(a) Are there civil or penal/criminal sanctions in the legal system of this economy in relation to the incurring and non-payment of debts by corporate debtors (for example, some type of sanction - such as the concept of 'insolvent trading' - to which the directors of the corporate debtor may be subject)?

 

Section 426 of the Companies Act defines the liability as contributories of present and past members- As per this Section in the "event of a company being wound up, every present and past member shall be liable to contribute to the assets of the Company to an amount sufficient for payment of its debts and liabilities. "

Section 428, in additional defines the term 'contributory" to mean any person liable to contribute to the assets of a Company in the event of its being wound up, and includes the holder of shares".

Directors of a company are also contributor, and have the same liability during winding up as any other contributory. The Companies Act, lists penalties against the delinquent directors etc. S.543 of the Act is with regards to the Power of the Court to assess damages against delinquent directors.

'If in the course of winding up of a company, it appears that any person who has taken part in the promotion or formation of the company, or any part or present director, manager, liquidator etc.

(a) has misapplied, or retained, or become liable or accountable for, any money or property of the Company; or

(b) has been guilty of any misfeasance or breach of trust in relation to the Company;

The Court may on the application of the official liquidator, or the liquidator of any Creditor may examine into the conduct of the person, director, manager etc. and compel to repay or restore the money with interest at such rate as the Court thinks just or to contribute such sums to the assets of the Company".

The proceedings under this section are of quasi-criminal and of serious nature they are independent of, whether or not the person proceeded against may be criminally liable for any actions complained of within the statutory scheme. It is not necessary for the liquidator to prove any such thing as criminal conduct on the part of the directors. Proceedings under the section are of civil nature. The above section applies to all kinds of winding up.

In addition, Section 545 of the Act deals with the prosecution of delinquent officers and members of company.

"If it appears to the Court that the directors or any other officers have been guilty of any offence in relation to the Company, the Court may either on application of any person interested in the winding up or of its own motions direct the liquidator either himself to prosecute the offender or to refer either matter to the Registrar."

The liquidator then has to prepare a report.

The Companies Act does not lay down any special procedure for enquiry into and trial of offences under the Act. The Criminal Procedure Code governs the enquiry and trial of the offences under the Companies Act. Trials conducted by Criminal Courts cannot be held to be vitiated because of non- compliance with certain provisions relating to the initiation of proceedings and irregularities committed by the Registrar in the course of his investigation.

In addition to the above there is a personal liability of directors of private companies in liquidation. Under section 179 of the Income-Tax Act, 1961, it is provided that 'when any private company is wound up after the commencement of this Act and tax assessed on the Company whether before or after in the Course of or after its liquidation, in respect of any income of any previous year cannot be recovered, then every person who was a director of the private company at any time during the relevant previous years shall of such tax under he proves that the non-recovery cannot be attributed to any gross neglect, mis- feasance or breach of duty on his part in relation to the affairs of the company."

(b) What are these sanctions?

 

In addition to the liability of directors under the Companies Act, the personal liability is covered (as insolvent) by Section 69 of the Provincial Insolvency Act, 1909.

"If a debtor, whether before or after the making of an order of adjudication.

(a) Willfully fails to performs the duties imposed or fails to deliver up possession of any part of his property which is divisible among his creditors or.

(b) to conceal the state of his affairs, or to avoid paying his debts.

(i) has destroyed or otherwise willfully prevented or purposely withhold the production of any document or.

(ii) has kept or caused to be kept false books, or

(iii) has made false entries in or withheld entries from or willfully altered or willfully falsified any document in relation to his affairs,

(iv) fraudulently, with intent to diminish the sum to be divided among his creditors or to give an under preference to any of his creditors,

(v) has discharged or concealed any debt due to or from his, or

(vi) has made way with, charged, mortgaged or conceded any party of his property of any kind whatsoever,

(c) Such a person punishable on conviction with imprisonment which may extend to one year. Therefore there are criminal sanctions, and even imprisonment is contemplated.

(c) Do any of these sanctions have the effect of encouraging the directors of a corporate debtor to seek protection for the corporate borrower under the insolvency law regime?

 

It can be safely said that under the insolvency law regime, action commenced brings about a certain protection for the borrower. Section 442 of the

Companies Act, deals with the power of Court to stay or restrain proceedings against Company. Also Section 446 of the Act is regarding the suits that can be stayed:

"When a winding up order has been made or the official liquidator has been appointed as provincial liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding up, shall be proceeded with against the Company except by leave of the Court and subject to such terms and conditions on the Court may impose".

The sanctions therefore encourage the directors of a corporate debtor seek the statutory protections viz. 'winding up" This is so, as the object of winding up of a company before the Court, is to facilitate the protection and realisation of its assets with a view to ensure an equitable distribution thereof among those entitled and to present the administration from being embarrassed by a general scramble among creditors and others. Consequently, once the Court has taken the assets of a company under its control or has passed on order for its being wound up, it will not be proper to allow proceedings to started or continued against the company and embraces the administration of tits affairs.

(d) Does the presence of the possible application of any of these sanctions create a problem if a corporate debtor which is in financial difficulty or insolvent seeks to negotiate an informal work out with creditors?

 

The presence of the possible applications of sanctions can effect the chances of an insolvent seeking to negotiate an informal arrangement with the creditors. The specter of penalties and sanctions can lead to absconding debtors, and other modes of time delays. Once the proceedings gather speed, the fear of their assets being attached can also lead to the debtors avoiding an informal arrangement with their creditors.

Continued fraudulent trading where there is an intention to defraud or mens rea enables the company court to proceed against the directors or the persons in charge including managers for the acts of fraud either against the company or the members of the public. The normal criminal sanctions against the Companies Act against the directors, former directors or managers by way of misfeasance, malfeasance or non-feasance actions. These sanctions may be monitory penalties or civil imprisonment.

Under the Sick Industrial Companies (Special Provisions) Act, the declaration of sickness suspends the right of making recovery action or execution during the pendency of a scheme of rehabilitation, akin to the provisions of Chapter XI of the Insolvency Law in USA. Directors have a duty under Section 15 and 23 of the SICA to report industrial sickness to the Board for Industrial & Financial Reconstruction.

This procedure is applicable only to scheduled industries. It does afford the corporate directors some protection during prosecution when their scheme or arrangement is pending consideration.