Voluntary Liquidation under IBC 2016

A New Beginning

• The Central Government has, on 30 March 2017, notified, inter alia, Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) which deals with voluntary liquidation of corporate entities with effect from 1 April 2017.
• On next day, IBBI, vide its notification dated 31 March 2017, notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (Regulations) with effect from 1 April 2017.
• Now regulation are in place for the voluntary liquidation of a corporate person under the Code, which includes companies, limited liability partnerships and any other persons incorporated with limited liability.

In Old Arena

• Prior to the aforesaid notifications, voluntary liquidation was governed by the provisions of the Companies Act, 1956 (1956 Act) as neither the relevant sections of the Companies Act, 2013 (2013 Act) nor the Code were in force.
• Further, by virtue of the notification of the Eleventh Schedule of the Code (notified with effect from 15 November 2016), various winding up provisions of the 2013 Act had been amended and voluntary winding up sections under the 2013 Act were omitted.
• Accordingly, under the previous voluntary liquidation regime, the provisions of the 1956 Act continued to apply in relation to voluntary winding up proceedings before the High Courts.

At present there are 2 types of petition:

1. Proceedings already pending and
2. Those which will be initiated on and after 1 April 2017

Pending voluntary winding up proceedings:

Rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (Transfer Rules), which has been notified on 7 December 2016 and brought into force from 1 April 2017, prescribes that all applications and petitions relating to voluntary winding up of companies pending before a High Court prior to 1 April 2017, shall continue to be dealt with by the High Court in accordance with the provisions of the 1956 Act.

Fresh voluntary winding up proceedings to be instituted under the Code :

On combined reading Section 59 of the Code, Sections 434 (1) (c) and 465 of the 2013 Act and Rule 4 of the Transfer Rules, all fresh proceedings for voluntary winding up on and from 1 April 2017 shall be instituted before the NCLT and shall be governed as per the provisions of the Code and the Regulations.

Initiation of the process

As per Section 59 of the Code read with the Regulations, any corporate entity may initiate a voluntary liquidation proceeding if it satisfies all the following conditions:

1. It has not committed any default

2. If majority of the directors or designated partners of the corporate person make a declaration verified by an affidavit to the effect 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

Such declaration is accompanied by the audited financial statements and valuation report of the corporate person

Within 4 (four) weeks of such declaration, a special resolution (an ordinary resolution would suffice in cases of voluntary liquidation by reason of expiry of its duration or occurrence of any dissolution event) is passed by the contributories* requiring the corporate person to be liquidated and appointing an insolvency professional as a liquidator (Contributories' Resolution) and

5. Creditor(s) representing two­thirds in value of the total debt owed by the corporate person, approve the Contributories' Resolution within 7 (seven) days of its passage (Creditors' Approval).

* As per the Regulations, 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.

As per Section 59(4), the company shall notify the ROC and the Board about the resolution passed under section 59(3) to liquidate the company with seven days of passing such resolution or subsequent approval by the creditors, as the case may be.

Liquidation Commencement Date

Subject to the Creditors' Approval (if required), the voluntary liquidation proceedings in respect of a corporate person shall be deemed to have commenced from the date of passing of the Contributories' Resolution (Liquidation Commencement Date).

On and from the Liquidation Commencement Date, the corporate person shall cease to carry on its business except as far as required for the beneficial winding up of its business.

Main functions of the Liquidator

To value, sell, recover and realize all assets of and monies due to such corporate persons in a time­bound manner

Opening a bank account for the purpose of receiving all moneys due to the corporate person

Distribution of proceeds to the stakeholders within a period of 6 (six) months of receipt of the proceeds and

To preserve a physical or an electronic copy of the reports, registers and books of account for at least 8 (eight) years after the dissolution of the corporate person, either with himself or with an information utility

Completion of liquidation

Once the affairs of the company have been completely wound up and its assets fully liquidated, an application shall be made by the liquidator to the NCLT for its dissolution along with a final report (inter alia consisting of audited liquidation accounts, statement(s) demonstrating details of the disposed assets and their manner of sale, and statement(s) that all debt has been discharged and sufficient provision has been made in case of any adverse outcome of a pending litigation).

This final report also needs to be filed with ROC & Board.

Pursuant to this application by the liquidator, the NCLT shall pass an order for dissolution and the entity shall stand dissolved from the date of NCLT's order.

A copy of this order needs to be forwarded with ROC with in 14 days of passing such order

Formats Prescribed under IBBI (Voluntary Liquidation Process) Regulations, 2017

Schedule 1

As per schedule 2 of Reg. 10, the liquidator shall maintain the following registers and books as may be applicable, in relation to the liquidation of the corporate person:

Regulation 39: Unclaimed proceeds of liquidation or undistributed assets.

Before the order of dissolution is passed under section 59(8), the liquidator shall apply to the Adjudicating Authority for an order to pay into the Companies Liquidation Account in the Public Account of India any unclaimed proceeds of liquidation or undistributed assets or any other balance payable to the stakeholders in his hands on the date of the order of dissolution.

Any liquidator who retains any money which should have been paid by him into the Companies Liquidation Account under this Regulation shall pay interest on the amount retained at the rate of twelve per cent per annum, and also pay such penalty as may be determined by the Board.

The liquidator shall, when making any payment referred to in sub-regulation (1), furnish to the Registrar and the Board, a statement setting forth the nature of the sums included, the names and last known addresses of the stakeholders entitled to participate therein, the amount to which each is entitled to and the nature of their claim.

The liquidator shall be entitled to a receipt from the Reserve Bank of India for any money paid to it under sub regulation (2), and such receipt shall be an effectual discharge of the liquidator in respect thereof.

A person claiming to be entitled to any money paid into the Companies Liquidation Account may apply to the Board for an order for payment of the money claimed; which may, if satisfied that such person is entitled to the whole or any part of the money claimed, make an order for the payment to that person of the sum due to him, after taking such security from him as it may think fit.

Any money paid into the Companies Liquidation Account in pursuance of this Regulation, which remains unclaimed thereafter for a period of fifteen years shall be transferred to the general revenue account of the Central Government.

The author is a practising CA and is registered Insolvency Professional. He can also be reached at cavinodchaurasia@gmail.com