Introduction
When it comes to corporate law and bankruptcy, the fate of a liquidated company appears predetermined. Most of the times, once companies are strike off from register of companies, it seems that the company ceases to exist with no space for additional reregistration. However, there is a key to recover from the legal challenges i.e. restoring the company's name in the register of companies. This might sound simple to one but it's a critical process, especially in the case of Corporate Insolvency Resolution Proceedings (CIRP) commenced against a liquidated company.
Corporate insolvency and its legal consequences are complex, often involving complex cases and legal precedents. It includes the case of Satyabrata Mitra & Ors. v. Earth Towne Infrastructure Pvt. Ltd. stands out as a milestone, providing valuable lessons on restoration of name of the company in the event of a corporate bankruptcy. This blog explores key insights from this judgment and their implications.
"Let's dive into some key takeaways from this judgment along with their implications. It is essential that before understanding the impact of name restoration we should know what company law is about and who all are involved in insolvency. In most cases, a struck-off company, is non-existing in law."
Main blog
The Corporate insolvency Resolution Plan (CIRP) is a framework of Insolvency and Bankruptcy Code (IBC) that helps creditors recover their debts yet allowing company stay afloat. But for a defunct company, initiating CIRP is a hurdle which can be solved only through reviving the name of the company.
Reviving the corporate personality of a company, is a ground for legal action. The importance of restoring the name of the company as a legal action ground is highlighted by Mr. Hemang Phophalia v. The Greater Bombay Co-operative Bank Ltd. and Another case and Satyabrata Mitra & Ors. v. Earth Towne Infrastructure Pvt. Ltd. This is because without having a valid corporate personality, it becomes impossible for the creditors to enforce their claims or even begin with the insolvency proceedings. However, when creditors restore the name of the company, they renew the legal procedures, empower them to start a CIRP and start recovering loans.
In the case of Mr. Hemang Phophalia v. Greater Bombay Co-operative Bank Limited and another, The Greater Bombay Co-operative Bank Limited (the "Property Lender") filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ( 2016 ). "IBC") to initiate a CIRP against Penguin Umbrella Works Private Limited (the "Debtor"). The National Company Law Tribunal, Mumbai Bench ("NCLT, Mumbai") allowed the said petition for compensation. The said order was challenged by Mr. Hemang Phophalia, former director and shareholder of the corporate debtor (the "Appellant") as the name of the corporate debtor was removed from the register of companies and there were no issues of insolvency possibly on a start-up company that went bankrupt.
The issue before the court was whether an application under section 7 or 9 of the IBC to trigger a CIRP could be maintained against a creditor of the corporation if the name of the creditor of the corporation had been removed from the register of companies.
The NCLT said that the Supreme Court is empowered to reinstate the name of a company and the names of all other persons to initiate a CIRP under sections 7 and 9 of the IBC upon request by creditors or employees 'put it for a period of twenty years from the date as provided in the Companies Act. In the present case, the application under Section 7 was allowed, the corporate debtor and its directors, officers, etc. were deemed to have returned.
The case of Satyabrata Mitra & Ors. v. Farth Towne Infrastructure Pvt. Ltd. centers on when to initiate insolvency proceedings against a defunct company.
In this case, Mr. Satyabrata Mitra and 145 other people who were planning to buy houses (hereinafter referred to as "applicants") petitioned against Earth Towne Infrastructure Pvt Ltd (referred to as the Corporate Debtor) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the sum of Rs.28,64,48,786/- owed to the applicants. The applicants alleged that they entered into an agreement with the lending company and its subsidiary to develop housing project. It was said that they jointly allocated a substantial amount in recognition of the shares but did not acquire the property before the scheduled completion date.
After the strike-off, the Corporate Debtor ceased to be a legal entity, and hence, its liabilities have to be cleared by its members, directors or managers. The NCLT pointed out that the authority to restore the name of a struck-off company is given to the Tribunal under Section 252 of the Companies Act, 2013. This power cannot be used on its own and needs the corresponding action from the concerned parties. The NCLT instructed the applicants to take the required measures to restore the Corporate Debtor's name in the Register of Companies in order to proceed with the application under Section 7 of the IBC.
The importance of restoration of name serves as a key in order to initiate a legal proceeding against a dissolved company. The restoration of the company's name underscores the significance of maintaining continuity and identity, which can have far-reaching implications for stakeholders, creditors, and the business ecosystem at large.
In the Satyabrata Mitra and Ors. v. Earth Towne Infrastructure Pvt. Ltd. Tribunal decision will be a landmark in the field of insolvency against a defunct company and set as a precedent. It facilitates legal conception and decision-making through the provision of a clear clarification of concepts and legal principles governing such cases.
Conclusion
The Satyabrata Mitra & Ors. Vs Earth Towne Infrastructure Pvt. Ltd. case presents some interesting aspects that exists between restoration of name and corporate insolvency. When a corporation is wound up, it loses its existence because it is dead; therefore, restoring a dissolved body does not make any sense unless that body comes back into existence through restoration. This case establishes five major considerations: preservation of corporate identity (once resurrected), judicial discretion (to sanction reinstatement or not), stakeholder interests in both companies (dead and existing), corporate governance for reviving entities, and legal clarity as regards status post-reinstatement so that this decision sets a good precedent among such cases similarly situated in future for easy identification during their trial. This highlights the significance of corporate insolvency to society at large and its consequences on the law, requiring a more sophisticated and balanced approach.
The Tribunal underscore general principles of corporate governance and accountability in the midst of a financial crisis. On the other hand, the court called upon the company to reinstate its registration, an action that affirmed the significance of preserving corporation's identity and values as a way of promoting transparency and accountability.
Although petitioners accused Corporate Debtor of defaulting, the question of its legal personality became crucial therefore necessitating a resolution through procedure. The case analysis reveals how the Companies Act and the Insolvency and Bankruptcy Code interact, emphasizing that the liability still exists even after a company's name is removed from the register. It emphasizes on the objective of CIRP which is to revive and rehabilitate Corporate Debtor while protecting stakeholders' interests.
References
- Author – Raj Bhojani, CIRP Cannot Be Initiated Against A Struck Off Company Unless ROC Restores The Name Of The Company: NCLT, Law Beat, Date of Publication – 1 Dec https://lawbeat.in/news-updates/cirp-cannot-be-initiated-against-struck-company-unless-roc-restore-name-company-nclt
- Author – AVID LEGAL, Name Restoration and Corporate Insolvency: Lessons from the Satyabrata Mitra & Ors. Vs Earth Towne Infrastructure Pvt. Ltd., Date of Publication – 29 Nov 2023. https://www.linkedin.com/pulse/name-restoration-corporate-insolvency-lessons-from-satyabrata-ujcvf/
- Author – Vaish Associates, Corporate Insolvency Resolution can be initiated against a struck-off company, Date of Publication – 30 Oct 2019. https://www.vaishlaw.com/corporate-insolvency-resolution-can-be-initiated-against-a-struck-off-company/
- Author – Pragya Kriti, NCLT Delhi: Application U/s 7 IBC Cannot Be Initiated Against A Struck-off Company; NCLT cant Suo Motu Restore The Name, Live Law, Date of Publication – 29 Nov https://www.livelaw.in/ibc-cases/nclt-delhi-application-us-7-ibc-cannot-be-initiated-against-a-struck-off-company-nclt-cant-suo-motu-restore-the-name-243228
- Satyabrata Mitra & Ors. v. Earth Towne Infrastructure Pvt Ltd
- Hemang Phophalia v. Greater Bombay Co-operative Bank Limited and another
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