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The difficulties in the process of company liquidation and neededreforms?

Winding-up a brief:

The Companies Act, 1956 contain elaborate provisions as to when a Company is to be

wound-up, the procedure for initiating winding-up proceedings, the role of the

managerial personal if the company is wound-up by the Company Court and the

liquidation process to be conducted by the Official Liquidator appointed by the Company

Court. It is generally understood that the Company faces winding-up proceedings when

its financial position is not good or it has become insolvent. In most of the cases it may

be true that only insolvent companies are wound-up in accordance with the provisions of

the Companies Act, 1956. But, it is also true that a Company may be wound-up due to

the serious difference of opinion among the groups in the Company and it is on the

ground just and equitable. But, when the company is not insolvent, then, the

differences among the groups may normally lead to approaching Company Law Board

under section 397/398 of the Companies Act, 1956. At the same time, a Company with

valuable properties and the scope for expansion of business is wound-up at times. We

see few cases where the winding-up proceedings are long fought in the Court by

preferring appeals and convincing the court with some revival scheme. There are cases

where the Company which has faced serious winding-up proceedings reviving well later.

Official Liquidator and his responsibilities:

I want to deal with the issue of Official Liquidators responsibilities in the conduct of

liquidation process and inherent difficulties. Once official liquidator is appointed by the

Company Court, then, in accordance with the provisions of the Companies Act, 1956, the

official liquidator gets the information from the managerial personal and takes charge of

all the properties of the Company. The Official Liquidator also entertains the claims from

the creditors of the Company and the Liquidator himself adjudicates the claims and

makes proportionate payments with the permission of Company Court. It is a

complicated and risky process without any option. The office of the Official Liquidator is

burdened with many liquidation proceedings and often the Court appoints an expert

liquidator to ease the burden on the Official Liquidator attached to the High Courts.

There is a provision in the proposed Companies bill for the appointment of company law

experts or the experts as liquidators of the Company so as to speed-up the entire issue.

Its a good move actually as otherwise the shareholders of a Company or creditors of the

Company may feel as if they are not supported by law and I have heard the expressionof few of creditors of a Company in Liquidation and their enormous problems in the

course. The office of the official liquidator is not computerized at present and even if the

office is computerized fully, liquidation is a complicated exercise to be done and it is

better to take experts as liquidators and these experts may be supported by the staff of

the Official Liquidator attached to the concerned High Courts.

Normally, when the Company is wound-up and the Official Liquidator is appointed, then,

the Official Liquidator will realize money out of the properties of the Company and

discharges the liability of the Company to the workmen, creditors, secured creditors, tax

and other payments to the government and other organizations. The Companies Act,

1956 contain detailed provisions as to how the payments are to be made by the

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Liquidator and also about preferential payments. We have many precedents on the issue

of preferential payments and I dont want to deal with those in detail.

Rules governing the payments during liquidation process:

Dealing with the issue of making payments during liquidation process, the Madras High

Court, in In re Manasuba and Co. (P.) Ltd, (1973) 43 Com Cases 245, was pleased toobserve that section 529 of the Companies Act, among other things, provides that in

the winding up of an insolvent company the same rules shall prevail and be observed

with regard to the respective rights of secured and unsecured creditors as are in force

for the time being under the law of insolvency with respect to the assets of persona

adjudged insolvent. While exercising jurisdiction under section 529, the company court

would observe the well established rules unless which regulate the affairs in insolvency

proceedings and the tests which would apply for deciding whether a particular asset has

vested in the official assignee for distribution among the general body of creditors would

equally apply for determining whether the asset would vest in the official liquidator for

distribution and payment of dividend pro rata without any claim for preferential

payment. Normally, in the winding up of an insolvent company, just as in an insolvency,

a secured creditor will be out of the scope of liquidation and he will be entitled to enforce

the security and realise the same to obtain full satisfaction of the secured debt and it is

only the surplus which will go into the hands of the official liquidator. It is settled law

that were a fiduciary relationship is established between the company and a third party

and money are paid by the third party to the company in a situation in which the

company occupies a fiduciary relationship is established between the company and a

third party and moneys are paid by the third party to the company in a situation in which

the company occupies a fiduciary relationship, with an obligation to either use the moneyfor a specified purpose or to retain or keep it with the company to meet certain

contingencies, the said sum would be impressed with a fiduciary character and would not

form part of the general assets of the company. Property thus held by an insolvent

company in a fiduciary capacity, burdened with certain fiduciary obligations, is treated a

property held in trust for a specific purpose under the insolvency laws. Such property or

money held for a specific purpose is by law treated as clothed with a species of trust

governed by the same principles and rules which apply to property held in express trust.

Section 529 of the Companies Act of 1956, which has taken the place of section 229 of

the fact of 1913, corresponds to section 317 of the English Act. In the matter of

preferential payments and claims for priority resting upon a fiduciary relationship, the

Companies Act of 1956, merely provides that the provisions of the bankruptcy law would

be observed. Cases in England and in India have taken the uniform view that property

deposited with the bankrupt for a specific purpose would come under the category of

trust property and would not vest in the official assignee as bankrupts property either

because there is a specific trust with regard to the same or because the property was

entrusted to the bankrupt, the later being clothed with a fiduciary obligation with regard

to the property. In order that the property may be exempted from vesting under the

aforesaid provision, it is not necessary that an express trust should have been

constituted and it is sufficient if the entrustment involves obligations on the bankrupt in

the nature of a quasi or constructive trust.

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Secured Creditors and their steps:

The Companies Act, 1956 provides for a preferential payment to the secured creditor

and for making a payment, their due is to be ascertained by the Official Liquidator

normally. But, there can be a special law like Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002, enabling the securedcreditors or the Financial Institutions to proceed with their recovery process overriding

other laws. In such a case, it becomes the responsibility of the Official Liquidator to

represent the Company before the concerned forums like Debt Recovery Tribunal. We

can not say that the Financial Institutions or especially public financial institutions are

good and will not commit any illegalities or irregularities. We are seeing many cases

where serious allegations are being made against the Public Financial Institutions too.

Under such circumstances, the Official Liquidator, in the interest of the workmen and

shareholders, should effectively represent the Company before the forums like Debt

Recovery Tribunal. But, the Official Liquidator may be handicapped with the relevant

information and facts to fight with the secured creditors in many cases. Other

shareholders and creditors may not be normally allowed to represent the Company when

the Official Liquidator is appointed. This is an interesting area to be looked into during

the liquidation process. It is true that when the Official Liquidator or his office is efficient

and listens to the other creditors and shareholders of the Company, then, the Official

Liquidator may be able to effective discharge his responsibility before the Company

Court and also before other forums like Debt Recovery Tribunals under special law. But,

we can not ignore the practical difficulties, limitations and complications in the course.

Right of the Secured Creditors and Liquidators Responsibility:

It is seen that, in most of the cases, the banks or Public Financial Institution are thesecured creditors. And, for realizing their claim, they will resort to special laws like

Recovery of Debts due to Financial Institutions Act, 1993 and the Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Stating that the official liquidator is mandated to represent the workers in order to get

their lawful stake from and out of the realization of the money, the High Court of

Madras, in V.K.Seshasayee and another Vs. Official Liquidator, (2005) 127 Comp Case

(Mad), was pleased to observe that as a determination of the claim of the secured

creditors before the Debt Recovery Tribunal was going on, it is was necessary for the

official liquidator in the interest of the workmen to participate in the proceedings before

the Tribunal. The official liquidator was to represent effectively in the proceedings before

the Tribunal for distribution of the sale consideration to the secured creditors and

workers and shareholders of the company. Dealing with the scope of the issue, the

Supreme Court of India, in Industrial Credit and Investment Corporation of India Vs.

Srinivas Agencies, 1996 (5) JT 405: 1996 (4) SCC 165: 1996 (3) Supreme 40, was

pleased to observe that it may be pointed out that S. 529 and 529-A of the Act do

contain provisions insofar as the priority of secured creditor's claim is concerned. Of

course, the Company Court would not transfer the proceeding to it merely because of its

convenience ignoring the difficulties which may have to be faced by the secured creditor,

who may be at a place far away from the seat of the Company Court. The need to

protect the company from unnecessary litigation and costs have, however, to be borne

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in mind by the Company Court. Further, the court went on observing that we are,

therefore, of the view that the approach to be adopted in this regard by the company

court does not deserve to be put in a strait-jacket formula. The discretion to be

exercised in this regard has to depend on the facts and circumstances of each case.

While exercising this power we have no doubt that the Company Court would also bearin mind the rationale behind the enactment of Recovery of Debts Due to the Banks and

Financial Institutions Act, 1993, to which reference has been made above. We make the

same observation regarding the terms which a Company Court should like to impose

while granting leave. It need not be stated that the terms to be imposed have to be

reasonable, which would, of course, vary from case to case. According to us, such an

approach, would maintain the integrity of that secured creditor who had approached the

Civil Court or desires to do so, and would take care of the interest of other secured

creditors as well which the Company Court is duty-bound to do. The company court shall

also appraise itself about the fact as to whether dues of workmen are outstanding; if so,

extent of the same. It would be seen whether after the assets of the company are

allowed to be used to satisfy the debt of the secured creditor, it would be possible to

satisfy the workmen's dues pari passu.

Conclusion:

Liquidation, being the responsibility of the Official Liquidator, is a risky process and

needs expertise. Going by the experience, the Official Liquidator and their office attached

to the High Courts, had their own difficulties or limitations in effectively completing the

liquidation process. The new Companies Bill contains a provision for appointing experts

as Liquidators and it is to be seen as to how the liquidation is done in future. Its a very

complicated area under Indian Company Law needing many reforms.