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BY D. VIJAYA BHASKAR, ICLS, OFFICIAL LIQUIDATOR, HIGH COURT OF ANDHRA PRADESH,

ROLE OF CHARTERED ACCOUNTANT IN LIQUIDATION PROCEEDINGS SPECIFICALLY RELATAING TO NBFCs AND OTHER COMPANIES. BY D. VIJAYA BHASKAR, ICLS, OFFICIAL LIQUIDATOR, HIGH COURT OF ANDHRA PRADESH, MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA.

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BY D. VIJAYA BHASKAR, ICLS, OFFICIAL LIQUIDATOR, HIGH COURT OF ANDHRA PRADESH,

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  1. ROLE OF CHARTERED ACCOUNTANT IN LIQUIDATION PROCEEDINGS SPECIFICALLY RELATAING TO NBFCs AND OTHER COMPANIES BY D. VIJAYA BHASKAR, ICLS, OFFICIAL LIQUIDATOR, HIGH COURT OF ANDHRA PRADESH, MINISTRY OF CORPORATE AFFAIRS, GOVERNMENT OF INDIA

  2. THE PHOLOSOPHICAL FOUNDATIONS OF CORPORATE INSOLVENCY LAW FROM THE ENGLISH LAW Corporate Insolvency law has four overriding objectives: to restore the debtor company to profitable trading where this is practicable; to maximize the return to creditors as a whole where the company itself can not be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a limited redistribution of rights; and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book and, where appropriate, deprived of the right to be involved in the management of the other companies. To facilitate achievement of these objectives the insolvency law provides a battery of legal and administrative instruments and institutional structures. 11/17/2014 2

  3. VISION, OBJECT AND CONCLUSION OF THE LIQUIDATION VISION: To maximize the collective returns to creditors what US commentators say; OBJECT: For Just Distribution of the Net Assets on the principle of “pari passu” rule, of course, distribution on “pro rata” method - [the pari passu rule has a long history in insolvency law. It is to be found in a statute of Henry VIII calling for the sale of a bankrupt’s assets ‘for the satisfaction and payment of (his) creditors: that is to say, to every of the said creditors, a portion Rate and Rate like, according to the quantity of their Debts’. Ref Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441 applying the same principle in a later statute.] AND CONCLUSION: To bring company in liquidation to a logical end : Termination of Company’s existence - dissolution 11/17/2014 3

  4. SCHME OF INSOLVENCY LAWS Two Kinds of Insolvency Laws: 1. Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908; (the process is through the appointment of “Receiver”) and 2. Corporate Insolvency – It results in winding up of the company under the Companies Act, 1956. if it is for revival of the company, the Sick Industrial Companies (Special Provisions) Act,1985 (SICA) deals with it. (the process of insolvency triggers through the appointment of “Liquidator”). 11/17/2014 4

  5. MAIN REASONS FOR CORPORATE INSOLVENCY-I Company’s entire capital is eroded due to heavy losses:- Lack of financial management; Inadequate capital investment; Excess percentage of credit borrowing in disproportionate to actual capital investment; too much reliance on external marketing; Unpreparedness with the changes in business scenario; In competencies in facing with global competition 11/17/2014 5

  6. MAIN REASONS FOR CORPORATE INSOLVENCY-II • Company’s entire capital is eroded due to heavy losses:- • Lack of business skills (risk management); Lack of experience or poor strategies in marketing and customer service; • Lack of harmonious relations with stakeholders as well as among the management; • Failure to prevent frauds; Diversification of funds; to cherish self driven goals at the cost of stakeholders interests; • Circumstantial collapses ( Recession; Unfavorable court verdicts; Cancellation of Product Licenses; Disturbance in external relations); Anti trade polices;

  7. MODES OF WINDING UP S. 425. Modes of winding up.‑ (1)The winding up of a company may be either (a) by the Court; or (b) voluntary; or (c) subject to the supervision of the Court. (2) The provisions of this Act with respect to winding up apply, unless the contrary appears, to the winding up of a company in any of those modes. 11/17/2014 7

  8. CORPORATE INSOLVENCY WITH REFERNECE TO THE PROVISIONS OF COMPANIES ACT, 1956 The Act does not provide any precise definition for the word “Corporate Insolvency” Section 433 (e) of the Act only to some extent answer the “Insolvency”- The company unable to pay its debt- (i). Debt and (ii). Inability to pay: Cash Flow Test : Inability to Pay Test Balance Sheet Test: Liability of the Debtor exceeds his assets Debt is admitted if there is no bona fide dispute;( Seciton 434 is deeming provision to decide inability to pay debts if it is due of Rs. 500 or more) The court can hardly exercise any discretion where the company is so hopelessly insolvent that there is absolutely no chance of resurrection. A bona fide dispute implies existence of a substantial ground for the dispute raised. The companies were unable to pay debts. They could not substantiate their defence. Winding up was inevitable. Sicom Ltd. v. Shree Panduranga Poultries P. Ltd., (1999) 2 Comp LJ 218: (2001) 103 Com Cases 318 (AP). 11/17/2014 8

  9. S. 433. CIRCUMSTANCES IN WHICH COMPANY BE WOUND MAY UP BY COURT (a) if the company has, by special resolution, resolved that the company may be wound up by the court; (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting; (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two; (e) if the company is unable to pay its debts; (f) if the court is of opinion that it is just and equitable that the company should be wound up.

  10. STATUTORY DECLARATION – INSOLVENT-I Company’s assets are not sufficient to pay its debts; A company carrying on business with borrowed money and carrying forward its losses, in the balance‑sheet and a company whose assets are so locked‑up that they cannot be realised for payment of its debts, these are indications of commercial insolvency. Ramesh Premchand Shah v. Engineers Enterprises P. Ltd., (1977) 47 Com Cases 294 (Bom); Concord Finance P. Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156 (Del). Company becomes defunct and it has not been carrying business operations for the last several years. 11/17/2014 10

  11. WINDING UP ORDER AND ITS CONSEQUENCES-II Section 454: Statement of Affairs to be made to OL; Section 456- Custody of the company’s property Ownership of company’s property vests with the liquidator though the title stands in the name of the company. But the rights of the company has been divested on the date of winding up order itself. The Liquidator can take the assistance of the District Magistrate and other revenue staff; (Since the object of winding up proceedings is to put all unsecured creditors on par and to pay them pari passu, an attachment effected by the revenue authority on the immovable properties of the company in respect of dues to the Employees' State Insurance Corporation, Wages Authority and Regional Provident Fund Commissioner, was ineffective and the liquidator could take the properties into his custody free from all attachments and realise their value according to winding up procedures. Ananta Mills Ltd. (In Liquidation) v. City Deputy Collector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)). 11/17/2014 11

  12. STATUTORY DECLARATION – INSOLVENT-III The shares of a company were accepted by the stock exchange for listing but subsequently the permission was cancelled. The application money became refundable. There was no prospect of the company doing any business and there was a complete deadlock among the directors. It was doubtful if the creditors were likely to be paid. It was held to be a case of commercial insolvency. Deccan Farms & Distilleries Ltd. v. Velabai Laxmidas Bhanji, (1979) 49 Com Cases 321 (Bom) (DB). 11/17/2014 12

  13. S. 439. Provisions as to applications for winding up • An application to the Court for the winding up of a company shall be by petition presented, subject to the provisions of this section, • -by the company; or -by any creditor or creditors, including any contingent or prospective creditor or creditors; or - by any contributory or contributories; or - by all or any of the parties specified in clauses (a), (b) and (c) whether together or separately; or -by the Registrar with the previous sanction of the Central Government to the presentation of the petition

  14. S. 441. Commencement of winding up by Court.- • Voluntary Winding up- deemed to have commenced at the date of passing of special resolution; • Compulsory winding up or winding up by the court – deemed to have commenced at the date of presentation of the petition for winding up. • S. 443. Powers of Court on hearing petition.- (1) On hearing a winding-up petition, the Court may • (a) dismiss it, with or without costs; or • (b) adjourn the hearing conditionally or unconditionally; or • (c) make any interim order that it thinks fit; or • (d) make an order for winding-up the company with or without costs, or any other order that it thinks fit etc.

  15. S. 445. Copy of winding up order to be filed with Registrar • -On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within 2[thirty days] from the date of the making of the order. (Sub Section (1)) • -Such order shall be deemed to be notice of discharge to the officers and employees of the company, except when the business of the company is continued (Sub Section (3)) • S. 446. Suits stayed on winding up order.

  16. Effect of winding up order • S. 447. Effect of winding up order.- Anorder for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. The effect of an order of winding up is to put the company into the hands of the Official Liquidator for completing the process. Till an order of the court for distribution of the company's assets has been obtained and the assets have been distributed, the properties continue to be those of the company. The company under liquidation continues to exist as a juristic personality until an order under S. 481 for dissolution is made. It is only thereafter that the company can be said to become non-existent in the eye of the law. Official Liquidator of Gannon Dunkerley v. Urban Land Tax, (1992) 73 Com Cases 168 (Mad).

  17. CERTAIN PROVISISONS – OFFICIAL LIQUIDATOR • Appointment of Official Liquidator – Sec.448 • Official Liquidator to be Liquidator – Sec.449 • Appointment and powers of provisional liquidator – Sec.450 • General Provisions as to Liquidators – Sec.451 • Style, etc., of liquidator – Sec.452 • Receiver not to be appointed of assets with Liquidator – Sec.453 • Statement of Affairs to be made to Official Liquidator – Sec.454 • Report by Official Liquidator – Sec.455 • Custody of company’s property – Sec.456 • Powers of Liquidator – Sec.457; Discretion of liquidator – Sec.458 • Exclusion of certain time in computing periods of limitation – Sec.458A • Provision for legal assistance to liquidator – Sec.459 • Exercise and control of liquidator’s powers – Sec.460 • Books to be kept by liquidator – Sec.461 • Audit of liquidator’s accounts – Sec.462 • Control of Central Government over liquidators – Sec.463

  18. S. 456. CUSTODY OF COMPANY’S PROPERTY • - take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled. • -by writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effects or actionable claims or any books of account or other documents of the company may be found to take possession thereof, To securing compliance with the provisions of subsection, they may take or cause to be taken such steps and use or cause to be used such force as may in his opinion be necessary.] • - All the property and effects of the company shall be deemed to be in the Custody of the Court as from the date of the order for the winding up of the company.

  19. STEPS INVOLVED IN THE WINDING UP-1 • To take into custody or under control, all the property, effects and actionable claims to which the company is or appears to be entitled. • To take steps to provide security guards to protect such properties; • To make inventory of such properties with reference to Statement of Affairs; • To get properties valued • To put properties for sale • To call and adjudicate claims of all creditors • To distribute the amount so realized among the creditors on the principle of pari passu and onpro rata basis with reference to their respective priorities

  20. STEPS INVOLVED IN THE WINDING UP-2 • To get the accounts audited twice in the year and submit to the court; • To invest the realized amounts in investments as per the court orders • To file misfeasance application in case of frauds; • To file dissolution application

  21. BASIS FOR ON IDENTIFICATION ASSETS • Audited financial statements • Interim financial statements • General Ledger • Other specifically maintained asset registers (e.g.. investments, receivables, fixed assets or bank accounts)

  22. CONDUCTINGOF THE INSOLVENCY • All correspondence should clearly indicate that the company is insolvent. • Meeting and accounts • Realization of assets (power of sale) • Tracing of assets if necessary • Identifying creditors • Litigating if required • Suggest Court Order for any major decisions especially sale or disposal of major assets. • Distribution to creditors (interim or final) dividends or return of capital

  23. VOLUNTARY LIQUIDATIONS • Members’ resolution by passing a special resolution at a general or special meeting. • Creditors liquidation through members’ resolution • Officers and Directors powers cease.

  24. MARSHALLING AND DISTRIBUTION OF ASSETS • Cost & expenses including Insolvency Practitioner remuneration. • Preferred creditors • Ordinary creditors • Members

  25. PROOF OF RANKING OF CLAIMS • Section 528 to 530 • Sections 541 to 542 _Misfeasance Proceedings against delinquent; • Companies (Court) Rules 1956 Proof of debts: fixation of date by the OL by advertisement; claimants to prove their debt; liquidator to communicate acceptance or rejection of debt – Rules 147-163 • Appeal by creditor against decision of OL – Rule 164 • Proof and list of creditors to be filed in court – Rule 167 • Application of the assets of the company Application of Insolvency Rules – sec 528/529; Priority of Payments – sec 529/529A/ 530 • Section 481- Dissolution of company.

  26. CROSS-BORDER INSOLVENCY IN INDIA • There is no mechanism under the Companies Act, 1956; • The question of choice of law arises in all cross-border transactions due to (1) development of international trade in which inter-country debtor-creditor relations across the border develops; (2) development of transnational and multinational institutions through building up trans border organizational structure through permanent establishment, branches or franchises; (3) development of organizational relations through chain of organization structure of subsidiaries, and joint venture and finally (4) development of complexities in modern business relations.

  27. “UNCITRAL” MODEL INSOLVENCY LAW STILL UNDER DISCUSSION • The UNCITRAL came out with a Model Law on Cross-Border Insolvency negotiated among more than 40 countries representing a broad spectrum of differing legal systems. • The law applies in the following situations where: • assistance is sought in a state by a foreign court or a foreign representative in connection with a proceeding under the domestic law of a state; (2) assistance is sought in a foreign state in connection with a proceeding under the domestic law of a state; (3). a foreign proceeding and a proceeding under the domestic law of a state in respect of the same debtor are taking place concurrently; or (4) creditors or other interested persons in a foreign state have an interest in requesting the commencement of, or participating in, a proceeding under the domestic law of the state.

  28. CONSTITUION OF HIGH LEVEL EXPERT COMMITTEES • In the year 1999, the Government of India set up a high level committee headed by V.B. Balakrishna Eradi, J., for remodeling the existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field. • In 2001, the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra committee, made several recommendations on bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into a separate code. However, no legislative steps have still been taken in this regard.

  29. Non Banking Financial Companies (NBFCs)-1 • Non Banking Financial Companies-ACTIVITIES • COVERED UNDER NBFC SECTOR: 1. MERCHANT BANKING 2.      UNDER WRITING 3.  PORTFOLIO MANAGEMENT SERVICES 4.  INVESTMENT ADVISORY SERVICES 5.      FINANCIAL CONSULTANCY 6. STOCK-BROKING 7.   ASSET MANAGEMENT 8.   VENTURE CAPITAL 9.   CUSTODIAL SERVICES 10.  FACTORING CREDIT REFERENCE AGENCIES 12.  CREDIT RATING AGENCIES 13.  LEASING & FINANCE 14 HOUSING FINANCE 15. FOREX-BROKING 16.  CREDIT CARD BUSINESS 17.  MONEY-CHANGING BUSINESS 18. MICRO-CREDIT 19.  RURAL CREDIT

  30. Non Banking Financial Companies (NBFCs)-2 • Chit Fund Companies; • Collective Investment Scheme (CISs) Companies (Eg. Plantation companies etc) • Others doing business at the cost of investors investments Note:- In certain matters, the above category companies have proved to be detrimental to the interest of investors. The NBFCs fall under the jurisdiction of RBI. The Collective Investment Schemes (CISs) Companies fall under the jurisdiction of the Stock and Exchange Board of India. The Chit Fund business comes under the purview of the A.P. Chit Fund Act. The Listed Companies (Public Issue Companies) comes under the jurisdiction of SEBI mostly and in certain issues which come under the purview of the Registrar of Companies.

  31. NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-1 • In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietary firms for doing finance business. The claim of chit holders / deposit holders is that • The successful bidders kept their bid amount as deposit in the firm. 11/17/2014 31

  32. NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-2 • The firm promised that the interest earned on the said FD will be adjusted towards chit installments. Hence the chit holders are contending that they are not liable to pay balance subscription. • The FD holders of finance firm are lodging claims against the chit fund company under liquidation on the ground that both the firm and the Company in liqn. are under the same management.

  33. During adjudication of claims, i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? ii. Whether to consider the large cash payments made towards future installments in respect of which the company has not conducted the chit auctions ? iii. Whether to consider dividends already earned ?

  34. Services of CAs is vital – investigation of claims in respect of Chit Fund Companies During adjudication of claims: i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers? • Whether to consider the large cash payments made towards future installments in respect of which the company has not conducted the chit auctions ? - Claims Investigation in complicated transactions – Chartered accountant service is vital; valuation of properties of companies; preparation of Balance sheet for the gap periods

  35. STATEMENT OF AFFAIRS • DETAILS TO BE FURNISHED IN THE STATEMENT OF AFFAIRS • Statement of Affairs to be filed as on the date of order for winding up in Form No.57 and is required to be seconded with the Affidavit of concurrence of other directors as per Form No.58.

  36. Assets not specifically pledged : List-A: • Assets not specifically pledged : List-A: • Balance at Bank: To be furnished along with full address of the Banks, Account Nos., amounts lying therein supported by the statement of account for the last one year. • Marketable securities: Full details of the securities such as shares etc along with certificates, their realizable value as on date etc. • Trade debtors: Names, address, L.F.No., date of transaction, last date of payment, Book value, realizable value, details of security if any and other relevant information. • Loans & Advances: Names, address, date of security if any and other relevant information. • Freehold properties: Detailed description of the properties, estimated value, title documents etc.

  37. Assets not specifically pledged : List-A: (In continuation) • Leasehold properties: Details of lease, lease documents, unexpired period of lease, transferability of lease, its value etc. • Details of Plant & Machinery, furniture fittings etc, vehicles, investments other than marketable securities such as deposits etc : location of the assets, inventory/description, maturity value (deposits), realizable value of other assets etc. • Debts from contributories: Name of the shareholder, address, S.No. in share register, nature of debt, amount due, security held etc.

  38. Assets specifically pledged and creditors fully or partly secured: Assets specifically pledged and creditors fully or partly secured: Complete description of the assets charged, list of plant and machinery, current assets, date of mortgage, estimated value of security, details of each creditor, date of contract, consideration etc., to be given separately.

  39. List ‘C’ Preferential creditors under Sec.530 including workmen: • Details such as, name and address, nature of claim, period of accrual of the claim, due date, amount of claim, amount payable, details of workmen such as E.No., basic, allowances, Gratuity dues, last date of payment etc.

  40. List ‘D’ Debenture holders:Name of the holder, address, amount, assets secured. • List ‘E’ Unsecured Creditors: Name and address of the creditor, amount of debt, date of contract, LF No., Consideration. • Details of Preference and equity share holders such as Register No., Name, address, number of shares held, nominal amount of share, amount called up per share, total called up amount.

  41. Difficulties in Liquidation Proceedings • The ex-Directors are not traceable. • Statement of Affairs is not filed or is defective. • Books of Accounts are not delivered. • Registered office is not traceable. • Books seized are irrelevant/in dilapidated condition. • Diversion and misappropriation of funds. • Ledgers are not updated. Debts become time-barred. • Manipulation of Records & receipts is found. • Monies/properties are attached/sold by courts/consumer forums on complaints by the depositors. • Ex-Directors fail to respond to the queries of Official Liquidator. • Details of assets secured to the Bond holders is not furnished or no charge is created with the Registrar of Companies with regard to such bonds.

  42. HOW BEST THE SERVICES OF CAs BE AVAILED IN INSOLVENCY PROCEEDINGS:I The classical investigative auditing goals in insolvency cases fall mainly into three fields: • Irregular activities of the managers or employees of the company in the pre insolvency era – dilution of funds or assets of the company; • Possible frauds committed by clients or suppliers in respect of the company in pre insolvency era; and • Tracing assets belonged to the company and disappeared in the final stages of the company closure before insolvency or even beforehand. -(creditcontrol.co.uk)

  43. II - Latest available balance sheet with the ROC is ordinarily 3 to 5 years older to the winding up order; • Difficulties in identifying the properties’ • Difficulties in estimating the actual/realisable values – resolution – to get a balance sheet prepared with the help of CA for the gap period; • Money laundering, diversification of funds, manipulation of accounts, destruction of records; • Collusion with the borrowers and allowing the debts time barred

  44. Services of CAs is vital – investigation of records of Chit Fund Companies • In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietory firms for doing finance business. The claim of chit holders / deposit holders is that • The successful bidders kept their bid amount as deposit in the firm. • The firm promised that the interest earned on the said FD will be adjusted towards chit installments. Hence the chit holders are contending that they are not liable to pay balance subscription. • The FD holders of finance firm are lodging claims against the chit fund company under liquidation on the ground that both the firm and the Company in liqn. are under the same management.

  45. Services of CAs – E-form based • Tracking and analyzing e-from based accounts; • Dubious transactions – diversification of - funds for personal gain; • -Ascertaining loss- Misfeasance • -Amalgamation – voluntary liquidation matters; • - Office purpose- auditing specific

  46. THANK u TO ALL PARTICIPANTS AND STAFF OF THE ICAI HYDERABAD.

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