(a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the administrative organs/entities involved in the implementation and management of that procedure? (For example a trustee, liquidator, receiver, government official.)

(b) What qualifications must each type of administrator of insolvency procedures possess? Is there a system of regulation of insolvency administrators in this economy?

(c) Are the creditors of a corporate debtor permitted to participate in the administration of the relevant insolvency procedure, and if so, how? (For example are the creditors permitted to assist the administrator, or supervise or dictate the conduct of the administration?)

 

Administration of insolvency procedures generally:

As explained above in relation to corporate insolvency the official liquidator as an officer of the court or the court receiver as an officer of the court are dealing with insolvency related procedures.

Under the Sick Industrial Companies (Special Provisions) Act, the Board for Industrial and Financial Reconstruction as appointed by the Government and the Operating Agencies being public financial institutions or banks administer the rehabilitation aspects of industrial sickness of Schedule I industries as explained above. In special companies like banks or non-banking financial companies the RBI administers or request for the winding up of insolvent non-banking financing companies or banking companies.

Since the insolvency administrators are appointed by the court, these officers are usually qualified in law. There are no statutory qualifications under the Company Court Rules for appointment of the Official Liquidator since it is a corporation sole and its employees are supervised by the Company Court. The same provision is true of the Court Receiver which is also a corporation sole created by the original side rules of the High Courts. Liquidators other than the Official Liquidators employed in voluntary winding up should not be bodies corporate. There are specific rules relating to official liquidator's accounts and procedures applicable for the official liquidator.

These are contained in the Company Court Rules, 1959 which have been settled by the Supreme Court of India. Part III of the Company Court Rules are extensive and Rules 95 to 338 dealing with all aspects of the liquidator's functioning and the procedural rules in the inter-action of the official liquidator and the Company Court, as also with unsecured and secured creditors.

The unsecured creditors of a corporate debtor can, in accordance with the substantive rights contained in the Companies Act and the procedural rights given by the Company Court Rules, participate in the administration of insolvency procedure.

They can propose a scheme of arrangement and composition to rehabilitate an insolvent company. This is equally true of the procedure under the Sick Industrial Companies (Special Provisions) Act. By petitioning the Board or the Company Court with a viable scheme of arrangement the Board or the Company Court can convene a general meeting of the shareholders or the creditors to accept a scheme of arrangement and revive the company. If a scheme of arrangement is sanctioned with a special majority then the Company Court can monitor the scheme of arrangement and can suspend creditor claims if they are not in accord with the revised or novated rights of the creditors pursuant to the Company Court's sanction. This is also true of the functioning of the BIFR.

The Official Liquidator can call upon uncalled capital or calls for partly paid shares to meet liabilities and the contributories would have to pay for such unpaid calls.

The creditors can also petition the Company Court or the Official Liquidator to take custody of the company's properties and to prevent fraudulent actions on the part of persons presently in management or the former directors. The Creditors are permitted to render assistance to the court if they are secured creditors for seeking administrative directions from the Court for the receiver. However, the Company Court normally dictates and directs the Official Liquidator.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the powers given to each type of administrator by statute, at general law or pursuant to the terms of the appointment? (for example power to carry on the business of the organization, to pay creditors, to compromise claims of or against the debtor, to issue or defend legal proceedings, to obtain credit, to sell property, to execute documents on behalf of the debtor.)

(b) To what extent and in what circumstances may each type of insolvency administrator seek assistance, advice or direction in the conduct of the administration, and from what sources? (for example the Court, his appointor, the creditors of the debtor, a solicitor, accountant or other relevant person.)

 

The powers of the Official Liquidator are provided in the Companies Act and the procedural directions available to an Official Liquidator are stipulated in the Company Court Rules, 1959 – Part III (Rules 95 to 338). The powers of the Official Liquidator under the Companies Act are stipulated in Section 457 of the Companies Act and include the power to litigate the Board, to carry on business for the beneficial winding up of the company, the power of sale of property as a whole or in parts, the power to raise on the security of the assets money required, and to take all steps for distribution of assets and winding up of the affairs of the company. The power of executing contracts, inspecting the files of the company with the Registrar without fee, proving and ranking the claims of creditors of the insolvent, the authority to make negotiable instruments and to appoint agents are also statutorily prescribed. These are statutory powers and are automatically available upon the appointment of the official liquidator on demand of a winding up petition.

As explained above the Official Liquidator can seek directions from the Company Court for exercise of its powers and for the orderly winding up of the affairs of the Company. For each kind of right or power made available to the Official Liquidator the Company Court would have to give directions both on the administrative side and on the judicial side when there is a contest or claim or petition moved by the creditor or the former directors or secured creditors for reliefs. The Official Liquidator can seek the assistance of the court for private advise and when directions are given to incur expenses and to enter into contractual rights the Official Liquidator can do so.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the duties imposed upon each type of administrator by statute and at general law? (for example a duty to take possession of assets of the debtor, to realise those assets, to discharge the debt owed to his appointor, to call for proofs of debts owed to creditors, to adjudicate upon claims of creditors, to apply available assets in discharge of those claims, to report on the conduct of the debtor by the proprietors.)

 

The provisions of Section 451 of the Companies Act indicate that the Official Liquidator is to conduct the proceedings in winding up and to perform such duties in reference thereto as the court may impose. Duties in relation to the drawing up the statement of affairs of the company, reporting as an Official Liquidator keeping in custody the assets of the company and distribution of the assets pursuant to the claims made and under orders of the Court are the general duties. There are specific provisions as mentioned above for the accounting by the Official Liquidator and there are special accounting rules applicable. There is a power given to the Official Liquidator to examine the former directors or managers and to take action against absconding persons who do not render accounts or the statement of affairs of the company. The official liquidator has to realize assets, to pay out dividends to the creditors equitably to call for proofs of the debts and to report generally as is the normal law for liquidators.

(a) What remedies and/or sanctions are available in the legal system of this economy in respect of breaches of duty or transgressions committed by each type of insolvency administrator?

(b) Have there been actual instances of breach of duty or transgressions committed by insolvency administrators?

(c) If so, give the details of any major cases and a summary of the action taken and the results.

 

Under the provisions of Section 514 and 515 of the Companies Act any person who agrees or offers to give any gratification for securing the appointment of a company liquidator can be removed.

Under Section 513 of the Companies Act a body corporate is not qualified for appointment as a Liquidator though a firm of Chartered Accountants may be appointed as Liquidator. The Company court has the power to remove a Liquidator on cause shown i.e. some unfitness of the person or mis-feasance or mal-feasance or mis-appropriation or non-observance of the wishes of the creditors in a company meeting. The courts have also recognised the doctrine of conflict of interest of a liquidator.

When a Liquidator other than an Official Liquidator is appointed (example in a voluntary winding up), then the Liquidator has to furnish security in the sum and manner directed by the Court. The Official Liquidator is subject to audit as directed by the Court (see Rules 302 to 307 of the Company Court Rules). The Official Liquidator can take upon the accounts of a Liquidator not being an Official Liquidator, especially when appointed by the District Courts and detailed rules and books of accounts have to be maintained for investments made and expenses incurred.

Statutory forms for receipts and payment accounts are prescribed by the rules. Accounts are to be filed on affidavit and the consequences of mis-statement and perjury will be visited on a false affidavit by the Official Liquidator. The Judge in the Company Court has the right to examine the Official Liquidator and if unsatisfactory accounts are maintained the Official Liquidator and the individual employee can be personally held liable and subject to prosecution sanctioned by the Company Court which may include criminal offences for mis-appropriation.