Research Work: Company Law

A firm CD-Steels regularly supplies certain raw materials to a partnership firm QR & Co., carrying out its business of manufacturing Water Heaters. After 6 months of regular supply of goods, QR & Co. failed to clear the outstanding dues of CD-Steels amounting to principal amount of Rs.1,25,000/- with interest accrued thereon. An individual Kumar lends his fleet of trucks to a Company AB & Co. used for transporting goods to and from the factory of AB & Co., despite repeated demands AB & Co. fails to pay to XY the accumulating dues of Rs.3,50,000/- payable for the fleet of truck lent to AB & Co with interest accrued thereon. In both cases CD-Steels and Kumar are advised to initiate the winding up process of QR & Co. and AB & Co.

Draft the following issues on the above facts with any relevant case law:-

1) Describe Winding-up under the Companies Act, 2013? What was the status of modes of winding up before the effect of implication of Insolvency and Bankruptcy Code, 2016?

2) Bring out the changes in the laws relating to winding up of companies after coming into the effect of the Insolvency and Bankruptcy Code, 2016?

3) As CD-Steels and Kumar were operational creditors, explain their statutory role? 

4) Explain how an operational creditor can file an application before the NCLT seeking initiation of CIRP under the IBC, 2016?

5) Elaborate the statutory provisions and rules to be followed by CD-Steels and Kumar under the IBC, 2016 for initiation of insolvency resolution?

RESPONSE TO ABOVE MENTIONED ISSUES:  

Describe Winding-up under the Companies Act, 2013? What was the status of modes of winding up before the effect of implication of Insolvency and Bankruptcy Code, 2016?

According to Companies Act, 2013, winding up is a legal process through which the life of a company comes to end which means that the assets of the company are disposed of, debts paid off out of the assets realized and the surplus amount is distributed among the members of the company in accordance to their respective rights.  

In general terms, winding up means an administered liquidator is appointed and he takes control over the company by disposing off all the assets in order to pay its debtors and if any surplus amount is left after the payment of the dues the same is distributed among the members of the company in accordance to their proportion of holdings. 

Section 272 : Person Entitled to apply for the Winding Up

A petition for winding up can be represented by any of the person as mentioned below under Companies Act, 2013: 

  1. The company; or
  2. Any creditor or the creditors, including any contingent or prospective creditor or creditors; or
  3. Any Contributory /s or,
  4. All or any of the above three specified parties 
  5. The registrar
  6. Or any person authorised by the central government in this behalf as per sec. 243
  7. By the Central Government or State Government in case of a Company acting against the interest of sovereignty and integrity of India.

Modes of Winding up before Insolvency and Bankruptcy Code, 2016 Sec 270

Compulsory Winding up by the court (Sec.433)

A company can be wind up by the order of the court when:-

  • Statutory meeting is not being held in the given period.
  • Statutory report not submitted to the registrar.
  • The Management is not able to start the business even after getting the commencement of business certificate.
Voluntary winding up (Sec.484)[1]

When the company wounds up itself by surrendering and realising it asset for the payment of debts, it can be called as voluntary winding up. Voluntary winding up can take place by passing ordinary resolution or by special resolution. It is further divided into the following:

Members Voluntary Winding Up.

Member’s voluntary winding up is only chosen if the company is solvent and,

  • Member/ Members of the business  wants to retire 
  • Nobody else wants to take over the family business after the member;/ members have stepped down
  • Member/ members do not want to run the business anymore.
  • Creditors Voluntary Winding Up.

A director or board of directors ca propose voluntary winding up or liquidation if

  • The company can’t pay its debt 
  • Majority of shareholders agrees to the resolution.

After the agreement, the company will stop any kind of trading and be wound up.

Winding up under the supervision of the court 

A voluntary winding up may be affected under the supervision of the court where an application to that effect is made by a creditor or a contributory or a company or a liquidator and the court makes an order that voluntary winding up should continue subject to the supervision of the court. 

Bring out the changes in the laws relating to winding up of companies after  coming into the effect of the Insolvency and Bankruptcy Code, 2016?

The enactment of the Insolvency and Bankruptcy Code, 2016 has brought various amendments to the insolvency of companies, partnership firms, limited liability partnership into a single legislation. It aims to provide time bound relief to the creditors and give them power to start the procedure of insolvency, commonly called winding up under the companies act 2013. 

With the act coming into the effect, it brought many changes in the winding up process under the companies act 2013. This changes can be seen below:

  1. In the definition of the winding up, new insertions were made which makes winding up under this act as winding up or liquidation under the insolvency and bankruptcy code, 2016.
  2. Section 270 of the companies act 2013, which elaborated on the modes of winding up the company is now replaced with modes of winding up by the tribunal.
  3. Section 271 of the companies act 2013 which deals with the winding up by the tribunals have been substituted with – A company is required to be wound up by the tribunal under section 272, if the company has resolved to wound up or if the company acts against the sovereignty, integrity, security of India by forming friendly relations with the neighbouring countries or if the tribunal is of the opinion that the object of the company is fraudulent and it is carrying out the activities by defrauding others or by defaulting the financial statements then in such circumstances the tribunal has full power to start the insolvency (winding up) process on just and equitable grounds.
  4. The sub-section 275 of the companies act 2013, has been substituted with as section 275(2) of the insolvency and bankruptcy act, 2016 which deals with the company liquidator and their appointment as per the tribunals shall appoint the provisional and company liquidator from amongst the insolvency professional registered under the Insolvency and Bankruptcy Code,2016.
  5. Circumstances in Which Company May be Wound up Voluntarily

304. A company may be wound up voluntarily,—

  • If the company in general meeting passses a resolution requiring the company to be wound up voluntarily as a result of the expiry of the period for its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company should be dissolved; or
  • if the company passes a special resolution that the company be wound up voluntarily.[2]

However, section 304 of the companies act which dealt with voluntary winding up of the company has been omitted from the Insolvency and Bankruptcy Code,2016 along with other provisions dealing with the voluntary winding up.

As CD-Steels and Kumar were operational creditors, explain their statutory role? 

Section 5(20) of Insolvency and Bankruptcy Code, 2016 defines operational creditors as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

An operational creditor is an entity who has a claim (corporate has debt) for providing any of the four categories to the defaulted corporate-

  • Goods
  • Services
  • Employment and 
  • Government dues (Central Government, state or local bodies)

Statutory Role of Operational Creditors

  1. Operational creditor has the right to submit a resolution application like a financial creditors. As per the IBC, in case of default of debt by the corporate debtor, financial or operational creditor can make an application to the respective authority i.e. NCLT for commencing Insolvency Resolution Programme. This means the operational creditor can file a resolution application.
  2. At the same time, when there is a dispute with the corporate debtor, the operational creditor cannot submit the resolution application in such case only a financial creditor can file a resolution application.
  3. Operational Creditors right in the committee of creditors

The committee of creditors Coc is the decision making body which decides the course of action on behalf of the debtors in the resolution process. Here the IBC prescribes that the committee of creditors shall solely consist of financial creditors. The resolution plan can be implemented only if it is approved by 66% of the creditors. Only Operational Creditors having total debt 10% shall be given notice of the meeting. But these operational creditors do not have the power to vote. So, the right of the operational creditors is to sit in the Coc if he has the threshold credits but doesn’t have the voting power.

Explain how an operational creditor can file an application before the NCLT seeking initiation of CIRP under the IBC, 2016?

If the operational creditor does not receive payments or any notice from the corporate debtor he can file an application before the Adjudicating authority of National Company Law Tribunal (NCLT) seeking initiation of  Corporate Insolvency Resolution Process (CIRP) only after the expiry of 10 days from the date of delivery of the notice or invoice demanding such payment.

Following is the process that operational creditor has to follow in order to initiate the CIRP Section 9 under IBC, 2016: 

An operational creditor must make an application in form 5 along with the application he shall furnish the following documents –

  • A copy of invoice demanding the payment or the demand notice delivered by the operational creditor to the corporate debtor
  • An affidavit to the effect that no notice was given by the corporate debtor relating to the dispute of unpaid operational creditor
  • A copy of the certificate from the financial institutions that maintains accounts of the operational creditor assuring that there was no payment of an unpaid operational debt by the corporate debtor, if available;
  • a copy of any record containing information of utility thus confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
  • any other proof confirming that there was no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.

The applicant shall dispatch forthwith, a copy of the application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the corporate debtor.

An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional

Elaborate the statutory provisions and rules to be followed by CD-Steels and Kumar under the IBC, 2016 for initiation of insolvency resolution?

The system to initiate an insolvency has changed after the new act Insolvency and Bankruptcy act, 2016 came into force. As per this act three entity can file an insolvency resolution application they are:

  1. Financial Creditors 
  2. Operational creditors 
  3. Corporate itself.

Here CD-Steels and Kumar are operational creditors under the Insolvency and Bankruptcy Act, 2016 and therefore the statutory rules need to be followed for initiation of insolvency resolution are led down below:

In case of late payment the operational creditor can send a request for notification of unpaid debt to the debtor by way of an invoice requesting the payment of the amount corresponding to the late payment to the debtor company in accordance with Form 3 of IBC.

The debtor must send a reply to the creditor within the 10 days of receiving such notice or a copy of an invoice.

After the expiry of 10 days from the date of delivery of the notice or an invoice demanding of payment if the operational creditors does not receive the payment from the corporate debtor the operational creditor has the power to initiate the corporate insolvency resolution process by filing an application to the adjudicating authority in form 5 of the insolvency and bankruptcy code, 2016.

Withdrawal of application.—The Adjudicating Authority may give permission to  withdraw  the application that was made under the   rules 4, 6 or 7, as per the case, only on this basis when request is made by the applicant before its admission.

Interim resolution professional — (1) The applicant, wherever he is required to to make recommendation with respect to the appointment of the insolvency resolution professional, must obtain a written communication in the Form. 2 from the person who has experience in the insolvency for the appointment as an interim resolution professional and this should be enclosed with the application made under the rules 4, 6, or 7, according to the case. 

The application under sub-rule (1) should be enclosed with a certificate confirming the eligibility of the insolvency professional for the appointment as a resolution professional with respect to Insolvency and Bankruptcy Act (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Filing of application and application fee.— (1) Till the time  the rules of procedure for conduct of proceedings get notified under the act , the application made under sub-section (1) of section 7, sub-section (1) of section 9 or sub-section (1) of section 10 of the Code should be filed before the Adjudicating Authority in connection to rules 20, 21, 22, 23, 24 and 26 of Part III of the National Company Law Tribunal Rules, 2016.

An applicant under this act should, after immediately getting aware, must notify the Adjudicating Authority with an application stating any winding up petition that may have been filed against the corporate debtor.

The application must be accompanied with the fees as specified in the schedule.

The application and the accompanying document should be filed online in electronic form whenever the process is available and prescribed by the adjudicating authority. 

Assuming that when all such facilities are made available the applicant will be able to submit the bulky documents in electric form, by scanning them into legible portable document format and storing them in a data storage device such as compact disc or USB flash drive etc all these are acceptable to the adjudicating authority.

This was in short about the various provisions and rules that were to be followed by the CD- Steels and Kumar being an operational creditor under the Insolvency and Bankruptcy Act 2016, for the initiation of insolvency resolution.


[1] The Companies Act 1956, s. 484  https://indiankanoon.org/doc/1177325/

(Last Visited on 20th March, 2021 14:26)

[2]The Companies Act 2013, s. 304 http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=26348

(Last Visited on 20th March, 2021 14:27)

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