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The Exit Labyrinth

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If you thought starting a business was difficult, try winding it down voluntarily. ABC Constructions (name changed on request) was registered with the Registrar of Companies (RoC), Jalandhar, in 1999 with an initial capital of Rs 1 lakh. In September 2005, the management passed a resolution to dissolve one of its subsidiaries and a liquidator was duly appointed. At that time, according to the company's auditors, the subsidiary had 100 per cent investment from its parent, no liabilities, and assets of more than Rs 75 lakh. But, more than four years later, the management is still waiting for the liquidator's report, as there's no set deadline. "This is not a multi-billion turnover group," says the company's auditor. "The parent group has blocked the capital assets, which could have been used to generate revenues, but they are as good as dead now." Now, not only has the management decided not to pursue the case further, another subsidiary it wanted to dissolve has been stripped of its assets and left comatose.

Industry experts say the situation arises largely because of the paucity of liquidators —there are only 16 LOs (liquidator officers) compared to 28 benches of high courts in the country. "Other than this, it's time there is a computerised system in place," says a liquidator. "An investor has a right to know the status of the file of his case whenever he wants.''

Winding down is a tedious, time-consuming and thoroughly discouraging procedure (see ‘The Long winding path to closure'). What takes 1.7 years of procedural time in the OECD (Organisation For Economic Co-Operation And Development) countries, to which most developed nations belong, can drag on for no less than seven years in India. It is not surprising, therefore, that ‘Doing Business' IFC World Bank report 2010 ranks India at 133, behind Pakistan (56), Sri Lanka (45) and Bangladesh (108). One of the denominators in computing this index is the time taken to exit a business, where India comes a cropper.

The Long, Long Wait
"Six-seven years is too much time for dissolving a company," agrees a senior official at the Ministry of Corporate Affairs (MoCA), who wished not to be named. "It has to be cut short but, we feel, the creditors, investors and stakeholders should not lose. If we can accelerate the system while protecting them, it should be done, and we are committed to doing it."

 In OECD countries, it takes 1.7 years to close a company, in India it
takes seven years. Here's why

  1. Board of directors pass resolution for voluntary winding up. Declare solvency with audited balance sheet.
  2. Liquidator appointed within five weeks. In next 10 days, ROC informed, and advertisements placed in official gazette and two newspapers (English and vernacular).
  3. Form 23 to be submitted to RoC in a month; Statement of Affairs filed in Form 57, in 21 days from liquidator's appointment.
  4. Notice of (the liquidator's) appointment is given to RoC, income tax (I-T) and commercial tax authorities. Published in the official gazette within a month.
  5. Taking clearance from I-T dept and Foreign Exchange Management Act in case the company has foreign investment. It could take anywhere between a month to two years.
  6. If the liquidator doubts the company's ability to pay its debts, statement of assets and liabilities (Form 150) has to be placed in front of creditors.
  7. If more than a year elapses, he calls a general meeting and lays a statement of his acts and dealings, together with the statements in Forms 153 and 154.
  8. The liquidator realises all assets, settles all liabilities and distributes surplus, if any, among contributories; prepares a statement in Form 156 and gets it audited.
  9. Lays statement of accounts before company's contributories; passes resolution for disposal of books and papers of the company.
  10. Lays statement of accounts before company's contributories; passes resolution for disposal of books and papers of the company.
  11. Within a week, a copy of the final statement of accounts to be filed with RoC and official liquidator together with a return in Form 157; liquidator to file Form 23 with RoC within 30 days.
  12. Liquidator to verify books and records of the company and file a report with the high court, asking for dissolution of the company. Maximum delay, of several years, can happen here.
  13. Certified copy of the high court's dissolution order filed with RoC.

On the ground, companies leave non-viable entities as defunct bodies on the RoC's roster. "More than 30 per cent of registered companies do not file annual reports, and we think these companies should be struck off from the roster," says Avinash K. Srivastava, official spokesperson of the MoCA. There are 850,000 companies registered with the 21 RoCs in the country.

So, "we recommend our clients opt for closure only when they are bound by some legal requirement or their assets have to be withdrawn, otherwise it is a waste of time and resources," says a Delhi-based auditor requesting anonymity. "I have not heard of action, either by the Serious Fraud Investigation Office (SFIO) or the RoC. At the most, their names will be struck off the RoC. The law is not a deterrent in this case."

That is a shame, because quick closure not only inspires investor confidence, but also allows assets to be released for use in other business ventures. Besides, timely action allows the liquidator to evaluate the true value of assets, and restrains managements from manipulating the books. It is widely known in government investigative circles that some investors even resort to hawala rackets to save their assets.

"As per the present Companies Act, agencies such as the Board for Industrial and Financial Reconstruction (BIFR), RoC and the local high court are involved," says Mumbai-based chartered accountant Suresh Surana. "Multiple authorities compound delays. In the age of e-documentation, this time could be cut short. It is high time now to opt for a single-window system."

The lack of a single-window system, which does not feature in the Companies Act or its new draft bill, is the biggest drawback. For instance, a Chennai-based 100 per cent subsidiary of a US-based technology company (name withheld) that was registered with the city's RoC in 2001 with a paid-up capital of Rs 1 lakh, opted for liquidation in 2007. "We would be happy if it happens in five years," says its auditor, sharing the documents of the company management's resolution, which cleared the decks for the appointment of a liquidator.

"This long drawn-out closure process does play on the mind of an investor considering a foray into the country," says Amrita Goel of Mumbai-based ELP Consultants. "Reducing  interventions by the courts will minimise the abuse of the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, and frivolous claims placed before the BIFR." Srivastava says the RoC has recently been asked to strike off all companies that have not filed reports for the past 5-6 years, and that do not have any pending dispute, either in any court or with any government department. If the apex court allows the formation of the National Company Law Tribunal (NCLT), Srivastava says, it will certainly help more companies opt for voluntary closures. The NCLT would have the jurisdiction of a high court, and will be able to clear cases. 

Quicker, Faster, Better
In other recent developments, the MoCA has allowed e-filing, e-stamping and digital documentation, enabling entrepreneurs to start a business in a single day. "But to close a business, there is trouble still looming large," says Binoy Chacko, a Bangalore-based company secretary.

However, the authorities alone are not to be blamed. "Delays are also caused by directors who do not file their Statement of Affairs on time, or creditors who delay lodging their claims," says Mumbai-based lawyer Pranay Bhatia.

The only ray of hope is to be found in the draft provisions for the NCLT in the Companies Law Bill of 2009, although the process for this was initiated in 2003. Bhatia suggests specific provisions be made to ensure that the books of accounts are complete and audited up to the date the winding-up order has been issued by the ex-directors of the company, and its expenses met out of the company's assets. "It has been a point of contention in most liquidation processes, and should be fixed forever," he says. "Foreign creditors should be allowed to prove their claims only on reciprocal basis." Indian investors believe that the government is more inclined towards foreign investors and moves their files faster.

Like in life, everything that is created must also meet its end. The key is to ensure swift and painless closure.


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