The Recent Amendments To Section 176 Of The Companies Act 1965

by ranjan chandran

From Current Law Journal

Note: All references to any statutory provisions hereinunder are to the Companies Act 1965 unless otherwise specified.

In view of the present economic problems, s. 176 had to be amended to avoid an abuse by an ailing debtor company from seeking a restraining order pursuant to s. 176(10) to simply obtain a moratorium in respect of their indebtedness to several creditors.

The recent amendments to s. 176 which came into operation with effect from 1 November 1998, are incorporated in the Companies (Amendment) (No. 2) Act 1998 and focuses on the provisions of s. 176(10).

The amendments retain all the existing provisions of s. 176 but have added new provisions in the form of ss. 176(10A) to 176(10E).

It is noteworthy that the amendments principally focus on the need for full disclosure to creditors so as to prevent an abuse of the restraining order obtained pursuant to s. 176(10), which orders are commonplace given the current economic climate.

The s. 176(10) provision empowering the court to restrain proceedings as against the debtor company is clearly intended to free the company of any proceedings pending against it, or any fresh proceedings being instituted against it, pending the outcome of the meeting as ordered pursuant to s. 176(1).

The new s. 176(10A) introduces certain conditions to be satisfied in achieving this aim:

Firstly, the court can only restrain a creditor through a restraining order for a maximum duration of 90 days. However, there is a discretion to grant an order to restrain for a longer duration but only for good reasons. Therefore, the debtor company would have to proffer sound reasons to get an extension. The position in the pre-amended provision of s. 176 was that at times such s. 176(10) orders were made for a period of six to nine months or even as long as one year.

The second condition requires the court to be satisfied that there is a proposal for a scheme of arrangement or compromise between the debtor company and its creditors or any class of creditors representing at least one half in value of all the creditors at the point in time when it is called upon to consider whether a restraining order should or should not be made.

From: 1999 1 CLJ