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It’s unclear if winding up a small business will get easier

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The rules for the winding up of companies on grounds other than their inability to pay off debts have been long pending. The relevant provisions of the Companies Act were made effective in 2016; and in the absence of such rules, the Companies (Court) Rules had continued to apply.

Though a wind-up option under Section 271(a) of the Companies Act still exists, voluntary liquidations are now primarily undertaken through Section 59 of the Bankruptcy Code, as this is seen as a less cumbersome process. Therefore, the ambit of winding-up petitions under Chapter XX of the Companies Act is fairly narrow. The Companies (Winding Up) Rules, 2020, seek to inter alia reduce the burden on the National Companies Law Tribunal (NCLT) by enabling summary procedures for liquidation to be filed with the Central government.

Though the draft rules had made this available only for small companies, the final rules make it available to companies that have assets of book value not exceeding 1 crore; and have not taken deposits beyond 25 lakh, or have no secured loans beyond 50 lakh, or turnover beyond 50 crore, or paid up capital beyond 1 crore. A large part of the procedure applicable to regular companies will still be applicable to such companies, though they can opt for the new summary procedure. It is unclear if merely shifting the jurisdiction over such cases to the Central government will fast-track the process.

Akila Agrawal is partner & head, M&A, at Cyril Amarchand Mangaldas

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