Jan 30, 2020

New rules help small entities wind up biz without moving NCLT

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The Ministry of Corporate Affairs has notified rules for winding up small businesses without having to go to a tribunal, under a provision in the Companies Act that offers an alternative to the commonly used liquidation procedure under India’s bankruptcy code.

The rules notified by the ministry further define provisions of section 361 of the Companies Act which allowed such an option for liquidating small firms with assets up to ₹1 crore.

As per the rules, those companies which have total outstanding deposit of up to ₹25 lakh, or those with outstanding loan including secured loan up to ₹50 lakh, or entities with up to Rs50 crore sales or those with paid up capital up to Rs1 crore are covered under this provision.

The rules mandate that the closure of the company will be carried out by the official liquidator hired by the government, who will take charge of the assets and deal with the claims of the company. If the liquidator finds any fraud having been committed by shareholders, directors or other officials of the company, the government may order a probe. The rules say that the central government will issue directions to the liquidator in case of companies going for summary liquidation similar to what bankruptcy tribunals do in other cases.

The Companies (Winding Up) Rules, 2020, signed off on 24 January and effective 1 April, prescribe how official liquidators have to go about in managing the resources of the company that goes into liquidation under various provisions of the law and the manner of selling assets under the guidance of bankruptcy tribunal.

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