WINDING UP UNDER COMPANIES ACT 2013 AFTER IBC-DECODED-BY CS ROHIT KUMAR


In this article, we will discuss how the provisions or route related to winding up of companies changed after the introduction of the Insolvency & Bankruptcy Code 2016 (the "IBC" or "Code") because before the enactment of IBC, winding up of companies was under purview of Companies Act 1956 2013.  

HOW IBC CHANGE THE SCENARIO OF WINDING UP OF COMPANIES?

Before the enactment of IBC the term Winding up was not defined in the Companies Act, 2013 as well as 1956. It was November 15, 2016 when section 255 of the IBC was notified which caused so many changes in Companies Act, 2013 (through XI schedule) and introduced new section 2(94A) in the 2013 Act to define the term Winding up as follows:
"winding up under this Act or liquidation under Insolvency and Bankruptcy Code, 2016"
It means after November 15, 2016 winding up of the companies  shall be governed by both laws. Now the important question is how both Acts shall govern Winding up of the companies because it may create more chaos. To remove confusion, the complete part on Voluntary Winding up  and winding up on the ground of "Inability to pay debts" were removed from the Companies Act, 2013 and left the Companies Act, 2013 only with section 271 to deal with winding up.

To activate section 271, MCA notified the provisions of Chapter XX of the Companies Act, 2013 on December 7, 2016 [enforced w.e.f. December 15, 2016] with modified section 271 to remove the ground of winding up of companies on the basis of Inability to pay debts. So, now a company can be wound u/s 271 of the Companies Act 2013 on following grounds:

(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal [NCLT];

(b) if the company has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations with foreign States, public order, decency or morality;

(c) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;

(d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or

(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

WHY GROUND OF "INABILITY TO PAY DEBTS" REMOVED FROM THE COMPANIES ACT, 2013?

The prime reason to remove this ground of winding up of companies was the intention of the IBC. The main thrust of IBC is to check possibility of revival before liquidate a company. Therefore, if there is default in payment of debt by corporate person then you can not use this criteria (inability to pay debts) to liquidate a corporate person. First, you have to file application either u/s 7 or 9 of the IBC as financial creditor or operational creditor, as the case may be, before NCLT to initiate Corporate Insolvency Resolution Process (CIRP) i.e. you need to check that can a corporate person be resolved or not? If not, then only liquidation process starts [u/s 59 of the Code]. Initially, people considered the IBC as a money recovery tool but the Hon'ble Supreme Court clarified that IBC is not a substitute to a recovery forum [Mobilox Innovations Private Limited vs. Kirusa Software Private Limited]. To recover your money, you can very well file civil suit under Civil Procedure Code ("CPC") before appropriate forum but not before NCLT under the IBC. 

So, you may say that criteria of Inability to pay debts was subsumed in sections 7 or 9 of the Code but not in toto.

NEW SHELTER OF VOLUNTARY WINDING UP

Provisions related to Voluntary Winding up found its place in section 59 of the IBC. Voluntary winding up has nothing to do with default in paying debts. It is an option available  to a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary proceedings under Chapter V of IBC.

CONCLUSION

To sum the whole discussion on winding up of companies, we can say that:
  1. The Companies Act shall govern winding up of companies only on those grounds mentioned in section 271.
  2. If there is a default in payment of debts, then CIRP can be initiated once application u/s 7 or 9 is admitted by NCLT under IBC. If CIRP does not result into revival of a corporate person, then only liquidation process shall start.
  3. Section 59 of the IBC shall govern only Voluntary winding up of companies.

I hope you find this article useful.




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