Voluntary Liquidation: An Assortment Under the Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 (Code) not only allows the insolvency proceedings of the insolvents but also the Code encompasses provisions for solvent companies those who want to dissolve their business and abstain from show off their business. The solvent company must be in a position to pay off its debts in order to be eligible for voluntary liquidation. The Central Government on 30th March, 2017, notified the Section 59 of the Code with effect from 1st April, 2017, as it hold stipulations for Voluntary Liquidation of the Corporate Persons. Even after the enactment of Companies Act, 2013 and before coming of IBC into the picture, the voluntary winding up of company were facilitated by High Courts. But now under the latest provision, Voluntary Liquidation of Corporate Person including Company, Limited Liability Partnership, can take place u/s 59 of the IBC.
Meaning of Voluntary Liquidation
Voluntary Liquidation generally denotes a company is to be liquidated at the instance of its members. It is a sort of private liquidation proceeding where the Courts' intervention is very minimal. This process is applied in situations where -
a) the entity has been formed with a particular objective and that objective has been fulfilled;
b) the articles provide that the entity shall be liquidated on the happening of an event and that event has occurred;
c) it is unable to carry its own business.
a. Proceedings already initiated and pending : As per rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (Transfer Rules), brought into force from 1st April, 2017 provides that all the voluntary winding up petitions pending before a High Court prior to 1ST April, 2017, shall continue to be dealt with by the High Court under the provisions of Companies Act, 1956.
b. Fresh voluntary liquidation proceedings to be commenced under IBC : According to Section 59 of IBC, Section 434 (1) (c) & Section 465 of Companies Act, 2013 and Rule 4 of the Transfer Rules, all voluntary liquidation proceedings on or from 1st April, 2017 shall be instituted before the NCLT and shall be governed as per the provisions of the IBC and its regulations.
Eligibility Criteria for an entity before initiating Voluntary Liquidation
a) Either the company has no debt or will be able to pay off its debts in full from the proceeds of assets to be sold in the Voluntary Liquidation.
b) The company is not being liquidated with an intention to defraud any person.
Compliances needs to be followed before commencement of the Voluntary Liquidation :
A. Declaration of solvency : The directors of the company in majority shall submit a declaration of solvency supported by an affidavit quoting that they have made detailed inquiry into the affairs of the company and have arrived at the opinion that the company has no debts or that the company will be able to pay off its debts from the liquidation estate in full. They shall also affirm that the company is not liquidated to defraud any person. the declaration provided by the directors shall contain the following as attachment:
i. Audited financial statements along with records of business operations for the previous two years or for the period since its incorporation, whichever is late.
ii. A valuation report of the assets of the company, if any prepared by the registered valuer.
B. Members approval : The members of the company shall within four weeks of filing declaration of solvency pass a special resolution in general meeting stating that the company be liquidated voluntarily. The members shall also appoint an insolvency professional to act as liquidator.
C. Creditors approval: Where the company to be liquidated owes a debt to any person, then in such a situation approval from creditors representing two third in value of the debt of the company shall be obtained within seven days of the passing of the special resolution by members.
D. Communication to ROC and IBBI: After obtaining approval from members and creditors for undergoing voluntary liquidation, the company shall intimate about the resolutions passed to ROC and IBBI within seven days of receiving approval from members and creditors.
When does voluntary liquidation commence?
On receipt of the required approval, the voluntary liquidation process shall be deemed to commence from the date on which special resolution is passed by the members along with the approval of creditors.
Effect of Liquidation
From the liquidation commencement date, the corporate person shall cease to carry on the business. The corporate person shall carry business only for the beneficial winding up of the same. Even after the liquidation also, the corporate person shall continue to exist till it's finally dissolved as per the provisions of the code.
Voluntary Liquidation : The Process
The detailed process for voluntary liquidation as per the IBC code and its accompanying regulations are as follows:
A. Appointment of Liquidator
The members of the company shall after furnishing the declaration of solvency pass special resolution for the appointment of Insolvency Professional as liquidation to undertake the voluntary liquidation process. Only eligible insolvency professional shall be appointed as liquidator.
B. Public Announcement by Liquidator
Within five days of appointment, the liquidator shall make a public announcement of his appointment. Vide the public announcement; the liquidator shall request the stakeholders to submit their claims by the last date which shall be a term of thirty days to be counted from the liquidation commencement date. The public announcement shall be published in one English and one regional language newspaper which is in wide circulation at the place of registered office as well as on the corporate person's website.
C. Submission of proof of claim by creditors
Once the public announcement is made by the liquidator, all persons who claim to be stakeholders of the corporate person shall be submit and prove their claim for debts within the provided time limit. The persons claiming to be the creditors or stakeholders of the corporate creditor are required to submit their proof of claim in the prescribed forms as mentioned in the code along with annexing the required documents.
D. Verification of claims
The liquidator on receipt of claims shall verify the claims received within a period of thirty dates to be counted from the last date by which claims were required to be submitted by the creditors. The liquidator while verifying the received claims may either accept or reject the received claims. Also, the liquidators may ask for any other additional information from the claimants while verifying their claims.
E. Preparation of list of stakeholders
After verifying the received claims, the liquidator shall prepare a list of stakeholders keeping into account the claims received and accepted by him. The list shall be prepared within forty-five days which shall be counted from the last date for receipt of the claim.
F. Realization of Assets of the corporate person
Once the list of stakeholders is finalized, the liquidators shall commence with realizing the assets of the corporate person. The liquidator shall himself or with the assistance of a registered valuer ascertain the value of the assets in the prescribed mode and manner as approved by the corporate person. The liquidator shall also initiate the sale of the assets in the prescribed mode and manner as approved by the corporate person. The liquidator shall also initiate a recovery process to realize all the assets and the dues of the corporate person within due time. If there remains any uncalled amount from any contributory then the liquidator shall call for the same also at the time of realization.
G. The opening of a separate bank account of a corporate person
The liquidator shall along with realizing the assets of the corporate person open a separate bank account in a scheduled bank especially for the voluntary liquidation for receiving all money due to the corporate person. The bank account name shall contain "in voluntary liquidation" as part of the name. The liquidator shall deposit all money including cheques and demand draft received by him as liquidator of the corporate person in the bank account. All payments made by the liquidator above Rupees five thousand shall be made by cheque or through online banking transaction only.
H. Distribution of the realized proceeds
Once the assets of the corporate person are realized and the bank account is opened the liquidator shall then distribute the proceeds obtained by realizing the assets of the corporate person within a period of six months to be counted from the date of receipt of the amount among the stakeholders. Prior to distributing the proceeds, the liquidator shall deduct the liquidation cost incurred by him. During the distribution of assets if the liquidator comes across any asset that cannot be readily or advantageously sold due to its peculiar nature or any other condition then the liquidator can with the approval of corporate person distribute the same within the stakeholders.
I. Preparation of Final Report
After the distribution of the assets of the corporate person, the liquidator shall draft a final report of the liquidation process incorporating the audited accounts of the liquidation along with the report. Once the report is prepared by the liquidator, it shall be sent to the concerned registrar of companies, NCLT and to the Insolvency and bankruptcy board as well.
J. Application for dissolution of the corporate person
Once the affairs of the corporate person have been completely wound up and its assets have been realized and distributed among the stakeholders, the liquidator shall then file an application to the concerned adjudicating authority for dissolution of the corporate person.
The concerned adjudicating authority shall on receipt of the application filed by the liquidator shall pass a dissolution order in favour of the corporate person stating that the corporate person shall stand dissolved from the date of the order.
Duration of voluntary liquidation process
The voluntary liquidation process shall be completed by the liquidator within a period of twelve months to be counted from the liquidation commencement date. The liquidator shall make his best endeavours to complete the liquidation process within the provided duration of twelve months.
If the liquidation process continues for more than twelve months, then in such a situation the liquidator shall convene a meeting of the contributories within a period of fifteen days and thereafter every twelve months till the dissolution of the corporate person.
Functions of the liquidator in voluntary liquidation
The liquidator has a key role to play in the voluntary liquidation process. The entire voluntary liquidation process is controlled by the liquidator. Apart from being the supreme commander in the voluntary liquidation process, the liquidator is assigned with the following task:
i. To verify claims of all the creditors;
ii. To carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;
iii. To value, sell, recover and realize all assets of and monies due to such corporate person in a time bound manner;
iv. To open a bank account for the purpose of receiving all moneys due to the corporate person;
v. To pay and settle with the creditors of the corporate person;
vi. To obtain any professional assistance from any person or appoint an professional, in discharge of his duties, obligations and responsibilities;
vii. To maintain registers specified under regulation 10 of schedule 2;
viii. To distribute proceeds to the stakeholders within a period of six months of receipt of the proceeds; and
ix. To preserve a physical or an electronic cop of the reports, registers and books of account for at least eight years after the dissolution of the corporate person, either with himself or with an information utility.
Some recent trends
The voluntary liquidations under the Insolvency and Bankruptcy Code (IBC) are becoming popular for promoters to close down 'unviable' companies. The Quarterly Newsletter (April-June 2019) issued by IBBI, the insolvency regulator, shows as many as 452 companies have filed for voluntary liquidation till 30th June, 2018. Of that, 56 firms have so far been dissolved, final reports have been submitted in 114 cases and 338 are at different stages of the process. According to the IBBI newsletter, of the 452 cases reasons for liquidation in 415 cases were available. Of all the reason for companies applying for voluntary liquidation, the most common reason (254 out of 415) was that of the company is no longer carrying any businesses, followed by commercial unviability of the business (59) and no revenue (19). Experts believe that more companies are going for voluntary liquidation route for close of businesses as it offers a much simpler exit route for them instead of the ones prescribed under the Companies Act, 2013. Of the 338 ongoing cases, 100 of them have been under process for more than 30 days. According to IBBI, most of the companies which opted for voluntary are smaller entities, with 275 of them having less than Rs 1 crore paid-up capital and only 42 of them having a paid-up capital of Rs 5 crore or more. The total outstanding debt of the 415 (out of the 452) firms under the voluntary liquidation was Rs 857 crore.
With the introduction of new regulations, Government intends to expedite the process of voluntary winding up in a time bound manner. Such move of the Government is welcome by the corporates as well as professionals, since, the voluntary winding up under CA, 1956 was a time-consuming process and there was no qualification for appointment of the liquidator. Now, only the insolvency professionals, who are experts on the subject, are allowed to be appointed as liquidators which will expedite the completion of voluntary winding up including resolution of all issues in a time bound manner. The IBBI has changed the process of liquidation to make it time bound. The new rules say that the process must be finished within one year of its commencement. The new regulations also say that a compromise between the stakeholders must happen within 90 days of the liquidation order. The latest amendment requires the financial creditors to contribute towards the liquidation costs, when the company does not have resources as this can be recovered with interest later. As the mandate completion of the process within 330 days, after which the debtor company goes into for liquidation. This is an increase from the existing 270 days. From the above analysis, voluntary liquidation is an expeditious process for winding up the affairs of a company without much complications or compliances. As it enables easy exit for solvent companies which are active if they desire to do so voluntarily provided that they cleared or have the capability to clear off their debts.