Companies might get a sigh of relief soon as ministry of corporate affairs is now gearing up to work on the process of insolvency reforms. Opening a business has been tough in India but closing it is even massive. If a company wants to close its business to enter an alternative avenue, it has to wait for a long time because of the legal formalities involved in the winding-up procedure.
As per a World Bank report, average time taken in disposal of cases of winding up in high courts is 10 years and the recovery rate too is very low. An MCA spokesperson told FE, ?Right now, the insolvency law reform proposal is in front of the Planning Commission and we are waiting for their approval. The proposal once passed will help in solving one of the major problems relating to corporate functioning in the country, which is the slow liquidation process.?
Delays in resolving insolvency issues result in physical, financial and human assets of the company losing value overtime. There is an increase in the investment risk as there is a blockage of capital that has been invested in the company. In the slow liquidation process, the value of the assets is significantly reduced which has been a big drawback for the corporates.
?A reform in insolvency regime will go a long way in retrieving the investment otherwise blocked in non-operative companies and putting them back into productive channels. This will also enhance the value of the investments made by the stakeholders,? said Ashok Haldia, secretary, ICAI.
For facilitating easy exit of defunct companies, the ministry launched two simplified exit schemes in 2003 and 2005 to identify and strike off names of such companies. About 52,000 companies were struck off in 2003. Again in 2007, action for striking off names was also initiated in respect of companies that had had not been filing their mandatory documents for over three years continuously. Another 50,000 companies were struck off the list and the process is going on.
Winding up other than defunct companies takes place under the supervision of high court under the provisions of the Company?s Act 1956. During the winding up of the company, an official liquidator (OL) is appointed by the high court that works as per its directions but administratively he is an officer of MCA.
An MCA source said the ministry was trying to improve the functioning of the official liquidator throughout India so that the winding up process can be easier, more transparent and faster. It is also planning to incur huge expenditure in computerisation, infrastructure of official liquidator?s offices and the processes associated with it.
The institutional framework exit route of the companies in India is not at all simple as the existing framework is not as per the requirement. Against the 28 benches of high court in India, only 16 offices of OLs exist to assist the high courts. Moreover, there is a dual control over OLs- high courts and the Centre. There are infrastructural inadequacies as well as poor record and process management by OLs.