About the Author: Rachana. D is a Student of the RV Institute of Legal Studies, Bengaluru.
INTRODUCTION
Prof. L.C.B. Gower defines winding up as “the process whereby its life is ended and its property administered for the benefit of its creditors and members. An administrator called liquidator is appointed and he takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights.”[1]
Companies usually undergo involuntary wind-ups due to insolvency or bankruptcy. However, voluntary winding up can occur for various reasons, nearly seven out of ten companies simply stop operating, whereas two out of them opt for voluntary liquidation because they find their business commercially unviable. Less than one out of ten winds up because their purpose is fulfilled or the promoters are unable to manage affairs.[2] Other miscellaneous reasons include the departure of the company’s founder, tax relief, merger of a subsidiary, regulatory or technical changes, or other strategic business decisions.
The Insolvency and Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017 permits a corporate entity to initiate voluntary liquidation through the following process:
- The company shall take a declaration from the majority of the directors and a verified affidavit stating that there are no debts and no intention to defraud creditors.[3] Post amendment, they are required to declare that sufficient provisions are being made to meet the obligation arising out of any pending litigations.[4] Such declarations shall also be accompanied by disclosures about the pending proceedings in respect of the corporate person.
- Verification is crucial for confirming the veracity and validity of claims as well as holding the deponent accountable.[5]
- There is a presumption until the contrary is shown, that all the debts of the company will be paid in full and it must be taken that the company is solvent when there is no evidence to the contrary.[6]
- Passing a resolution within 4 weeks of declaration appointing a liquidator.[7] If the articles of association or the partnership deed specify a fixed duration, a simple majority resolution is sufficient, otherwise requires a special resolution.[8] Creditors’ approval is needed if the company owes a debt.[9]
- Within 7 days of the resolution, the company must inform the Board and the Registrar of Companies of the decision to liquidate the business under section 59(3).
- Only a qualified insolvency professional can be appointed as a liquidator and has to be independent i.e., not a related party[10], not a former employee, not a partner in any audit, legal or consulting firm which had significant dealing with the company in the preceding three years.[11]
- If needed, the liquidator can hire professionals, but not relatives, related parties, or former auditors from the last five years.[12] Stakeholders are expected to cooperate throughout the process, any unfair or exploitive credit transactions must be identified and addressed.[13]
- Within 5 days of his appointment, the liquidator makes a public statement requesting all parties involved to file their claims within 30 thirty days of the liquidation’s start date.[14] Some liquidators seek a No Objection Certificate (NOC) or No Dues Certificate (NDC) from the Income Tax Department, even though it is not required. This delays the time-bound liquidation process. Therefore, IBBI vide its Circular No. IBBI/LIQ/45/2021 dated 15-11-2021 states that insolvency professionals are not required to obtain NOC/NDC for voluntary liquidation.
- The liquidator verifies the claims submitted within 30 days from the last date for receipt of claims. If a claim is not precise, the liquidator estimates the amount based on available information.[15] There are guidelines for handling debts in foreign currency,[16] adjusting mutual dues[17], and considering future payments.[18]
- The liquidator shall prepare a list of stakeholders on the basis of proofs of claims submitted and accepted within 45 days from the last date of receipt of claims.[19]
- The liquidator then works to maximize value for all stakeholders by recovering and realizing all assets and debts owed to the corporate person in a time-bound manner.[20]
- After this, the liquidator distributes the proceeds from realization within 6 months from the receipt of the amount to the stakeholders.[21]
- The liquidation procedure must be finished within 270 days of the start of the process. The liquidator calls a meeting of the corporate person’s contributories within 25 days of the end of the 270 days or 90 days, as the case may be and then at the end of each subsequent 270 days or 90 days, as the case may be, until the submission of an application for the corporate person’s dissolution from the liquidation commencement date and the presentation of a Status Report if the liquidation process drags on for longer than time allowed by Reg. 37(1).
- The Liquidator prepares a final report consisting of audited accounts of the liquidation, disposal of the assets of the corporate person, sale statement etc. when the liquidation procedure is complete.[22]
Once the business entity’s operations have been concluded and its assets have been entirely liquidated:
- The liquidator must submit an application for the liquidation of the company to the NCLT along with the Final Report.[23]
- The Tribunal will set a date for the petition hearing.
- NCLT will issue a dissolution order if the Tribunal is satisfied.[24]
- As of the NCLT’s order date, the entity will be dissolved.
CONCLUSION
Voluntary liquidation is not just a legal process; it is a structured procedure that allows companies to exit. Through voluntary liquidation, solvent businesses can effectively conclude their operations while safeguarding the interests of stakeholders. Companies can pay debts, divide assets and formally dissolve by adhering to The Insolvency and Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017. Transparency, responsibility and a prudent market departure are guaranteed by this procedure.
For companies, voluntary liquidation is not necessarily the end but can be a responsible closure making way for new beginnings be it, a fresh entrepreneurial journey, restructuring, or a shift in business strategy. By adhering to statutory requirements and maintaining ethical practices, companies can improve their reputation even in closure, leaving a positive legacy in the corporate ecosystem.
References:
[1] Professor Paul Davies and Professor Sarah Worthington, Modern Company Law ( 9th edn, Sweet & Maxwell 2012)
[2] Ibid
[3] Insolvency and Bankruptcy Code 2016, s 59(3)(a)
[4] Inserted vide Notification No. IBBI/2023-24/GN/REG109, dated 31st January 2024
[5] A. K. K. Nambiar v Union of India AIR 1970 SC 652
[6] Gerard v. North of Paris Ltd.[1936] 2 All ER 905(CA)
[7] Insolvency and Bankruptcy Code 2016, s 59(3)(c)(i)
[8] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 3
[9] Insolvency and Bankruptcy Code 2016, s 59(3)
[10] Companies Act 2013, s 2(76)
[11] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 7
[12] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 11
[13] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 12
[14] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 14
[15] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 24
[16] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 25
[17] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 28
[18] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 27
[19] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 30
[20] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 32
[21] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 35
[22] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 38
[23] Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations 2017, reg 38(3)
[24] Companies Act 2013, s 59(8)