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Modes of Removal of a Company: A Discussion

Different business structures available in India under which one can establish its business are sole proprietorship, partnership, LLP, and a company. The advantage of registering as a LLP, or a company is that they offer limited liability to the shareholders and perpetual succession to the business structure. However, if a company is not doing well, i.e. is not producing any profits in the past few years, such company is liable to be struck off, either by will of the company, or compulsorily by the Registrar of Companies.

On the other hand, if a company holds assets, and is liable to repay debt of a number of creditors, and is not making any profits, such company is liable to be wound up by the tribunal, either on application, or by suo moto action of the Tribunal, to settle the payment of debts.

Sections 248 to 252 of the Companies Act, 2013 make provisions for a company to make an application before the Registrar of Companies to strike off its name on account of not being able to produce business for the last two financial years. Striking off, however is not the option for a company who holds debt against several creditors, and needs for the Tribunal to carry out the dissolution process with the help of insolvency professionals.

Winding up is another way to bring an end to the life of a company. Winding up can be carried out in two ways: one, by the order of the tribunal, and two, by an application made to the Tribunal either by the members of the company, or by the creditors. Some of the grounds on which a company may be compulsorily wound up are: inability to pay debts, inability to comply with an order of the Court to pay a creditor, and complete commercial insolvency of the company.

The present paper aims at studying the various ways in which a company can be dissolved or struck off under the provisions of Companies Act, and their interpretation by way of precedents.

Procedure of Striking Off Under the Companies Act, 2013

Section 248 of Companies Act, 2013 gives the Registrar power to remove the name of a company from the Register of companies if he has a reason to believe the following circumstances:
  1. The company has failed to commence its business within one year of its incorporation.
  2. The company has not been able to pay the subscription money, which it was liable to pay within 180 days of incorporation.
  3. The company has not been carrying on any business for the last 2 financial years, and has failed to apply for the status of a dormant company.
On the contrary, a company can also make an application to the Registrar for striking its name off the Register of companies if it thinks the above mentioned conditions are fulfilled.[1] The procedure of striking off is as follows:

Procedure of compulsory striking off by Registrar:

The Registrar, if believes that on account of any or all criteria mentioned above, a company needs to be struck off, he shall send a notice to the company and all its directors showing his intention to strike off a company. The company requires to make a representation within 30 days of the receipt of the notice. In case the company doesn't make any representation within the prescribed time, the Registrar may strike off the name of the company from the Register.

Procedure of voluntary striking off by application:

The company, if has reasons to believe that any or all of the criteria mentioned above are fulfilled and the company needs to be struck off, it shall make an application to the Registrar for the same.

For making the application, the company needs to get a special resolution passed to that respect, or needs to get approval of 75% of the members in respect of the paid up share capital. After receiving the application, the Registrar shall issue a public notice in the prescribed manner for the knowledge and information of general public. In case no objections are received by the Registrar in prescribed time, the Registrar shall remove the name of the company from the Register of companies.

It may be noted that for the Registrar to remove a company from the register, he needs to make sure the company has settled all its debts and liabilities towards all its creditors. In case the company has failed to repay any of its creditors, the company shall first go through the process of winding up through the Tribunal before getting its name struck off.

Is restoration of a company possible once struck off?

An appeal may be made to the Tribunal for revival of the company by the Registrar is he thinks such striking off has been done based on incorrect facts, or incomplete information, the company if it believes the striking off was unjustly done, or by any of the parties that are aggrieved from such striking off.[2] If the court is satisfied that such removal has been done unjustly, or affects the rights of a party, the Tribunal may revive the status of the company.

When a creditor who had obtained a decree from the court against the company for recovery of money appealed for restoration, the court made an observation that the company had misinformed the Registrar about being liable to pay the appellant. The court observed that if the name of the company is not restored, it shall adversely affect the rights of the creditor embarked upon him by the Court, and hence such restoration was inevitable and in the interest of justice.[3] The rule was thereafter affirmed in several cases in the future.

In another matter, the company, ignorant of the fact that its name had been removed from the register of companies created legal charge on two properties in its name. The court restored its name and gave the order retrospective effect to validate the legal charge created on the properties. Therefore, the rule as to the retrospectivity of the restoration order was laid down.[4]

Procedure of Winding Up under Companies Act

s. 270 of the Companies Act provides for the two kinds of winding up of a company by the Tribunal. The Tribunal could either take a suo moto action, or initiate the process of winding up as a result of a voluntary application made by the company or any party holding interest in such winding up, such as the creditors.

The compulsory winding up of a company may be carried out by the Tribunal on the following grounds[5]:

  1. Inability to pay debts:

    A company may be dissolved or wound up by the Tribunal if it is unable to repay its debts. If a creditor has given a notice of 21 days to the company and the amount of debt is more than Rupees 1 Lakh, the Tribunal may initiate the process of winding up of the company. Irrespective of whether the creditor has sent a 21 days' notice or not, repetitive notices by the creditors, and failure to pay the debt would amount to its inability to pay.[6]

    However, in a case where a company has reason to believe that is is not legally liable to pay the debt, and such issue is pending before the court of law, the non-payment of debt would not amount to inability to pay.[7] Following criteria were laid down in Amalgamated Commercial Trader (P) Ltd. v. ACR Krishnamurti[8], to determine whether the company is unable to pay the debt or not: if the company is able to produce prima facie proof that it is not liable to make such payment, if such defence is of substance and in good faith, and if the court believes that such defence is likely to succeed in the court of law.

    On the similar point, the court in another matter observed that if the court has sufficient reason to believe that the company has initiated a legal proceeding against the debt only as a cloak to hide its liability and prevent itself from the process of winding up, the Court may order for initiation of the process of winding up.[9]
     
  2. Inability to satisfy a decreed debt:

    if a creditor holds a decree against the company in a matter, and the company fails to pay the liable amount, the Tribunal may wound up the company. However, if the Company believes that such decree of the court needs to be set aside, and challenges the decree in a higher court, such winding up shall be adjourned till the disposal of the said appeal.[10] It was observed by the Calcutta HC that a decree-holder may initiate the winding up process for the execution of the decree, without pressing for the execution proceeding.[11]
     
  3. Commercial Insolvency:

    if the company is not able to pay its debts and statutory liabilities, whether asked for or not, the Tribunal may order for winding up. The tribunal shall compare the assets and liabilities of the company and ascertain whether it is commercially insolvent.[12] Under this clause, the task of the court is to ascertain whether the company is commercially insolvent or not. In a case, the company claimed that the amount of assets in its case were more than the liabilities, and hence, winding up may not be carried out. The court observed that most of its assets involved its buildings and machinery, and hence winding up of the company was necessary.[13]

Process of Corporate Insolvency Resolution under the IBC

Before the Insolvency and Bankruptcy Code came into force, there were several Acts governing the insolvency laws in India such as the Sick Industrial Companies (special provision) Act, 1985 (“SICA”), SARFAESI Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”), Companies Act, 1956 as well as Companies act, 2013.

The Code overrides the existing laws on bankruptcy and provides for a consolidated, uniform procedure relating to insolvency and bankruptcy for not only individuals but partnerships, companies and LLPs too. The code was enacted with the objective of merging the existing laws on insolvency and to avoid multiplicity of fora.

The code creates a new institute, consisting of a regulator, insolvency professionals, information utilities, adjudicating authority, and setting up of Committee of Creditors (CoC).

Corporate Insolvency Resolution Process (CIRP)

CIRP is a time-bound process for resolution of insolvency of a corporate debtor. It begins with the admission of a CIRP application, which can be filed by a Financial Creditor[14], Operational Creditor[15] or a Debtor itself[16]. In case, an insolvency application is admitted, NCLT declares a Moratorium Period, calls for submissions of creditor's claims and appoints an Interim Resolution Professional (IRP).

The CIRP is to be completed within 180 days with an extension of 90 days, which may be granted subject to the tribunal's order. However, if a resolution plan cannot be agreed upon in that period, then the debtor goes into liquidation according to the liquidation waterfall mechanism specified in the Act.

Insolvency Professionals

Insolvency professionals, also known as the resolution professionals, are the major building blocks of this new code. They are registered with the Insolvency and Bankruptcy Board of India (IBBI) and are appointed by the NCLT to effect the insolvency resolution process initiated against a corporate debtor[17]. Furthermore, the function of IPs is to form a committee of creditors, which forms a resolution plan subject to approval or disapproval by the NCLT.

During the resolution process, IRPs primary function is to take over the management of the corporate borrower and operate its business as per the directions of CoC. The IRP will protect the assets of the debtor, invite genuine creditors, and propose a resolution plan to the CoC.

Committee of Creditors

The adjudicating authority gives Interim IP the power to collect information from the Information Utilities or the debtor, identify the financial creditors of the corporate entity and form a committee of creditors[18]. The committee has the power to decide the final resolution plan with majority votes. Majority votes require more than or equal to 75% of the voting share of the financial creditors. Voting share of a single financial creditor is based on the proportion of the financial debt owed by the corporate debtor to him.

The operational creditors may attend the meetings of the Committee but do not have the voting power. Also the debtor is required to attend every meeting but does not have a power to vote. The IP acts as a mediator and suggests plans for resolution but the final decision is in the hands of the creditors only.

Moratorium period

The adjudicating authority gives the IP and the Committee of Creditors a period of 180 days to present a resolution plan[19]. During this period, the adjudicating authority imposes a moratorium on filing of any new cases or initiation of debt recovery against the corporate entity. It is also known as the calm period. During this calm period, the IP under the supervision of the adjudicating authority manages the assets of the entity. This period is provided by the code for the creditors and the debtor to negotiate on the viability of the entity.

Priority of claims

The code substantially changes the priority order for distribution of assets after liquidation. After the costs of insolvency resolution process, secured debts of creditors and workmen dues who are operational creditors under the code is paid up to preceding 24 months are paid, after that unsecured creditors recover their advances followed by government dues (taxes, compliance fees etc.) of up to two years. After that if any capital is still non-liquidized, then preference shareholders rank above equity shareholders who come last in the waterfall order.

Conclusion: Comparison of Winding-Up and Striking Off.
Winding up and striking off are the two methods available under the company law for making a company nonfunctional for all purposes and deleting its existence. However, the scope of the two is very different. The scope of winding up is large and the process involves several little intricacies. The process of striking off, on the other hand is really simple, and means only to remove the name of the company from the Register of the Companies.

The procedure of winding up is carried out by the Tribunal, whereas the procedure of striking off is purely in the hands of the Registrar. The Registrar, however has to make sure that the company doesn't need to go under the process of liquidation before he strikes off the name of the company from the register. All the dues and debts towards the creditors and the employees of the company need to be settled through the process of winding up before striking off takes place.

Despite Registrar holding the discretion to strike off the name of a company, if any of the interested parties feel that such striking off has been done unjustly, or that the Registrar was misinformed about the liabilities of the company, the interested party may appeal to the Tribunal for reversal of the order of striking off. The order reversing the order of the Registrar has retrospective value, and will operate as if the name of the company was never struck off.

Both the processes of winding up and striking off can be carried out either voluntarily by the company or compulsorily by the Tribunal or by the Registrar respectively. The application for such procedures can also be made by the creditors of the company on non-payment of debt despite repetitive notices sent by the creditor for such payment.

The idea behind such procedures is to identify the companies that are not producing any business, or have not initiated their business since their incorporation or the value of their liabilities have crossed the value of their assets, and hence need to be wound up and struck off.

Such measures have been incorporated under the Companies Act to protect the rights of the creditors and other interested parties keeping in view the limited liability of the company. The objective is to identify the company at a stage where its creditors can be paid off before the company becomes completely insolvent.

End-Notes:
  1. The Companies Act, 2013. S. 248(2).
  2. Id. S. 252
  3. Bhogilal v. Registrar of Joint Stock Companies AIR 1954 Madhya Bharat 70. Also see Workvale Ltd. 1991 1 WRL 294; (1992) 2 AII ER 627.
  4. Re Boxco Ltd. [1970]2 WLR 959.
  5. The Companies Act, 2013. S.270.
  6. Manganese Ore India Ltd. v. Sandur Manganese & Iron Ores Ltd, (1998) 98 Comp Cas 755 (Kant): Electron Industries Ltd. Soham Polymer (P) Ltd, (2005) 13 SCC 86.
  7. British India Banking Corpn. v. Sylhet Commercial Bank, AIR 1949 Ass 45.
  8. (1965) 35 Comp Cas 456 (SC).
  9. Vanaspathi Industries Ltd. Firm Prabhu Dayal AIR 1950 EP 142.
  10. Steel Equipment & Construction Co, (1968) 38 Comp Cas 82.
  11. All India General Transport Corpn. Ltd. v Raj Kumar Mittal, (1978) 48 Comp Cas 604 (Cal).
  12. Gujarat State Financial Services Ltd. v Megabyte Consultancy Services (P) Ltd., (2003) 115 Comp Cas 165 (Bom).
  13. Shree Shanmugar Mills Ltd. v SK Dharmaraja Nadar, AIR 1970 Mad 203
  14. The Insolvency and Bankruptcy Code, 2016. S. 5(7).
  15. The Insolvency and Bankruptcy Code, 2016. S. 5(20)
  16. The Insolvency and Bankruptcy Code, 2016. S.9.
  17. The Insolvency and Bankruptcy Code, 2016. S. 16-19, 22-23.
  18. The Insolvency and Bankruptcy Code, 2016. S. 21, 24.
  19. The Insolvency and Bankruptcy Code, 2016. S. 13, 14.
Written by Pushkaraj Ghorpade-3rd Year BA.LLB(Hons), from NMIMS SCHOOL of Law, Navi Mumbai.

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