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Introduction to Section 316
Section 316 of the Companies act, 2013 lay down the provision regarding the progress report of winding up which is to be submitted by company liquidator. It was part of chapter XX of companies act 2013, dealing with winding up of companies. It was contained in part II of chapter XX which is now omitted by the Insolvency and Bankruptcy code, 2016 (IBC) vide its section 255 and schedule XI. The code, 2016 consolidates all the laws on insolvency under one heading, thus increasing the efficiency of the procedure and at the same time empowers the creditors by creating a time bound resolution. This analysis will briefly explain the section as stood before its omission and its history and its status under IBC if any.
Purpose of Section 316
This section prior to its omission read as following briefly:
- The company liquidator had to quarterly report on the progress of winding up of the company to its members and creditors in such manner prescribed.
- The company liquidator also had to call a meeting of members and creditors as and when necessary, but at least once in every quarter and apprised them of the progress of the winding up of the company in the prescribed manner.
- If the company liquidator did not comply with the provisions of his section, then by default it was liable to pay a fine which may extend to one lakh rupees.
This section basically tried to keep the members and creditors in the loop and informed them about the process of winding up, which would greatly impact them being members and creditors, by entrusting it as a duty of company liquidator.
Now after the enforcement of IBC, 2016 section 59 of the code lays down the procedure for voluntary liquidation of a company. The procedure in brief is as follows:
- A corporate that has not committed any default, can initiate the process of voluntary winding up under this section.
- Voluntary liquidation under this section has to meet such conditions and procedural requirements as may be specified by the board.
Following conditions have to be meet by the company for voluntary liquidation under this section without prejudice to requirements specified by the board:
- Declaration affidavit have to be given by majority directors stating (1) inquiry was made into affairs of the company and it is the opinion that firstly the company has no debt or secondly that it will be able to pay its debt from the proceeds of assets sold during winding up (2) company is not being liquidated to defraud anyone.
- Declaration has to be accompanied with (1) audited financial statements and business record of last two financial years (2) a report of valuation of assets of the company if prepared by a registered valuer.
- Within four weeks of this declaration, there needs be (1) a special resolution passed in general meeting requiring the company to be liquidated voluntarily and an insolvent profession should be appointed as a liquidator (2) resolution in a general meeting requiring the company to be liquidated voluntarily. Provided that if the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company will have to approve the resolution passed above within seven days of such resolution.
- The company has to notify the registrar and board about the above resolution within seven days of such resolution being passed.
- From the date of passing of such resolution, the process of voluntary liquidation shall be deemed to be commenced subject to approval of the creditors.
- Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator must make an application to the adjudicating authority for dissolution of such company and thus ending the process.
- The adjudicating authority will on application filed by the liquidator pass an order that the company shall be dissolved from the date of that order.
- A copy of the above order shall be within fourteen days forwarded to the authority with which the company is registered.
In the above procedure it is evident that the requirements of section 316 are not a part of voluntary liquidation as provided under IBC, 2016 which has replaced the procedure as laid down under companies act 2013.
Situation Before the Enactment of Section 316
The old companies act of 1956, which was followed in India before the act of 2013 also had provision of the same line. Section 496 and section 508 together provide for meeting by company liquidator of members and creditors. The sections are not totally similar. Under the Old Act, the liquidator is required to call the meeting of the members and/or the creditors, as the case may be, only in cases where the liquidation continues for a period exceeding one year. Such meeting shall be called at the end of first year from the date of commencement of winding up and at the end of each succeeding year, or as soon as thereafter as may be convenient within three months from the end of the year or such longer period as the Central Government would allow. The New Act provides for a quarterly reporting system and convening of the meeting. The new act safeguards the rights members and creditors and tries to keep them informed and involved in the process of winding up. In the old act, the penalty for non-compliance was just thousand rupees whereas the new act extends it up to one lakh, giving priority to these reports and meetings and making sure that company liquidators don’t take these lightly.
Application of Section 316
This particular section had application during the time of voluntary winding up by the company. Due to this section the creditors and members were kept informed of the procedure and kept in the loop so their interest can be safeguarded.
There have been no amendments to this section under the 2013, as it had never been notified and prior to enforcement of IBC, 2016, voluntary winding up and winding up by tribunal was governed by the provisions of 1956 act. This section along with other provisions of part II of chapter XX were omitted and now no more form part of companies act. Voluntary winding up now takes according to insolvency and bankruptcy code, 2016.
This section of the act, 2013 is no more and thus there isn’t a lot of material and discussion on it as just after three years of its inclusion by 2013 act it was omitted by IBC, 2016. Now a company who has not committed any default but intends to liquidate itself voluntarily follows the procedure as laid down by IBC, 2016 under section 59 along with relevant regulation issued under IBC. Winding is a very important process and is done for much reason. By switching to IBC not only the efficiency increased but the procedure is also streamlined.
Also read, The relationship of director with company: a primer on the responsibilities and relationship.