Annual accounts of certain textile mills taken over

by the Government of India for management.

1.The Government of India had taken over management of 13 textile undertakings in October 1983, under the Textile Undertakings (Taking Over of Management) Act, 1983. The salient features of the takeover under the provisions of the above Act insofar as they affect the accounts are as under:

(i) While the management of textile undertakings was taken over, the limited companies who were the owners of these undertakings continue to have separate existence and the records of secretarial divisions including those relating to shares were not taken over.

(ii) The custody and management of all the assets of the textile undertakings as on the date of takeover were to be taken over by the Custodian appointed under the Act, with an Additional Custodian who has the effective managerial charge of the mills. The Additional Custodian is a subsidiary company of the Custodian holding company.

(iii) All the liabilities as on the date of takeover have been frozen and the Custodian / Additional Custodian are not allowed to effect payment in respect of any of the pre-takeover liabilities. The company, therefore, does not make provision for interest, if any, applicable on such liabilities for the post-takeover period in the mills’ books maintained by the Additional Custodian.

2. As on the date of takeover, the accounts of most of these limited companies were in arrears for different periods and in order to bring the accounts uptodate, the following actions were taken by the Additional Custodian: -

(i) A consolidated account of respective mills was prepared from the date upto which the accounts were already finalized and audited by the respective statutory auditors to18.10.83, i.e., the date of takeover of the undertakings, for preparing an opening balance sheet as on the date of takeover.

(ii) The account so prepared was got audited by professional firms of chartered accountants, appointed by the Additional Custodian, as examiners.

(iii) The accounts for the period from 18.10.1983 onwards of the textile undertakings were got audited by chartered accountants’ firms who were appointed as internal auditors as it was not possible to appoint statutory auditors pending finalisation of the accounts for the pre-takeover period.

(iv) In March 1988, Ministry of Textiles, vide its Notification, dated 14^th March, 1988, specified that the various provisions of the Companies Act, 1956, would continue to apply to the textile company in the same manner as it would apply before the commencement of Textile Undertakings (Taking Over of Management) Act, 1983, subject to the conditions specified therein. Under this Notification, Ministry of Textiles appointed various firms as statutory auditors for auditing the accounts of the taken over textile undertakings.

3.During the course of their audit, these forms have raised certain doubts as to the manner in which the liabilities, which were not assumed by the Custodian but were incorporated in the accounts of these undertakings for the period prior to the date of takeover, are to be exhibited in the balance sheets. These doubts are as under: -

(i) As the limited companies have not been taken over, whether the share capital/net worth is required to be shown in the balance sheets of the textile undertakings? If so, under what style?

(ii) Whether the various loans from the financial institutions, debentures and deposits from public as well as commercial banks taken by the limited companies prior to the date of take-over are to be shown as secured or unsecured in view of the fact that as per the provisions of the Taking Over of Management Act, the assets of the textile undertakings have been taken over by the Custodian free from encumbrances. It is also not known whether the amount raised by way of loans from financial institutions and by issue of debentures and deposits from public was utilised for the textile undertaking or other activities of the limited companies.

(iii) Whether the interest payable on the above loans is required to be provided in the accounts of the textile undertakings for the post takeover period.

(iv) Whether the liabilities payable to the employees as well as to the suppliers for the pre-takeover period are to be shown separately in the balance sheet as well as in the schedules forming part thereof.

(v) Whether the assets taken over as on the date of takeover are also to be shown separately both in the balance sheet and schedules forming part thereof instead of being merged with the post-takeover period.

(vi) Whether it would be sufficient if the liabilities mentioned in (i), (ii), (iii) & (iv) above are clubbed together and exhibited in the balance sheet under a separate heading ‘Pre-takeover liabilities’.

4. The matter was discussed by the querist with all the statutory auditors appointed by the Government of India. Doubts were expressed whether the action suggested at (vi) above would meet the requirements of Schedule VI to the Companies Act, 1956. As no consensus could be arrived at the meeting, it was felt that the matter may be referred to the Institute’s Expert Advisory Committee for its opinion, so that, while preparing the accounts, presentation of the various liabilities enumerated above could be done in the manner which would meet the requirements of the Companies Act, 1956.

5.The querist has, accordingly, sought the opinion of the Expert Advisory committee on the issues raised in para 3 above.

Opinion April 26, 1990

1.The Committee notes that the preamble to “The Textile Undertakings (Taking Over of Management) Act, 1983”, states, inter alia, as below:

“An Act to provide for the taking over in the public interest of the management of the textile undertakings of the companies specified in the First Schedule pending nationalization of such undertakings and for matters connected therewith or incidental thereto………..

AND WHEREAS, pending the acquisition of the said undertakings, it is expedient in the public interest to takeover the management of the said undertakings.”

2.The Committee also notes the Notification No. S.O. 267 (E), issued on 14^th march, 1988, by Ministry of Textiles, which prescribes exceptions, restrictions and limitations subject to which certain provisions of the Companies Act shall apply to the said undertakings. Those pertaining to section 210(1) are reproduced below:

“Balance sheet and Profit and Loss Accounts of the Companies shall not be placed before the Annual General Meeting. In other words the Companies shall have to prepare Balance sheet and Profit and Loss Accounts as usual within the prescribed time but are not required to place the same before the Annual General Meeting. The Companies shall file the statutory returns and Balance sheets with the Registrar of Companies. The exemption shall not affect the provisions of section 159 (1) of the Companies Act, 1956.”

3.The Committee is, therefore, of the view that the textile companies, whose management has been taken over under the said Act, continue to exist as separate entities until their ownership is taken over by nationalizing them. The Committee is further of the view that, according to the entity concept of accounting, separate profit and loss accounts and balance sheets will have to be prepared in respect of each of the textile companies the management of which has been taken over. However, along with the name of the company in the financial statements, it should be stated that the management of the company has been taken over by the Central Government under the said Act.

4.The Committee further notes the provisions of sections 3(7), 6(1), 8(2) and 9 of the Textile Undertakings (Taking Over of Management) Act, which are reproduced below:

“3(7) For the removal of doubts, it is hereby declared that any liability incurred by a textile company in relation to the textile undertaking before the appointed day shall be enforceable against the concerned textile company and not against the Central Government or the Custodian.

6(1) The Central Government may, if satisfied, in relation to any of the textile undertakings or any part thereof, the management of which has vested in it under this Act, that it is necessary so to do in the interests of the general public with a view to preventing any fall in the volume of production of such undertaking, by notification, declare that………

(b) the operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force (to which such textile undertaking or the textile company owning such undertaking is a party or which may be applicable to such textile undertaking or textile company) immediately before the date of issue of the notification shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date, shall remain suspended, or shall be enforceable subject to such adaptations and in such manner as may be specified in the notification.

8(2) Subject to the provisions contained in sub-section (1), and to the other provisions contained in this Act and subject to such other exceptions, restriction and limitations, if any, as the Central Government may, by notification specify in this behalf, the Companies Act, 1956, shall continue to apply to the textile companies in the same manner as it applied thereto before the appointed day.

9. In computing the period of limitation prescribed by any law for the time being in force for any suit or application against any person by any of the textile companies in respect of any matter arising out of any transaction in relation to its textile undertaking, the time during which this Act remains in force shall be excluded.”

5. According to the Committee, it is clear from the above that the liabilities of the textile undertakings incurred before the take over of the management shall be enforceable against the concerned textile company and not against the Central Government or the Custodian. Consequently, the liabilities continue to exist even during the period the management of the said companies has been taken over by the Central Government.

6..On the basis of above, the opinion of the Committee on the issues raised by the querist in para 3 of the query is as below:

(i) Share capital/net worth of the textile companies should be shown in balance sheet in the normal manner as per the requirements of Schedule VI to the Companies Act, 1956.

(ii) The fact that the liabilities cannot be enforced against the Central Government or the Custodian does not change the nature of the liabilities. The assets as such have not been taken over but only the custody and management of the assets has been taken over by the Central Government. There is no provision in the Act by virtue of which the charge on the assets ceases to exist. Thus, loans from financial institutions, debentures, deposits from public and loans from commercial banks taken by the companies during the period prior to takeover of their management should be shown as ‘secured loans’.

(iii) Since the liabilities of pre-takeover management period do not cease to exist even during the post-takeover management period, interest on such liabilities in respect of post takeover period should be provided for. However, interest for pre-takeover and post-takeover periods should be separately disclosed in the parenthesis with the relevant item in the financial statements or by way of a note to the accounts.

(iv) The liabilities towards employees and suppliers pertaining to the pre-takeover management period should be disclosed in the notes to the accounts or in the parenthesis with the relevant items in the balance sheet.

(v) Assets pertaining to pre-takeover management period may not be separately shown in the balance sheet or in the relevant schedules forming part thereof.

(vi) In view of the above, the treatment suggested by the querist in para 3 (vi) of the query is not permissible. However, the liabilities of pre-takeover period and post-takeover period should be shown separately as the former cannot be enforced against the Central Government.

____________________