Company Dissolution in the Indian Financial Sector
Company Dissolution or Winding up of a company means a procedure by which a corporate is dissolved or liquidated. With this process, the assets are disposed of to pay off the liabilities and the surplus. All the assets are distributed among shareholders/members in a proportion to their shareholding and the amount of debt with the company. Wind-up proceedings are governed under the norms of the Companies Act 2013 and also under the IBC 2016.
- Liquidation of firm under the IBC, 2016.
- Wind-up under the Companies Act, 2013 by NCLT.
- Removal/Striking off corporate’s Name from RoC.
In the following sections, we will understand the basic nuances of all these three methods of winding up a corporate and their associated business.
Dissolution Under IBC 2016
A) Voluntary Liquidation of a Corporate (Section 59 of the Codes)
- A firm that intends to liquidate itself voluntarily to pay off its debt can initiate voluntary liquidation proceedings under the norms of the Insolvency and Bankruptcy Code 2016.
- The voluntary Liquidation procedure of a corporate person who is registered as a company, must meet the subsequent conditions:
1. A declaration signed by a majority of the administrators of the corporate verified through an affidavit that states-
- They have conducted a full investigation into the affairs of the corporate or corporate person and they have come to an opinion that either the corporate has no debt or that it will be ready to pay its debts completely from the proceeds obtained by liquidation of its assets during the voluntary liquidation of company.
- the corporate liquidation is not taking place with an intention to defraud any person.
2. A declaration under the sub-clause (a) must be accompanied with the subsequent documents—
- audited financial statements of the firm and record of business operations of the corporate from previous two years or since its incorporation, whichever is later;
- A report on the valuation of the assets of the corporate prepared by a registered valuer;
3. within four weeks of a declaration as per sub-clause (a), there must be—
- A special resolution from the members passed in a general meeting stating that the corporate needs to be liquidated and appointment of an insolvency professional is needed for the same; or
- A resolution from the members passed in a general meeting stating that the corporate needs to be liquidated voluntarily because the last due date of paying the dues has expired. The Resolution should also state that debt resolution through asset resolution must take place via an insolvency professional.
In case of a corporate owing any debt to a person, its creditors who represent two-thirds of the value of the debt owed by the corporate must approve the resolution under sub-clause (c) within 7 days passing from the General Meeting.
4. The corporate must notify the Registrar of Companies (RoC) and the Board (IBBI) regarding the resolution to liquidate the corporate within 7 days of spasming from the General meeting or the day after approval from the group of creditors (whichever is the case applicable).
5. Subject to approval by the creditors (if needed), the voluntary liquidation procedure related to a firm shall be deemed to have commenced from the date of passing of liquidation resolution.
- The norms of sections 35 to 53 of Chapter III and Chapter VII will apply to voluntary liquidation procedures for corporate people with such modifications as are necessary.
- Where the objectives of the corporate are completely unaffected and its assets are completely liquidated, the liquidator should make an application with the Adjudicating Authority to dissolve such a corporate.
- On receipt of an dissolution application by the liquidator, the Adjudicating Authority must pass an order that the debtor firm should be dissolved from the date of order.
- a replica of an order passed by the Adjudicating Authority should be forwarded within 14 days from the date of order to the authority with which the company is registered.
B) Liquidation Procedure if a Corporate has made default in debt payment
- The norms related to insolvency and liquidation of corporate debtors will be applicable only if the quantity of the debt is Rs. 1 Lakh or more. However, the Central Government has increased the minimum amount of default by notification to Rs. 1 Crore or more.
- Where any corporate debtor commits a default in debt payment, a creditor (financial or operational) or the debtor itself may apply to initiate Corporate Insolvency Resolution Process (CIRP) through an application to the Adjudicating Authority.
- A financial creditor either by himself or jointly with any other financial creditor may file an application under section 7 of the IBC. On the other hand, an operational creditor must first serve demand notice to debtor demanding repayment of the operational debt as per the agreement. This rule is as per section 8 and the Operational creditor has to file the application under section 9 of the IBC.
- The Corporate Insolvency Resolution Process (CIRP) should be completed within a period of 180 days from the date of acceptance of the application. Although, such period could be extended to a maximum of 90 days if a resolution for the same has been passed at a gathering of the committee of creditors (CoC) by seventy-five percent voting shares.
- On receiving the application, the adjudicating authority can take the following decision by an order- (a). declare a moratorium (b) make a public announcement initiatiating CIRP and submission of claims; (c). Announce the appointment of an Interim Resolution Professional (IRP).
- The Interim Resolution Professional (IRP) will manage the whole operation of the debtor company and exercise the rights of the Board/Partners. He will collect all claims received against the debtor company and constitute a CoC (Committee of Creditors).
- The CoC will comprise of all the financial creditors, who in their first meeting will come up with a resolution plan for the debt. The plan must keep the interest of all the involved parties intact.
- The Resolution Professional will submit the resolution plan from the CoC, which must be submitted within the prescribed timeline or else it maybe rejected by the Tribunal. In case the tribunal rejects the resolution plan due to any reason, it can order the liquidation of the corporate as per appropriate procedure laid down within the IBC to resolve the debts owed by the corporate debtor.
Removal/Striking off Company’s Name from RoC
1. A company can be dissolved by the Registrar of Company (RoC) on suo motu basis, if it has reasonable grounds to believe that:
- The company has not commenced its business within one year of obtaining its incorporation certificate.
- The company has not carried on any business or operation for the previous two fiscal years and has not made any application within that period to obtain the status of a dormant company under Section 455. In such a case, ROC sends a notice to the corporate and each one of its directors asking them the reason to stop the operation of the company and applying for dormant status. It will requesting them to send their answers alongside relevant documents within 30 days from the date of receiving the notice.
- If the subscribers to the memorandum haven’t paid the requisite subscription amount which they had undertaken for payment at the time of company incorporation and a declaration to the present effect has not been filed within 180 days of incorporation;
- The company is found to be inoperative or dormant during the physical verification carried on at the registered office of the corporate by the RoC.
2. The dissolution can also be carried by the corporation itself by filing of an application with the RoC on all or any of the grounds mentioned in point 1. If a corporation opts to get rid of its name on suo motu basis (on any or all grounds mentioned in option 2), it can be done by following the steps summarized below-
a) A Company (after extinguishing all its pending liabilities) can pass a special resolution or take consent of seventy-five per cent of the members in paid-up share capital.
b) File an application to RoC for removal of its name by filing eForm STK-2 alongside the requisite fee of Rs. 5,000 and the document prescribed in the list of RoC.
- A No Objection Certificate (NOC) from a regulatory body under whose regulation the company was operating. For example, an NBFC has to file a NOC from the Reserve Bank of India.
- Indemnity bondS duly notarized by every director of the firm in Form STK 3.
- A press release of accounts having assets and liabilities of the corporate accumulated 30 days before the date of application. The press release must be authorized by a Chartered Accountant.
- An affidavit in the format of the Form STK 4 by every director of the company;
- Copy of the special resolution certified by each administrator of the corporate with the consent of seventy-five percent of the members of the corporate. The certification must be given in terms of the paid-up share capital as on the date of application.
- A press release related to pending litigations, if any, involving the corporate.
On receipt of an application, the registrar will issue a public notice in Form STK-6 and place it on the MCA’s website and the company’s website. They should also publish it in the newspapers and also issue an Official Gazette for the knowledge of the public.
The Registrar of Companies (RoC) will simultaneously intimate the related regulatory authority under whose regulation the corporate was working. This includes income-tax authorities, RBI, SEBI, central excise authorities, IRDAI, and service-tax authorities.
Upon expiration of the time mentioned within the notice, if no objection is received on its part, the Registrar will cross off the name of the company from its record. It will publish notice of the same in the Official Gazette and post-publication of the notice, the corporate will remain dissolved.
Dissolution by the Tribunal under the Companies Act
Section 271 of the Companies Act has laid down the situations in which the firm can be dissolved by the tribunal:
- If the corporate itself has resolved through some special resolution that the corporate should be liquidated by the Tribunal.
- If the corporate has in any way acted against the interests of the sovereignty or integrity of India. Even if the corporate is found guilty of harming the safety of the State, public order, relations with foreign States, decency or morality of the society it can be dissolved through order of the Court.
- If an application made by the Registrar or any other government authorised person or institution releases notification against a company that has conducted fraudulent operations, then the Tribunal can order its dissolution.
- If the corporate has made a default in filing of essential documents like its financial statements or annual returns to the RoC for preceding three fiscal years consecutively.
- If the Tribunal is of the opinion that it’s just and equitable that the corporate should be aroused
Section 272 of the Companies Act, clarifies the list of entities who are entitled to file a petition for the dissolution of a firm:
- The company promoters.
- Any contributor or contributories ( partly/fully paid-up stakeholder).
- All or any of the people laid out in clauses (a) and (b).
- The Registrar from RoC.
- A person authorised by the Central Government to carry out the job on their behalf.
How to File the Petition for Dissolution?
A Petition presented by the corporate shall be admitted and a press release is given to inform the public affairs. The Tribunal after careful examination of the petition, the court will decide the fate of the petition. Within 90 days from the date of presentation of the petition, the tribunal may pass any of the subsequent orders:
- Dismiss it, with or without any costs;
- Appoint a provisional liquidator for the corporate till the release of final order.
- Pass an order for the dissolution of the corporate with or without any costs;
- Any other order deemed fit.
- The Tribunal at the time of the passing of the order of liquidation, shall appoint a Liquidator or the Liquidator who will be amongst the Insolvency Professionals registered under the IBC 2016.
So, that was everything to know about how a company gets dissolved in the Indian financial sector. Out of these ways, company dissolution through insolvency is considered the best and easiest to pay off the debt. The insolvency procedure must be taken care of under the supervision of a legal company. The IBC is also used to recover money from other debtors. Companies can opt for legal consultation before moving on with the process of insolvency for debt recovery. For a company being struck off from RoC but not dissolved, there are legal ways to revive the business. Find a good legal and financial consultant if you want to revive your business or just want to consult regarding insolvency procedure.