This article is written by Devang Singh, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.com. Here he discusses “Analysis and Comparison of Option of Voluntary Liquidation under IBC and it’s Parallel under Companies Act”.
With the advent of Insolvency and Bankruptcy Code(IBC), 2016, a uniform, comprehensive Code was introduced which encompassed all companies, partnerships, and individuals (other than financial firms). The plan was to introduce the act back in 1992 but it was not until 2016 that this plan was officially added to complement Companies Act 2013. Its primary goal is to consolidate the Insolvency resolution process into a fast track for all companies, partnerships and individuals (other than financial firms).
Now, the IBC not only enables the insolvency proceedings of the Corporate Debtor turning Insolvent but also contains provisions for Companies who want to surrender their business and give up their right to carry on the same.
The Central Government vide its notification introduced in 2017 notified Section 59 of Insolvency and Bankruptcy Code.
Prior to the above Notification which notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulation 2017 (“The Regulation”) and introduced the concept of Voluntary Liquidation process which was governed by the Companies Act 1956, as the provisions under Companies Act 2013 were not notified. Thereby meaning that that voluntary liquidation or winding up of company continued to be governed by the 1956 Act before the Government introduced the notification on Section 59 of the IBC in 2017.
The Insolvency and Bankruptcy Board of India (IBBI) has notified Section 59 which deals with Voluntary Liquidation, meanwhile the Voluntary Liquidation process in use before IBC, was Companies Act 1956 and Companies Act 2013. Voluntary Liquidation is when a company self imposes upon itself to wind up and dissolve itself after approval of its shareholders. It generally happens when company turns insolvent and is unable to pay off its liabilities.
Now, the government vide its Notification has repealed the provision of Voluntary Liquidation under Companies Act 1956 and Companies Act 2013.
The Companies Act 1956 had 38 Sections and Companies Act 2013 had 20 Sections which dealt with Voluntary Liquidation, but the IBC 2016, vide Chapter V of Part II consists only of one Section i.e Section 59, which deals with voluntary liquidation.
Another key difference between Companies Act and IBC 2016 is that under Companies Act 1956 the process of Voluntary Liquidation was classified into 2 types i.e Members Voluntary winding up and Creditors Voluntary winding up. These distinctions made by Companies Act 1956, has been officially eliminated by Section 59 of IBC 2016.
In terms of Section 59 of the IBC, a Corporate Person who hasn`t committed any default, is only eligible for initiating Voluntary liquidation process. It is imperative for us to fathom, whether the term Default is existing default or includes past default as well? When we are to analyze the definition of Default under IBC, we find out that the definition mentions only the existing debts which are due and not repaid but payable in nature. The default which has occurred in past and has been paid off, is not included in the definition and is out of scope of Voluntary Liquidation i.e. S/59 of IBC. The default must be existing in nature whether from past or present, it doesn`t matter unless the payment is still due.
Another important condition that is imposed in IBC is that the liquidation happening should not be to defraud any person. It must be reasonable and as per law.
The majority of directors or the partners of the Corporate Person must make a declaration which should be made along with an affidavit to verify that the corporate person is not in default or if any debts are due then it shall pay off the same under the proposed voluntary liquidation.
The declaration should be supplemented by financial statements which must be audited properly along with a valuation report of the corporate person.
Within 4 weeks of the said declaration being submitted, a special resolution shall be passed by the contributors (Contributors Resolution) requiring the corporate entity to be liquidated and then they shall appoint an Insolvency Resolution Professional as a Liquidator.
Within 7 days after passage of the said declaration, creditors who represent 2/3rd value of total debt of Corporate entity, approve the Contributors Resolution.
But who is a Contributory? As per the regulations, a `contributor` is a person who is member of the company or a partner of a LLP and any other person who may contribute financially to the liquidation process of the corporate person which may benefit the company as a whole.
The Registrar of Companies (ROC) and the Board shall be notified as per the provision of Section 59(4) for the resolution passed under Section 59(3) after taking the approval of creditor or to liquidate the company within 7 days.
After the said amendment, all cases filed on or after the 01/04/2017 shall be governed by the Insolvency and Bankruptcy Code of India and the adjudicating authority shall be shifted from High Court to National Company Law Tribunal only. But what happens to the cases already pending before High Court? The cases already pending before the High Court even after applicability of the Code shall continue to be dealt with by the Hon`ble High Court of the States.
Thus as per Rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016, which was notified in December 2016 and came into effect from April 2017, states that Voluntary Liquidation of companies pending before any High Court before April 01, 2017 shall be dealt by that High Court only. But any fresh Voluntary liquidation process initiated on or after April 01, 2017, shall be instituted before the Hon`ble National Company Law Tribunal and shall be governed by the IBC 2016 and regulations thereof.
Under the new amended regulations, the Government has not just simplified the process of Voluntary Liquidation but has also specified time limits or rather time period for various compliances. The procedure for the process of Voluntary liquidation as per the amended regulation is summed up as below specified :-
I: A document is to be submitted called Submission of Declaration to Registrar of Companies, which shall state that the said company shall or should be able to pay off its debt and it has started the process of voluntary liquidation to not defraud any person or entity;
II: A Special Resolution shall be passed to approve the process of voluntary liquidation and an Insolvency Professional shall be appointed as a liquidator (“Approval“), within a time frame of four weeks after the submission of declaration. An approval of 2/3rd of the creditors shall also be required if the said corporate person has any unpaid debts.
III: As soon as the Approval is granted a Public Notice is to be announced within 5 days of such approval in Newspapers as well as on the website (if any) of the Corporate Person inviting claims or objections of all stakeholders involved.
IV: An intimation about the grant of Approval is to be sent within seven days of such Approval to the Registrar of Companies and the Board;
V: The preliminary finding of the authorised capital, approximations of asset and liabilities, the proposed plan of action etc., is to be made into a Report called Preliminary Report, which shall and submitted to the corporate person within a period of Forty-Five days of the said Approval;
VI: Within Thirty days from the last day of receipt of claims, verification of such claims shall be done and Within Forty-Five days from the last day of receipt of claims, the list of stakeholders involved shall be done.
VII: A bank account on the name of the said Corporate Entity which shall be followed by the words’ involuntary liquidation’, in any of the scheduled banks, for the purpose of receipt of all amount due to the corporate entity;
VIII: The process of sale of all the assets of the Corporate Person and the recovery of amounts which are due to the corporate person and the realization of capital which are uncalled or unpaid in nature or are contributions which are unpaid, shall be done;
IX: The amounts received from the realisation of the Capitals shall be distributed within a period of six months to all the stakeholders involved;
X: A Final Report is to be submitted by the Insolvency Professional appointed as the Liquidator for the Corporate person`s Voluntary Liquidation. Registrar of Companies and the Board shall also submit the final report.
XI:An application is to be sent to the Hon`bleNational Company Law Tribunal for the dissolution or winding up or voluntary liquidation of the Corporate Person,
XI: After the application is submitted to the Hon’ble National Company Law Tribunal, it`s order of dissolution of the Corporate Person shall be submitted within a period of fourteen days to the Registrar of Companies.
The simple steps if to be understood from a simple point of view then it must be summed up as below:-
- The Board of Directors of the Corporate Person shall hold a board meeting and the resolution for voluntary liquidation of the corporate person shall be passed and a declaration of the solvency of the corporate person is also to be issued.
- The shareholders of the Corporate Person shall convene a meeting to approve the resolution for voluntary liquidation of the Corporate Person and an Insolvency Professional shall be appointed as a liquidator of the Corporate Person.
- Any debt owed by the Corporate Person shall be approved by the creditors who represent the 2/3rd of the debt value and the same shall be approved within seven days of passing of such resolution.
- All the Necessary filings which are to be done shall be done with the Registrar of Companies, Insolvency and Bankruptcy Board of India and Income Tax Authorities.
- After the appointment of the Liquidator, he shall take charge of the Corporate Person and shall proceed as per the set procedure which includes the recovery of amounts which are due to the corporate person and the realisation of capital, the settlement of unpaid debts and the proceeds of the above process which shall be distributed to the stakeholders involved.
- A Public Notice shall be issued by the Liquidator in Newspapers and website of Corporate Person, inviting claims from all the stakeholders involved.
- The appointed Liquidator shall attempt to achieve or rather finish the voluntary liquidation process within a time span of Twelve Months from the date of commencement of liquidation.
- In case it is found that the accounts of the Corporate Person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority i.e. National Company Law Tribunal for the liquidation of such Corporate Person.
- After an application filed by the Liquidator, The Adjudicating Authority shall pass an order, ordering the corporate debtor to be dissolved from the date of the order and the corporate person shall stand dissolved accordingly.
- A copy of the said order shall be forwarded to the concerned authority with which the corporate person was registered.
Before the said amendment was introduced we can safely assume that The Companies Act 2013 divided the whole process into 4 parts which were:
- Winding up by the NCLT on an inability to pay debts [S. 271(1)(A)]
- Voluntary Winding Up (S. 304-323) – where the tribunals didn`t have any authority to entertain petition with respect to winding up as the rules framed by the Supreme Court (Court Rules 1959) anytime before the commencement of 2013 Act will be applicable due to non-notification of provisions of voluntary liquidation.
- Winding up on other than an inability to pay debts
- Appointment of Liquidator
Thus we see that Section 59 of the IBC expedites the whole process by removing the ambiguities and bringing a timeline to the whole process.
- Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017
- non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.
- Limited Liability Partnership Act
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