How can a solvent company in India exit voluntarily?
Modes of voluntary exit options:
A company incorporated in India can exit voluntarily by :
Fast tracking the exit scheme of Ministry of Corporate Affairs. To avail this option, the company should be inoperative for at least 2 years and should not have any assets & liabilities.
Voluntary Liquidation under Insolvency and Bankruptcy Code, 2016 (IBC).
For solvent companies which cannot be shutdown under fast track, voluntary liquidation under IBC is a boon.
Commencement of Regulations for Voluntary Liquidation under IBC:
The Insolvency and Bankruptcy Code not only enables the resolution of insolvents, it also allows the solvent companies that do not want to run operations, to voluntarily opt for closure, provided they have the capacity to pay their debts, if any. Voluntary Liquidation, now made part of Insolvency and Bankruptcy Code, 2016, was earlier under the Companies Act, 1956. The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016, have been notified on 31st March, 2017 and came into force with effect from 1st April, 2017.
Conditions for opting voluntary liquidation:
The company has no debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation;
It is not being liquidated to defraud any person.
A declaration is to be given by majority of the directors satisfying the above conditions. Within 4 weeks of such declaration, the approval of Members and creditors is to be obtained for Voluntary Liquidation and appointment of Liquidator. The liquidation commences from the date of approval of members. From the liquidation commencement date, the company ceases to carry on business, except when its beneficial in winding up the business.
Timeline for completion:
It may take a minimum of 12 months or lesser than that, to complete the process. If it goes beyond 12 months, liquidator has to report periodically accordingly.
Role of Liquidator:
The liquidator plays a vital role in winding up ensuring compliance of IBC, 2016. The role of Liquidator shall be to :
Verify and collect claims, if any
Realise all assets or monies due to the company
Value and sell the assets of the company
Distribute the sale proceeds to all stakeholders
Distribute the unsold assets to stakeholders
Avoid under value, extortionate and fraud transactions
Maintain all records and registers
Report the stakeholders, Adjudicating Authority, Registrar of Companies and IBBI
Annual status report
Minutes of consultation with stakeholders
Final report, etc.
Obtain dissolution order from Adjudicating Authority
Submit the dissolution order to Register of Companies and ensure that the name of the company is struck from their register.
To the Company: To the extent company having accumulated profits, tax is payable by the company pursuant to the provisions of Section 2(22)(d) of the Income Tax Act 1961 as ‘Deemed dividend’.
To the Shareholder/Investor: The income because of the transfer of assets by company over and above “Deemed Dividend” are chargeable to income-tax under the head “Capital gains” pursuant to provision of Section 46 of the Income Tax Act 1961 with cost of acquisition (indexation).
Though companies can close under fast track exit option under Companies Act, 2013, it can be exercised only by inoperative companies which have nil assets and liabilities. Now, the IBC, 2016 enables easy exit even for solvent active companies if they desire so for various reasons, provided they clear or capable of clearing all their liabilities. Voluntary Liquidation under IBC is a marvellous option for such companies. One should explore the possibilities of closing under Voluntary Liquidation, to ensure that assets are not blocked unused.