CORPORATE INSOLVENCY, PROCEDURE AND LEGAL
ASPECTS.
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By
Pradeep K Mittal
B.Com,LLB,FCS
Central Council Member - The Insitute
of Company Secretaries of India.
The law relating to Corporate Insolvency is contained in Section 433 of the Companies Act, 1956. The Company could be wound up under the following circumstances:-
a. If the company has,by special resolution, resolved
that the company be wound up by the Tribunal;
b. if default is made in delivering the statutory report
to the Registrar or in holding the statutory meeting;
c. if the company does not commence its business within
a year from its incorporation, or suspends its business
for a whole year;
d. if the number of members is reduced, in the case of
of a public company, below seven, and in the case of
of a private company, below two;
e. if the company is unable to pay its debts;
f. if the Tribunal is of the opinion that it is just
and equitable that the company should be wound up;
g. if the company has made a default in filing with the
Registrar its balance shheet and profit and loss
account or annual return for any five consecutive
financial years;
h. if the company has acted against the interests of
sovereignty and integrity of India, the security
of the State, friendly relations within foreign States,
public order, decency or morality;
i. if the Tribunal is of the opinion that the company
should be wound up under the circumstances specified
in Section 424G.
Provided that the Tribunal shall make an ordr for winding up of a Company under clause (h) on application made by the Central Government or a State Government.
In this, primarily we are discussing the ground of 433(1)(e) i.e. inability to pay debts.
INABILITY TO PAY DEBTS
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The Company would be deemed to be unable to pay debts if it fails, neglects and/or otherwise refuses to pay the undisputed debts. Undisputed debts could take any of the following forms:-
a. the amount is admitted under an agreement;
(Lease Agreement - Hewlett Packard India
Ltd Vs. BPL Net Co Ltd 2002 (2) Comp LJ 271
(Karnataka).
NCC Finance Ltd vs. TMT India Ltd 2000 (3)
Comp LJ 230 (AP).
b. the amount is acknowledged under money receipt;
Indian Oil Corpn Ltd Vs. NEPC India Ltd
2003 (114) Company Cases Madras.
c. the amount is admitted under bills of exchange,
promissory notes,
Tolani Shipping Co Ltd Vs.Saw Pipes Ltd
1999(97) Company Cases 394.
d. the amount is admitted in the Balance Sheet;
KV Associates (P) Ltd Vs. Matharu Chemicals
2004 (49) SCL 537 (Raj)
e. the amount is admitted under cover of Sales
Tax Declaration;
(Mittal Iron Foundry Ltd Vs.Elektro Flame Ltd
2001 (40)CLA 1 (Snr) (AP-DB)
f. the amount is admitted in the correspondence
exchanged between the parties.
(Imperial Corporate Services (P) Ltd Vs.
Aruna Sugars & Enterprises Ltd 2003 (CLC)
131 (Madras).
g. Dividend declared is a debt - Amalgamated
Commercials Ltd (P) Ltd Vs. AC Krishnaswamy
1965 (35) Company cases 456 (SC).
h. Amount of unpaid salary. M Satyanarayana
Vs.Stiles India Ltd 2002 CLC 450 (AP).
i. Inter-corporate deposits. Hi-Tech Gears Ltd
Yogi Pharmacy Ltd 1998 (5) Comp LJ 400 All.
j) Dealer deposit Bhardwaj Gas Agency Vs. Appenzell
Petroleum P Ltd 1998 (94)Comp Cases 521 P&H.
k) The professional fees: K K Vasudeva Kurup
Vs. Phgulchand Exports Ltd 2003(113)Comp Cases 401 Bom
CONDITION PRECEDENT FOR FILING OF WINDING UP PETITION
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a. service of notice at the Registered Office of the
company;
Alliance Credit & Investment Ltd Vs. Khaitan
Hostomebe Spinels Ltd 1999 (95 )Company Cases
436 (All).
b. a notice must contain an averment that if the
payment is made within 21 days the Petitioner
would be compelled to file winding up petition;
Paramjit Lal Badhwar Vs. Prem Spng & Weaving
Mills ltd 1986 (60) Comp Cases 420 All.
c. petition could be filed after expiry period of
21 days after service of notice;
Traders Banks Ltd Vs. Kwick Travels (P) Ltd
1988 (2 Comp L J ) 56 (Delhi).
d. the amount should not be disputed one.
Madhusudar Gordhandas & Co Vs. Madhu Woollen
Industries (P) Ltd 1972 (42) Company Cases
125 : AIR 1971 SC 2600.
Sir Shadilal Enterprises Vs. Coop Co Ltd
2001(103) Company Cases 863 (All).
e) Claim for short delivery or non delivery
Vineet Udyog Ltd Vs. Roayale Manor Hotel
1999 (20) SCL 298 (Guj).
f) Commercial Insolvency:ROC UP Vs. MK Brotherrs
(P) Ltd 1977 (47) Comp Cases 314 (All).
g) Failure to pay amount of redemption amount
of debentrues. Ranjana Kumar Vs. Indian
Dyestuff Industries Ltd Vs. 2002 (46) CLA 151 (Bom).
h) Amount claimed should not be time-barred
Indian Turpentine & Resin Co Ltd Vs. Pioneer
Consolidated Co of India Ltd 1988 (64) Company
cases 169
POINTS TO BE KEPT IN THE MIND WHILE DRAFTING
WINDING UP PETITION
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a. Constitution of the Petitioner Company
b. Authority of the person who sign a company
petition.
c. Reproduce main objects of the Respondent Company.
d. Narrate events culminating into crystalisation
of debts right from placing of purchase orders.
e. Mandatory clause that the Respodent Company
has become insolvent and its liabilites are
far in excess of its assets;
Kalra Iron Stores Vs. Faridabad Fabricators
(P) Ltd 1992 (73) Company Cases 337 (Delhi)
f. Jurisdiction clause;
g. Cause of action clause;
h. Affidavit in support of petition should be
as per Rule 9 of Company Court Rules.
Sand Plast India Ltd Vs. ITC Bhadrachalam
Finance & Investment Ltd 2002 (111)Comp Cases
471 (Raj).
i. Attach photocopies of all the supporting
documents duly certified by the authorised
officer of the Petitioner on which reliance
has been placed in the petition;
Neg Micon Vs. NEPC India Ltd 2000 CLC 1615
(Madras -DB)
j. Court fees in the form of stamp paper purchased
from treasury duly cancelled to be attached;
k. Memo of Parties
l. Index
m. An application for interim injunction
n. Application for appointment of official liquidator
an provisional liquidator
o. Two copies of the winding up petitions are filed.
All miscellaneous application to be supported with affidavit of the duly authorised officer namely Director, Company Secretary, Principal Officer, Senior Level Officer duly authorised either by way of Board Resolution or under a Power of Attorney.
PROCEEDINGS SUBSEQUENT TO FILING OF WINDING UP PETITION
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a. On the day of admission, point out to the Court
that statutory notice was served.
b. How the amount claimed in the petition is undisputed
one?
c. For the purpose of interim rtelief, point out to the
Court that the Respondent may sell or dispose off
all the assets of the company.
d. If the Court prima facie satisfy, the Court will
order for issuance of notice to the Respondent.
In the meantime, grant interim relief as prayed for.
e. Filing of reply by the Respondent to the petition
filed by the Petitioner.
f. Filing of rejoinder by the Petitioner to the reply
filed by the Respondent.
Now the petition is ripe for final hearing and disposal.
IMPORTANT POINTS TO BE KEPT IN THE MIND AT
THE TIME OF FINAL ARGUMENTS.
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a. Highlight the salient features of the Petitioner's
case.
b. Point out to the Court the inability of the
Respondent to pay the debt.
c. Point out to the Court the inconsistency in the
pleadings and the documents filed by the
Respondent.
d. Keep ready photocopies of the judgements relied
upon by the Petitioner duly underlined.
POINTS KEPT IN MIND BY THE COMPANY JUDGE:
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a) that the defence of the company is in good
faith and is one of some substance;
b) the defence is likely to succeed in point of
law; and
c) the company produced prima-facie proof of the
facts on which the defence depends;
United Construction Co Vs. Piccadily Sugar &
Allied Industries Ltd 2001 (104) Company Cases
357 (P&H).
ADVANTAGES OF WINDING UP PETITION
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a. Winding up petition is a summary remedy.
b. A fixed Court fee of Rs.260/- to be paid.
c. The winding up petition is filed before the
High Court.
d. Expectation - better quality of justice.
RELIEF
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The Court does not pass Money Decree, but gives an opportunity to the Respondent to make payment and in default appoints Official Liquidator as Provisional Liquidator and/or order for publication of admission of winding up petition in two newspapers, one in English and one in Hindi circulating in the neighbourhood where the Registered Office of the Company is located.
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