known as Rehabilitation Fund for taking care of the workers of sick companies and their investors as per the global standards in keeping with the norms of globalisation of Indian economy under the World Trade Organisation regime.

However, the new Insolvency Law has provided for a time bound expeditious and efficient winding up procedure for sick companies in tune with modern global standards under the WTO regimen so that workers promoters and other investors do not have to suffer for a longer period. The existing procedure delays the liquidation of companies..

However certain components like Tribunalisation of Justice, Over Burden, Lack of severe penal consequences, International insolvency in India, etc. still pose a certain element of threat to the efficacy of the new mechanism.

Now what is required is to see that the provisions of the new Act are strictly implemented and complied with so that the objectives of this entire new concept with new mechanism are achieved.

Books Referred:
  • Ramaiya, Guide to Companies Act,  ( Wadhwa, Nagpur, Ed. 15th)
  • Datey V.S., Students’ Guide To Corporate Laws, (Taxmann, New Delhi, Ed. 5th )
Statutes Referred:
  • The Companies Act, 1956
  • The Sick Industrial Companies (Special Provisions) Act,  1985
  • The Sick Industrial Companies (Special Provisions) Repeal Act, 2001
  • The Companies (Second Amendment) Act, 2002 (Act XI of 2003)
Hyperlinks Referred:
  • http://
  • http://

[1] Meanwhile BIFR, set up to tackle the problem of industrial sickness since its inception in May 1987, has been receiving about 45 references a month. Till the end of December 2000, it has received 4,575 references. Out of the references received, 3,296 were registered with the Board as on December 31, 2000. While 688 references were dismissed as non-maintainable, 557 rehabilitation schemes, including 24 by AAIFR and Supreme Court were sanctioned. Further, 824 companies were recommended to be wound up
[2] All the matters relating to companies, which were earlier handled by various High Courts, CLB, BIFR and AAIFR will now be handled by the NCLT. Pending matters with the High Courts and CLB will be transferred to NCLT. As the SICA has not yet been repealed, the sick Companies will continue to be under BIFR. Only sick ancillary undertakings will come under the jurisdiction of NCLT, as the newly inserted definition of Industrial Undertaking, seems to be faulty. Further, the definition of Industrial Undertaking is explicitly exempting the Small Scale Industries (SSI) from its ambit and therefore, SSI will remain out of the purview of the BIFR and the NCLT both.
[3] Section 10FC ,Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[4] Section 10 FI, Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[5] Section 10 FO Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[6] Section 10 FM Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[7] Section 22(1), The Sick Industrial Companies (Special Provisions) Act,  1985
[8] Section 433 of Companies Act, 1956.
[9] A company shall be deemed to be unable to pay its debts - if a creditor to whom the company is indebted in a sum exceeding five hundred rupees, has served on the company a demand by registered post at its registered office requiring it to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum; or if execution or other process issued on a decree or order of any court in favour of a creditor of the company is returned unsatisfied; or if it is proved to the satisfaction of the court that the company is unable to pay its debt.
[10] Section 439 of Companies Act,1956.
[11] Such an application is made by Central Government if, on investigation into the affairs of the company, it finds that it is just and equitable that the company be wound up.
[12] Section 443 of Companies Act,1956
[13] Section 448 of Companies Act,1956.
[14] Section 456 of Companies Act,1956.
[15] Section 446 of Companies Act, 1956.
[16] Section 529 of Companies Act, 1956.
[17] Section 529, 529 A and 530 of the Companies Act.,1956
[18] On lines similar to the provisions contained in Section 20 of SICA.
[19] Report of High Level Committee on Law relating to Insolvency of Companies
[20] Report of High Level Committee on Law relating to Insolvency of Companies
[21]  Section 441C,Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[22] Section 441D,Companies (Second Amendment) Act, 2002 (Act XI of 2003)
[23] Section 448 ,Companies (Second Amendment) Act, 2002 (Act XI of 2003)


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  2. Thanks for providing this information was of great help for my needs, Keep posting content related to Corporate Insolvency Services

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