NCLAT quashes NCLT order to make MCA party in all insolvency cases as this will be not only excessive but perhaps counterproductive
The National Company Law Appellate Tribunal (NCLAT) quashed an order of the National Company Law Appellate Tribunal (NCLT) directing that the Ministry of Corporate Affairs (MCA) be made a party to every case under the Insolvency and Bankruptcy Code (IBC) on Monday.
According to the appellate tribunal, the NCLT’s order, was beyond the power of the tribunal as it was tantamount to the imposition of a new rule in a compelling fashion
The impugned order making it applicable throughout the country to all the benches of NCLT is untenable and it suffers from material irregularity and patent illegality in the eye of law, said the judgment of the three-judge bench headed by Justice Venugopal M.
“The NCLAT ruled that the MCA need not be a party to all Section 7,9 and 10 applications, although they may be impleaded in certain cases based on exercise of judicial principles and following principles of natural justice. Although the MCA has been central in the implementation of the IBC, their being a party to every single IBC fillings is not only excessive but perhaps counterproductive,” said Richa Roy, partner at Cyril Amarchand Mangaldas.
In November 2019, the NCLT had directed the MCA, through its secretary, be party to all cases under IBC on the grounds that authentic records would be made available by officers of the MCA.
The Centre challenged the order arguing that such rule making was the exclusive domain of the government. It further said that authentic records could be furnished by the Registrar of Companies and certified copies could be made available for a fee.
The NCLAT order added that such “wholesale, blanket and omnibus directions” cannot be issued in a single stroke” and impleadment of the MCA can only be determined on a case-to-case basis.
Financial creditors moving the National Company Law Tribunal (NCLT) for initiation of insolvency process will have to mandatorily file ‘default record’ from the information utility (IU). No new petition will be entertained without record of default under Section 7 of the Insolvency and Bankruptcy Code (IBC), said the NCLT in a new directive.
The NCLT has also directed authorised representatives/ parties, in the cases pending for admission under Section 7 of the IBC, to file default record from an IU before the next date of hearing.
What is an IU?
An information utility is a repository of electronic evidence. It is an information network that stores financial data such as borrowings, default, and security interests, among others, of firms.
In India, the National e-Governance Services Limited ( NeSL), in mid-2017, became the first IU for bankruptcy cases under the insolvency and bankruptcy code (IBC).
A record of default is a statement of default on a particular loan and facility. With the latest NCLT move, the entirety of an IU as an integral part of the process to establish default and allow immediate admission before such a Tribunal is now complete, say experts.
The Corporate Affairs Ministry (MCA) had, about four months back, internally taken a decision that there is a need to make IU evidence mandatory in insolvency admission matters.
Today, the NeSL, which started its journey in September 2017, has information of loan details of 100 per cent of the corporates in India. It is sitting on data of ₹76-lakh crore of corporate borrowing outstanding.
As of end April this year, 220 financial institutions, including 75 banks, 147 NBFCs, and two debenture trustees, have uploaded data on the NeSL. Reacting to the latest NCLT move making record of default from an IU mandatory, S Ramann, Managing Director and CEO, NeSL, said: “We are satisfied that the Information Utility is playing its part as per the design of the IBC.”
Vidisha Krishan, Partner, MV Kini & Co, a law firm, said that till date the default record from IU was not mandatory, and even other records or evidence were sufficient to demonstrate a default.
However, now it has been made compulsory vide the latest direction, she added.
– The Central government will provide required approvals to such companies for winding up instead of the tribunal – MCA notifies the Companies (Winding Up) Rules, 2020, vide Notification dt. 24 January 2020, comprising of Rules 1 to 191 and Forms WIN 1 to WIN 95, applicable for winding up under the Companies Act 2013 w.e.f. 1 April, 2020
The Ministry of Corporate Affairs (MCA) on Tuesday notified rules for winding up of companies, making it easier for smaller firms to wind up businesses without taking approval.
The rules have provided summary procedures for liquidation of companies with asset size of Rs 1 crore and which have not accepted deposits exceeding Rs 25 lakh and turnover less than Rs 50 crore and total loan under Rs 25 lakh.
The Central government will provide required approvals to such companies for winding up instead of the tribunal.
The rules said, “…wherever the word Tribunal is mentioned, it shall be read as Central Government and with further directions issued by the Central Government as may be necessary, from time to time.”
G.S.R. (E).- In exercise of the powers conferred by sub-sections (1) and (2) of section 468 and sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely:-
Part 1: GENERAL
1. Short title, commencement and application.-
(1) These rules may be called the Companies (Winding Up) Rules, 2020.
(2) They shall come into force on the 1st day of April, 2020.
(3) These rules shall apply to winding up under of Companies Act 2013 (18 of 2013).
2. Definitions.-
In these rules, unless the context or subject matter otherwise requires, –
(a) “Act” means the Companies Act, 2013 (18 of 2013);
(b) “Form” means a Form annexed to these rules;
(c) “Registrar” means the Registrar of the National Company Law Tribunal or National Company Law Appellate Tribunal and includes such other officer of the Tribunal or Bench thereof to whom the powers and functions of the Registrar are assigned;
(d) “Registry” means the Registry of the Tribunal or any of its Benches or of the Appellate Tribunal, as the case may be, which keeps records of the applications and documents relating thereto;
(e) “Section” means section of the Act;
(f) words and expressions used and not defined in these rules but defined in the Act shall have the meanings respectively assigned to them in the Act.
Part II: WINDING UP BY TRIBUNAL
3. Petition for winding up.-
(1) For the purposes of sub-section (1) of section 272, a petition for winding up of a company shall be presented in Form WIN 1 or Form WIN 2, as the case may be, with such variations as the circumstances may require, and shall be presented in triplicate.
(2) Every petition shall be verified by an affidavit made by the petitioner or by the petitioners, where there are more than one petitioners, and in case the petition is presented by a body corporate, by the Director, Secretary or any other authorised person thereof, and such affidavit shall be in Form WIN 3.
4. Statement of affairs.- The statement of affairs, as required to be filed under sub-section (4) of section 272 or sub-section (1) of section 274, shall be in Form WIN 4 and shall contain information up to the date which shall not be more than thirty days prior to the date of filling the petition or filling the objection as applicable and the statement of affairs shall be made in duplicate, duly verified by an affidavit, and affidavit of concurrence of the statement of affairs shall be in Form WIN 5.
5. Admission of petition and directions as to advertisement.- Upon filing of the petition, it shall be posted before the Tribunal for admission of the petition and fixing a date for the hearing thereof and for appropriate directions as to the advertisements to be published and the persons, if any, upon whom copies of the petition are to be served, and where the petition has been filed by a person other than the company, the Tribunal may, if it thinks fit, direct notice to be given to the company and give an opportunity of being heard, before giving directions as to the advertisement of the petition, if any, and the petitioner shall bear all costs of the advertisement.
6. Copy of petition to be furnished.- Every contributory of the company shall be entitled to be furnished by the petitioner or by his authorised representative with a copy of the petition within twenty four hours of his requiring the same on payment of five rupees per page.
7. Advertisement of petition.- Subject to any directions of the Tribunal, notice of the petition shall be advertised not less than fourteen days before the date fixed for hearing in any daily newspaper in English and vernacular language widely circulated in the State or Union territory in which the registered office of the company is situated, and the advertisement shall be in Form WIN 6.
8. Application for leave to withdraw petition.-
(1) A petition for winding up shall not be withdrawn after presentation without the leave of the Tribunal subject to compliance with any order of the Tribunal, including as to costs.
(2) An application for leave to withdraw a petition for winding up which has been advertised in accordance with the provisions of rule 7 shall not be heard at any time before the date fixed in the advertisement for the hearing of the petition.
Apart from decision to set up the NCLAT Bench in Chennai, five new Benches of the NCLT were set up during 2018-2019 in Jaipur, Cuttack, Kochi, Indore and Amaravati. Benches of the NCLT are set up in states depending on the case load and other relevant factors.
The Centre has decided to set up a Bench of the National Company Law Appellate Tribunal (NCLAT) in Chennai for clearing pending litigations.
Apart from decision to set up the NCLAT Bench in Chennai, five new Benches of the NCLT were set up during 2018-2019 in Jaipur, Cuttack, Kochi, Indore and Amaravati.
The government has recently appointed another 28 members in the NCLT and 4 more members in the NCLAT. For capacity building of members, regular colloquiums are being held, apart from e-Court project being implemented in a few Benches with heavy case load.
Anurag Singh Thakur, Union minister for state for finance & corporate affairs, in a written reply to a question in the Lok Sabha said the Chennai NCLAT Bench is being set up in pursuance of judgment of the Supreme Court.
Benches of the NCLT are set up in states depending on the case load and other relevant factors. Considering the heavy case load at some existing Benches, additional members have been appointed and additional courts have been operationalised from time to time.
Thakur also said the government is taking steps to strengthen the NCLT and NCLAT in terms of number of Benches, number of courts and number of members to reduce pendency.
Press Information Bureau Government of India Ministry of Corporate Affairs
02-December-2019 15:12 IST
Government to set up National Company Law Appellate Tribunal Bench in Chennai
In pursuance of judgement of Hon’ble Supreme Court, the Government has decided to set up a bench of National Company Law Appellate Tribunal (NCLAT) at Chennai.
This was stated by Shri Anurag Singh Thakur, Union Minister for State for Finance & Corporate Affairs, in a written reply to a question in Lok Sabha today.
Benches of National Company Law Tribunal (NCLT) are set up in various States depending on the case load and other relevant factors. Considering the heavy case load at some existing benches, additional members have been appointed and additional courts have been operationalised from time to time.
The Minister further stated that the Government is taking all steps to strengthen the NCLT and NCLAT in terms of number of benches, number of courts and number of members, to reduce the pendency.
Apart from decision to set up NCLAT bench at Chennai, five new benches of NCLT have been set up during 2018-2019 at Jaipur, Cuttack, Kochi, Indore and Amaravati. The Government has recently appointed 28 more members in NCLT and 4 more members in NCLAT. For capacity building of members, regular colloquiums are being held. e-Court project has also been implemented in a few benches with heavy case load.
The provisions for resolution for individuals under the Insolvency and Bankruptcy Code (IBC) is being implemented in a phased manner. On Friday, the corporate affairs ministry said the provision pertaining to personal guarantors to corporate debtors will be in force from December 1 A case is taken up for resolution under the law only after approval from the National Company Law Tribunal.
The insolvency regime for individual guarantors to corporate debtors will be in force from December 1, according to the government.
The provisions for resolution for individuals under the Insolvency and Bankruptcy Code (IBC) is being implemented in a phased manner.
On Friday, the corporate affairs ministry said the provision pertaining to personal guarantors to corporate debtors would come into force from December 1.
The Code provides for a market-driven and time-bound resolution for stressed assets.
A case is taken up for resolution under the law only after approval from the National Company Law Tribunal (NCLT).
In October, Corporate Affairs Secretary Injeti Srinivas said personal insolvency regime would be fully operational in one year.
“In the first phase, personal guarantor to a corporate debtor is almost under commencement. The next would be the fresh start process, basically giving relief to very small borrowers who are not in a position to repay the debt. That may be in another four to six months. Then proprietorship and partnership and others,” he had said.
The Centre is looking at further changes to the IBC as it doesn’t want to leave any room for litigation on the distribution of proceeds.
The government is considering a formula for distributing the proceeds of insolvency resolution among financial and operational creditors in a fixed proportion, said people with knowledge of the matter. The goal is to protect the interests of operational creditors and reduce delays due to litigation, ensuring that the objective of the Insolvency and Bankruptcy Code (IBC) is preserved.
“This is one of the solutions that is being looked at,” an official said. The government will take a final call only after extensive deliberations, he added.
Distribution of resolution proceeds has emerged as one of the key factors behind the extended litigation, delaying major insolvency cases. Dissatisfied operational creditors have been the source of such cases in some instances.
The Supreme Court is currently deciding on the distribution of proceeds in the case of Essar Steel, which entered the National Company Law Tribunal (NCLT) system in August 2017. The process was thought to have ended when Arcelor Mittal’s Rs 42,000-crore bid for the debt-ridden steel manufacturer was approved in March 2019. But the original promoters, the Ruias, opposed approval of the plan, questioning Arcelor Mittal’s eligibility.
Operational creditors rejected the plan on the grounds of discriminatory treatment. Financial creditor Standard Chartered Bank has also gone to court against the resolution plan on the same grounds. Financial creditors moved the Supreme Court after the National Company Law Appellate Tribunal (NCLAT) ordered proportional recovery for both financial and operational creditors. Under the IBC, cases have to be decided within a 330-day window.
The decision to change the rules to grant greater protection to operational
creditors had come from the “highest levels of the government,” said one of the
persons.
The Centre is looking at further changes to the IBC as it doesn’t want to
leave any room for litigation on the distribution of proceeds, the person said.
The IBC is regarded as one of the signal reforms of the first Narendra Modi
government. The process got bogged down in litigation over some of the biggest
cases, blunting the IBC’s aspiration of speeding up bankruptcy resolution and
cleaning up banks’ books. The 2016 IBC has already been tweaked several times
toward this end.
Operational creditors had slightly higher recoveries than financial
creditors, according to data available with the government, said the person
cited above. The Insolvency and Bankruptcy Board of India has pegged the
average recovery for financial creditors in cases where there was successful
resolution at 41.5% at the end of the September quarter.
In the latest set of amendments to the IBC, carried out in the budget
session of parliament, the government had clarified that the CoC would have the
right to decide on the distribution of proceeds but that all creditors must
receive liquidation value or the amount they would receive if resolution
proceeds were distributed according to the ‘waterfall mechanism,’ whichever is
higher.
The waterfall mechanism under the IBC outlines the order of priority for
repayment to creditors in the event of liquidation.
Under this, secured creditors have to be paid fully before any payments can
be made to unsecured financial creditors who in turn have priority over
operational creditors.
Experts said the government will have to come up with a balanced
formulation. Setting a high fixed proportion for operational creditors could
prompt CoCs to opt for liquidation instead of resolution. “At present, in many
cases, operational creditors are not getting anything,” said Manoj Kumar, partner
at Corporate Professionals.
The income-tax (I-T) department is estimating tax recovery of over Rs 100 billion from companies that have been struck off from records of the Registrar of Companies (RoC) last year.
The tax department is in the process of filing a petition before the National Company Law Tribunal (NCLT) for restoration of registration in as many as 50,000 such companies.
The RoCs had struck off 300,000 companies after it was found they had not filed their statutory returns. Directors of these companies have been prohibited from holding directorships in any other company.
The move follows Central Board of Direct Taxes’ (CBDT) directive to identify, process and file petition to restore these companies by August 31. The board also asked the Ministry of Corporate Affairs (MCA) not to oppose the restoration application in the tribunal, as such a move would refrain them from launching tax recovery proceedings against these firms.
“Several of these companies are restricted to operate their bank accounts and movable and immovable properties until they are restored. The restoration will compel these firms to make relevant disclosures of credentials under Companies Act, and then accordingly tax proceeding will be initiated for tax recovery,” said an I-T official.
Tax industry experts, too, believe that restoration is essential to recover taxes due from these firms.
“The tax department is contesting the strike off of so-called companies as in several cases there would be pending tax demands that cannot be recovered if the company is not active. Also, even in cases where genuine companies have been struck off, with the best intentions, the companies would not be able to pay the tax dues as all their assets including bank accounts would be non-operational,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP.
The I-T department is of the view that these companies abused their corporate structure by creating multi-layering during demonetisation for cash deposits. I-T probe also reveals that many individuals have used these firms for siphoning money or converting undisclosed cash to legitimate money post the note ban.
Official data say that 35,000 companies deposited and withdrew cash worth over Rs 170 billion after the note ban, through about 60,000 bank accounts.
It was noticed that the accounts that had negligible balance on November 8, 2016, have seen significant cash deposits and withdrawal during this period.
According to people with knowledge of the matter, along with restoration, the I-T department will also start issuing notices to these firms under Section 179 of the I-T Act, which makes the company’s directors/promoters liable to pay dues on behalf of the firm, without adjudication by the court.
Further, tax recovery officers have been asked to conduct survey operations on select firms where the tax demand is high. In cases where assets or bank accounts are lying abroad, the department will seek the foreign tax authority’s assistance to recover tax claims with the provisions in the relevant treaty, said another senior official.
Sources said that in a meeting of a task force on shell companies set up by the Prime Minister’s Office, on November 30 last year, the director general of corporate affairs (DGCoA) had suggested that the tax department approach RoCs for taking up the matter of reviving these companies. It was also suggested that revenue considerations should weigh in favour of restoring them.
Apart from these companies, another set of above 200,000 firms have been sent notices and action will soon be taken against them. However, the tax department wants MCA to keep them posted before striking off any company, since there could be tax dues.
Taxing Affair
I-T pursuing restoration of 50,000 struck-off companies
RoCs had struck off 300,000 companies, prohibited their directors from holding directorship in other firms
Tax industry experts believe that restoration is essential for recovery of taxes from these firms
Restoration will allow companies to operate bank account, assets
After restoration, I-T to issue notices under Section 179 of I-T Act
Directors/promoters would be liable to pay tax dues
These firms abused corporate structure to facilitate significant cash transactions post note ban
