Insolvency and Bankruptcy Code (IBC) Overview and Company Management Insights.pdf

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1. Insolvency and Bankruptcy Code (IBC) Overview and
Company Management Insights
BCom (Honours) (Christ (Deemed To Be University))
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Insolvency and Bankruptcy Code (IBC) Overview and
Company Management Insights
BCom (Honours) (Christ (Deemed To Be University))
Scan to open on Studocu
Studocu is not sponsored or endorsed by any college or university
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2. Company Management StructureThis structure outlines how individuals direct and coordinate activities to achieve a business’s goals. It defines the hierarchy within the company, detailing how roles are assigned as well as how information flows between different levels of management. Typically, we can categorize the company position hierarchy into three main levels:
Role of ShareholdersShareholders hold shares making them entitled to a share in the profits and the right to be represented by directors at board meetings. Directors are considered the elected representatives of shareholders. Executive directors are made responsible for continuous decision making in the business. Non-executive directors offer regular advice to the company but are not directly involved in the everyday company management. Role of DirectorsIn company management the shareholders will select a board of directors to represent the company’s interests. The following conditions will be observed when selecting the director specifically:
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3. A minimum of three directors in the case of a Limited CompanyTwo directors in the case of a Private Limited CompanyOne director in the case of a One Person CompanyA Managing Director will be selected who has general responsibility for managing the company’s affairs. The managing director with aid and assistance from other directors will select and employ senior managers or officers related to the domain of company management. Role of OfficersOfficers of a company are appointed by the Board to Directors to hold various top level roles and responsibilities within the company. There is no statutory requirement for appointment of officers in a company. However, Directors are statutorily required to be appointed for all company by its shareholders. Some of the most popular types of officers of a company are:Chief Executive OfficerChief Executive Officer (CEO) is the highest-ranking person in a company who is ultimately responsible for taking managerial decisions for the day to day operation of the company.Chief Operating OfficerChief Operating Officer (COO) is a senior executive who oversees ongoing business operations within the company. COO reports to the CEO (Chief Executive Officer) and is usually second-in-command within the company.Chief Financial OfficerChief financial officer (CFO) is a senior financial executive with responsibility for the financial affairs of a company. Typical responsibilities of the CFO include planning, budgeting, bookkeeping, accounting, setting up of internal controls, fund raising and other accounting/financial matters.Chief Technology OfficerChief Technology Officer (CTO) is a senior technology executive within a company who oversees current technology development and maintenance aspects. Typical responsibilities of a CT include aligning of technology-related decisions with the company's goals, managing technology development, maintaining technology assets and create technology policies.Chief Marketing OfficerChief Marketing Officer (CMO) is a senior marketing executive within a company who is involved in a wide variety of tasks like increasing revenue, improving brand image and managing marketing campaigns. CMO works directly with sales, marketing, and development departments to integrate marketing strategies in all divisions of the company.Chief Legal Officer
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4. Chief Legal Officer (CLO) is a senior legal executive within a company who helps the company reduce its legal risks by advising the company and its employees or stakeholders on major legal and regulatory issues the company confronts and manage litigation risks.Role of ManagersManagers report to the Officers or to Presidents/Vice Presidents/Senior Managers within the division. Examples of responsibilities of managers in a company are as follows:Accounts Manager - Maintenance of books of the companyRecruitment Manager - Recruiting employees for the company and setting up of interviewsTechnology Manager - Development of a product or serviceStore Manager - Maintenance of stocks of the companyRegional Managers - In the case of a company operating on a regional basis.Functional Managers - In the event of a company divided into different functions for example human resources, finance, sales, etc.,Departmental Managers - In the event of a company being divided into various departments for example retail, B2B, online.General Managers - In an office or factory may hire a general manager to whom functional managers report.Directors:The directors are the persons elected by the shareholders to direct, conduct, manage or supervise the affairs of the company. They manage and control the overall affairs of the company. The day to day working of the company is left to other managerial persons appointed for the purpose. a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and b) a maximum of fifteen directors: However, a company may appoint more than fifteen directors after passing a special resolution.Types of DirectorsResidential DirectorAs per the Act, every company needs to appoint a director who has been in India and stayed for not less than 182 days in a previous calendar year. Such a director will be a residential director.
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5. Independent DirectorIndependent directors are non-executive directors of a company and help the company to improve corporate credibility and enhance the governance standards. In other words, an independent director is a non-executive director without a relationship with a company which might influence the independence of his judgment.The tenure of the independent directors is five consecutive years; however, they shall be entitled to reappointment by passing a special resolution with the disclosure in the Board’s report. Every listed public company must have at least one-third of a total number of directors as independent directors. Following unlisted public companies need to appoint at the least two independent directors:Public Companies with Paid-up Capital of Rs.10 Crores or more,Public Companies with Turnover of Rs.100 Crores or more,Public Companies with total outstanding loans, deposits, and debenture of Rs.50 Crores or more.Small Shareholders DirectorsA listed company, could upon the notice of a minimum of 1000 small shareholders or 10% of the total number of the small shareholder, whichever is lower, shall have a director which would be elected by small shareholders.Women DirectorA company, whether be it a private company or a public company, would be required to appoint a minimum of one woman director in case it satisfies any of the following criteria:The company is a listed company and its securities are listed on the stock exchange.The paid-up capital of such a company is Rs.100 crore or more with a turnover of Rs.300 crores or more.Executive DirectorAn executive director is the full-time working director of the company. They look after the affairs of the company and have a higher responsibility towards the company. They need to be diligent and careful in all their dealings.Non-executive DirectorA non-executive director is a non-working director and is not involved in the everyday working of the company. They might participate in the planning or policy-making process and challenge the executive directors to come up with decisions that are in the best interest of the company.Qualification Required to be a Director
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6. Only a natural person can be a director in a company. Thus, an artificial person, such as a company, corporation, firm, entity or association, cannot be appointed as a director. The following persons are eligible to be appointed as a director in a company: The person should be above 21 years and below 70 years.The person should have a sound mind. The person should not be an undischarged insolvent.The person should not have applied to be adjudicated as an insolvent. The person should not have been convicted by a court of an offence and sentenced to imprisonment for more than six months, and a period of five years should have elapsed from the expiry of the sentence. There should not be any order in force passed by a court or tribunal disqualifying the person for director appointment. The person should have paid any calls in respect of any shares of the company held by him/her within six months from the last day fixed for the payment of the call.The person should not have been convicted of the offence dealing with related party transactions under section 188 at any time during the preceding five years. The person must have a Director Identification Number (DIN).The person should not be appointed as a director in more than 19 companies or nine companies in the case of public companies since the maximum number of companies in which a person can act as a director is 20 companies or ten companies in the case of public companies. A person cannot be appointed as a director if he/she is a director in the following companies:A company that has not filed financial statements or annual returns for a continuous period of three financial years.A company that has failed to repay the deposits, interest on deposits, failed to redeem any debentures on the due date, pay interest on debentures, or pay the dividend declared for more than one year.Independent Director QualificationsThe person should possess appropriate experience, skills and knowledge in one or more fields of law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other disciplines related to the company’s business.The relatives of an independent director should not -
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7. be indebted to the company, its subsidiary, holding or associate company or their director or promoters.have given a guarantee or security in connection with the indebtedness of a third person to the company, its subsidiary, holding or associate company or their directors or promoters of such holding company, for an amount of Rs.50 lakhs, at any time during the two immediately preceding financial years or during the current financial year.The person is not:A promoter of the company or its subsidiary, holding or associate companies.Related to the directors or promoters in the company, or any of its subsidiary, holding or associate companies.The person should not have any financial relationship (other than remuneration as a director or havingtransaction not exceeding 10% of the total income) with company or any of its subsidiary, holding or associate companies or their directors or promoters, during the current financial year or the last two immediately preceding financial years.The person or his/her relatives should not:Held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the company or any of its subsidiary, holding or associate companies in any of three financial years immediately preceding the financial year in which such person is proposed to be appointed.Be or has been and employee, proprietor or a partner in any three financial years immediately preceding the financial year in which such person is proposed to be appointed – as an auditor firm, cost auditor, legal consultant or company secretary of the company or any of its subsidiary, holding or associate companies.Holds together with relatives a total voting power exceeding 2% in the company.Be a Chief Executive or director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters or directors or its subsidiary, holding or associate companies or that holds 2% or more of the total voting power of the company.How Independent Directors Contribute to Corporate GovernanceIndependent directors play a crucial role in strengthening corporate governance by ensuring transparency, accountability, and ethical decision-making. Their contributions can be assessed in the following ways:1. Enhancing Board Independence and Oversight
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8. Independent directors are not affiliated with the company, its promoters, or management, reducing conflicts of interest. They ensure that the board's decisions are made in the best interests of all stakeholders, not just majority shareholders or executives.2. Strengthening Financial Oversight and Risk ManagementThey serve on audit committees, ensuring that financial statements are accurate and comply with regulatory standards. Help in risk assessment and mitigation by questioning risky investments or financial misreporting.3. Protecting Minority Shareholders' InterestsIndependent directors act as a check against majority shareholders who might pursue self-serving actions. They provide a neutral perspective on mergers, acquisitions, and related-party transactions that may impact minority shareholders.4. Improving Ethical and Legal ComplianceEnsure adherence to corporate governance guidelines, including SEBI regulations (India), SEC rules (USA), or UK Corporate Governance Code. Monitor compliance with anti-corruption laws, environmental regulations, and ethical business practices.5. Enhancing Strategic Decision-MakingProvide objective insights into business strategy, corporate restructuring, and long-term planning. Offer industry expertise and diverse perspectives, reducing managerial bias in decision-making.6. Enhancing Corporate Reputation and Investor ConfidenceIndependent oversight reassures investors, regulators, and stakeholders that the company is well-governed. Companies with strong independent boards often enjoy higher valuations and better access to capital.7. Monitoring CEO Performance and Executive CompensationIndependent directors assess CEO and senior management performance, ensuring accountability. They regulate executive pay and incentives to align them with long-term company goals rather than short-term financial gains.8. Promoting Sustainability and ESG PracticesMany independent directors drive the Environmental, Social, and Governance (ESG) agenda, ensuring responsible business practices. Encourage adoption of corporate social responsibility (CSR) initiatives that benefit society and improve company image.Independent directors play a pivotal role in corporate governance by ensuring accountability, reducing conflicts of interest, and safeguarding shareholder value. However, their effectiveness depends on their ability to remain truly independent and actively engage in decision-making.
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9. Strengthening regulatory frameworks and improving board dynamics can further enhance their contributions.Relationship between Director’s characteristics and Corporate Decision Making:Corporate decision-making is influenced by various board-level factors, particularly the characteristics of directors. These characteristics determine the board's ability to monitor management, shape strategy, and unsure transparency. Below is a detailed analysis of how specific director characteristics influence corporate decisions:1. Director's Experience and ExpertiseDirectors with strong industry experience help firms navigate market challenges, make informed investment decisions, and drive long-term growth. Those with financial expertise improve corporate decision-making by ensuring prudent financial management, risk assessment, and capital allocation. Directors with a legal background enhance compliance with regulatory requirements, reducing the risk of litigation and corporate misconduct.Empirical EvidenceStudies suggest that companies with highly experienced directors perform better financially and have lower risk exposure. For instance, firms with directors who have previously held CEO positions tend to have more aggressive growth strategies.2. Independent Directors and Board ObjectivityIndependent directors provide unbiased oversight, preventing conflicts of interest between management and shareholders. They challenge poor managerial decisions, ensuring that executives act in the best interests of all stakeholders. Companies with strong independent boards tend to avoid excessive risk-taking and demonstrate better financial discipline.Real-World ExampleAfter the Enron scandal, corporate governance reforms mandated a higher proportion of independent directors to prevent fraudulent financial practices. Companies like Infosys and Tata Group have leveraged independent directors to strengthen corporate governance.3. Age and Risk-Taking BehaviorYounger directors tend to embrace innovation and higher-risk strategies, such as investing in technology and RD. Older directors are generally more risk-averse, prioritizing stability, regulatory compliance, and conservative financial management. Boards that include a mix of both age groups benefit from balanced decision-making ensuring growth without exposing the fem to excessive risks.Example
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10. Startups and tech firms often prefer younger, risk-taking directors, while traditional industries (like banking) favor older, experienced directors for stability.4. Board Diversity and Cognitive PerspectivesA diverse board leads to better problem-solving, as different perspectives contribute to broader risk assessment and innovation. Cognitive diversity ensures that decisions are less biased and more strategic. Companies with gender, ethnic, and professional diversity tend to perform better in dynamic market environments.Supporting ResearchMcKinsey's studies have shown that companies with greater board diversity outperform their competitors in profitability and innovation. Multinational corporations (MNCs) with diverse boards make more globally competitive decisions.5. CEO-Director Relationship and Power DynamicsIf directors have strong ties to the CEO, they may fail to question poor decisions o rubber-stamp executive actions. A power-balanced board ensures that the CEO is held accountable, improving governance quality.ExampleThe WeWork collapse was partly due to weak oversight by its board, which failed to challenge the CEO's high-risk financial decisions.Role of Women Director in Enhancing Corporate Governance1. Improving Board Independence and AccountabilityWomen directors promote ethical decision-making, reducing cases of corporate fraud and financial misreporting. Research suggests that boards with higher female representation have better compliance with corporate governance norms.2. Enhancing Decision-Making QualityWomen tend to bring inclusive leadership styles, which foster better discussions and multi-dimensional problem-solving. Their presence on boards leads to higher-quality financial decisions and long-term strategic planning.ExampleStudies show that firms with at least 30% women on boards have higher return on assets (ROA) and lower earnings manipulation.3. Strengthening Corporate Social Responsibility (CSR) and ESG ComplianceWhy Women Directors Drive ESG Policies
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11. Women on boards are more likely to push for sustainability initiatives and ethical labor practices. Companies with higher female board representation perform better in Environmental, Social, and Governance (ESG) rankings.ExamplePepsiCo and Unilever, with strong female board presence, have been pioneers in sustainability and ethical sourcing.4. Promoting Ethical Leadership and Reducing Corporate MisconductWomen Directors are less likely to engage in aggressive accounting practices or approve unethical executive behaviours. They help ensure that companies maintain transparent governance structures.5. Enhancing Investor Confidence and Firm PerformanceInvestors perceive gender-diverse boards as an indicator of strong governance and reduced financial risk. Firms with more women on boards tend to attract long-term investors, leading to higher market confidence.Procedure for Director RemovalThe procedure to be followed for Director Removal is explained in detail below:Removal of Director - Resignation by DirectorsWhen a director voluntarily tenders their resignation, the following steps are taken to remove their name from the register of directors:Board Meeting Notice: The Company convenes a Board Meeting, providing clear notice, which typically means a notice period of 21 days, excluding the day on which the notice was sent and received.Resignation Discussion: During the Board Meeting, board members discuss and deliberate on whether to accept the Director's resignation.Board Resolution for Resignation: Upon agreement, the Board passes a formal resolution to accept the Director's resignation.Filing Form DIR-11 (Director's Responsibility): The outgoing Director takes responsibility for filing Form DIR-11. This form must include the Board Resolution, proof of delivery of the resignation letter, and a copy.Filing Form DIR-12 (Company's Responsibility): The Company is responsible for filing Form DIR-12 with the Registrar of Companies (RoC). This filing should include the resignation letter and the Board Resolution.Removal of Director Name from MCA: After completing all necessary form submissions and formalities, the Director's name will be officially removed from the Company's master data on the Ministry of Corporate Affairs website.
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12. Director Absence from Board Meetings for 12 MonthsThe steps in case a director remains absent from all board meetings over twelve months are as follows:Step 1: If a director is absent from all board meetings over twelve months, regardless of seeking leave of absence, they are deemed to have vacated their office under Section 167.Step 2: File Form DIR-12.Step 3: Upon completing the formalities, the concerned Director's name will be removed from the Ministry of Corporate Affairs (MCA) database.Director Removal by ShareholdersThe steps for the removal of a director by shareholders are as follows: Send a notice to all shareholders for a board meeting within seven days from the date of the removal of a Director through Ordinary Resolution. To remove a Director, a Company can follow these steps through an Ordinary Resolution, provided the Director was not appointed by the Central Government or the Tribunal:Board Meeting Notice: Initiate the process by calling a Board Meeting and giving seven days' notice to all directors. In this notice, inform the directors about the intended removal of the Director.Extraordinary General Meeting Resolution: During the Board Meeting, pass a resolution to convene an Extraordinary General Meeting (EGM). Additionally, pass a resolution for removing the Director, contingent upon shareholder approval.EGM Notice to Members: Issue a notice for the EGM, ensuring a clear notice period of 21 days. Clear notice means a notice period of 21 days, excluding the day on which the notice is sent and the day of the meeting.Voting at EGM: Members are asked to vote on the resolution for the Director's removal at the EGM. If the majority of members are in favor of the decision, the resolution is passed.Opportunity for Director to Be Heard: Allow the Director to be heard before passing the resolution. Allow them to present their case or provide an explanation.Form DIR-11 and Form DIR-12 Submission: Following the passing of the resolution, submit Form DIR-11 and Form DIR-12 to the Registrar of Companies. These forms should include the attachments of the Board Resolution and Ordinary Resolution.Removal of Director Name from MCA: Upon successful form submissions and completion of all required formalities, the Director's name will be officially removed from the Ministry of Corporate Affairs website.
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13. Meeting:Meeting may generally defined as the gathering, assembly or coming together of two or more persons for transacting any lawful business. For proper working of the company, it is necessary that the shareholders meet as often as possible and discuss matters of mutual interest and take important decisions. Meetings provide a place for fruitful participation where free and frank discussion takes place. The decisions taken at the meetings generally become acceptable and are met with least resistance. Company 'meetings can broadly be classified as follows:
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19. CSR COMMITTEE The CSR Committee is responsible for the following: Formulating and recommending to the board, a corporate social responsibility policy which shall indicate the projects/activities to be undertaken by the Company in areas or subject, as specified in Schedule VII. Recommending the amount of expenditure to be incurred on CSR projects/ activities undertaken. Instituting a transparent monitoring mechanism for implementation of CSR projects/activities undertaken by the company. Reviewing performance of the Company in the areas of CSR. Submitting an annual report of CSR projects/activities to the board. Monitoring CSR Policy from time to time.AUDIT COMMITTEE:Audit Committee As per Section 177, every listed public company and such other companies as may be prescribed, to constitute an audit committee. Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 requires the following classes of companies to
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20. constitute an Audit Committee of the Board— i) all public companies with a paid up capital of ten crore rupees or more; ii) all public companies having turnover of one hundred crore rupees or more; iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority. The majority of members of Audit Committee including its Chairpersons shall be persons with ability to read and understand the financial statement. As per the listing agreement, two third of the members of the Audit Committee shall be independent directors and the committee is required to be chaired by an independent director. The Company Secretary shall act as the secretary to the Audit Committee. The audit committee must meet at least four times a year and between two meetings not more than one hundred and twenty days shall elapse. The primary focus of the Audit Committee is on the oversight of financial reporting and disclosures. It inter alia includes i) making the recommendation for appointment, remuneration and terms of appointment of auditors of the company; ii) reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process; iii) examining the financial statements and the auditors’ report thereon; iv) approving and modification of transactions of the company with related parties; v) scrutiny of inter-corporate loans and investments; vi) valuation of undertaking or assets of the company, whenever necessary; vii) evaluation of internal financial controls and risk management systems; and viii) monitoring the end use of funds raised through public offers and related matters.REMUNERATION & NOMINATION COMMITTEE:Section 178 requires every listed public company and such other class of companies as may be prescribed, to constitute the Nomination and Remuneration Committee of the Board of Directors. Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 requires the following classes of companies to constitute a Nomination and Remuneration Committee of the Board— i) all public companies with a paid up capital of ten crore rupees or more; ii) all public companies having turnover of one hundred crore rupees or more: iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more. The Nomination and Remuneration Committee shall consist of a minimum of three non- executive directors with independent directors forming a majority. The chairperson of the company may be appointed as a member of the Nomination and Remuneration Committee but shall not chair the Committee. As per the listing agreement, all the members of the Nomination and Remuneration Committee shall be non-executive directors and the chairperson shall be an independent director. The Nomination and Remuneration Committee inter alia is responsible for: i) identifying persons who are qualified to become directors and who may be appointed in senior management positions; ii) specifying manner for effective evaluation of performance of Board, its committees and individual directors; iv) formulating the criteria for determining qualifications, positive attributes and independence of a director; and v) recommending to the Board, a policy relating to the directors, key managerial personnel and other employees.
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21. UNIT-4(DIVIDEND)
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23. Comparison of interim dividend vs final dividend:FeatureInterim DividendFinal DividendTimingDeclared during the financial yearDeclared after the end of the financial yearDeclaration AuthorityDeclared by Board of Directors aloneRequires approval from shareholders at AGMBased OnEstimated/partial profitsActual profits after final accounts are preparedFrequencyCan be declared more than once a yearDeclared once a year, typicallyPurposeTo give early returns to shareholdersTo distribute profit after all assessmentsDisclosureMust be disclosed in quarterly/periodic reportsDisclosed in annual financial statementsRisk FactorSlightly higher risk due to uncertain profitsLower risk since it is based on audited results
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25. (BOOKS OF ACCOUNTS)
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27. (AUDIT)After the financial statements are ready, they need to audited. The object of audit is two fold (a) to detect and prevent errors and (b) to detect and prevent frauds. Every concern, small or big, sole proprietorship, partnership or company etc. should get accounts audited. For listed companies and for specified unlisted public companies and private companies accounts must be audited compulsorily. An auditor must be a qualified chartered accountant certain companies must have internal audit department. Cost audit is done by a qualified cost accountant. An auditor has certain rights and duties as well.
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28. INVESTOR EDUCATION AND PROTECTION FUND The Central Government set up this Fund Under Companies Act, 1956. The Companies Act, 2013, under section 125 lays down the sources and purposes for which the fund monies can be utilised. An authority called “Investor Education and Protection Fund Authority” administers it. It has a chairperson, members not exceeding seven and a Chief Executive Officer. Sources: The following amount shall be credited to the funds: a) The amount given by Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the fund; b) Donations given to the Fund by the Central Government, State Governments, companies or any other institution; c) The amount in the Unpaid Dividend Account of Companies; d) The amount in the general revenue account of the Central Government and amount lying in the Fund under the Companies Act 1956 as it stood immediately before the commencement of the Companies (Amendment) Act 1999 and remaining unpaid or unclaimed on the Commencement of this Act. e) The amount lying in the investor Education and Protection Fund under Section 205C of Companies Act, 1956. f) Interest or other income received out of investment made from the fund; g) Amount received under section 38(4) i.e., amount received through disgorgement or disposal of securities;
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29. h) The application money received by companies for allotment of any securities and due for refund; i) Matured deposits with companies (except banking companies); j) Matured debentures with companies; k) Interest accrued on amounts referred above in (g) and (h); l) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for seven or more years; m) Redemption amount of preference shares remaining unpaid or unclaimed for seven or more years. n) Such other amount as may be prescribed.Utilisation: The fund shall be utilized for : a) The refund in respect of unclaimed dividends, matured deposits, matured debentures, application money due for refund and interest thereon; b) Promotion of investors’ education, awareness and protection; c) Distribution of any disgorged amount among eligible and identifiable applicants for shares, or debentures, shareholders, debenture holders or depositors who have suffered losses due to wrong action by any person, in accordance with the orders made by the court which has ordered disgorgement; d) Reimbursement of legal expenses incurred in pursing class action suits by members, debenture holders or depositors as may be sanctioned by the Tribunal; and e) Any other purpose incidental thereto.(BOARD’S REPORT)The Board’s Report is a formal communication from the Board of Directors to the shareholders, giving a comprehensive overview of the company’s financial performance, governance practices, and major developments during the year. Procedure of preparation of board’s report:StepDescription1. DraftingPrepared by the Company Secretary or finance team under the guidance of directors.2. ApprovalPassed by resolution at a board meeting.3. SigningSigned by Chairman or two directors (one must be MD, if any).4. Inclusion in Annual ReportSent to shareholders before the AGM.5. FilingFiled with RoC via prescribed forms (e.g., MGT-7).
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30. Contents of board’s report:SectionDetailsFinancial SummaryRevenue, profits, and key financial metrics.Dividend DetailsProposed or paid dividend (interim/final).ReservesTransfer of profit to reserves.Board CompositionChanges in directors, KMPs.Board MeetingsNumber and date of meetings held.Related Party TransactionsDisclosure of any such dealings.Subsidiaries & JVsPerformance of group companies.CSR ReportDetails on CSR expenditure and projects.Risk ManagementKey risks and mitigation strategies.Internal Financial ControlsAdequacy and implementation.Auditor’s ReportResponse to auditor’s qualifications.Director’s Responsibility StatementAssurance of fair financial practices.Significance of board’s report:AspectImportanceTransparencyProvides a clear view of operations and strategy.AccountabilityMakes the Board answerable to shareholders.ComplianceFulfills legal disclosure requirements.CommunicationBridges the gap between management and stakeholders.GovernanceReinforces ethical corporate practices.
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31. UNITS-5(INSOLVENCY AND BANKRUPTCY CODE)The Insolvency and Bankruptcy Code (IBC), 2016 is a comprehensive legislation enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. Objectives of IBCEnsure time-bound resolution of insolvency (180 days, extendable by 90 days).Maximize value of debtor’s assets.Promote entrepreneurship and availability of credit.Balance interests of all stakeholders.Improve Ease of Doing Business in India.History of IBC:1. Pre-IBC Insolvency Framework: A Fragmented SystemBefore the enactment of the IBC, insolvency and bankruptcy in India were governed by multiple overlapping laws, which created confusion, delay, and inefficiency in resolving financial distress. These laws included: a. Sick Industrial Companies Act (SICA), 1985Introduced to detect sick companies and facilitate their revival.Implemented through the Board for Industrial and Financial Reconstruction (BIFR).Criticized for being ineffective and delayed, often used to avoid accountability.Failed to revive companies or recover creditor dues.b. Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI), 1993Created Debt Recovery Tribunals (DRTs) to expedite debt recovery for banks and FIs.Focused more on recovery than revival or restructuring of businesses.Overburdened with cases and procedural inefficiencies.c. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002Allowed secured creditors to enforce their security interest without court intervention.Limited in scope — applicable only to secured creditors, not a full insolvency mechanism.Did not cover resolution or restructuring processes.
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32. d. Companies Act, 1956 / 2013 (Winding-Up Provisions)Dealt with winding-up and liquidation of companies.Processed through High Courts; very slow and judicially intensive.No clear timelines or creditor coordination mechanism.2. Problems with the Pre-IBC RegimeFragmentation: Different laws for recovery, restructuring, and winding-up.Delays: Average time to resolve insolvency was more than 4 years.Low Recovery Rates: Creditors recovered only 20-25% of dues on average.Debtor-Friendly Regime: Promoters remained in control during insolvency, leading to misuse.Lack of Transparency: No standardized process or timeline for stakeholders.3. Urgent Need for ReformWith the rising Non-Performing Assets (NPAs) in the banking sector and the economic slowdown, it became crucial to have:A unified, modern law for resolving financial distress.A creditor-friendly regime to encourage responsible lending and borrowing.A time-bound process that protected value and promoted ease of doing business. 5. Enactment of IBC, 2016The IBC was passed by Parliament in May 2016 and notified in phases starting from December 1, 2016.It consolidated laws related to insolvency and bankruptcy into a single legislation.Repealed or amended many outdated provisions of older laws.Made India’s insolvency resolution process modern, transparent, and efficient.A company is insolvent when it is unable to pay its debts either due to lack of liquidity (cash flow insolvency) or because its liabilities exceed its assets (balance sheet insolvency).Under IBC, insolvency triggers a Corporate Insolvency Resolution Process (CIRP), which is a formal legal mechanism designed to either:Revive and restructure the company by bringing in a new owner/plan, or
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33. Liquidate the company if revival is not possible.Consequence Legal:Moratorium on all legal actions Management:Suspension of Board of DirectorsFinancial:Freezing of bank accounts; creditor claims invitedReputation:Negative impact on market and stakeholder confidenceContracts:Some contracts may be terminated or renegotiatedPenalties:Fraudulent transactions during look-back period may lead to prosecutionSTEPS INVOLVED IN LIQUIDATION:Step 1: Order of Liquidation by NCLToNCLT passes an order of liquidation under Section 33 of IBC.oThe resolution professional (RP) becomes the Liquidator, unless replaced.Step 2: Public AnnouncementThe Liquidator makes a public announcement (Form B) inviting:oClaims from creditors (within 30 days),oStakeholders to submit their interests.Step 3: Formation of Stakeholder List and Verification of ClaimsThe Liquidator verifies the claims submitted by:oFinancial creditors,oOperational creditors,oEmployees/workers, and others.A list of stakeholders is prepared and published.Step 4: Formation of Liquidation EstateThe Liquidator creates a Liquidation Estate:oIt includes all assets that can be liquidated (movable, immovable, financial).oIt excludes assets held in trust, third-party assets, etc.Step 5: Asset ValuationA registered valuer is appointed to determine the fair value and liquidation value of assets.Step 6: Realization of AssetsAssets are sold via:oAuction,oPrivate sale,oAny method prescribed by IBBI.Proceeds go into a liquidation account.
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34. Step 7: Distribution of Liquidation ProceedsThe liquidation proceeds are distributed as per the waterfall mechanism (Section 53 of IBC):StakeholderInsolvency Resolution Process Cost and Liquidation CostSecured creditors (unpaid) & Workmen dues (up to 24 months)Other employee dues (up to 12 months)Unsecured creditorsGovernment dues & unpaid secured creditors (remaining)Other creditors (including operational creditors)Shareholders / partners (if anything left)Step 8: Final Report and ClosureThe Liquidator prepares a Final Report on:oRealization,oDistribution,oCompliance,oUnclaimed proceeds (if any) deposited with IBBI.The report is submitted to NCLT, and upon satisfaction, NCLT:oDissolves the company, andoRemoves its name from the Register of Companies. Step 9: Filing with ROC and IBBIFinal filings are made with the Registrar of Companies (ROC) and the IBBI.Unclaimed proceeds are deposited with the IBBI's liquidation account.ROLE OF IBBI:The Insolvency and Bankruptcy Board of India (IBBI) is the regulatory authority established under the Insolvency and Bankruptcy Code, 2016. Implementation of the IBC:The IBBI is tasked with enforcing the rules and regulations set forth in the IBC. Regulation of Professionals:The IBBI regulates Insolvency Professional Agencies (IPAs), Insolvency Professionals (IPs), and Information Utilities (IUs). Regulation of Processes:The IBBI oversees and regulates various insolvency processes, including corporate insolvency resolution, individual insolvency resolution, corporate liquidation, and individual bankruptcy. Setting Standards:The IBBI establishes minimum standards for professional competence and ethical conduct for insolvency professionals.
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35. Advisory Body:The IBBI also acts as an advisor to the government on matters related to insolvency and bankruptcy. Promoting Development:The IBBI promotes the development of insolvency professionals, agencies, and other institutions within the insolvency framework. COMPONENTS OF IBC:The Insolvency and Bankruptcy Code (IBC) in India has several key components, including a regulatory body, professional insolvency professionals, and specific adjudication authorities. It also includes provisions for a moratorium period, liquidation, and a streamlined resolution process to manage financial distress. 1. Regulatory Body:Insolvency and Bankruptcy Board of India (IBBI): This board oversees the insolvency proceedings, regulates entities involved, and professionalizes insolvency services. The IBBI ensures a professional framework involving insolvency professionals, insolvency professional agencies, and information utilities.2. Insolvency Professionals:Licensed Insolvency Professionals: The IBC introduces licensed professionals who play a key role in the resolution process. These professionals manage the insolvency process, control the debtor's assets, and guide the resolution. 3. Adjudicating Authorities:National Company Law Tribunal (NCLT):This tribunal handles insolvency-related matters for companies and limited liability partnerships.Debt Recovery Tribunal (DRT):The DRT adjudicates insolvency cases involving individuals and partnership firms. 4. Resolution Process:Moratorium:A period during which creditors' claims are frozen, allowing the debtor to restructure or reorganize. Corporate Insolvency Resolution Process (CIRP):This process involves a structured framework for resolving insolvency, including the appointment of an insolvency professional, the formation of a committee of creditors, and the development and approval of a resolution plan. Liquidation:If a resolution plan cannot be reached, the debtor's assets are sold, and the proceeds are distributed to creditors according to a defined order of precedence. WINDING UP OF COMPANY:The winding up is the process oi putting an end to the life ~e5f the company. During this process the company ceases to carry on its normal business, the assets sf the company are
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36. sold and the proceeds are utilised in paying off the debts and liabilities. If any surplus is left, it is paid back to the members in proportion to their contribution to the capital of the company.Company Law & Secretarial Practice1. Winding up by the Tribunal2. Voluntary winding up. This may be -(i) members' voluntary winding up, or (ii) creditors' voluntary winding up.WINDING UP BY THE TRIBUNALWinding up of a company under the order of a Tribunal is also known as compulsory winding up.Grounds for Winding Up by the Tribunal (Sec. 271)A company (public as well as private) may be wound up by the Tribunal in the following cases:1. Special resolution of the company. Winding up order under this head is not common because the members would prefer to wind up the company voluntarily for in such a case they shall have a voice in its winding up. Moreover, a voluntary winding up is far cheaper and speedier than a winding up by the Tribunal.2. Default in holding statutory meeting. If a default is made in delivering the statutory report of a public company to the Registrar of Companies or in holding the statutory meeting of the company, the Tribunal may make a winding up order. A petition on this ground can be made either by the Registrar or by a contributory.3. Failure to commence business A company is wound up on this ground if it does not commence its business within a year from its incorporation or suspends its business for a whole year. 4. Reduction in membership if, at any time, the number of members of a company is reduced in the case of a public company below 7, or in the case of a private company below 2; the company may be ordered to be wound up5. Inability to pay its debts. A company may be ordered to be wound up if it is unable to pay its debts.6. Just and equitable. The words 'just and equitable' are of the widest significance and do not limit equitable" in the following cases:a. When it is carrying on business at a loss and its remaining assets are sufficient to pay its debts.b. When the existing and probable assets are insufficient to meet the existing liabilities.
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37. 7. Default in filing balance sheet. if the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any consecutive 5 financial years.8. Action against sovereignty. If the company has acted against the interest of sovereignty and integrity of India the security of the State, friendly relations with foreign states, public order decency or morality.VOLUNTARY WINDING UPVoluntary winding up means winding up by the members or creditors of a company without interference by the Tribunal. The object of a voluntary winding up is that the company, i.e., the members as well as the creditors, are left free to settle their affairs without going to the Tribunal. They may however apply to the Tribunal for any directions, if and when it is necessary.A company may be wound up voluntarily -(1) By passing an ordinary resolution. When the period, if any, fixed for the duration of a company by the Articles has expired, the company in the general meeting may pass an ordinary resolution for its voluntary winding up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company is to be dissolved, has occurred (Sec. 304).(2) By passing a special resolution. A company may at any time pass a special resolution that it be wound up voluntarily (Sec 304).A voluntary winding up may be:1. A members' voluntary winding up, or2. A creditors' voluntary winding up.In voluntary winding up it a declaration of solvency is made in accordance with the provisions of Section 305, it is a members' voluntary winding up. The declaration shall be made by a majority of the directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts in full within 3 years from the commencement of the winding up. Creditors' voluntary winding up is a process where a company, facing insolvency, is dissolved through a voluntary resolution by its members, rather than through a court order. This occurs when the company cannot pay its debts in full and is not in a position to declare solvency. The winding up process involves a resolution by the members, followed by a meeting of the creditors, where they appoint a liquidator to oversee the process. The company shall call a meeting of the creditors of the company on the day, or the day next following the day, on which the resolution for voluntary winding up is to be proposed. It shall
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38. send notices of the meeting to the creditors by post simultaneously with the sending of the notices of the meeting of the company. Notice of any resolution passed at a creditors' meeting shall be given by the company to the Registrar within 10 days of the passing thereof. The creditors and the members at their respective meetings may nominate a liquidator for the purpose of winding up the affairs and distributing the assets of the company. If the creditors and the members nominate different persons, the creditors' nominee shall be the liquidator. The committee of inspection, or if there is no such committee, the creditors may fix the remuneration to be paid to the liquidator or liquidators. Where the remuneration is not so fixed, it shall be determined by the Court; Any remuneration fixed shall not be increased in any circumstances whatever, with or without the sanction of the Court.
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