In this article, Priya Venkatesan of Tamil Nadu National Law School does an analysis on Insolvency and Bankruptcy Board of India (Voluntary Liquidation Regulation 2017).

In 2016, the need for creating Insolvency and Bankruptcy Code of India was seen after having numerous laws, dealing with debt recovery and insolvency intermingled with each other. This code, established a board called Insolvency and Bankruptcy Board of India (IBBI). The board under its powers conferred by Section 58, 196 and 208 of the code released Voluntary Liquidation regulation. This Article is a detailed analysis of the same.

Insolvency and Bankruptcy Board of India (Voluntary Liquidation Regulation 2017)

The Insolvency and Bankruptcy Code of India provides for Chapter V which deals with the Voluntary liquidation of a corporate person. The Voluntary Liquidation Regulation, 2017 was formed by the Board (IBBI) by virtue of its power under 59(2) of Insolvency and Bankruptcy Code of India 2016. The Voluntary Liquidation Regulation, 2017 applies in cases where a corporate person intends to liquidate itself.

The regulation lays down the procedure to be followed while liquidating a corporate person and gives authenticity to a liquidation. The regulation has 8 chapters in total and is a very compact yet all-encompassing regulation.

What constitutes a corporate person?

Since the Regulation deals with the voluntary liquidation of a corporate person, it becomes necessary to understand who a corporate person is. Under Insolvency and Bankruptcy Code of India, 2016, the definition of corporate person is given under Section 3 (7). Under the said section, “corporate person” can be:

• A company as defined in clause (20) of section 2 of the Companies Act, 2013, i.e. A company incorporated under Companies Act, 2013 or any other Companies Act.
• A limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, i.e. A partnership registered under Limited Liability Partnership Act, 2008.
• Any other person incorporated with limited liability under any law for the time being in force.
• It shall not include any financial service provider.

What is “liquidation”, why would a corporate person liquidate?

Liquidation is dissolving of a company. Many a time, an insolvent company would want to liquidate itself. There can be various reasons why a company wants to liquidate itself. Since these regulations apply to a corporate person willing to liquidate voluntarily, the reasons may differ for each corporate person.

Need for the Regulation

The board (IBBI) has been given powers to form this regulation under IBCI, 2016. The need for these regulations arose to keep in check that all stakeholders, creditors and people who have any interest in the company get their share. Besides this, these regulations make it very easy to liquidate a company, unlike the older times where the company to liquidate had to comply with various laws which would complicate the situation.

Provisions of the Regulation

Commencement of Voluntary Liquidation

To liquidate a corporate person, other than a company these regulations have to be followed.

• The designated partners or persons responsible for exercising its corporate powers shall make a declaration, along with an affidavit giving assurance that there is no debt or debt can be paid in full form from the proceeds and that the liquidation is not to defraud anyone. A valuation of assets has to be prepared and audited financial statements for previous two years has to be produced.
• Within 4 weeks of such declaration, a resolution has to be passed special majority of the partners or contributors for furthering such liquidation.

Corporate persons including the company have to do the following:

• Ratification by creditors- the above-mentioned resolution is to be signed within 7 days by the creditors if any
• A liquidator has to be appointed who will then take over the process of liquidation.
• Once this is done, according to regulation 5 “A voluntary liquidation for a corporate person other than a company shall be deemed to have commenced from the date of passing of the resolution”
• The corporate person is then to cease to carry on its business except that required for effective winding up of business.

Who is a Liquidator?

The Act requires a Liquidator, who will work to liquidate the company in a lawful manner. The regulation lays down the eligibility criteria to appoint such a liquidator. The person should be an insolvency professional independent to the corporate person. Such a professional will not be eligible to be the liquidator if he is representing any of the stakeholders. The regulation has a provision for his remuneration and it also vests a few powers in him.

This is a commendable step by the Board as shifting the responsibility on a person would ensure proper liquidation of the corporate person. There will be some sort of check so that no person is wronged.

Powers of a Liquidator

Chapter 4 of the regulation deals with powers and functions of a liquidator. Though the whole regulation gives various powers and authorities to the liquidator, this chapter specifically lays down various powers he has. When a voluntary liquidation of a corporate person is initiated, the liquidator assumes the most important role, therefore, his responsibility is equivalent to the powers he has. The powers given in this chapter are enlisted below.

1. The liquidator has the power to report and retain such a report in electronic and paper form.
2. The liquidator has powers to complete registers and books of account.
3. The liquidator may appoint professionals for his assistance.
4. The liquidator can consult the stakeholders in all matters relating to liquidation.
5. The liquidator can make extortionate credit transactions
6. The liquidator can make public announcements for things listed in the regulations.

The regulation deals with the claimants and lists out all the claims out of such liquidation. There can be various creditors like operational creditors, financial creditors, by workmen and employee, stakeholders. There can be persons with claims of promissory notes and bills of exchange, the liquidator is to dispose of such claims by checking the authenticity. The liquidator also has the power to ask such claimants for other proof to substantiate the claims.

Claims

Any claimant is to show the proof of claim. The regulation provides regulation for various claimants:

• Claims by operational creditors
• Claims by financial creditors
• Claims by workmen and employees
• Claims by other stakeholders

The chapter on claims also deals with people who produce promissory notes who are to produce it in front of the liquidator. Any evidence can be called by the liquidator before approving a claim, cost of such proof to be borne by the claimant.

Realisation and distribution of assets

The liquidator, to realise and distribute the assets. The manner of the same is provided in the regulations. Once the assets are realised, they need to be distributed. The Regulation therefore also provides for proceeds of liquidation and distribution of such proceeds.

Such liquidation by the liquidator is to be started post opening of a bank account in the name of the corporate person followed by the words ‘in voluntary liquidation’. The mode method and time limitations for payment of the dues by liquidator have been provided for in the regulation. Ultimately, when everything is wound up, the liquidator is to provide a final report prior to dissolution.

Public announcements

• The regulation also provides for Public announcement of such a liquidation. The Liquidator is to make an announcement within 5 days from his appointment.
• It shall call upon stakeholders to submit their claims
• It shall also mention the last date of such date which would be 30 days from commencement of liquidation
• It is to be published in the official Gazette, a newspaper- one english and one in regional language, on website of the corporate person and on website of board designated for this purpose.

Requirements

The Regulation provides for a few forms to be filled in its annexures linked here.  

Conclusion

With changing time and increasing amount of corporate persons, the necessity of a regulation which would check dissolution of the same also became necessary. This regulation came as a respite to many who wanted to liquidate corporate persons and had no checklist of what to do. The appointment of a liquidator puts in responsibility in one person so that it is wound up easily. The Regulation ensures there is no blame game and vests powers in one person acting on behalf of a corporate person. Therefore, the regulation is a necessary and good initiation by Insolvency and Bankruptcy Board of India.