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Regulatory Alert: Introduction of Companies (Winding Up) Rules, 2020

03 February 2020

Winding up of Companies can be dealt under the Companies Act, 2013 (‘Cos Act’) and the Insolvency and Bankruptcy Code, 2016 (‘IBC Code’).

While the proceedings pertaining to ‘voluntary winding up’ and ‘winding up by Tribunal on the grounds of inability to pay debts’ are within the purview of IBC Code, the proceedings of winding up on the grounds other than inability to pay debts (as listed out in Section 271 of Cos Act) are governed by the Cos Act by following procedures mentioned under the National Company Law Tribunal Rules 2016, as there does not exist any specific rules pertaining to winding up under the Cos Act.

With a view to systemize the procedure of winding up of a Company under Cos Act, the Ministry of Corporate Affairs (‘MCA’) vide notification[1] dated 24 January 2020, has notified the Companies (Winding Up) Rules, 2020 (‘The Rules’). The Rules are applicable to companies going into “winding up for the circumstances mentioned u/s 271” as well as “Summary procedure for liquidation u/s 361” of Cos Act.  The Rules comprise of 191 rules and 95 forms and shall become applicable from 1st April 2020.

The important highlight of this notification is as under:

Summary Procedure for Liquidation

  • The notification allows any of the following class of companies to close their business by making a winding up application to Central Government without having to go to National Company Law Tribunal (‘Tribunal’)

Companies accepting deposit and having total outstanding deposits

Upto INR 25 Lacs*

Companies having total outstanding loan including secured loan

Upto INR 50 Lacs*

Companies having total turnover

Upto INR 50 Crores*

Companies with Paid up capital

Upto INR 1 Crore*

*based on latest audited balance sheet

  • In addition, Companies having book value of assets upto INR 1 Crore (currently specified u/s 361(1)(i)), can also approach Central Government for liquidation.
  • The provisions of the Rules related to filing and audit of the Company Liquidator’s accounts and its procedure (Rule 91 to 99 of the Rules) and disposing of assets (Rule 165 to 167 of the Rules) shall be applicable to above class of companies with modification that the word “Tribunal” shall be considered as “Central Government”.

Other procedural aspects of the notification are as under:

  • The Rules lay down the process for meeting of creditors and contributories of the Company, and specify the scenarios in which creditors can and cannot vote
  • The Rules make it necessary for all the money lying in the bank account of Company Liquidator which is not immediately required for the purposes of winding up, to be invested in government securities or in interest bearing deposits in any scheduled bank
  • The Rules lay down the procedure for maintenance of registers and books of accounts by the Company Liquidator
  • The Rules also outline the procedure for creditors to prove their debts and claims against the company and if the proof of such debt gets rejected by the Company Liquidator, there is also a provision and process for creditor to make an appeal to Tribunal 

BDO Comments:

The striking feature of this notification is the summary procedure for liquidation introduced through Part V of the Companies (Winding up) Rules, 2020. An important factor for such summary winding up is that the Central Government will provide required approvals to such companies for the normal winding up process which is otherwise undertaken through the Tribunal, thereby reducing the burden on Tribunal and greatly shortening the overall winding up timelines.