No. 51/14/2012-Insolvency Section, Dated 27th March, 2012

Government of India, Ministry of Corporate Affairs, New Delhi -110 001.

Subject : Draft Manual on the functioning of Official Liquidators.

Sir,

The Official Liquidators (OLs) are appointed under Section 448 of the Companies Act, 1956 and on winding up order being made in respect of company; Official Liquidator becomes Liquidator of the company under section 449 of the Companies Act, 1956.

2. In order to streamline the functioning of OLs and improving their efficiency and bringing uniformity in their working, this Ministry is considering preparing a Manual on the functioning of OLs. Various stakeholders from corporate sector, professionals such as Advocates, Company Secretaries, Chartered Accountants, Valuers etc. are connected with the functioning of the OLs. In addition, members of citizens, opinion makers, practitioners and theorists in the field of administrative and legal reformers may also be interested in these reforms

3. All are welcome to examine the draft Manual and furnish comments/suggestions to this Ministry within a period of one month through e-mail on the following e-mail address: –

adinsolv-mca@nic.in rd.ser@mca.gov.in

Yours faithfully,

(Jaikant Singh)

Director

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PREAMBLE

Chapter VII of the Companies Act deals with winding up procedures to be followed for liquidating the affairs of the company. The present Companies (Court) Rules, 1959 framed by the Hon’ble Supreme Court of India supplement the winding procedures and it has the effect of an act of Parliament. It provides for every segment of liquidation exhaustively till dissolution of a company in liquidation. However, there are certain areas where various High Court issues instructions to carry out a certain function in a particular manner thus leading to variation from the procedure followed by one Official Liquidator to the another Official Liquidator in the same matter.

2. It has been the experience of many Official Liquidators that wherever there were no specific Rules for a particular act/incidence the Court exercised inherent powers vested in it under Rule 9 of Companies (Court) Rules, 1959. The objective of the inherent power is to enable the Winding up Court to give such directions or pass such orders as may be necessary for the end of justice or to prevent the abuse of process of the Court.

3. Part III of the Companies (Court) Rules, 1959 deals with winding up by Court. The role of the Official Liquidator commences only when he is delivered with a copy of the winding up order for a company or an order appointing him as Provisional Liquidator passed by the Winding up Court of the High Court. Till then, he has no role to play. Even before a company is ordered to be wound up on admission of a petition for winding up of a company by a Court, upon the application of the creditor or a contributory or the company, if the Court thinks fit, upon satisfying itself for appointment of a Provisional Liquidator, the Official Liquidator used to be appointed as Provisional Liquidator. Even though Rule 106 (2) specifies that the order appointing the Provisional Liquidator shall set out the restrictions and limitations on his powers, seldom the order specifies the same. Whether the power is so specified, he has to function accordingly. It is noted that  generally such orders are not specifying or limiting the powers of the Provisional Liquidator and therefore he has all the powers of the Liquidator of the company under liquidation.

4. Therefore, the triggering point for action on the part of the Official Liquidator is receipt of either an order appointing him as Provisional Liquidator or the Official Liquidator of a company. The Companies (Court) Rules, 1959 does not provide for the time within which the order appointing him as Provisional Liquidator or Official Liquidator is to be communicated to him by the Winding up Court (Registry). In a few cases the order of his appointment as Official Liquidator/Provisional Liquidator reaches him late and consequently he activities belatedly. In such cases, he can defend very well for non action on his part, if any.

5. Where the company is not the Petitioner, the Official Liquidator shall cause sealed copy of the order served upon the company by RPAD at the Registered Office of the company or any other office as may be available from the records of Registrar of Companies. If the Court has issued a direction to Official Liquidator to issue advertisement on the winding up of a company, he may do so. In the case of winding up orders passed pursuant to the recommendations of BIFR or its appellate body, invariably the Courts issue direction to the Official Liquidator to advertise the winding up order made on the BIFR’s recommendation. The Official Liquidator may have to look to the secured creditors/ operating agency or Common Establishment Fund to fund the advertisement cost after obtaining the Court’s order. This Manual has been attempted to guide the Official Liquidator to be conversant with various course of action to be taken in appropriate time in the best interest of the liquidation.

6. Though the Act says any transaction of transfer of property or payment made within 6 months or one year before commencement of the winding up as per Section 531/531A of the Act is invalid per se. The Court’s  have examined the matter from various angles like whether the transaction is done in good faith and for valuable consideration, whether there is collusion between the company in liquidation and the purchaser whether the transaction is intended to deny the creditors the said assets etc,. If the preference is made under duress/force, (any legal proceeding threatening the functioning of the company /credibility /business /winding up to say a few instances of force) then the transaction is not held to be a fraudulent preference. The burden of proof is on the Liquidator to prove that there is a fraudulent preference attracting the provisions of Section 531/ 531A of the Act.

7. Likewise, the applicability of Section 531A has to be examined by utilizing the documents mentioned in the above Para and here it should be examined whether the property or delivery of goods etc. has been made in good faith for a valuable consideration and in the ordinary course of business. The burden of proof is on the Official Liquidator and he has to examine the matter on the basis of the facts of the case and in the light of the various judgments pronounced by the Hon’ble Courts. This has been brought out in the Manual.

8. In the matter of Official Liquidator taking misfeasance proceedings, the judgment of the Hon’ble Supreme Court of India in Official Liquidator Vs. Raghava Desikachar (1975) 45 Company cases and Official Liquidator Vs. P.A. Tendolkar (1973) 43 Company cases where it was held that the Official Liquidator has to establish the misfeasance/malfeasance/ fraud/siphoning of funds, etc. against each respondent directors on the basis of the documentary evidence. Though the above two case laws are very clear about the applicability of Sections 542 & 453, Official Liquidator may advance his case, if the Directors have not filed the SA and not handed over the books of account and records, as it is the basic responsibility of the Directors to have filed the Statement of Affairs and handed over the books of account and records. If the Official Liquidator wants to use the above argument, he should have filed prosecution for non filing of the Statement of Affairs and non handing over of the books of account and records under Sections 454 and 468 respectively.

9. The Manual shall be in addition to the Companies (Court) Rules, 1959 and not a substitution and wherever there is conflict, the Companies (Court) Rules, 1959 shall prevail.

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