Government simplifies norms under Company Act to wind up small firms

By Express News Service
NEW DELHI: The Central government has notified new rules that will make it easier for smaller companies to wind up under the company law. The move will help lessen the burden on the National Company Law Tribunal (NCLT) and improve ease of doing business for start-ups.

The Ministry of Corporate Affairs has notified the Companies (Winding Up) Rules, 2020, according to which the government will provide companies with assets of up to Rs 1 crore a fast-track procedure for shutting shop, bypassing the legal route that they have had to follow so far. The Centre will provide required approvals to such companies for winding up, instead of the tribunal.

Petitions for winding up of companies, however, are subject to various conditions, including thresholds on turnover and paid-up capital. This will be applicable for firms with asset size of Rs 1 crore. The new rules would be effective from April 1. According to Akila Agrawal, partner and head (M&A) at law firm Cyril Amarchand Mangaldas, the rules seek to reduce, inter-alia, the burden of the NCLT by enabling summary procedures for liquidation to be filed with the Central government.

“Though the draft rules had made this available only for small companies, the final rules make it available to companies that have assets of book value not exceeding Rs 1 crore; and have not taken deposits beyond Rs 25 lakh, have no secured loans beyond Rs 50 lakh, turnover beyond Rs 50 crore or paid-up capital beyond Rs 1 crore,” Agrawal said. Currently, voluntary liquidation cases are primarily taken up under the Insolvency and Bankruptcy Code. “A large part of the procedure applicable to regular companies continues to be applicable to the companies that can opt for the summary procedure. It is therefore unclear if the process will be fast-tracked merely by shifting the jurisdiction to the Central government,” she noted.

New Rules

The new rules mandate that closure of the firm will be carried out by a government-appointed liquidator, who will take charge of the assets and deal with the claims 
If the liquidator finds any fraud that have been committed by shareholders, directors or other officials of the firm, the government may order a probe 
The Centre will issue directions to the liquidator in case of firms going for summary liquidation similar to what bankruptcy tribunals do in other cases

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