The Insolvency and Bankruptcy Board of India came into existence to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. It works for the maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The corporate Insolvency Resolution process is given under the Insolvency and Bankruptcy Code, 2016. According to IBC, CIRP can be initiated against those who are corporate debtors. A society registered under Societies Registration Act, 1860 can be a corporate debtor as per the IBC Act. Hence the corporate insolvency resolution process can be dragged against the society that has society registration.
Who is a Corporate Debtor?
Under section 3(8) of IBC, a corporate debtor is a corporate person who had taken a loan from any other individual or entity and did not or was unable to pay it back. Given below is the list regarding those who can be considered as corporate persons as per section 2(20) of IBC:
- Limited liability partnership
- Any other entity incorporated with limited liability under current laws.
- This definition excludes financial service providers.
What is the Corporate Insolvency Resolution Process?
Insolvency and Bankruptcy Code from section 6 to section 32 talks about the Corporate Insolvency Resolution Process. If a company has taken a loan then they have to pay back that loan amount. If a company is unable to pay the loan within a specified time duration, the corporate insolvency resolution process starts against them under section 6 of the insolvency and bankruptcy code. A proper process needs to be followed while CIRP which is given under section 7 to section 32 of the IBC. Following is the list of creditors who can initiate the corporate insolvency resolution process against the companies or entities given under section 2 of the insolvency and bankruptcy code.
- Financial Creditors
- Operational Creditors
- Corporate debtor itself
Whether Society Registered Under Societies Registration Act, 1860 Be Dragged To CIRP?
Given below is the list of entities against which the Corporate Insolvency Process can be initiated under the IBC:
- any type of company that is governed by any special Act, unless they are in conflict with the provision of special law
- any Limited Liability Partnership that is incorporated under the Limited Liability Partnership Act that came in 2008;
- Any other organization or body that is incorporated under any law
- Partnership firms and individuals, with respect to their insolvency, liquidation, voluntary liquidation, or bankruptcy, as per the requirement of the case.
- Companies or entities incorporated under the Companies Act of 2013
- Any entity incorporated under any company law before companies act of 2013
If we go into detail about the applicability clause of IBC it’s very clear from section 2 of the Insolvency and Bankruptcy Code that a Society registered under Societies Registration Act, 1860 falls under the criteria of those entities against which CIRP can be initiated. Hence it is very evident that a society registered under Societies Registration Act, 1860 can be dragged to CIRP.
Societies and Societies Registration Act, 1860
Under the Societies Registration Act, of 1860, societies are formed with limited liability and, hence, fall under the category of “corporate person”. The Societies Registration Act, of 1860, provides for the registration of many societies like the societies working for the literary, scientific, and charitable societies. A minimum of seven people associated with any type of society like society working for scientific, literary, or charitable purposes can apply for registration of a society. There is no such limit on the maximum number of members for the incorporation of society. Everything from registration to the functioning of the society after registration has been given under the societies act.
Issues with Initiating CIRP against Societies
There are many issues one has to face while initiating a Corporate Insolvency Resolution Process against any Society registered under Societies Registration Act, 1860. Some of them are given below:
Different Objectives
Society registered under Societies Registration Act, 1860 are not profit-making entities and are established for the promotion of the welfare of the society. Societies can be of many types with different perspectives and objectives like charitable, literary, or scientific. Therefore, it can be concluded that the purposes of societies are different from the companies or LLPs formed without profit-making goals. Hence societies cannot be compared with them.
Ownership and Liability
Societies do not have any shareholders or owners like the other companies. Although the members are not considered as the owners of the society everything regarding the societies is in the hands of the members of the society. They do not have any proprietary interest in the assets of the society registered under the Societies Act. Hence the practice of the concept of “haircut” or loss sharing, does not extend up to the societies.
Alternatives to CIRP
The nature of the Society registered under Societies Registration Act, 1860 in India is a little different and their objectives are for the welfare of the society, hence an alternate mechanism is also there to deal with the default by a society. For instance, the creditor can start civil proceedings against the society. This would ensure that the assets of the registered society are distributed among its members as per the bylaws of the society. The objectives of the society that is registered under the Societies Act must not be compromised.
Conclusion
Society registered under Societies Registration Act, 1860 are not profit-making entities with different objectives and ownership structures than companies or LLPs. Society registered under Societies Registration Act, 1860, can technically be subjected to Corporate Insolvency Resolution Processes (CIRP) as per the Insolvency and Bankruptcy Code. However, due to the unique nature and objectives of societies, pursuing CIRP may not align with their core purpose. Alternative mechanisms, like civil proceedings or winding up under the Societies Registration Act, are more suitable for addressing defaults by societies while preserving their distinctive character and objectives.
