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Sunday, August 29, 2010

Company Law - CROSS – BORDER INSOLVENCY and MNCs – An Indian Perspective


With the globalization of economy, the issues relating to corporate insolvency have assumed greater significance and a need has been felt for long for bringing about reforms in this branch of law. Moreover, with the Indian economy having been opened up for investment by foreign creditors and, internationally, the Indian corporate also making investments in companies outside, the realm of cross-border insolvency law has multiplied greatly.
 Cross – border insolvency is a term used to describe circumstances in which an insolvent debtor has assets and/or creditors in more than one country.
Many businesses have interests stretching beyond their home jurisdictions. Firms are increasingly organizing their activities on a global scale, forming production chains including inputs that cross national boundaries. With the advent of sophisticated communications and information technology cross-border trade is no longer the preserve only of large multi-national corporations.
These factors have led to an increasing number of situations where Australian businesses are involved in matters where cross-border insolvency issues arise. This trend is not likely to change.
The stream of insolvency laws can be segregated chiefly under two heads:
·         Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908 and,
·          Corporate Insolvency, whose consequence is winding up of the company under the Companies Act, 1956.
In the process of liberalization, deregulation and adopting market economy, India is experiencing a massive growth of retail loans to individuals, housing loans and credit card users. On account of phenomenal rise in retail lending, it will be necessary in the near future to give a re-look at the personal insolvency laws to ensure that any insolvency proceedings against individuals are also expeditiously decided.
However, the basic tenets of corporate insolvency can be classified as[1]:
-          restoring the debtor company to profitable trading where it is practicable;
-          to maximize the return to creditors as a whole where the company itself cannot be saved;
-           to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights;
-           and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book;
-          placement of the assets of the company under external control;
-          substitution of collective action for individual pursuits;
-           avoidance of certain transactions and fraudulent conveyances, dissolution and winding up etc.
In context of corporate laws, the word "insolvency" has neither been used nor defined. However, Section 433 (e) of the Companies Act, 1956 covers a company, which is "unable to pay its debts", and thus constitutes a ground for winding up of the company. Inability to pay its debts would be a case where, a company's entire capital is lost in heavy losses and no accounts are prepared and filed and no business is done for one year. In such circumstances, the Registrar of Companies makes out a case of inability to pay debts. These debts however, would only include debts, incurred after the legal incorporation of the Company. Inability to pay debts has even been amplified in Section 434 wherein, a creditor with a due of Rs. 500 or more serves a demand by registered post and the company neglects to pay, secure or compound the same in 3 weeks, in cases where the execution of a decree returned unsatisfied and also where the Court is otherwise satisfied that the company is unable to pay its debts.

Pursuit of Individual Claims

In the sphere of insolvency laws in India, where all the suits are stayed on making of the winding up order, parties may pursue individual claims in certain circumstances, namely:
1.      Winding up procedure implies all personal rights be converted into right to prove debt in winding up. 
2.      Under section 446, stay on all suits and the winding up Court to decide all suits by or against the company. 
3.      A secured creditor may enforce security interest without a suit and therefore, real rights of secured creditors are protected. 
4.      Criminal proceedings or proceedings against directors or officers are not stayed. 
5.      Income tax proceedings will continue against the liquidator.

Risks of cross-border insolvency[2]

One of the risks that all businesses face is that of a trading partner's failure. Most domestic laws provide for the handling of an insolvent enterprise. Typically, domestic laws will prescribe procedures for:
  • identifying and locating the debtors' assets;
  • 'calling in' the assets and converting them into a monetary form;
  • identifying and reversing any voidable or preference transactions which occurred prior to the administration;
  • identifying creditors and the extent of their claims, including determining the appropriate priority order in which claims should be paid; and
  • making distributions to creditors in accordance with the appropriate priority.
In a cross-border insolvency context, additional complexities that may arise include:
  • the extent to which an insolvency administrator may obtain access to assets held in a foreign country;
  • the priority of payments: whether local creditors may have access to local assets before funds go to the foreign administration, or whether they are to stand in line with all the foreign creditors;
  • recognition of the claims of local creditors in a foreign administration;
  • whether local priority rules (such as employee claims) receive similar treatment under a foreign administration;
  • recognition and enforcement of local securities over local assets, where a foreign administrator is appointed; and
  • application of transaction avoidance provisions.
The additional complexities surrounding cross-border insolvencies necessarily result in uncertainty, risk and ultimately costs to businesses. It would be of overall benefit to businesses in all countries to have adequate mechanisms in place to deal efficiently and effectively with cross-border insolvencies.

Chapter # 2

Corporate insolvency law has overriding objectives: to restore the debtor company to profitable trading where this is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book, and where appropriate, deprived of the right to be involved in the management of other companies. To facilitate achievement of these objectives the Two Acts governing insolvency law, and procedure in India[3]:
a) The Provincial Insolvency Act, 1920
b) The Presidency Towns Insolvency Act, 1909,
provide a battery of legal and administrative instruments and institutional structures. Therefore it can be said that the underlying philosophy of this country has the following objectives:
1) Rehabilitative
2) Distributive
3) Penal
The Companies Act, adopts the rules of insolvency, as laid down in these laws and provides the procedural law for corporate insolvency.
The four different elements of the philosophy of the insolvency law have been incorporated in (a) Section 28 of the Provincial Insolvency Act which describes the effect of an order of adjudication. This Section contains all the elements, distributive, rehabilitative etc. The effects of an order of adjudication are:
1. the insolvent to aid to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors. (Distributive element).
2. The whole of the property of the insolvent shall vest in the Court or its receiver and becomes divisible among the creditors. No creditor shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceedings, except with the leave of the court and on such terms as the court may impose. (Immunity and part rehabilitative element).
3. Under Section 38 of the Provincial Insolvency Act, a composition or Scheme of arrangement can be proposed to the Court dealing with insolvency, for securing rehabilitation of the debtor.
4. Part IV titled "Penalties" of the said act details the penalties that can be imposed on the insolvent under certain conditions. According to Section 69 if a debtor, whether before or after the making of an order of adjudication, fails to perform the duties imposed on him by Section 22 or does not cooperate in the delivery and possession of his property to the court or his creditors as the case may be, or fraudulently with intent to conceal the state of his affairs or to defeat the objects of this Act, keeps false books or tampers with the related records and documents and fraudulently with intent to diminish the sum to be divided among his creditors conceals any debts due shall be punishable on conviction with imprisonment, which may extend to one year.
Section 22 of the Provincial Insolvency Act requires the insolvent debtor to produce all books of account and give inventories of his property and list all creditors and debtors and debts due to and from them, and submit to examination by the Court or the receiver and execute such instruments or acts as required by the court or receiver.
Section 71 provides that where an insolvent has been guilty of any of the offences specified in Section 69, he shall not be exempt from being proceeded against therefore by reason that he has obtained his discharge or that a composition or scheme of arrangement has been accepted or approved.
Section 72 provides that an undischarged insolvent obtaining credit to the extent of fifty rupees or up wards from any person without informing such person that he is an undischarged insolvent, shall on convictions by a Magistrate, be punishable with imprisonment for a term which may extent to six months, or with fine or with both.
The Presidency Towns Insolvency Act, 1909 also has similar provisions. Section 17 details the effect of order of adjudication. Section 23 contemplates a Scheme of Arrangement or composition being proposed by an insolvent debtor for rehabilitation. Also Section 102 to Section 105 deal with penalties as with Section 69 to 72 of the Provisional Insolvency Act. Under the Companies Act the court established, has the jurisdiction to deal with corporate insolvency. For Schedule I industries under the Industries Development and Regulation Act, the BIFR deals with the distributive and rehabilitative aspects of insolvency. BIFR has also got penal powers. However, if such company is not capable of revival then the company court receives a report from BIFR to commence insolvency in accordance with the Companies Act.
Under the Companies Act there are similar provisions as are applicable to personal insolvency under a special part namely Part VII dealing with insolvency.
Section 447 prescribes the effect of winding up order which is akin to the Provincial and Presidential Insolvency Laws.
Section 446 of the Companies Act, has among other things, barred the commencement of a suit or other legal proceeding against a company in liquidation without the leave of the court. An almost similar legal restriction is found in Section 17 of the Presidency Towns Insolvency Act and Section 28(2) of the Provincial Insolvency act, imposing a ban on creditors, to whom the insolvent is indebted, from commencing any suit or other legal proceeding against the property of the insolvent in respect of the debt except with the leave of the Insolvency Court.
The provisions of Section 456 of the Companies Act declare that the custody of the company's property and its vesting is with the Official Liquidator upon the winding up being ordered. The right to sue and be sued stands transferred to the Official Liquidator.
No receiver can be appointed of properties, within the custody of the Liquidator.
Punitive provisions are also contained in Sections 531 to 545 of the Companies Act wherein avoidance of fraudulent preference or transfers are stipulated. The shares transfers made after the commencement of winding up can be avoided. Specific provisions for offences by officers of the company in liquidation, offences for falsification of books and frauds are also stipulated. The court has power to assess damages against delinquent directors and prosecute delinquent officers.
A rehabilitation scheme or a scheme of arrangement can also be proposed for winding up under the Provisions of Sections 391 to 394 as a compromise arrangement or a reconstruction scheme on principles akin to the law applicable to personal insolvency.

Chapter # 3
In spite of the urgent need for a legislation regarding the Law for Cross- Border Insolvency, however, there is no particular law enacted for this particular reason. It is only by a handful legislations that the entire aspect is governed by the Courts, in case of any dispute.
The important laws and their respective sections in this regard are:
4.      THE COMPANIES ACT, 1956

-          Dealing with the Recovery of Debts due to Banks and Financial Institutions Act, 1993, it is basically an act incorporated to relate to the Recovery of Debts, which is an important aspect of the Insolvency concept. This is so because once a Company has been declared insolvent, the role of the Creditors has not ended. In fact, now he has a far important role to play because of the money and credits that are stuck up in the company, due to be recovered. Moreover, since the Companies, who are organized at a larger scale, it is more of a common feature that the creditors would be Banks or Financial Institutions who allot large amounts of loans to the Companies. Hence, the Enactment of this Law. Moreover, the legislation is such that, with respect to the concept of insolvency, it finds a great application and hence, all the provisions of the Act are equally important, in order to understand the nature of the Condition/position of the Company.
-          Coming on to the Securities and Exchange Board of India, 1992, it is highly important with regard to the Private Companies functioning in the Country. This is so because of the Institution’s position as a Regulator of the Private Companies in India. It is organized to regulate the Companies in order to avoid any complications and to safeguard the interest of the Companies and the Stakeholders.
The Short Title of the Act provides that-
to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.”
This clearly illustrates the status of the Act with respect to the governance of the Companies and the rights of the Stakeholders. Here also, all the provisions of the Act are equally important.
-          Next being The Sick Industrial Companies (Special Provisions) Act, 1985, this act deals with the laws governing the aspects of the Sick Companies, that includes all the companies under section 3 of the Companies Act, 1956. Basically, a sick industrial company means an industrial company (being a company registered for not less than five years and employing fifty or above workmen), which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Net worth has been defined as the sum total of the paid up capital and free reserves. Hence, the companies who have been declared insolvent fall under the definition under this Act thereby, making the provisions applicable. Hence, it proves to be an important legislation with regard to the aspect of Sick Companies.
-          Lastly, the Companies Act, 1956, being the most relevant laws of all with respect to the Insolvency Law, relating to the Corporate regime. However, the Companies Act does not specifically talks about the position of the Insolvent Companies, rights of the Creditors and Investors, Liabilities of the Debtors, etc. But, the various provisions talk about the relative position and condition of the concerned Companies.
Some of the Relevant provisions are-
(a)    391.-Power to compromise or make arrangements with creditors and members,
(b)   392.-Power of High Court to enforce compromises and arrangements
(c)    393.-Information as to compromises or arrangements with creditors and members
(d)   394.-Provisions for facilitating reconstruction and amalgamation of companies
(e)    395.-Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority
(f)    396.-Power of Central Government to provide for amalgamation of companies in public interest
(g)   416.-Contracts by agents of company in which company is undisclosed principal
(h)   417.-Employees' securities to be deposited in post office savings bank or Scheduled Bank
(i)     433.-Circumstances in which company may be wound up by Court
(j)     434.-Company when deemed unable to pay its debts
(k)   448.-Appointment of Official Liquidator
(l)     456.-Custody of company's property
(m) 464.-Appointment and Composition of committee of inspection
(n)   474.-Power to exclude creditors not proving in time
(o)   484.-Circumstances in which company may be wound-up voluntarily
(p)   488.-Declaration of solvency in case of proposal to wind-up voluntarily.

Chapter # 4
-          Eradi Committee Report
In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balakrishna Eradi, a superannuated Judge of Supreme Court of India for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field[4].
The recommendations given by the Report have been incorporated in the Companies Act.
The Committee recommended that[5]:
(a)    The jurisdiction, power and authority relating to winding up of companies should be vested in a National Company Law Tribunal which should be vested with the functions and power with regard to rehabilitation and revival of sick industrial companies, a mandate presently entrusted with BIFR under SICA.
(b)   The 1956 Act should be suitably amended to take the power away from High Court and the transfer of the pending winding up proceedings to the Tribunal.
(c)    The adoption of the international trend in law relating to corporate bankruptcy, namely, sell the assets first as quickly as possible, and relegate to a later stage the adjudication of claims and distribution of proceeds.
(d)   An in depth assessment of the office of Official Liquidators, in view of inadequate and incompetent manpower and absence of latest office equipments and technologies.
(e)    A liquidation Committee consisting of creditors of the company on the lines of Section 141 of the Insolvency Act, 1986 of UK be set up to assist the Liquidator.
(f)    The repeal of SICA and recommended the ameliorative, revival and reconstructionist procedures obtaining under it to be reintegrated in a suitably amended form in the structure of the 1956 Act except that there is no stand still provision like Section 22 of SICA.
(g)   Part VII of the Companies Act, 1956 should incorporate a new substantive provision to adopt the UNCITRAL Model Law as approved by the United Nations and the Model Law itself may be incorporated as a Schedule to the Companies Act, 1956, which shall apply to all cases of Cross-Border insolvency.
(h)   Adopt the necessary principles enunciated under the heading "Legal Framework", "Orderly and Effective Insolvency Procedures - Key issues", to bring the provisions of the Companies Act, 1956 in line with international practices.
The Committee completed its work and submitted its report to the Central Government in the year 2000.In August 2001, the Companies (Amendment) Bill, 2001 and the Sick Industrial Companies (Special Provisions) Repeal Bill, 2001 were introduced in the Parliament of India.

Report of the Standing Committee on  International Financial Standards and Codes
May 2002
In order to facilitate positioning of international financial standards and codes in relevant areas of the financial system in India and to guide the overall process of implementation of appropriate changes in respect of various segments of the financial system, Reserve Bank of India (RBI) in consultation with Government of India, in December 1999, constituted a ‘Standing Committee on International Financial Standards and Codes’ under the Chairmanship of Deputy Governor, RBI and Secretary, Economic Affairs, Government of India as Alternate Chairman.
      The Committee was entrusted with the task of identifying and monitoring developments in global standards and codes being evolved by standard setting bodies as part of the efforts to create a sound international financial architecture and consider all aspects of applicability of these standards to the Indian financial system.  The Committee was also asked to consider plotting a road map for aligning India’s standards and practices as necessary and desirable in the light of evolving international practices, periodically reviewing the status and progress in regard to the codes and practices, and reaching out its reports on the above to all concerned organizations in public or private sectors.
In the light of Asian crises, the need for fundamental changes in the international financial architecture acquired great urgency. Many proposals were made for strengthening the international financial system and the focus of these proposals was broadly on identifying indicators of financial vulnerability, development of sound international codes, standards and best practices, introduction of pre-emptive measures and safety nets, and designing a framework for crisis management.  In this context, development of international standards and codes is one important element of the overall effort in the aftermath of the Asian crisis to reform the international financial architecture.
As part of the effort to strengthen financial systems and improve coordination among the agencies responsible for them, the Financial Stability Forum (FSF) was established in April 1999. Its mandate is to promote international financial stability by improving the functioning of markets and reducing systemic risk through information exchange and international cooperation in supervision and surveillance of financial markets. The FSF has drawn together various standard-setting bodies which were constituted by means of cooperation among central banks, international financial institutions, national authorities and international supervisory and regulatory bodies.
 The various Advisory committees constituted in the Standing Committee for the Assessment were[6]-
(1)   The Advisory Group on Transparency in Monetary and Financial Policies
(2)   The Advisory Group on Fiscal Transparency
(3)   The Advisory Group on Data Dissemination     
(4)   The Advisory Group on Payment and Settlement System
(5)   The status of the Accounting  Standards (AS) issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI)
(6)   The Advisory Group on Bankruptcy Laws
(7)   The Advisory Group on Corporate Governance
(8)   The Advisory Group on Banking Supervision
(9)   The Advisory Group on Securities Market Regulation
(10)                       The Advisory Group on Insurance Regulation

Now the report in relevance here is the Report by the Advisory Group on Bankruptcy Laws, whereby it studied in detail the existing status of the legislation in relation to international standards on bankruptcy laws and the position obtaining in other countries as also Cross – Border Insolvency issues.  The recommendations, inter alia, consisted of passing of a new legislation on a comprehensive bankruptcy code, and introduction of a professional bankruptcy institution known as the “Trustee”, repeal of Sick Industrial Company (Special Provisions) Act and abolition of BIFR.  The Report also has dealt with an effective trigger point for the operations of the bankruptcy code, special provisions for banks and financial institutions, cross-border bankruptcy principles and an orderly and effective insolvency procedures  that would facilitate efficient servicing of the need of the corporations requiring timely intervention of restructuring and a very efficient exit system which maximizes the protection of the interest of the creditors and the investors with quick liquidation  procedures and  well laid  down game rule for dispensation of the claims.  The Report also covers among others, a comparative analysis of the Indian legal situation and bankruptcy laws vis-a-vis the USA and U.K., and international standards and Indian situation in respect of UNCITRAL model law on Cross – Border Insolvency,  EC directive on finality in payment and securities settlement system and Cross – Border Insolvency Concordat Committee J. 

Chapter # 5
An effective insolvency system is an important element of financial system stability.  There is a need for an effective Insolvency framework, which enables resolution of insolvency in a timely and efficient manner.  Corporate insolvency may be addressed through Companies Act.  A separate Insolvency law  is not necessary at present.

A definitive and predictable time frame is needed for rehabilitation and liquidation process.

The law should strike a balance between rehabilitation and liquidation process.  It should provide an opportunity for genuine efforts towards revival.  Only where revival/rehabilitation is not feasible, winding up should be resorted to.
Both debtors and creditors should have fair access to insolvency system.  Rather than net worth erosion principle, test for insolvency should be default in payment of matured debt on demand within a prescribed time [liquidity test].  Debtors seeking rehabilitation should be able to approach Tribunal only with a draft scheme.  Creditors being at least 3/4th in value may also file scheme.

A limited standstill period is essential for genuine business restructuring to be regulated through Tribunal’s Orders during which there is prohibition on unauthorized disposition of debtors’ assets and suspension of actions by creditors to enforce their rights.  The law should provide for appropriate prohibitions on certain Debtors’ rights [transfer, sale or disposing of assets etc.] subject to certain exemptions on initiations of insolvency.

There should be duty on companies to convene creditors and shareholders meeting on default in payments to creditors to consider suitable steps to protect interest of stakeholders, preserve assets and adopt necessary steps to contain Insolvency.

The debtor assets should be subjected to supervision or management of impartial, independent, and effective Administrator.

Provisions should be made for setting up of Committee of secured creditors to safeguard their interest and provide a suitable platform for creditors’ participation in the process.  The law should also provide for mechanism to recognize and record claims of unsecured creditors.

A Panel of Administrators and liquidators should be prepared and maintained by an independent body out of experienced and knowledgeable Insolvency Practitioners.  Private professionals should play a meaningful role in all aspects of insolvency process.  The law should encourage and recognize concept of Insolvency Practitioners.

The law should prescribe a flexible but transparent system for disposal of assets efficiently and at maximum value.  Secured creditors’ claim should rank pari passu with workmen.  Public interests, Government claims should not get precedence over private rights.  Revival plan should be required to be approved by secured creditors holding 3/4th of total value to be binding on all creditors.

Establishment of NCLT would provide a major initiative for insolvency system reforms in the country and should be enabled quickly.  NCLT should have general, non intrusive and supervisory role.  The Tribunal should adopt a commercial approach to dispute resolution observing the established legal principles of fairness in the process.  Selection of President and Members of the Tribunal should be such so as to enable a wide mix of expertise for conduct of its work.

Provisions relating to rehabilitation cess should be replaced by the concept of “Insolvency Fund” with optional contributions by companies.  Government may make grants for the Fund and provide incentives to encourage contributions by companies to the Fund.  Companies which make contributions to the Fund should be entitled to certain drawing rights in the event of insolvency.  Administration of the Fund should be by an Independent Administrator.  Insolvency Fund should not be linked/credited to Consolidated Fund of India.

A suitable framework for Cross Border Insolvency which provides for rules of jurisdiction, recognitions of foreign judgments, co-operation and assistance among courts in different countries and choice of law is required.  The Government should consider adoption of UNCITRAL Model Law on Cross Border Insolvency with suitable modifications at an appropriate time.

Chapter # 6
Some of the important aspects of the Cross Border Insolvency are related to the Remedies available to the Creditors and the various Stakeholders. However, the related concepts which need to be looked into while studying the topic in detail for a better and elaborate understanding are –
Collection and Recovery of Unsecured Debt
Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods ----
The unpaid creditor can institute an ordinary civil suit for a money claim against a corporate debtor. If the unpaid debt is admitted by the corporate debtor then under the provisions of Section 434 of the Companies Act, if the debt exceeds a sum of Rs.500/- a winding up action can be instituted by issuing a winding up notice. Under such a notice the corporate debtor has to pay up an admitted debt within 21 days and if it is unable to pay up such debt, a Company Petition for winding up on the ground of inability to pay is available.
If the claim of the unsecured creditor is small or insignificant in comparison to the claim of the secured creditors, the company court directs scheduled payments to the unsecured creditors after issuing notice to the company and ascertaining the position from the company's balance sheets of the nature and extent of the security and the particulars of the secured creditors. The company court does not readily wind up companies unless there is a persistent default of several creditors or the magnitude of unsecured debt is adequate and of sufficient extent. The Company Court is slow to displace the worker's interest and cause the termination of employment consequential upon a winding up order. Once a civil suit is instituted an ordinary civil action is initiated and a trial of the claim is commenced. If it results in a judgment debt, then the same procedure as is available for a secured creditors execution is available for the execution of the judgment debt.

Effectiveness of judicial system –
The recovery procedure for debt collection is slow and tardy. The unsecured creditor has to first prove his claim before the court action in execution and result in debt collection. Unsecured creditors, like Lesser and hire purchase contractors, normally resort to private action to recover back their leased properties or hired properties by appointing security agents after notices have been issued as the process of obtaining court directions and court recovery is slow and cumbersome.
If a judgment is delivered and it results in a judgment debt, the process is still slow as it requires service upon a company and a requirement of ascertainment of the judgment debtor's assets which can be attached or sold in execution.

Civil / Penal Liabilities –
Section 426 of the Companies Act defines the liability as contributories of present and past members- As per this Section in the "event of a company being wound up, every present and past member shall be liable to contribute to the assets of the Company to an amount sufficient for payment of its debts and liabilities." Section 428, in additional defines the term 'contributory" to mean any person liable to contribute to the assets of a Company in the event of its being wound up, and includes the holder of shares". Directors of a company are also contributor, and have the same liability during winding up as any other contributory. The Companies Act lists penalties against the delinquent directors etc. S.543 of the Act is with regards to the Power of the Court to assess damages against delinquent directors.
'If in the course of winding up of a company, it appears that any person who has taken part in the promotion or formation of the company, or any part or present director, manager, liquidator etc.
(a) has misapplied, or retained, or become liable or accountable for, any money or property of the Company; or
(b) has been guilty of any misfeasance or breach of trust in relation to the Company.
The Court may on the application of the official liquidator, or the liquidator of any Creditor may examine into the conduct of the person, director, manager etc. and compel to repay or restore the money with interest at such rate as the Court thinks just or to contribute such sums to the assets of the Company".
The proceedings under this section are of quasi-criminal and of serious nature they are independent of, whether or not the person proceeded against may be criminally liable for any actions complained of within the statutory scheme. It is not necessary for the liquidator to prove any such thing as criminal conduct on the part of the directors. Proceedings under the section are of civil nature. The above section applies to all kinds of winding up.
In addition, Section 545 of the Act deals with the prosecution of delinquent officers and members of company.
"If it appears to the Court that the directors or any other officers have been guilty of any offence in relation to the Company, the Court may either on application of any person interested in the winding up or of its own motions direct the liquidator either himself to prosecute the offender or to refer either matter to the Registrar."
The liquidator then has to prepare a report. The Companies Act does not lay down any special procedure for enquiry into and trial of offences under the Act. The Criminal Procedure Code governs the enquiry and trial of the offences under the Companies Act. Trials conducted by Criminal Courts cannot be held to be vitiated because of non- compliance with certain provisions relating to the initiation of proceedings and irregularities committed by the Registrar in the course of his investigation.
In addition to the above, there is a personal liability of directors of private companies in liquidation. Under section 179 of the Income-Tax Act, 1961, it is provided that 'when any private company is wound up after the commencement of this Act and tax assessed on the Company whether before or after in the Course of or after its liquidation, in respect of any income of any previous year cannot be recovered, then every person who was a director of the private company at any time during the relevant previous years shall of such tax under he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company."

If a corporate debtor is in financial difficulty, there exists an attitude of 'concealment' or 'denial' toward the admission or exposure of that financial difficulty ---
The attitude of 'denial' towards the admission or exposure of the financial difficulty in extremely common in India. Since a disputed debt, is not considered a sufficient ground to wind up a Company, most Corporate Debtors dispute the debt due when a winding up or insolvency action is commenced.
According to Section 15 of the sick Industrial Companies (Special Provisions Act, 1985), where an industrial company has become a sick industrial company, the Board of Directors of the Company, shall, within 60 days from the date of finalization of the duly audited accounts of the Company for the financial year or at the end of which the company make to the Board for determination of the measures which shall be adopted with respect to the company clause (2) says that the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a Scheduled Bank may, if it has sufficient reasons to believe that any industrial company has become risk (which may be due to heavy debt, among other debtors), make a reference in respect of such company to the Board of determination of the measures which may be adopted with respect to such company. Section 23 of the same Act describes the proceedings in case of potentially sick industrial companies, misfeasance proceedings, Appeals and miscellaneous. The criteria here is erosion of 50% or more of the Companies peek or the highest net worth during the former financial years immediately proceeding the year in which accumulated losses of the company have exceeded the said net-worth.

The Indian insolvency procedure do not discriminate against debts due to foreign creditors, as long as such debts have been lawfully incurred. The provisions of the Foreign Exchange Regulation Act, 1973 provide certain specific requirements for contracting a foreign debt and prior approvals of the RBI or the Ministry of Finance before contracting a foreign debt should be in place. If these consents or approvals are filed with proof in the appropriate insolvency court then the debt can be proved and the courts have even declared that they have authority to pay in foreign currency.
Foreign creditors are not given any specific special treatment for priority of payment. If their debt is agreed to be paid in repatriable currency as declared at the time of the consent from the Ministry of Finance or the RBI then the decree can be in foreign currency. The law of India or the law governing the company would be applied in determining the debt or the claim. The normal procedure of a proof of a claim will be applicable[7].
The provisions of the Companies Act do not have extra territorial jurisdiction and extend to only the whole of India. If an Indian company has assets outside the territorial jurisdiction of India then depending upon the rules of registration of the Indian company or branch abroad in a foreign jurisdiction, foreign law may apply. An order of insolvency is a judgment in rem and based on principles of reciprocity and private international law, new proceedings may have to be instituted in foreign jurisdiction based on foreign law applicable for the liquidation and winding up and sale of such assets, or branch or foreign company. If an insolvency order is passed in India, the branch and its assets would be subjected to such insolvency order, as a branch has no independent legal existence.
Indian law will not recognize foreign insolvency procedures over an Indian Company. An insolvency order in order to be recognized against an Indian company has to be passed by the Company Court and no foreign court has authority to declare an Indian company as being wound up. A foreign court can at best pass a judgment against assets within its jurisdiction. If the judgment is unsatisfied, based upon rules of reciprocity and recognition of foreign judgments either the foreign judgment or decree may be executed in relation to reciprocating territories or found a new cause of action based upon the judgment in India. When a judgment is rendered as a judgment debt and is unsatisfied, insolvency procedure can commence in India before the Company Court.
As explained above no foreign court has authority as a Company Court to render a judgment or order of winding up in a foreign jurisdiction with reference to Indian companies. Therefore, the question of a foreign insolvency judgment of an Indian Company being recognized in India does not arise.

Chapter # 7
UNCITRAL Model Law on Insolvency

The United Nations Commission on International Trade Law (UNCITRAL) enacted the UNCITRAL Model law on Cross- Border Insolvency.
As the Preamble of the Enactment makes clear the objects of the Law, which are[8]
(a) Cooperation between the courts and other competent authorities of this State and
foreign States involved in cases of cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of cross-border insolvencies that protects the interests
of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled businesses, thereby protecting
investment and preserving employment.

Background to the UNCITRAL Model law

UNCITRAL was created by the United Nations in 1966 'to further the progressive harmonization and unification of the law of international trade'.
The original suggestion to undertake work on cross-border insolvency was made to UNCITRAL by practitioners directly concerned with the problem, in particular at the UNCITRAL Congress, 'Uniform Commercial Law in the 21st Century' held in May 1992.
Australia recognized the importance of this issue for international trade and its delegates to UNCITRAL actively encouraged the Commission to pursue work in this area. Australia's experience with attempting to recover assets from foreign jurisdictions in the wake of high profile corporate collapses in the late 1980s and early 1990s provided impetus for Australia's support for the work.
There was some opposition to UNCITRAL commencing this work, along the lines that national differences in approach to Insolvency law and policy would present insuperable difficulties to getting agreement among countries. However, in 1995 the Commission agreed to establish a Working Group to develop Model legislation relating to cross-border Insolvency. The Treasury and the Attorney-General's Department, which has responsibility for personal Insolvency policy, supported the Working Group of UNCITRAL in the development of the Model Law.
Over the next two years the text of the Model Law was developed at meetings of the Working Group, comprising representatives from 36 UNCITRAL member countries and 40 observer states, in consultation with 13 international organisations representing practitioners, judges and lenders. In comparison with other comparable projects, the Model Law was developed quickly, due in large part to the enthusiasm for the work on the part of the participants.
The Working Group on Insolvency presented its finalized text to the UNCITRAL annual session of 1997, where it was endorsed by the Commission.
The UNCITRAL Model Law on Cross-Border Insolvency was adopted by the Untied Nations Commission on International Trade Law in 1997 and is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework, which will address more effectively cases of cross-border insolvency. This would include cases where the insolvent debtor as assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.
The Model Law respects the differences among different national procedural laws and does not attempt to impose a substantive unification of insolvency law.
This consultation seeks to build on the Government’s commitment to reduce red tape and to produce clearer information on regulatory issues. The aim of the consultation is to provide a background and explanatory information and to seek views on the implementation of the Model Law on Cross-Border Insolvency with specific comments on the draft articles and procedural rules.

Features of the UNCITRAL model law
-          National insolvency laws are often not designed to cope with cross-border insolvencies and the problems that arise, both jurisdictional and practical, make it difficult for insolvency officeholders to administer such insolvencies speedily and effectively. The uncertainty that arises in cross-border  insolvencies is widely seen as a barrier to trade and the flow of investment from country to country. A universal approach to cross-border insolvencies is crucial, as is the co-operation between national courts, authorities and practitioners[9].
-          One of the obstacles to the flow of trade is the conflict of laws between  different jurisdictions with regard to insolvency proceedings, which can result in the dissipation of assets and the loss of an opportunity to save a viable business. The UNCITRAL Model Law on cross-border insolvency is that body’s attempt to promote modern and fair legislation for cases where the insolvent debtor has assets in more than one State.
-          Implementation of the Model Law will be beneficial in serving the cause of fairness towards creditors worldwide and will provide an example to other States in terms of our readiness to engage in a genuinely two-way process of  cooperation in international insolvency matters. Over time, when other States implement the Model Law, GB officeholders will progressively enjoy the same benefits abroad, in terms of reduced administrative costs incurred in recovering assets from overseas, thereby increasing funds available for distribution to creditors.
-          The Model Law addresses specific issues set out in the body of its text. These issues are the recognition of foreign proceedings, co-ordination of proceedings concerning the same debtor, rights of foreign creditors, the rights and duties of foreign representatives, and co-operation between authorities in different States. It does not address nor does it seek to unify the substantive and procedural law on insolvency of the enacting States. It simply seeks to ease the access of foreign representatives and creditors to our courts and insolvency procedures.
-          The Model Law entitles a foreign representative to apply directly to the courts of the enacting State to commence insolvency proceedings under the laws of that State and to participate in such a proceeding once commenced.
-          The Model Law also sets out a procedure for a foreign representative to seek recognition and relief for foreign insolvency proceedings. Proceedings will be recognized as main proceedings or as non-main proceedings depending on where the debtor has its Centre of main interests. In simple terms the location of a debtor’s centre of main interest will be the habitual residence or registered office but may depend on factors such as the whereabouts of the main trading presence or business or where the main administrative functions are carried out.
-          The Model Law is a legislative text that forms the basis of a recommendation to States for incorporation into their national law. When drafting the articles, we have tried to stay as close to the drafting in the Model Law as possible to try and ensure consistency, certainty and harmonization with other States enacting the Model Law and to provide a guide for other States who are considering enacting the law. Our policy has been to try and enact as drafted, which may result in the use of some terms, which may not be standard in Indian insolvency law.
-          The Model Law is quite general in its detail and broad brush in its use of terminology, which is again something not normally found in British legislation. However, the courts will be able to interpret the text and apply it to the detail of specific cases.

A cross-border insolvency arises when an insolvent entity is placed into a form of insolvency administration in one State but has assets or debts in other States. Such a proceeding can be inefficient and costly and in addition the costs of accessing foreign courts can be prohibitive.
There have been relatively few cases to date of cross-border insolvency proceedings involving GB entities. There is no typical case profile and no statistics kept in respect of number, costs or impact. The assumption remains that the incidence of cross-border insolvencies will be very low although it should be noted that such cases might involve substantial assets or debts and by their very nature, be complex.


In the process of deregulation and liberalization, number of restrictions on undertaking industrial activities has been withdrawn and relaxed. There is a need to take the process of liberalization a step further and recognize that so long as a company is acting in the interest of shareholders and otherwise observing the law of the land it should have the freedom to manage its affairs, merge, amalgamate, restructure and reorganize or otherwise plan its affairs as it considers best in the interest of the stakeholders. Interference by the Government or court or any tribunal should only be in the event of any detriment to the shareholders or under the Competition Act to prevent monopolies or restrictive trade practices. While undertaking reforms in the Insolvency Laws there is a need to change the focus from strict regulation of the activities of companies to granting freedom to the industry in conducting its business activities and lay down norms for protection of interest of stakeholders.
However, with the developing ambit of the Globalization in the country, there is a need for an effective Insolvency Law for the corporate organs  functioning from abroad and those Indian Companies functioning outside the country.
Further, as has been mentioned in the research work, the features and the advantages in adopting the UNCITRAL model law on Insolvency. It pursues a well-defined approach towards understanding and dealing with the concepts and the complications arising out of the Cross- Border Insolvency.
Moreover, with the advent of time, no country would remain strictly within its own regime and boundaries, For the purposes of gaining profits and the expansion of market, the Companies from distinct countries will emerge into a common market.
Now, in such a situation, it becomes difficult in determining certain aspects like liabilities of the debtor company, rights of the creditors, etc. However, the most difficult yet most important question to be sorted out is – Laws of which country shall be made applicable ? The laws of no two countries are similar, however, the principle on which they are based may be the same.
But the dispute in the application of a common law becomes the problem. Therefore, the UNCITRAL model law should be accepted by all the countries who have adopted the policy of Globalization and Liberalization, so that the common problem arising can be sorted out in a more effective and an efficient manner.
A classic example of such a case is the ENRON Co. Case involving India whereby the MNC was based in India and was operating in the Indian Market. However, the company turned insolvent thereby leading to arising of conflicts relating to the subject in question. 


[3] www.insolvencyasia/India/Subject.html
[4] Ibid
[5] Annexure I., as cited from

[7] www.insolvencyasia/India/TOC/Section_N.html

1 comment:

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