(a) In relation to each type of insolvency procedure available in the legal system of this economy, what assets of the corporate debtor are available to its administrator to satisfy the claims of its creditors?

 

Assets Available to Creditors Generally.

Under the provisions of the Companies Act, the official liquidator can take into custody or control any property effects or actionable claims to which the company is or appears to be entitled. The books of account or other documents of the company are also taken into the custody of the liquidator. The district magistrate or the company court can give notice to the party who is in possession of such property effects, actionable claims, books of accounts or other documents for delivering possession of the official liquidator. In the event of a secured creditor having established a receivership over his security then unless leave of the court appointing the court receiver is taken, the official liquidator cannot take into his possession and custody the security in the possession of the Court Receiver for secured creditors.

This is for the reason that the company is not entitled to the custody or control of such property as it merely has an equity of redemption. Section 456 of the Companies Act regulates this procedure. Equally a receiver cannot be appointed of assets in the hands of a liquidator except by or with the leave of the company court under Section 453 of the Companies Act.

(a) To what extent and in what circumstances may the administrator of a corporate debtor take steps to recover assets of the debtor by overturning past transactions involving property of the debtor? (for example preferences given to certain creditors over others, invalid charges granted by the debtor, uncommercial transactions entered into by the debtor, profits on sales to and from the debtor at an undervalue or overvalue.)

(b) What powers or mechanisms are available to each type of administrator for investigation of the affairs of the corporate debtor, for examination of persons formerly involved in the management or control of the debtor, and for the discovery of assets of the debtor?

Avoidance of past transaction affecting the assets of a corporate debtor.

Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to the property made, taken or done by or against a company within 6 months before the commencement of its winding up, which had it been made, taken or done against an individual within 3 months before the presentation of an insolvency petition on which he is adjudged insolvent would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up have deemed to be a fraudulent preference of its creditors and be invalid.

Preference made not in the ordinary course of business or in favour of the purchasers or encumbrancer in good faith and for valuable consideration is liable to be set aside as void against the liquidator. Any transfer or assignment by the company of its property to trustees for the benefit of creditors is also void.

Any person preferred is subject to same liabilities as persons in management, who have given a fraudulent preference (Section 533 of the Companies Act).

Where a property has onerous covenants or constitute unprofitable contracts the liquidator can disclaim such property within 12 months from the commencement of winding up.

Under Section 536 of the Companies Act any transfer of share made after the commencement of the winding up is void. Any attachments, distress or execution put without the leave of the court against the estate of the company after the commencement of winding up or any sale without the leave of the court of any property or effects of the company after such commencement is void under Section 537 of the Companies Act.

Section 538 of the Companies Act prescribes offences by officers of company in liquidation for offences against the company or creditors in relation to fraudulent removal of property, concealment of property, non-maintenance of books, non-delivery of books, non-delivery of the custody of movable and immovable property, suppressed value sales, omissions in relation to the statement of affairs of the company, false claims of debts, destruction or mutilation of records, making of false entries, fraudulent alteration of entries, making of fictitious losses or claims, false representation or obtaining credit, fraudulent punning or disposal of property of the company for obtaining credit not paid for. There are independent penalties for falsification of books and frauds by officers under Section 539 and 540 which may extend to imprisonment for seven or two years respectively. There is a liability for non-maintenance of proper accounts for upto one years imprisonment. In the event of a person having fraudulently conducted business, Section 542 imposes a two years imprisonment and a fine of Rs.5,000.

The court can assess personal damages against the past directors or present directors, managers, liquidators or officers of the company who have mis-applied or retained property of the company or has been guilty of misfeasance or breach of trust in relation to the company. This claim in damages is in addition to the criminal liability incurred. The court can direct prosecution under Section 545.

Under the Companies Act once a company is ordered to be wound up, Section 554 of the Companies Act requires a statement of affairs to be made to the official liquidator in a prescribed form and verified by affidavit. Such a statement of affairs has to be made by the present or past directors and/or the managers and would indicate the assets, cash and bank balances, securities, debts and liabilities, names, residential addresses and occupations of creditors, the debts due to the company and such information as the official liquidator may require (Section 454). If a person fails without reasonable excuse to make such a statement of affairs, he should be punished with imprisonment for a term which may extend to two years or with fine of Rs.100 per day.

 

(c) What procedures may be employed by each type of administrator for the recovery of assets of the corporate debtor which are available for distribution to creditors? (for example initiation of legal proceedings, compensation from directors.)

 

Answered above.