In this article, Navdeep Baidwan discusses Voluntary Liquidation under the Insolvency and Bankruptcy Code, 2016.

Up until now, there was no single legislation in India to deal with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy of companies could be found in the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debt due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and applicable provisions of the Companies Act, 1956/ 2013. The aforesaid legislations provide for multiple authorities viz., Board of Industrial and Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) to adjudicate upon and decide on matters pertaining to insolvency and bankruptcy of companies. Having said that, voluntary liquidation of companies was governed by the applicable provisions of the Companies Act, 1956.

Voluntary Liquidation under the Insolvency and Bankruptcy Code, 2016

The Central Government on March 30, 2017, inter alia notified, Section 59 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) which deals with voluntary liquidation of corporate entities. Subsequently on March 31, 2017 the Insolvency and Bankruptcy Board of India (“IBBI”), notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (the “Regulations”). The provisions of voluntary liquidation and the Regulations were made effective from April 1, 2017.

Erstwhile provisions

Preceding to the aforesaid provisions, voluntary liquidation process was governed by the provisions of the Companies Act, 1956, more specifically Section 482 to Section 530. Until then the provisions contained in the Act of 2013 had not been enforced. Subsequently by virtue of notification of the Eleventh Schedule of the Code with effect from November 15, 2016, various winding up provisions contained in the Act of 2013 had been amended and voluntary winding up sections under the Act of 2013 were omitted and the provisions of the Act of 1956 continued to apply in relation to voluntary winding up proceedings before various High Courts in the country.

Jurisdiction over proceedings of Voluntary Liquidation of Companies

Invoking Voluntary Liquidation process

In terms of the Code, a Corporate Person[1] may initiate a Voluntary Liquidation process if it satisfies the following conditions:

• the Corporate Person should not have committed any default;
• majority of the directors or designated partners of the Corporate Person make a declaration[2] verified by an affidavit stating that each of the directors have made full enquiry into the affairs of the company, basis which they have formed an opinion that (i) the Corporate Person has no debt or it will be able to pay its debts in full out of the sale proceeds of its assets under the proposed liquidation; and (ii) liquidation is not initiated to defraud any person;
• the Corporate Person shall within a period of 4 weeks from the date of declaration pass a special resolution, approving the proposed Voluntary Liquidation;
• Where the Corporate Person owes any debt to any person, creditors representing two-thirds in value of the debt shall consent to the Contributories’[3] Resolution within 7 (seven) days of its passage (Creditors’ Approval).

Liquidation Commencement Date

The Voluntary Liquidation process shall be deemed to have commenced from the date of passing of special resolution approving the proposed Liquidation and subsequent approval of the creditors (if required).

Effect of Liquidation form Liquidation Commencement Date

The Corporate Person shall from the Liquidation Commencement Date cease to carry on its business except to the extent as required for the purposes of winding up its business. However, the Corporate Person shall continue to exist unit the Adjudicating Authority[4] passes an Order giving effect to the Liquidation.

Appointment and remuneration of Liquidator

The Liquidator so appointed shall be independent of the Corporate Person. A person shall be considered independent of the Corporate Person, if he-

• Is eligible to appointed as an independent director on the board of the Corporate Person under section 149 of the Act of 2013, where the Corporate Person is a Company ;
• Is not a related party within the meaning of Section 188 of the Act of 2013;
• Has not been an employee or proprietor or a partner- (i) of a firm of auditors or company secretaries or cost accountants or cost auditors of the Corporate Person; (ii) of a legal or consulting firm, that has or has had any transactions with the Corporate Person contributing ten per cent or more of the gross turnover of the firm.

Additionally, remuneration payable to the Liquidator shall form a part of the Liquidation process.

Powers and duties of Liquidator

In terms of Section 35 of the code, Liquidator shall inter alia have the following power and duties: (a)      to verify claims of all the creditors; (b)     to take into his custody all assets, property, effects and actionable claims of the corporate person; (c)      to evaluate the assets and property of the corporate person in the manner as may be specified by the Board and prepare a report; (d)     to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary; (e)      to carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary; (f)      to sell the immovable and movable property and actionable claims of the corporate person in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified; (g)     to invite and settle claims of creditors and claimants and distribute proceeds in accordance with the provisions of this Code; (h)     to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities; (i)      to perform such other functions as may be specified by the Board

Public announcement of Liquidator

Liquidator shall make public announcement in ‘Form A‘ of Schedule I within 5 days of his appointment inviting stakeholders to submit their claims due to the Company within 30 days from the date of his appointment.

Claims by stakeholders

Every stakeholder shall submit their Statement of Claims to the liquidator within 30 days from the commencement of Liquidation.

On receipt of claims, the Liquidator would verify the claims within a period of thirty days’ from the last day of receipt of claims and may either accept or reject the claims, in whole or in part. The reasons for acceptance or rejection of the claim shall be writing and shall be communicated to the Corporate Person within seven days.

Realization of assets, Proceeds of Liquidation and distribution of proceeds

Completion of Voluntary Liquidation process and preparation of final report

Liquidator shall endeavour to complete the liquidation process within 12 months from the date of commencement of liquidation process. “Upon completion of the liquidation process, the liquidator shall prepare the Final Report consisting of (a) audited accounts of liquidation, showing receipts and payments pertaining to liquidation since its commencement; (b) statement demonstrating that assets of the corporate person are disposed off, debts are satisfied and no litigation is pending against the corporate person and (c) a sale statement in respect of all assets realized.

Adjudicating Authority to effectuate Liquidation process

Upon completion of the Liquidation process and subsequent preparation of the final report, the Liquidator shall make an application to the NCLT in form NCLT-1 for dissolution of the Corporate Person. The Adjudicating Authority shall then fix a date for the hearing of the petition/ application. Where the NCLT is satisfied with the application, it shall pass an order that the Corporate Person be dissolved from the date of that order.

Limited liability of the Directors of the Corporate Person

The liabilities of a Directors of the Corporate Person shall not continue to post its dissolution, except in such cases where the Liquidator and/ or the Adjudicating Authority have opined that the dissolution process was initiated to fraud and deceive any person and/ or the creditors.

Allied risks and liabilities

Any person[5] who initiates the voluntary liquidation proceedings with the intent to defraud any person shall be punishable with a minimum penalty of one lakh rupees which may extend to one crore rupees. It is a well-founded principle of law that a fraud vitiates all underlying transactions. Where the Adjudicating Authority is of the view that the directors of the company who have initiated the voluntary liquidation proceeding with the intention to defraud any person, the entire liquidation process would be suspended/ rendered void.

Further, where during the liquidation process, the Liquidator is of the view that the business of the Corporate Person has been carried out with the intent to defraud the creditors of the Corporate Person, or for any other fraudulent purpose, the Liquidator may make an application in terms of the NCLT Rules to the Adjudicating Authority, upon which the Adjudicating Authority may pass an order that such persons who were knowingly parties to the carrying out of the business in such fraudulent manner shall be liable to make such contributions to the assets of the corporate person as it may deem fit.

Moreover, Where the Liquidator is of the opinion that the Corporate Person will not be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation, he may make an application to the Adjudicating Authority to suspend the process of voluntary liquidation and pass any such orders as it deems fit.

Appeal provisions

The Code allows flexibility to the Company to prefer an appeal against the order of the Adjudicatory Authority by filling an appeal memorandum to National Company Law Appellate Tribunal (“NCLAT”). Sub-section (2) of Section 61 says, “Every appeal shall be filed within thirty days before the NCLAT”. In addition to the same an appeal may also be preferred to the Hon’ble Supreme Court of India against the order of the NCLAT within 45 days from the receipt of such order.

[1] ‘Corporate Person’ means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liabilities Partnerships Act, 2008, or any other person incorporated with limited liability under any law for the time being in force, but shall not include a financial service provider;

[2] such declaration shall be accompanied by audited financial statements and a record of business operations of the Corporate Person and valuation report of the assets of the Corporate Person prepared by a registered valuer;

[3] A ‘contributory’ means a member of a company, partner of a limited liability partnership, and any other person liable to contribute towards the assets of the corporate person in the event of its liquidation.

[4] The Adjudicating Authority for the purpose of the Code shall be the National Company Law Tribunal (NCLT) having territorial jurisdiction over the place where the registered office of the Corporate Person is located.

[5] In terms of Section 3(23) of the Code, a person shall include;

• an individual;
• a Hindu Undivided Family;
• a company;
• a trust;
• a partnership;
• a limited Liability Partnership; and
• any other entity established under a statute