MCA reworks rules for winding up businesses
PremiumIt is to give firms a chance to make a case for exit through electronic filing
The ministry of corporate affairs (MCA) has revised the rules on voluntary winding up of companies to give additional opportunities to companies for making the case for an exit through electronic filing after the initial request.
The idea is to make the corporate exit process under the Companies Act provisions, outside the Insolvency and Bankruptcy Code (IBC), smoother. The move seeks to improve the business climate as ease of exit is a consideration for many entrepreneurs before they commit investments.
Before allowing voluntary closure of businesses, the registrar of companies has to make sure that the company has no assets or liabilities and needs to review the latest financial statements.
The Companies (Removal of names of companies from the register) Amendment Rules 2022 notified by the ministry offers two additional opportunities for businesses to rectify their application for closure and to provide any additional information sought by the registrar. On each of the occasions, the businesses can furnish the information within 15 days of intimation by the regulator, according to the order.
Voluntary winding up offers an opportunity for companies with little economic activity to down their shutters outside the IBC process. This is vital for the industry as many entrepreneurs remain unable to commence business operations for various economic reasons after incorporating a company. This is separate from the regulator striking off the name of the company from the register for defaulting on filing annual returns for two consecutive years. At present, around 40,000 companies are being removed from the official database this way. Companies that do not commence operations after incorporation have the option to seek ‘dormant status’ to avoid getting struck off by the regulator.
Voluntary winding up under the Companies Act and the corporate restructure option available under a 2019 Reserve Bank of India scheme are two options other than IBC available to businesses.
The government has been taking several steps to address industrial sickness. IBC has increased the pace of resolving bankruptcies, but legacy cases transferred to the National Company Law Tribunal from the previous regime of the Board for Industrial and Financial Reconstruction dominate cases of liquidation under the IBC regime. These cases with little assets offer no chance of a turnaround. The government is working on amendments to the IBC and a Bill is expected to be placed before Parliament in the monsoon session. The proposals include a cross-border insolvency regime and steps to reverse questionable transactions of bankrupt firms.
Experts said that voluntary winding up and removing defunct companies by the registrar help keep the official database clean and manageable at a time the government is scaling up services to the industry. Keeping the database manageable is also vital for effective enforcement. MCA recently rolled out a new module for limited liability partnerships on its compliance portal MCA21 and is rolling out a similar module for companies. The ministry is increasingly relying on data analytics and artificial intelligence to detect trends from the vast amount of statutory filings by companies that may warrant detailed inspection.