Applicability of Insolvency and Bankruptcy Code, 2016 to charitable Institution in India.

The legal framework prior to the Insolvency and Bankruptcy Code, 2016 (IBC) was not effective to help timely recovery of defaulted and bad assets resulting not only delayed justice but also caused the undue strain on the Indian credit system.

Before enacting IBC 2016 multiple laws dealing with the recovery of defaulted and bad assets involving various legal institutions/courts causing unnecessary delay in delivery of justice has now been abolished or curtailed.

IBC has made the recovery of defaulted money very easy and time bound. The frame work created involves time bound proceedings, applicability and accessibilities, moratorium and suspension of proceedings, operating agencies, appointment of Administrators and their duties. Creditor’s committee and liquidators, increased role of professionals, insolvency practitioners, cross border insolvency etc.

In this article the discussion will remain limited to the applicability of Insolvency and Bankruptcy Code, 2016 to charitable companies/organisations.

In India majority of organizations involved in charitable activities are either incorporated under section 8 of the companies Act, 2013 previously section 25 of the Companies Act, 1956 or registered under as Trust or Societies.

The purpose of enacting IBC is to have an efficient and effective system in place for the recovery of debts whether due to financial services or against supply of goods or services or Government due.

Let us examine Section 2 of IBC which deals with the applicability of IBC:

Sec 2. The provisions of this Code shall apply to:

  • any company incorporated under the Companies Act, 2013 or under any previous company law;
  • any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;
  • any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008;
  • such other body incorporated under any law for the time being in force, as the Central Government may, by notification, specify in this behalf; and

(e) personal guarantors to corporate debtors;

(f) partnership firms and proprietorship firms; and

(g) Individuals, other than persons referred to in clause (e)

 in relation to their insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be.

Section 2 (a) clearly states that any company incorporated in India under the companies Act,2013 or under any previous company law will be covered under the provisions of IBC. This section has not made any differentiation between the companies which are incorporated for carrying commercial activities and those incorporated under section 8 of the companies act, 2013 with its main object being to carry charitable activities.

Section 2(g): as per this section IBC is applicable to individuals, other than persons referred to in clause (e).

From the above definition it is not clear whether societies registered under the societies act 1912 are also covered under the provisions of IBC. For more clarity we need to read section 3(7) of IBC:

Section 3(7): “corporate person” means a company as defined in clause (20) of section 2 (20) of the companies Act, 2013 (18 of 2013) , a limited liability partnership , as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009 ) , or any other person incorporated  with limited liability under any other law for the time being in force but shall not include any financial service provider.

Black’s Law Dictionary defines ‘person’ as follows: “In general usage, a human being (i.e. natural person), though by statute term may include Labour Organizations, Partnerships, Associations, Corporations, Legal Representatives, Trustees, Trustees in Bankruptcy, or Receivers”.

Black’s Law Dictionary defines a corporation as “an association of shareholders (or even a single shareholder) created under law and regarded as an artificial person by courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or …

Section 18 of the Co-operative Societies Act, 1912:

Societies to be bodies corporate: The registration of a society shall render it a body corporate by the name under which it is registered, with perpetual succession and a common seal, and with power to hold property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all things………

Section 238 of IBC, 2016:

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The above section 238 of IBC says that the provisions of IBC overrides the provisions of any other law.

From the above definitions and IBC sections read with section 18 of the Co-operative societies Act 1912 and the definition of Persons and Incorporation as per Black’s Law Dictionary it is clear that the intention of enacting IBC 2016 was to cover all types of entities including individuals to safeguard the interests of those who have to recover defaulted dues both financial and operational- i.e.  dues against supply of goods or services. Thus, organizations providing charitable services whether incorporated under companies act or under any other law for the time being are covered by the Insolvency and Bankruptcy Code of 2016.

In the case of winding up of companies with charitable objects. Etc Section 8(9) of the companies act 2013 has been suitably amended as:

If on the winding up or dissolution of a company registered under this section , there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose or may be sold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016

  1. Com; FCA (ICAI); LL.B.; PGDFM; PGDCA; DBM; Cert. IFRS (ICAEW); NCFM Capital Market (Dealers Module); Microsoft Certified IT Professional: Application for Microsoft Dynamics NAV (ERP) & AXAPTA (ERP). Certificate Advance Certificate Course on Companies Act. 2013 (NUJS Kolkata),
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: