Blog Details

Introduction

There are a few companies whose purpose for formation has been fulfilled and therefore the Management feels that there is no point in continuing the Company as it involves a lot of cost, compliances and time. In such a scenario, it is feasible to Voluntarily Liquidate the Company.

Voluntary liquidation is a self-imposed wind-up and dissolution of a Corporate Person that has been approved by owners. The initial decision to cease the operations of a corporate person is taken by the Corporate Person’s leadership which is followed by the approval of its ownership in a General Meeting.

The purpose of a voluntary liquidation is to:

•           terminate a Corporate Person’s operations;

•           wind up its financial affairs;

•           dismantle its corporate structure in an orderly fashion, while paying back creditors according to their assigned priority.

The Insolvency and Bankruptcy Code, 2016 (IBC) allows for ‘voluntary liquidation’ of Corporate Persons who are solvent i.e. the Companies who have assets, sufficient to pay off all the outstanding liabilities. Therefore, solvent companies can now file for voluntary liquidation as the procedure gets simpler with the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC).

IBC also permits for ‘voluntary liquidation’ for Corporate Persons who are healthy and have the capacity to repay all their dues. This opportunity is offered to companies which either have zero debt or are confident of meeting all the debt obligations from the sale of assets of the firm during liquidation.

The voluntary liquidation of a corporate person under the Code has a much wider scope as it includes companies, limited liability partnerships and any other persons incorporated with limited liability. The New Regulations provides the process for initiating voluntary liquidation by a corporate person i.e. companies, limited liability partnerships and any other persons incorporated with limited liability. It should be noted that the Companies going under voluntary liquidation should not have any prosecutions pending from any of the Regulatory Authorities.

Brief Overview of Legal Regime

The provisions concerning Voluntary Winding up of Company were specified in Sections 304-325 of the Companies Act, 2013, although these provisions were never notified. Prior to 1st April, 2017 the voluntary winding up process continued to be carried under Companies Act, 1956.

As per section 255 and Schedule XI of IBC, the sections of Voluntary winding up were “Omitted” from the Companies Act, 2013. Notification No. IBBI/2016-17/GN/REG010 dated 31st March, 2017 IBBI notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. The Central Government, vide Notification S.O. 1005(E) dated 30th March, 2017 appointed April 1, 2017 as the date on which certain provisions of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) shall come into force. These provisions relate to Voluntary Liquidation (Section 59), Information Utilities [Section 209-215 and Section 216(1)] and Agreements with Foreign Countries (Section 234-235). As a result of the same, with effect from 1st April, 2017 voluntary winding up shall be conducted under Insolvency and Bankruptcy Code, 2016 (hereafter referred to as “IBC”).

These Regulations apply to the voluntary liquidation of companies under Chapter V of Part II of the IBC. These regulations provide for the process from initiation of voluntary liquidation of a corporate person - companies, limited liability partnerships and any other persons incorporated with limited liability - till its dissolution. The regulations specify the manner and content of public announcement, receipt and verification of claims of stakeholders, reports and registers to be maintained, preserved and submitted by the liquidator, realisation of assets and distribution of proceeds to stakeholders, distribution of residual assets, and finally dissolution of corporate person.

 Under New Regulations, the Government has also reduced the time period of various compliances. Some of the significant things to be kept in mind and the entire procedure for bringing a lawful end to life of company is as under:

i.               There is no need to give government gazette unlike earlier Acts;

ii.              No segregation as Members’ and Creditors’ voluntary dissolution;

iii.            There are no specific provisions regarding ceasing of powers of Board of Directors.

Detailed Procedure

A corporate person, who intends to liquidate itself voluntarily and has not committed any default, may initiate voluntary liquidation proceedings under Chapter V Part II of Insolvency Code, 2016 - Section 59(1) of IBC, 2016.

Step I: Directors’ Declaration

Company should first submit a declaration to the Registrar of Companies (ROC) in e-form GNL-2. The Declaration must be prepared by majority of the directors of the company verified by an affidavit[1] stating that -  

(i)             they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and

(ii)           the company is not being liquidated to defraud any person.[2]

The declaration shall be accompanied with the following documents, namely –

(i)             audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later

(ii)           a report of the valuation of the assets of the company, if any prepared by a registered valuer.

Step II: Special Resolution (Contributories’ Resolution)

Within four weeks of a declaration, there shall be either of the following:[3]

(i)             a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or

(ii)           a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:

The resolution for appointing the Liquidator shall contain the terms and conditions of the appointment of the insolvency professional, including the remuneration due to him. The resolution has to be filed to the ROC in e-form MGT-14.

The company shall notify the Registrar of Companies and the Board (IBBI) about the resolution under section 59(3) to liquidate the company within seven days of such resolution or the subsequent approval by the creditors, as the case may be.

Effect of the Resolution:[4]

The voluntary liquidation proceedings in respect of a corporate person shall be deemed to have commenced from the date of passing of the Contributories’ Resolution (Liquidation Commencement Date).  However, the corporate personality shall continue until the company is dissolved. On and from the Liquidation Commencement Date, the corporate person shall cease to carry on its business except as far as required for the beneficial winding up of its business.

Step III: Creditors’ Approval[5]

If a corporate person owes debts, in such case the creditor(s) representing two third in value of the total debt owed by the corporate person, either

i.               approve the Contributories’ Resolution within 7 days of its passage (Creditors’ Approval) ;or

ii.              provide a No Objection Certificate (NOC).

Step IV: Public Announcement by the Liquidator

The liquidator shall make a public announcement in Form A of Schedule I within five days from his appointment (i.e., 5 days from the date of General Meeting).[6]

The public announcement shall consist of the following:

i.               Call upon stakeholders to submit their claims as on the liquidation commencement date; and

ii.              Provide the last date for submission of claim, which shall be thirty days from the liquidation commencement date.

The announcement shall be published-

i.               In one English and one regional language newspaper with wide circulation at the location of the registered office and principal office, if any, of the corporate person and any other location where in the opinion of the liquidator, the corporate person conducts material business operations;

ii.              On the website, if any, of the corporate person; and

iii.            On the website, if any, designated by the Board for this purpose.

Step V: Preliminary Report by Liquidator

The liquidator shall submit a Preliminary Report to the Company within 45 days from the Liquidation Commencement Date, detailing the following:[7]

Step VI: Liquidator’s Business

i.               Maintenance of Registers and Books of Account - The liquidator shall maintain the registers and books.[8] If the books of account are incomplete on the liquidation commencement date, the liquidator shall have them completed and brought up-to date, with all convenient speed. He shall keep receipts for all payments made or expenses incurred by him.

ii.              He may call for such other evidence or clarification from a claimant for substantiating the whole or part of its claim.

iii.            Verification of claims – He shall verify the claims submitted within thirty days from the last date for receipt of claims and may either admit or reject the claim, in whole or in part.[9] (A creditor may appeal to the adjudicating authority against the decision of the liquidator under Section 42 of IBC, 2016)

iv.            List of stakeholders - The liquidator shall prepare the list of stakeholders, on the basis of proofs of claims submitted and accepted, within forty-five days from the last date for receipt of claims. It should include the amounts of claim admitted, the extent to which the debts or dues are secured or unsecured, the details of the stakeholders, and the proofs admitted or rejected wholly or in part.

v.              Paid Money into Bank Account - He shall open a bank account in the name of the corporate person followed by the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of all moneys due to the corporate person.  All payments out of the account by the liquidator above five thousand rupees shall be made by cheques drawn or online banking transactions against the bank account.

vi.            Distribution - He shall distribute the proceeds from realization within six months from the receipt of the amount to the stakeholders. The liquidation costs shall be deducted before such distribution is made. The liquidator may, with the approval of the corporate person, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances.[10]

Step VII: Preparation of Final Report

The liquidator shall try to complete the liquidation process within twelve months from the liquidation commencement date.[11]If he is unable to do it, he is required to hold meeting of contributors, he is also required to file Annual Status Report.

On completion of the liquidation process, the liquidator shall prepare the Final Report giving details as specified below[12]:

Ø  An audited account of the voluntary liquidation, showing the receipts and payments pertaining to liquidation since the liquidation commencement date; and

Ø  A statement demonstrating that-

i.               the assets of the Company have been disposed of;

ii.              the debt of the Company has been discharged to the satisfaction of the creditors;

iii.            No litigation is pending against the Company or sufficient provision has been made to meet the obligations arising from any pending litigation.

Ø  A Sale statement in respect of all assets containing - the realized value; cost of realization; the manner and mode of sale; an explanation for the shortfall, if the value realized is less than the value assigned by the registered valuer in the report of the valuation of assets; the person to whom the sale is made; and any other relevant details of the sale.

The liquidator shall send the Final Report by registered post and by electronic means to the Contributors[13], Registrar and the Board. The liquidator shall submit the Final Report to the Adjudicating Authority along with the application for liquidation.[14]

Step VIII: Application to NCLT

Where the affairs of the Company have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the NCLT in form NCLT-1 for the dissolution of such Company.

Step IX: Order by NCLT

NCLT shall fix a date for the hearing of the petition. If the Tribunal is satisfied with the application, it will pass an order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.[15]

Step X: Filing of order with ROC

The order of the Tribunal shall be filed with the ROC by the company within a period of 14 days of the receipt of the copy of order, or such other time as may be fixed by the Tribunal.[16]

Other Important Features and Provisions

Suspension of Process of Liquidation:

A process of voluntary liquidation can be suspended in two scenarios, namely –

i.               Fraud - If liquidator is of the opinion that the voluntary liquidation is being done to defraud a person, he shall make an application to the adjudicatory authority to suspend the process of voluntary liquidation.[17]

ii.              Insolvency - If liquidator is of the opinion that the company will not be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation, he shall make an application to the adjudicating authority to suspend the process of voluntary liquidation.[18]

Requirement of a Registered Insolvency Professional

As of now, a Registered Insolvency Professional will be required to act as a Liquidator in case of winding up proceedings. The following categories of individuals are eligible for registration as insolvency professionals:

i.               Advocates, Chartered Accountants, Company Secretaries and Cost Accountants with 10 years’ of post-membership experience (practice or employment) or a Graduate with 15 years’ of post-qualification managerial experience, on passing the Limited Insolvency Examination.

ii.              Any other individual on passing the National Insolvency Examination.

Institution of Proceedings

Prior to the aforesaid notifications, voluntary liquidation was governed by the provisions of the Companies Act, 1956 (1956 Act) as neither the relevant sections of the Companies Act, 2013 (2013 Act) nor the Code were in force.

At present, there are two types of petitions:

1.              Proceedings already pending and

2.              Fresh Petitions initiated on and after 1 April 2017

Pending voluntary winding up proceedings:

Rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (Transfer Rules), which has been notified on 7 December 2016 and brought into force from 1 April 2017, prescribes that all applications and petitions relating to voluntary winding up of companies pending before a High Court prior to 1 April 2017, shall continue to be dealt with by the High Court in accordance with the provisions of the 1956 Act.

Fresh voluntary winding up proceedings to be instituted under the Code :

On combined reading Section 59 of the Code, Sections 434 (1) (c) and 465 of the 2013 Act and Rule 4 of the Transfer Rules, all fresh proceedings for voluntary winding up on and from 1 April 2017 shall be instituted before the NCLT and shall be governed as per the provisions of the Code and the Regulations.

Case Studies

In the matter of Central Inland Water Transport Corporation Ltd.[19]

The liquidator filed an application under regulation 40(2) of the IBBI (Voluntary Liquidation Process) Regulations, 2017 praying for suspension of the voluntary liquidation process initiated by the company as the pre-requisite for voluntary liquidation that the company is solvent was absent in the instant case. On being satisfied, the Adjudicating Authority suspended the voluntary liquidation process. It, however, refused to convert it to a compulsory liquidation under section 271 of the Companies Act, 2013.

In the Matter of Online Scrips (India) Private Limited[20]

The Liquidator Mr. C.S. Thirupal Gorige, Practicing Company Secretary has filed this Petition in the name of Applicant Company “Online Scrips (India) Private Limited” under Section 59 of I & B Code 2016. under Section 59(7) seeking of dissolution of Corporate Person “Online Scrips (India) Private Limited”. Therefore, the Corporate Person shall be dissolved. In the result “Online Scrips (India) Private Limited” is ordered to be dissolved with effect from 12^th February 2018 and a copy of this order shall be forwarded to the concerned authority where the Corporate Person is registered within 14 days.

In the matter of TKJ Marketing Group Pvt. Ltd.[21]

A petition was preferred by the liquidator namely M/s TKJ Marketing Group Private Ltd. under Section 484 of the Companies Act, 1956 read with Section 59 of the Insolvency and Bankruptcy Code, 2016.  Difficulties had arisen regarding transfer of proceedings relating to those cases of voluntary winding-up of a company where notice of the resolution by advertisement has been given under sub-section (1) of section 485 of the 1956 Act but the company has not been dissolved before the 1^st April, 2017, since the Code provides for a substantially different framework for persons who may be appointed as liquidators and for making of an application for dissolution by the liquidator. While under the 1956 Act, any person could be appointed as a liquidator, only an insolvency professional registered with the Insolvency and Bankruptcy Board of India can be appointed as a liquidator subject to certain conditions.

Further, under the 1956 Act, liquidator is required to make a report to the Official Liquidator who, in turn, makes a report to the High Court for dissolution of the company, whereas under the Code, the liquidator is required to make an application for dissolution directly to the Tribunal.

Hence, by the operation of Companies (Removal of Difficulties) Order,2017[22] in exercise of powers conferred by sub-section (i) of Section 470 of the Companies Act, 2013 and hence this Petition is required to be proceeded with as per the procedure prescribed under Companies Act, 1956 relating to Voluntary Liquidation and not under the provisions of Section 59 of IBC, 2016 and the Petition was sent back to the Registry of NCLT for recourse to the provisions of Companies Act, 1956.

Implementation Data

The state of implementation of the new procedure and Regulations can be gauged from the following statistics:

On 31st March, 2017 the IBBI (Voluntary Liquidation Process) Regulations, 2017 was notified to enable a corporate to liquidate itself voluntarily if it has no debt or if it will be able to pay its debts in full from the proceeds of the assets to be sold under the liquidation. In pursuance to these Regulations, 13 corporates had initiated voluntary liquidation proceedings by 30th June, 2017. During the last quarter, 55 corporates initiated such proceedings. As evident from the above Table, the no. of Corporate persons who are going in for voluntary dissolution has been rising since the quarter April-June 2017. The value of paid-up capital is in Crores.

It may take a minimum of 12 months or lesser than that, to complete the process. However, in cases where the process of Liquidation goes beyond a period of 12 months, the liquidator has to present the status report along with the audited account of the voluntary liquidation showing the receipts and payments pertaining to liquidation since the liquidation commencement date in compliance with Regulation 9 (1) of IBBI (Voluntary Liquidation) Regulations, 2017.

The process of Voluntary Liquidation is simpler and time-bound as compared to the earlier regulations, however, it being a new Regulation, understanding and practically implementing the same is time-consuming and tricky.