The Insolvency and Bankruptcy Code 2016 not only enables the insolvency proceedings of the insolvents but also the code contains provisions for solvent entities that want to themselves surrender their business and refrain from carrying on their business. To be eligible for voluntary liquidation, the solvent entity must be in a state to pay off its debts.
The Central Government on 30th March 2017 notified the Section 59 of the Insolvency and Bankruptcy Code 2016. Section 59 of the Code contains provisions for Voluntary Liquidation of the Corporate Persons. The provisions of section 59 actually came into effect from 1st April 2017. Thereafter on 31st March 2017, the Insolvency and Bankruptcy Board of India(IBBI) vide its notification notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process)Regulations, 2017 which came into effect from 1st April 2017.
Prior to the above notifications, the voluntary liquidation process was governed by the provisions of the Companies Act, 1956. This was because of the fact that the provisions of the Companies Act, as well as the case, were not notified. Further vide notification of the eleventh schedule of the IBC Code which got notified on 15th November 206, the provisions related to winding up got amended and the provisions related to voluntary winding up were omitted. Under the priory prevailing voluntary liquidation regime, the provisions of the companies act 1956 were applicable in relation to voluntary liquidation. The voluntary liquidation proceedings under the companies act 1956 were handled by the High Courts. At present, the proceedings are handled by the National Company law Tribunal (NCLT).
The present scenario after the applicability of the insolvency and bankruptcy code 2016 is that the cases pending before the high court shall continue to be dealt with by the High Court even after the applicability of the code. All cases filed on and after 1st April 2017 shall be governed by the provisions of the insolvency and bankruptcy code and shall be dealt with by NCLT only. Currently, there exist two scenarios for voluntary liquidation:
Rule 4 of the Companies (Transfer of Pending proceedings) Rules, 2016 was notified on 7th December 2016 and it came into effect from 1st April 2017. The said rule prescribed that all applications or petitions related to voluntary liquidation of companies pending before the high court prior to 1st April 2017 shall continue to be dealt with by the High Court in accordance with the provisions of Companies Act 1956.
As per Section 59 of the IBC , Section 431(1)(C) and 465 of the Companies Act 2013 along with Rule 4 , all fresh proceedings for voluntary liquidation that come up on or after 1st April 2017 shall be instituted before NCLT and be governed by the provisions of the Code and its Regulations.
Prerequisites for opting Voluntary Liquidation
The process for voluntary liquidation is simple and less detailed but it can only be adopted on satisfying the following prerequisites:
The company possesses no debts or it will be able to pay off its debts from the proceeds of the assets sold during voluntary Liquidation.
The company in not being liquidated with an intention to defraud any person.
Who can apply for Voluntary Liquidation?
A corporate person who intends to liquidate itself voluntarily provided it has not committed any defaults may initiate voluntary liquidation proceedings under the provisions of section 59 of the Insolvency and Bankruptcy Code 2016. Therefore, any company or LLP which has not defaulted in payment and possesses the capacity to repay its debts in full may apply for voluntary liquidation.
Pre Liquidation Compliances
The code contains a few compliances which are to be undertaken before the commencement of the voluntary liquidation process. The pre compliances are mandatory for commencing the liquidation process under the code. The pre-liquidation compliances are as follows:
1. 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:
Audited financial statements along with records of business operations for the f previous two years or for the period sine incorporation, whichever is later.
A valuation report of the assets of the company, if any prepared by the registered valuer.
2. 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.
Where the company to be liquidated voluntarily 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.
4. 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 approvals, 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 is 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:
1. 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 liquidator to undertake the voluntary liquidation process. Only eligible insolvency professional shall be appointed as liquidator.
2. 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.
3. 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 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.
4. 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.T he liquidator while verifying the received claims may either accept or reject the received claims. Also, the liquidator may ask for any other additional information from the claimants while verifying their claims.
5. 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.
6. Realization of Assets of the corporate person
Once the list of stakeholders is finalized, the liquidator 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 of the corporate debtor and thereafter 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.
7. 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 ion the bank account. All payments made by the liquidator above Rupees five thousand shall be made by cheque or through online banking transaction only.
8. 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.
9. 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.
10. 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 favor 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 endeavors 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 responsible for preparing the following documents:
1. Preliminary Report
2. Annual Status Report
3. Minutes of the consultations with stakeholders
4. Final Report
5. Books and registers
Cash Book Ledgers Bank Ledger Register of fixed assets and inventories Securities and Investment register Register of book debts and outstanding debts Tenants register Suits register Decree register Register of claims and dividends Contributories ledger Distributions register Fee register Suspense register Documents register Books register Register of unclaimed dividends and undistributed properties The liquidator shall also keep a record of all payments and expenses made by him along with their relevant proofs.
Therefore, the companies can close themselves under the Fast Track Exit (FTE) scheme as provided under the Companies Act 2013. The FTE scheme is available only to inoperative companies which have nill assets and liabilities. Now the IBC 2016 enables easy exit even for solvent companies which are active if they desire to do so voluntarily provided that they have cleared or have the capability to clear off their debts. A voluntary liquidation is a marvelous option for such companies.
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