The Hindu Business Line : For a smooth dissolution of company

The facilities include the limiting of shareholder's liability for the liabilities of the company to the extent of the face value of the shares held by him in that company and access to public funds by way of loans and deposits or supplies of goods and services on credit.

More important, despite its being an artificial entity, a company has the right to buy/sell/lease/mortgage its property and sue or be sued in its own name. It has a corporate seal and the right to perpetual succession. Its status is distinct from that of its shareholders. It is obvious that a company can exist as such only as long as it serves a purpose.

The Central Government, which has framed the law for its creation and regulation, has also the responsibility for winding it up if it does not take off at all, or if its net worth turns `negative', or if it is unable to pay its debts, or it has been abused/exploited for `fraudulent' purposes, or its continuance is found to be detrimental to the public interest. The insolvency of a company may not by itself mean its extinction any more than the insolvency of an individual; it may be possible to revive or resuscitate it. But the dissolution of a company implies loss of its corporate status and identity; it is tantamount to its death.

The Central Government has as crucial a role in the winding up of every company as in its creation and regulation, while the courts (and in future, the National Company Law Tribunal) will act as the high priest in enforcing compliance with the rituals.

No lack of ideas

The reports of the High Level Committee constituted by the Law Ministry with Justice S. Balakrishna Eradi as its Chairman and the Advisory Group formed by the Reserve Bank of India presided over by Dr N. L. Mitra, Director of the National Law School of India University at Bangalore, contain recommendations which are yet to be pursued or implemented properly.

The UNCITRAL Model Law on cross-border insolvency, the report on `Orderly and effective insolvency procedures' of the Legal Department of the IMF and the `Cross-border Insolvency Concordat' drawn up by the Insolvency and Creditor Rights Advisory Group of the International Bar Association do not appear to have been examined at all by those concerned with legislation. In any case, there is no evidence of any action having been initiated in the light of these studies.

On the other hand, we have some old wine in new bottle — the proposals in the Concept Paper of the Ministry of Company Affairs expressing, among other things, the view that a separate insolvency law is not immediately necessary, that the law should strike a balance between the rehabilitation of a company and the process for its liquidation, that genuine efforts should be made for a company's revival and that winding up should be resorted to only where revival is not possible. Other proposals include fair access to the insolvency system for both debtors and creditors, statutory preference of default in payment of matured debts instead of net worth erosion (liquidity test) and recognition of the right of debtors as well as creditors (to the extent of at least three-fourths in value) to file a scheme seeking rehabilitation of the sick company.

All these ideas in the Concept Paper are endorsed in the Irani Committee report.

Views on which there may be unanimity

There may not be much difference of opinion on the following points of view and suggestions of the Irani Committee:

There should be a provision that when the accumulated losses of a company in any financial year equal 25 per cent or more of its average net worth during the last two years and there is default in making payment to the creditors, the company should convene a general meeting of its shareholders without any delay.

Opportunity of restructuring should be available before an asset in declared to be non-performing.

Winding up should be resorted to where revival is demonstrated as not being feasible or when no plan for revival has been approved within a prescribed period.

Conversion to liquidation will be appropriate if a plan has been procured by fraud or can no longer be implemented.

The test for insolvency should be default in payment of matured debt on demand (liquidity test) within a prescribed period rather than an erosion of net worth which may be controversial.

Rather than being automatic, prohibition on unauthorised disposition of the debtors' assets and suspension of action by creditor should be on the orders of the Company Law National Tribunal, with the approval of the majority creditors in value. The Tribunal should have adequate powers to lift or modify the prohibitions in case the circumstances so warrant.

The law should provide for avoidance or cancellation of pre-bankruptcy fraudulent and biased/preferential transactions that were completed when the enterprise was insolvent or that resulted in insolvency.

The existing provisions for levy of rehabilitation cess made by the Companies (Second Amendment) Act, 2002 should be repealed, as it tends to penalise efficient firms to the benefit of inefficient ones.

The UNCITRAL Model Law on cross-border insolvency may be adopted by India, with or without changes keeping in view the modifications made to it by other countries having significant trade/investment linkages with India.

(By arrangement with Corporate Law Adviser, New Delhi.)