VOLUNTARY LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE VIS A VIS WITH COMPANIES ACT 2013

Abstract

Voluntary liquidation is when a company imposes upon itself, the decision to wind up on its own term, as approved by the shareholders of the company. It allows a company to terminate its operations, set off all assets and disassemble its corporate structure. Section 59 of Insolvency and Bankruptcy code deals with voluntary liquidation. The main aim is to streamline the insolvency resolution process for all businesses, associations, and individuals.

Keywords: Insolvency and Bankruptcy, Winding Up, Insolvency resolution, Voluntary Liquidation

Introduction

The Insolvency and Bankruptcy Code, 2016 (Code) not only permits insolvency proceedings for insolvents, but also has provisions for solvent businesses who choose to dissolve their operations and refrain from public display. In order to be considered for voluntary liquidation, a solvent corporation must be able to pay off its debts.The Central Government notified Section 59[1] of the Code on March 30, 2017, with effect from April 1, 2017, as it contains stipulations for Voluntary Liquidation of Corporate Persons. The voluntary winding up of companies was encouraged by High Courts even after the enactment of the Companies Act, 2013 and before the introduction of the IBC. A Corporate Person who has not committed any default is only entitled to initiate the Voluntary Liquidation process under Section 59 of the IBC. When we look at the concept of default under the IBC, we see that it only refers to current debts that are due and not repaid but payable in nature. The default that existed in the past and was paid off is not included in the description and falls beyond the scope of Voluntary Liquidation, as specified by IBC S/59.

Reasons behind Voluntary Liquidation

Unfeasible Condition – Voluntary liquidations, though not compulsory, can be the best choice for businesses with unviable operations and poor operating conditions.For instance, suppose a high-cost oil producer forecasts a period of low oil prices in the future.

Tax Relief – Another incentive to voluntarily liquidate activities is to take advantage of tax benefits associated with closing down, reorganising, or selling assets to other firms in exchange for equity in the acquiring business.

Special Purpose – Another explanation for voluntary liquidation is whether a corporation is only in operation for a short period and for a particular purpose.A special purpose Entity (SPE) or special purpose vehicle (SPV), for example, is a subsidiary corporation formed solely for the purpose of carrying financial obligations and isolating risk.

Departure of Company Founder- When a key member of an organisation leaves, the corporation may be forced to liquidate. For example, if a company’s founder chooses to leave and the shareholders decide not to continue operations, the company will cease to exist.

Procedure for Voluntary Liquidation under IBC

Declaration of Solvency –The directors, in majority, must sign a document stating that, after detailed review, they believe the company will be able to cover its debts with proceeds from the selling of assets under liquidation, and that the company is not being liquidated to defraud anybody.[2]

Initiating Voluntary Liquidation – A special resolution must be passed by the shareholders within four weeks of the declaration, requesting that the enterprise be liquidated and nominating a liquidator with details of remuneration. If the entity has debts, the creditors representing 2/3 of the debt must accept the resolution within 7 days of the resolution being passed by the shareholders.

 Public Announcement – Liquidator needs to make a public a public announcement within 5               days of his appointment. The announcement should be in English Paper and one in regional language

  Claim – The announcement should invite stakeholders to submit claims and give them 30 days to do so.   The liquidator can check the claims within 30 days of the last day of receipt. Within 45 days of the last day of claim receipt, the liquidator must compile a list of stakeholders.[3]

Submission of report- On conclusion of the liquidation process, the liquidator shall prepare a detailed final report in accordance to Rule 38 of the Regulations, 2017.

An application for the termination, winding up, or voluntary liquidation of the Corporate Person, must be filed with the Hon’ble National Company Law Tribunal. After the application is filed with the Hon’ble National Company Law Tribunal, the order of dissolution of the Corporate Person must be filed with the Registrar of Companies within fourteen days.

Jurisdiction

Initiated and pending proceedings: Rule 4 of the Companies Rules, 2016[4] , which came into effect on April 1, 2017, states that all voluntary winding up petitions pending before a High Court prior to April 1, 2017, will be dealt with by the High Court under the Companies Act, 1956.

New voluntary liquidation proceedings to be initiated under IBC: Pursuant to Section 59 of the IBC, Sections 434 (1) (c)[5] and 465 of the Companies Act, 2013, and Rule 4 of the Transfer Rules, all voluntary liquidation proceedings commenced on or after April 1, 2017 shall be brought before the NCLT and regulated by the IBC and its regulations.

Experts believe that more companies are opting for voluntary liquidation as a way to close their businesses because it is a much easier exit than the options provided by the Companies Act of 2013.

Voluntary Liquidation under Companies Act 2013

Inability to pay debts leads to the NCLT’s winding up [S. 271(1)(A)]. Voluntary Winding Up (S. 304-323)[6] – If the tribunals did not have the power to hear a petition for voluntary liquidation because the Supreme Court’s rules[7] were in effect prior to the start of the 2013 Act, the rules framed by the Supreme Court (Court Rules 1959) would apply due to the non-notification of the provisions of voluntary liquidation. Winding up on other than an inability to pay debts and Appointment of Liquidator

As a result, we will see that Section 59 of the IBC streamlines the entire procedure by eliminating ambiguities and establishing a timeline.

Advantages / Disadvantages

Voluntary Liquidation helps any outstanding unsecured business liabilities that are not personally insured to be written off after the corporation has been dissolved and the assets sold to creditors. Outside of individually guaranteed debts, this will relieve directors of the burden of repayment and encourage them to pursue new projects.Apart from the initial expense of preparing a statement of affairs, liquidations normally entail little cash flow because insolvency practitioners receive their fees from the proceeds of the asset sale. The cost of liquidating a business is often much less than the debt. With these benefits, there are certain disadvantages too such as payment to the creditors, the limited company’s assets, including land, equipment, and machinery, will be sold. There is a risk of wrongful trading proceedings if it is discovered that a director realised the company was insolvent and did not place the needs of the creditors first.If a director owes money to the company, it will be considered the same as any other debt and must be compensated.

Suggestions

The withdrawal or closure of the process after it has begun is not addressed in the IBC provisions or voluntary liquidation regulations.

Apart from recommending that a Corporate Person be able to request Adjudicating Authority approval for withdrawal from the voluntary liquidation process, IBBI stated that such a withdrawal should only be authorised if it is supported by a special resolution of the members, partners, or contributories.

Conclusion

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. This has changed the process of liquidation to make it time bound. The new regulations also state that within 90 days of the liquidation order, the parties must reach an agreement. If the company lacks cash, the new amendment allows financial creditors to contribute to the liquidation expenses, which can be recovered with interest later. According to the above review, voluntary liquidation is a quick and efficient way to wind up a company’s affairs without a lot of complexities or regulations. Since it allows solvent active businesses to exit easily if they want to do so voluntarily, provided they have cleared or have the potential to clear their debt.

CREDITS:

Anamika Singh, BBA LL.B (Hons.), Jagran Lakecity University


[1]Insolvency and Bankruptcy code 2016, No. 349, Insolvency and Bankruptcy, S. 59.

[2]IBBI discussion on voluntary liquidation process, India, https://www.taxmann.com/research/ibc/top-story/222330000000021070/ibbi-issues-discussion-paper-on-voluntary-liquidation-process-news  ( Last visited on 20th April 2021)

[3]Ashima obhan, India : Summary procedure for liquidation, Companies Act 2013, Modern Company Law 4th edition, Dec 23,2020.

[4] Companies (Transfer of Pending Proceeding rule), G.S.R 1119(E), 2016, S.248(2).

[5]Companies Act, 2013, No. 121- C, S. 434(1).

[6]Companies Act, 2013, No. 121- C,S. 304- 323.

[7]Companies Court Rules, 1959, No. 149, Rule 313.

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