Insolvency Resolution Process: An Unnecessary Hurdle in Winding up of certain Companies?

Generally, winding up or liquidation process of a company takes a considerable amount of time, this can be said when we compare India to other countries.  A World Bank report supports this fact and points out that it takes nearly 10 years in India to complete these processes when compared to other developed countries.[1] These stretches of time are not suitable to the needs of stakeholders. The process should be completed in a timely manner and must be aimed at the maximization of preserving value for the stakeholder.

A data report of the expert committee of Company Law which released a report on “Restructuring and Liquidation” made an observation that a balance must be maintained between rehabilitation of a company and its liquidation.[2]  An opportunity must be explored before restructuring or rehabilitating the company after the stakeholders have come to the same conclusion by a consensus. In cases where rehabilitation or restructuring is clearly not viable then winding-up is the option that must be resorted to.[3]

When we turn our attention to the Companies Act, 2013 we observe that it stipulated for provisions for creditors voluntarily winding up[4], the provision now has been removed/omitted.[5] Hence, the only recourse which remains with the Creditors is to apply before the National Company Law Tribunal (NCLT) by the way of Insolvency and Bankruptcy Code, 2016 (IBC).  Proceedings of liquidation cannot be sought as a final solution in the event of a non-payment to a Creditor. The IBC makes provisions for a financial or operational Creditor so that an Insolvency Resolution Process (IRP) could be initiated if there is a failure to pay amount of rupees one lakh and above[6], an IRP provides a collective mechanism to lenders to deal with the overall distressed position of a corporate debtor and only in case the resolution fails the proceedings of liquidation are allowed.

Let us take an example to understand, suppose say there is a company which is dead and there is no chance of its revival/restructuring/rehabilitation. The only option left is the initiation of corporate insolvency resolution process against it, once the process starts, the appointed interim resolution professional forms a committee of Creditors and a meeting is held within 30 days.

After the meeting is convened the following events may trigger initiation of the liquidation process against the company:

  1. Non – agreement of the members of the committee of Creditors on with regard to the resolution plan. If the members of the committee of Creditors are unable to agree upon a resolution plan for the revival of the company within the prescribed period of 180 days, it leads to the initiation of liquidation of the company. The time limit is extendable to a maximum period of 90 days, once, if the committee of Creditors by a voting of 75% of voting shares so decides.[7]
  2. The decision of Committee of Creditors in lieu of liquidation of the company.
  3. Rejection of a resolution plan by the tribunal.

If the proposed resolution plan is rejected by the committee of Creditors, it subsequently leads to winding up or liquidation of the company.[8]

  1. Contravention of requisite conditions pertaining to the resolution plan.[9]If the resolution applicant, say the corporate debtor contravenes the approved resolution plan, any person other than the corporate debtor whose interest has been affected by such contravention can apply to NCLT for the liquidation of the company. This attracts punishment of imprisonment of not less than one year which may extend to five years or fine ranging from Rs. One lakh to Rs. One Crore or with both.[10]

The lacuna that remains on the topics is that whether Creditors can initiate liquidation proceedings on the first meeting. On examination of Section 33 of the IBC it becomes clear that any time before the confirmation of Corporate Insolvency Resolution Process, the IRP can communicate to the tribunal that the Committee of Creditors have decided to liquidate the company if they do agree to do so by a requisite majority.

Going by the number of companies hurdling towards resolution, it seems likely that many of them will be not able to achieve the desired resolution plan in the180 days or in the extended period of 270 days. These are the compulsory timelines under which the resolution process must be completed.[11] After this failure, the only option remains is the liquidation of the company. In cases where there is a highly stressed business situation which requires an immediate solution, liquidation might be the only solution to rescue the company.

In one such example, the committee of creditors of the company had to decide for the liquidation of the company as the company was not operational for many years and had no employee being compensated on behalf of it. The only assets which remained with the company were its fixed assets which were its land and building. Moreover, the Committee of Creditors did not come up with any resolution plan prior to this decision of liquidizing the assets of the company.[12]

Another scenario where we were able to see such liquidation was where the Committee of Creditors did not see any viable business opportunities for the company to seize. Also, the committee felt that there was no point in putting in money to recover the company. In addition to this, the committee observed these points and decided to proceed to the liquidation of the company:-

  1. There is no point in defending the company against cases for recovery of money.
  2. That the assets of the company are not that valuable to satisfy all the creditors of the company.
  3. The assets such as shares and land are not conveniently recoverable.

The Corporate Debtor also accepted the fact that there were no near business opportunities to recover the company and that any resolution plan devised would fail in its entirety to rescue the company.[13]

Again, yet another company was subjected to liquidation since its business operations were already closed down and all the workers had left the company.[14] In a slightly, different case where the liquidation orders were already passed by the tribunal, it was contested by the ex-chairman of the company that no party was given the chance to revive the company as the resolution professional appointed did not invite any bids. In such a situation, the committee of creditors came to the conclusion that such a process would do nothing but make the resolution process longer and would not give any substantial result as the company was not a going concern.[15]

The defect which remains then is clear, that the Committee of Creditors cannot apply for winding up of a company directly, although having the power to place a company under liquidation by affirming a decision in the corporate insolvency resolution process. It seems logical in such a situation that a direct option to the creditors must be provided to liquidate and wind up the company to remedy this defect.

[1]Doing Business in India, 2005- India Regional Profile.

[2] Data Reports, Report of Expert Committee on Company Law, Restructuring and Liquidation, accessed at http://www.mca.gov.in/MinistryV2/restructuring+and+liquidation.html

[3]The Report of the Bankruptcy Law Reforms Committee: Volume I: Rationale and Design, accessed at ibbi.gov.in/BLRCReportVol1_04112015.pdf

[4]Section 304 (1), the Companies Act, 2013

[5] Ministry of Corporate Affairs, notification number, S.O. 3453 E of November 15th, 2016.

[6]Clause 4(1), Insolvency and Bankruptcy Code, 2016.

[7] Innoventive Industries Limited vs. ICICI Bank and Another,(2017), AIR 2017 SC 4084

[8]In re M/s. Hind Motors India Limited, 2017 SCC OnLine NCLT 11315

[9] Section 33(3), Insolvency and Bankruptcy Code, 2016

[10] Section 74, Insolvency and Bankruptcy Code, 2016

[11] M/s Surendra Trading Co. v. J.K Jute Mills Co. Ltd. & Others, I(2018) BC436(SC)

[12]  VIP Finvest Consultancy Private Limited v. Bhupen Electronics, C.P. No.03/I&BP/2017

[13]Chivas Trading Private Limited v. Abhayam Trading Limited, IND/1358//(IB)/CB/2017

[14]Best Deal TV Pvt. Ltd, C.P No. 852/I&BP/NCLT/MAH/2017

[15] Esskay Motors Pvt. Ltd, M.A 677, C.P 1076/I&BP/2017

The post has been contributed by Mr.Jai Bajpai & Ms. Shubhi Mudgil, students from School of Legal Studies, UPES, Dehradun.

Image from here

L&P Editorial Team

The Law & Practice Blog's editorial team.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.