Corporate Insolvency Resolution can be initiated against a struck-off company October 30, 2019
Published in: Between The Lines
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Ms. Batul Barodawala
Mr. Drushan Engineer
Ms. Ishita Mishra
Mr. Mahim Sharma
Ms. Rhea Sethi
The National Company Law Appellate Tribunal (“NCLAT”) in Mr. Hemang Phophalia v. The Greater Bombay Co-operative Bank Limited and Another (decided on September 05, 2019) has held that a creditor can file an application requiring the restoration of the name of a dissolved/struck-off company in the register of companies for initiating a Corporate Insolvency Resolution Process (“CIRP”) against the said company.
The Greater Bombay Co-operative Bank Limited (“Financial Creditor”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to initiate CIRP against Penguin Umbrella Works Private Limited (“Corporate Debtor”). National Company Law Tribunal, Mumbai Bench (“NCLT, Mumbai”) admitted the said insolvency application. An appeal was filed against the said order by Mr. Hemang Phophalia, Ex-Director and Shareholder of the Corporate Debtor (“Appellant”) as the name of the Corporate Debtor was struck-off from the register of companies and insolvency proceedings could not be initiated against a dissolved company.
Whether an application under Section 7 or 9 under IBC for initiating CIRP is maintainable against a Corporate Debtor, if the name of the Corporate Debtor is struck-off from the register of companies
Counsel appearing on behalf of the Appellant submitted that the name of the Corporate Debtor was struck-off from the register of companies under Section 248 of the Companies Act, 2013 (“Companies Act”), therefore, an application under Section 7 of IBC against a non-existent company is not maintainable. It was further submitted that in view of initiation of the CIRP, the resolution professional will ask the Appellant, ex-Director and others to handover the records and assets of the Corporate Debtor, which are not available. It was also submitted that the Corporate Debtor is non-functional since a number of years. The Corporate Debtor does not have any assets or any employees. Therefore, the resolution professional cannot make the Corporate Debtor a going concern. Accordingly, the application under Section 7 is not maintainable.
The arguments of the respondent have not been provided in the judgment.
FINDINGS OF THE NCLAT
NCLAT reproduced the relevant provisions of the Companies Act which deal with removal of names of companies from the register of companies as provided in Chapter XVIII of the Companies Act. As per Section 248(6) of the Companies Act, before passing an order to remove the name from the register of companies, the Registrar is to satisfy himself that sufficient provision has been made for realization of all amount due to the company and for the payment or discharge of its liabilities and obligations within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company.
As per the proviso thereof, notwithstanding the undertakings referred to in Section 248(6) of the Companies Act, the assets of the company are to be made available for payment or discharge of its liabilities and obligations even after the date of the order removing the name of the company from the register of companies. From Section 248(7) of the Companies Act, it is also clear that the liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company which is dissolved, shall continue and may be enforced as if the company had not been dissolved. Further, Section 250 of the Companies Act, also provides that after removal of the name of the company from the register of companies for the purpose of realizing the amount due to the company and for the payment or discharge of the liabilities or obligations of the company, the company shall not cease to be operational.
As per Section 252(3) of the Companies Act, if a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of Section 248, may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies and the tribunal may give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off. The NCLAT held that the tribunal is the adjudicating authority in terms of Section 60(1) of the IBC. Hence, on one side it plays role of adjudicating authority and on the other, tribunal, under the Companies Act.
Therefore, if an application is filed by a creditor (be it a financial creditor or an operational creditor) or workman (operational creditor) before the expiry of twenty years as prescribed, it is open to the adjudicating authority to give such directions and make such provisions as deemed just for placing the name of the company and all other persons in the same position nearly as may be as if the name of the company had not been struck off. The name of the Corporate Debtor may be struck-off, but the assets may continue. In such a case and in view of the provisions of the Companies Act, the NCLAT held that the application under Sections 7 and 9 of the IBC will be maintainable against a company, even if the name of the company has been struck-off.
DECISION OF THE NCLAT
Adjudicating authority which is also the tribunal is empowered to restore the name of a company and all other persons in their respective position for the purpose of initiation of CIRP under Sections 7 and 9 of the IBC based on the application, if filed by the creditors or workmen within twenty years from the date as prescribed under the provisions of the Companies Act. In the present case, the application under Section 7 was admitted, the Corporate Debtor and its directors, officers, etc. were deemed to have been restored.
Vaish Associates Advocates View
Several companies opt for de-registration by removing their name from the register of companies instead of undergoing the protracted process of winding up. In order to successfully remove their name from the register of companies, the conditions of Section 248 of the Companies Act need to be complied with. Most importantly, the Registrar of companies needs to be satisfied that sufficient provisions have been made for the payment or discharge of all the liabilities of the company. Nevertheless, the Companies Act keeps the liability of directors, managers or other officers who were exercising any power of management and of every member of the company alive.
Furthermore, Section 252(3) of the Companies Act also allows any aggrieved member, creditor or workman of the company to make an application to reverse the removal of the name of the company from the register of companies before the expiry of twenty years as prescribed in the Companies Act. The tribunal is required to exercise its discretion and be satisfied on one of these two counts for such an application to succeed (a) the company was at the time of striking off carrying on business or in operation or (b) it would be just that the company is restored.
In the present case, it was decided that the NCLT has been accorded the role of a tribunal under the Companies Act and the adjudicating authority under the IBC. Hereunder, NCLT, Mumbai considered it just for the purpose of initiation of the CIRP by the Financial Creditor against the Corporate Debtor to restore the name of the said Corporate Debtor in the register of companies. Therefore, this decision settles two important issues, namely: (1) applications under Section 252(3) of Companies Act for restoring the name of a struck-off company to initiate IBC proceedings against the said company is permissible; (2) creditors seeking to initiate CIRP against a dissolved debtor would not be required to first make an application for restoring the name of the dissolved company and then approach the NCLT for initiation of IBC proceedings; both can be done by way of a single application before the concerned NCLT.
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