Voluntary Liquidation of a Company

Article posted by: office@indialawoffices.com

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A legal process of incorporation brings a company into existence whereas under liquidation that existence comes to an end. Voluntary Liquidation is, as suggested, winding up of a corporate entity at the instance of its members. The major objective of the voluntary liquidation is minimizing the intervention of court and to enable the members and creditors to settle their affairs among themselves. Only a solvent company is eligible to enforce voluntary liquidation. Other than voluntary liquidation, a company can opt for the Fast Track Exit (FTE) mode, which is striking off the name/deregistration of a company from the Register of Companies u/s 560 of the Companies Act, 1956.

Then and Now:

Prior to the recent 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. Section 38 and 20 of the 1956 Act and 2013 Act respectively dealt with the voluntary liquidation. Under the 1956 Act, the voluntary liquidation was segregated into two categories: members’ voluntary winding up and creditors’ voluntary winding up.

On 31 March, 2017 the Insolvency and Bankruptcy Board of India (IBBI) vide its notification issued the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 which came into force on 1 April 2017. Section 59 of Chapter V of Part II of the Insolvency and Bankruptcy Code, 2016 (Code) is applicable to voluntary liquidation of corporate persons.

Transfer of Pending 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. 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.

Procedure of Voluntary Liquidation under IBC:

  • Declaration of Solvency: A declaration from majority of Directors is to be made stating that after complete enquiry, they are of opinion that the company will be able to pay its debts from proceeds of sale of assets under liquidation and the company is not being liquidated to defraud any person. Audited financial statements and record of business operations of the company for the past 2 years are to be submitted along with the declaration to the ROC.
  • Initiating Voluntary Liquidation: Within 4 weeks of the declaration, a special resolution is to be passed by the shareholders asking the company to be liquidated and appointing a liquidator with details of remuneration. If company has debts, the resolution is to be approved by the creditors representing 2/3 of the debt within 7 days of the resolution passed by members. Company is supposed to file the resolution with ROC and with the Board within 7 days of passing such resolution.
  • Intimation to the Authorities: Intimation is to be made to the tax department, company’s banker, and other statutory department regarding the commencement of the liquidation. A liquidation account is opened with the bank and liquidator will act as its signatory.
  • Public Announcement: Liquidator needs to make a public announcement in Form A of Schedule I of the Regulations, 2017 within 5 days of his appointment. The announcement should be made in English newspaper and one regional language newspaper.
  • Claims: The announcement should invite the claims from stakeholders and provide 30days’ time to them. Within 30 days of from the last day of receipt of claims, liquidator should verify the claims. Liquidator is responsible to prepare a list of stakeholders within 45 days from the last day of receipt of claims.
  • Preliminary Report: Liquidator is obliged to submit a Preliminary Report to the company within 45 days from the liquidation commencement date. The report should contain details of the capital structure of the company, estimation of assets and liabilities, proposed plan of action for conducting liquidation, and estimated liquidation cost and time.
  • Realization of Assets and Payment of Liabilities: Liquidator should sell the assets and distribute the proceeds to the stakeholders.
  • Final Report: On conclusion of the liquidation process, the liquidator shall prepare a detailed final report in accordance to Rule 38 of the Regulations, 2017. The report should be submitted to the ROC and Board, and an application is to made with NCLT for the dissolution of the company.
  • Final Order: After verification, NCLT shall pass am order for dissolution of the company and a copy of same should be filed with ROC within 14 days of the order.

Why Voluntary Winding Up?

Liabilities of a Director shall not continue post the dissolution of the company, except in cases of fraud, misrepresntation etc.

 

 

 

Under new code, only a licensed professional can act as a liquidator of the company that ensures speedy closure.

 

 

The Code is a single window legislative that has made the closure of the company easier and more uniform as compared to that under the Act,1956.

 

 

 

Under the new Code, the process is single-handedly run by liquidator with minimal involvement of the adjucating authorities.

 

 

Conclusion

The basics of the liquidation process remains the same as it were under Companies Act, 1956, however, the Code reduces the intervention of the regulatory authorities drastically that fasten up the process. Once the winding up process is completed, the liquidator has to make an application to the Tribunal for passing the order of dissolution of the company. Only solvent companies can file for voluntary winding up and approval of creditors is mandatory now unlike earlier in the Act.

With the removal of the concept of official liquidator, the onus of the entire process is on company liquidator, which might improve the liquidation process. The Code appears to be in harmony with the global practices removing overall obstacles which prevailed in older laws, due to which closure of solvent companies has become a lot smoother.

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