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The Ease of exiting business

Published: May 19, 2020

By Shweta Jain

Introduction

FOR ease of doing business, the Government is not only relaxing legal framework and norms in terms of extended timeline for filing various forms and returns but has also announced financial assistance for businesses. The Prime Minister has talked about self-reliant India and urged people to promote and use Indian products and brands. India's Rs 20 lakh crore COVID relief package is one among the largest, till date, declared in the world. The Union Finance Minister detailed various measures of support to businesses and ease of doing business under the relief package. Lower penalties for all defaults for Small Companies, One-person Companies, Producer Companies & Start Ups, private companies listing NCDs on stock exchanges not to be regarded as listed companies, including the provisions of Part IXA (Producer Companies) of the Companies Act, 1956 in the Companies Act, 2013 and steps for the creation of additional/ specialized benches for NCLAT are few examples of such measures. All these initiatives are welcome.

The talk, therefore, nowadays is about boosting the business sector so that no one is forced to shut down business during this rough and tough phase of pandemic COVID-19.

For a change, I thought of penning my views on exit from business or closure of business.

When much stress has been put on how to make things workable and easy for a business to run, it must be noted that ease of exit is also equally crucial and important.

Lengthy and highly technical conditions and legal compliance work as barriers to exit. Assets having low resale value and resettlement costs towards employees are also factors causing barriers. These barriers to exit forced people to continue with less profitable projects, resulting in blockage of fund and underutilization of resources. The Eradi Committee in 2000, in its report mentioned that winding up in India is a 'long-drawn affair'. The Irani Committee, in 2005, noted that "the liquidation process in India is costly, inordinately lengthy and results almost complete erosion of value."

There are several ways of exit for companies under the Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016 ('Code'). Some are voluntary while some of them are involuntary.

Voluntary Liquidation

A solvent company can be allowed to opt for voluntary liquidation under the Code. The appointment of liquidator is decided upon by the shareholders at the same general meeting of shareholders wherein the resolution approving voluntary liquidation is passed and NCLT has a role to play at the final stage of filing of application for dissolution. Creditors' approval by 2/3rd majority is sufficient if there is a debt.

Winding up by NCLT

Section 271 of the Companies Act provides for winding up by way of member's special resolution or an application of Registrar for non-filing of Financials for 5 consecutive years and for other reasons set out under the law. This type of winding up process has significant involvement of NCLT as well dependence on the company liquidator and the creditors. If a company defaults in repayment of loan or advances, then the only option before the creditor is to take the company to insolvency through the route under the Code and creditors cannot opt for winding under section 271 of companies Act.

Mergers and amalgamation of Companies

In merger/ acquisition Transferor Company dissolves pursuant to the scheme. Company dissolves irrespective of its existing liabilities, provided that due assent is received from the shareholders and creditors, as well as approval of the scheme by the NCLT. A fast-track merger is also possible for specified categories of companies. For fast-track merger, the concerned authority is the Central Government/regional director.

Summary liquidation

Section 361 of the Companies Act deals with the summary liquidation procedure for certain classes of companies. The long winding up rules applies to both the modes, section 270 as well as section 361 of the Companies Act.

Insolvency Liquidation

An insolvency process under code can be initiated by the creditors, either financial creditor under section 7 or operational creditor under section 9, upon default in payment by the company. NCLT is an adjudicating authority and all activities, decisions and progress have to report to NCLT. Liquidation process follows, if resolution fails. The company can also opt for self-filing under section 10 of the Code.

Striking-off Company

Section 248 of the Companies Act allows companies having no operations/ nil assets and liabilities to dissolve the company in a quick and easy manner, substantially reducing dependence on a professional and on representation before the NCLT, unless an appeal for revival is filed.

Processes such as insolvency or merger/ acquisitions are comparatively lengthy as well as costly process. Company's choice of option depends on factors like time, cost and other commercial considerations. When the code was introduced one of the aim was to reduce the time involved for closure of the company or the revival of businesses, but the present reality is that NCLTs are over-burdened with matters, the timelines are further extended and leading to unwarranted delay. Data reveals that out of the total number of cases before NCLT, more than half are under Code alone, and the remaining matters deals with oppression and mismanagement, revival of companies etc.

Conclusion

Even if there are various options for exit, yet there is a need to revamp the infrastructural set-up so as to speed up the success rate. Whatever is exit route, it should take care of the interest involved of other stakeholders like employees, creditors, shareholders, revenue authorities etc. The burden on NCLT needs to be reduced. It can be done by setting up more benches and mandatory imposition of a fine for frivolous litigation. The law needs to be sufficiently equipped with penal provisions for discouraging unhealthy conduct of those stakeholders who might act with self-serving interests to the detriment of others. It is very important to understand that if we are making entry into business easy for people, then it has to be equally balanced by creating an easy exit route,otherwise it will only demotivate ventures with a high-risk element from entering into the market.

[The views expressed are strictly personal.]

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