DNA Money Exclusive: Govt can soon wind up firms on grounds of national security

The Ministry of Corporate Affairs (MCA) will soon come up come with new rules for forcible winding up of companies by the government on extraordinary grounds, including national security, sovereignty and integrity of the country.

The rules, which will replace the 60-year-old rules in this regard, are likely to be finalised over the next one month. Winding up is a legal process of closing a company. 

According to the proposed rules, the government can initiate winding up process against a company if it has acted against the interest of the sovereignty and integrity of the country, security of the State and friendly relations with foreign countries. 

“The other grounds on which a company can be wound up include just and equitable, non-filing of financial statements or annual returns for five consecutive years and the company's affairs being conducted in a fraudulent manner. Most of the grounds under the old rules would be retained. However, the ministry is of the view that since the companies now have the option of seeking closure under the Insolvency and Bankruptcy Code (IBC), 2016, the new rules should do away with the provision that allows the government to close a company if a special resolution for winding up is passed by the firm,” an official said. “The rules are likely to be framed within a month. Once it's done, Sections 270 to 303 and 324 to 365 of the Companies Act, 2013 will be notified,” he said.

Under the new rules, both the central and state governments will be empowered to file a petition for winding up of the company under the Companies Act, 2013. As far as voluntary winding up of operations is concerned, the companies can apply for winding up or resolution under the IBC.

Earlier, Companies Act, 2013 alone dealt with incorporation to dissolution of companies. The old Companies Act, 1956, provided for three modes of winding up of companies – by court or compulsory winding up, voluntary winding up and winding up subject to the supervision of the Court.

With the enactment of IBC, a company can now be wound up either under it or under the Companies Act, 2013, depending upon the facts and circumstances of the case. Currently, the government can initiate winding up proceedings against a company as per the provisions of the Companies (Court) Rules, 1959 and in accordance with the old Companies Act, 1956.