Constitutional laws in India

The Companies Amendment Bill 2001

Written By: Ashish Rana III Year Amity Law School
Company Law
Legal Service
  • On 22nd October 1999 a committee was constituted under Justice V. Balakrishna Eradi to examine the existing laws relating to winding up of Companies, revival of sick companies along with Laws relating to recovery of debts, Securities contracts insolvency of companies and to suggest recuperative measures for the ailing corporate sector on these issues

    National Company Law Tribunal

    The Bill proposes to set up a National Company Law Tribunal (NCLT) which would encompass the 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. The cases pending with the company law Board and the winding up cases that are before various High Courts will stand transferred to proposed NCLT. The matters pending in BIFR / AAIFR would abate, however, such companies would file fresh reference to NCLT. NCLT will have principal seat in Delhi with atleast ten special benches at principal seats of High Courts. NCLT will consist of President and not mire than 62 judicial and technical members. An Appellate Tribunal in Delhi has also been proposed where the appeals against NCLT has to be filed within forty-five days from the receipt of the orders from the NCLT. An appeal against the order of Appellate Tribunal would lie before Supreme Court.

    Revival of a Sick Company

    Under the proposed Sec 2(46 AA) of the proposed Bill a 'Sick Company' is defined as one whose accumulated losses in any financial year are equal to or more than fifty percent of its average networth during our financial year immediately preceding such financial year or a company who fails to repay its debt within any three consecutive quarters on demand, for its repayment by a creditor or creditors. This is a marked change from the provisions of Sec 3 (1) (o) of The Sick Companies (special Provisions) Act, 1985 (SICA) where a sick industrial company has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and is registered for not less than five years. This change in definition will result in a Sick Company getting the attention earlier thereby improving the chances of its revival. The provision regarding the default in payments by the company for three consecutive quarters will not only allow the Board of directors of company but also Banks and Financial institution to refer the company to the Tribunal for its revival even it the company is registered for less than 5 years. This provision will even bring the companies registered for less than five years under the ambit of 'Sick Company'. 

    In the proposed dispensation the time period within which a company can be referred to NCLT been increased from 60 days (time period given in SICA) to 180 which is further extendable by 90 days, thus giving the sufficient time period to refer the company to the Tribunal for the revival or rehabilitation. The application to the tribunal is proposed to be accompanied by a certified copy of accounts audited by the body of auditors prepared by the Tribunal and not by the Board of Directors (as provided in SICA), thus removing the scope for manipulation of accounts by the directors of the company and there by preventing them from misusing the provisions of SICA. It would however be seen that the professionals that are being appointed by the Tribunal are of clean background and are well experienced in their fields. While referring the company to the Tribunal the company is required to submit a scheme of revival and rehabilitation to the Tribunal under section 424 A of the proposed bill. The bill also stipulates that the permission of the Central or State Government shall be taken before a government company can be referred to the tribunal.

    On receiving a reference the Tribunal will conduct an inquiry and if the Tribunal finds that it is impracticable for s Sick Company to make its net wroth exceed the accumulated losses or cannot repay its debt, it can order the winding up of the company itself against the earlier proviso in SICA where in the BIFR used to refer the winding up of the company concerned to the High Court which was a time consuming process. In the new desperation time period of one year has been stipulated for the completion of winding up proceedings after the passing of the winding up order. The Tribunal needs to work carefully and vigilantly to ensure that the winding up proceedings are completed within the prescribed time frame.

    Under Section 424 D (11) creditors of a Sick Company may also prepare and submit a scheme for revival or rehabilitation of a sick company provided it meets them approval of the two third creditors of the company. The provision is silent on the fact that whether this criterion of 2/3rd is related to numerical aspect or to the total amount expenses of the creditors 

    An amendment has also been proposed in Sec. 434(1) of The Companies Act, 1956 where the amount or Rupees five hundred has been raised to Rupees One lakh i.e. now a creditor can file a suit for winding up of the company only if the company is unable to repay the amount of Rs.1, 00,000/- or more. This is an encouraging step as the amount of Rs.500/- is very meager, for which a company should be wound up.

    Problems in Winding up of a Company

    The problems that are being highlighted regarding winding up of a company in justice Eradi Committee Report relates to delay in filing of statement of Affairs, delay in handing over updated books of account and records, delay in finalization of list of creditors and debtors, inadequate power and staff given to official Liquidator (OL), non availability of funds etc. In the proposed bill steps are being taken to solve and minimize these problems. Section 493(1) of the proposed Bill says that every company has to file its statement of affairs synchronous with the petition for winding up or while opposing a petition for its winding up. The statement shall be filed along with the names and addresses of the directors, creditors and debtors of the company and the location of assets and their values and such other information as ordered by the Tribunal. This provision will reduce the delay, which used to occur in making a statement of affairs of the company. Under section 457 C (a) of the proposed Bill the official Liquidator has been entrusted with wide powers such as he can appoint Chartered Surveyors, Chartered Accountants to value the assets of the company. In this Bill, earlier provisions of OL requiring to take courts permission for even small decisions has been done away with For example now he can appoint security guards to protect the property of the company and other helping staff required.

    Establishment of A Fund

    To tackle the paucity of funds the proposed Bill 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 proposed fund will take care of the interim payment of wages to the workers protection of assets and for other rehabilitation works. The fund is not free from the clutches of the Government as the Bill proposes to transfer the collected amount to the consolidated fund of India. The parliament may, by way of delegation create a body, which will release funds to Tribunal from time to time. This procedure may result in avoidable delays, as the Tribunal will have to interact with agency created for managing the funds. Another flaw which is apparent in this provision, is the levying of cess on the annual turn over of the company instead on the Profit of the company i.e. even the company that is incurring losses has to contribute to the fund.

    Power To Review
    In the new dispensation NCLT has been bestowed with inherent powers to review its own decisions, which has been provided as per Sec 10 FN of the proposed bill.

    The establishment of NCLT may prove to be a great help to the corporate world as now there will be 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. Now what is required is to see that the provisions of this bill are strictly implemented and the objectives of this bill are achieved.

    You may also contact the author for any query concerning this article: [email protected]

    Divorce by Mutual Consent in Delhi/NCR

    Mutual DivorceRight Away Call us at Ph no: 9650499965

    File Your Copyright - Right Now!

    Copyright Registration
    Online Copyright Registration in India
    Call us at: 9891244487 / or email at: [email protected]