The Corporate Insolvency Resolution procedure (CIRP) provided under the Insolvency and Bankruptcy Code (IBC), is aimed to maximize the value of a corporate debtor’s assets, and to ensure its ‘going concern’ status.
Issues, however, may arise when a company no longer exists as a going concern and has certain unpaid liabilities towards its financial or operational creditors. On such occasions would a petition to initiate an insolvency resolution process against such companies would be maintainable under the IBC? This question was answered by the National Company Law Appellate Tribunal (NCLAT) in Hemang Phophalia v. The Greater Bombay Co-operative Bank Ltd.
What is Striking off?
Keeping in mind the interest of all stakeholders, a company incorporated under the Companies Act 2013 (Act) needs to perform its functions smoothly, and duly file its returns to the Registrar of Companies (ROC). Failing this, it would be ceased to perform its operation as an independent entity, by losing its recognition from the registers maintained by the ROC. This process of ceasing an entity to perform its operations by the ROC is denoted as ‘Strike off’, or dissolution under the Act.
Background of the Case
For being non – operational for 15 years, name of Penguine Umbrella Works Private Limited (Corporate Debtor) was struck off from the Register of Companies under Section 248 of the Companies Act 2013. After being struck off, certain due worth Rs 9,11,08,439.37 remained unpaid to the Financial creditors of the Corporate Debtor (CD).
To recover the said debt, a petition to initiate Corporate Insolvency Resolution Process (CIRP), under Section 7 (petition by Financial Creditors) was filed before the National Company Law Tribunal (NCLT) Mumbai bench. The creditors claimed the appointment of a Resolution Professional (RP), who would ask the Ex- Directors, and other persons responsible for the management, to handover the unavailable assets of the CD. While passing an order to initiate the CIRP against the CD, the NCLT accepted the petition.
Against this order, an appeal was filed by Mr Hemang Phophalia, an Ex-director of the CD, before the NCLAT.
The Appellant claimed before the NCLAT that a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) could be filed against only those companies which are in a ‘Going Concern’ state. Since the CD, in this case, has already lost that status, by being struck off from the Register of Companies, provisions of the IBC would not be applicable on its insolvency resolution. On these grounds, the appellant challenged the maintainability of the petition filed before the NCLT.
This posed an issue before the NCLAT that whether the fact that the existing directors seize to be the directors, and that there are no existing shareholders of a company, be considered a ground for rejection of a petition for initiating CIRP under Section 7 or 9 of the IBC?
Judgment and Reasoning
The NCLAT, while rejecting the appeal, passed an order to allow petitions to initiate insolvency proceedings against struck off companies.
These were the points considered by the NCLAT while passing this order:
Realization of all liabilities from CD’s assets
The NCLAT, while answering the claims about the realization of liabilities from the existing assets of the CD, mentioned that,
“Name of the Corporate Debtor may be struck off, but the assets may continue.”.
While making this statement, the NCLAT referred to Section 248(6) which provides that, before passing an order of striking off the name of the company from the register, the ROC has to ensure that all amount due to the CD are realized and the payment and discharge of all the liabilities due to the CD in a reasonable period. It further referred to its proviso, which mentions that the assets of the company are to be made available for payment or discharge of liabilities and obligations even after removal of the name of the company from the register of companies.
Further, while citing Section 250, the NCLAT opined that even after being dissolved under Section 248, a Company still has to function to the extent of repayment of its dues, and for the realization of its liabilities.
From these references, the NCLAT concluded that, even when its name has been struck off from the register of companies, the CD can be directed to pay off its liabilities to the creditors from its assets.
Liabilities of former directors
While refereeing to Section 248(7), the NCLAT pointed out the provision under the Companies Act for holding the previous directors and any officer exercising the power of CD’s management, liable for paying off the liabilities of the company, as if the company hasn’t been dissolved.
Unaffected powers of Tribunal to wind up a company
In reference to section 248 (8) of the Companies Act 2013, the NCLAT concluded that, even after a company being struck off by the ROC, the tribunal’s powers of winding up of the company stand unaltered. It further referred to Section 2(94-A), which describes winding up as ‘winding up’ under the Companies Act, or liquidation under the IBC. With this, the NCLAT concluded that the sticking off name of a company from the register does not take away the power of NCLT to issue requisite directions for liquidating the CD under the IBC.
Power of Tribunals under Section 252
This provision was mentioned by the NCLAT while concluding that the tribunals have the power to reinstate the struck off CD and to pass any direction of bringing all persons associated with the CD on the same position as they were before the company got struck off by the ROC. This power, as mentioned under Section 252, can be utilized when an application is filed by any operational or financial Creditors of the Struck-Off Company.
In reliance to the aforementioned provisions of the Companies Act and the IBC, the NCLAT considered it to be its power to initiate a liquidation proceeding against a struck off CD, under the provisions of the IBC. However, for the reason that the provisions of the IBC demand initiation of a formalized CIRP, before ordering for a CD’s liquidation, the NCLAT ordered for the initiation of a CIRP against the CD under Section 7 of the IBC.
Following this order, after analyzing the status of the CD’s business, and keeping in mind the will of the Committee of Creditors, the NCLT, Mumbai bench recently ordered for liquidation of the CD.
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