Voluntary Liquidation: An Easier Exit Option for Solvent Inoperative Company under the IBC & A Speedier Process in Disbursing the Funds Within 90 Days

Concept of Solvent Inoperative Company & Need for Voluntary Liquidation

In certain cases, the Board of Directors considered to close down its business by way of voluntary liquidation as the Company had not been carrying business operations in India for a long period of time plus not earning any profits and neither has any reasonable future prospects or has incurred losses due to several business constrains and adverse economic situation and on-going market conditions or the shareholders of the Corporate Person do not want to continue with the business or due to unforeseen circumstances arises out of Covid-19 worldwide, so, it was not financially viable to continue and carry on the business activities, it is in the best interest of the Company to close down the business.

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Laws & Regulations Deals with Solvent Liquidation Under the Insolvency & Bankruptcy Code 2016

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Section 59 of the Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as “Code”) provides that a corporate who intends to liquidate itself voluntarily and has not committed any default - that is, solvent liquidation - may initiate voluntary liquidation proceedings under the provisions of Chapter V of Part II of the Code. The Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (For Short “IBBI Regulation”) govern the process. This process has been adapted in regulation 3 of the IBBI Regulation for corporate persons other than a company. It does not envisage the intervention of the NCLT for commencing voluntary liquidation process.

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However, before passing an order of dissolution U/s.59(8) of the Code, the NCLT is concerned to check whether the Corporate Person’s petition has complied with the provisions of S.59(7) of the Code and necessary compliances as per provisions of the Code, further, IBBI Regulations have been made by the Corporate Person and the Liquidator.

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This process is considered to be an easier exit option, cost-effective tool as well as speedier wherein a solvent inoperative company (who does not have any secured and unsecured creditors; there is no requirement of getting No objection certificate as per proviso to sub section 3 of S.59 of Code) can be liquidated within 90 days, so, that the funds of Corporate Person could have been duly distributed between the stakeholders as per their claims. Additionally, the procedure for payment of debts by the Corporate Person in full within a specified period, aims to balance the interests of all stakeholders and promote a streamlined process. Voluntary liquidation process is followed for winding down a corporate person (which includes both a company and an LLP).

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The then, Rao Inderjit Singh, who was Minister of State for Corporate Affairs stated in the Lok Sabha “From FY 2018-19 to FY 2023-24 (up to 30th September 2023) final reports of 1,168 companies have been submitted by Liquidators under section 59 of Code, of which final dissolution orders have been passed by NCLT in 633 cases during the said period”.

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?Effect of S.248(2) & S.59 IBC on Indian Economy

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?Section 248(2) of the Companies Act, 2013 pertains to voluntary exit of companies while Section 59 of the IBC relates to voluntary liquidation of companies.

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In May 2023, the government set up the Centre for Processing Accelerated Corporate Exit (CPACE) to centralise and expedite voluntarily exit of companies under Section 248(2) of the Companies Act, 2013.

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“Under CPACE the time taken for voluntary exit during the current year is around 110 days. 470 cases are currently pending for voluntary liquidation under section 59 of Code till September 2023. Further, 3,695 cases are pending for voluntary corporate exit under section 248(2) of the Companies Act, 2013 with CPACE”.

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The Corporate Affairs Minister Nirmala Sitharaman stated 7,946 foreign companies have registered their Indian subsidiary companies during the period from FY 2018-19 to FY 2022-23 (up to November).

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“The increase in foreign direct investment indicates the confidence of the foreign investors in the business atmosphere of the country”.

Prior to IBC, the Companies Act 1956, dealt with the winding up and liquidation of companies. A company could initiate voluntary liquidation under Section 304 of the Companies Act, which was subsequently omitted by the IBC in 2016. Further, the processes of winding up and liquidation under the Companies Act, 1956, resulted in extraordinary delays, which often led to almost complete erosion of the asset value of the debtor company. It also failed to provide a balanced or effective framework addressing all levels of financial distress.

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Understanding S.59 of Code r/w IBBI Regulations (2017) with Practical Considerations

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Before initiating Voluntary Liquidation, the Corporate Person is required to prepare a valuation report and a statement of assets and liabilities of the company as on the liquidation commencement date (i.e., the date from when the company has no liabilities, employees and assets, except cash and bank balance required to make payments if any claim is filed and to cover the liquidation expenses). Then, U/s.59(3)(a) and (3)(b) of Code as per Regulation 3(1)(a), a corporate person, who intends, may initiate a Voluntary Liquidation proceeding if majority of the directors or designated partners of the Corporate Person submit a Declaration of Solvency Affidavit, affirming that they have made a full inquiry into the affairs of the Company and formed an opinion that (i) the Corporate Person has no debt (no liabilities to pay) or it will be able to pay its debts in full from the proceeds of the assets to be sold under the proposed liquidation, (ii) the Corporate Person is not being liquidated to defraud any Creditor, Government, Company, Firm or any person (iii) further affirm that the Corporate Person has not committed any default, and (iv) further the Corporate Person shall makes a disclosure about pending proceedings or assessments before ?statutory authorities, and pending litigations and shall also declare that sufficient provision has been made to meet the likely obligations arising, if any, on account of the pending proceedings [Regulation 3(1)(iii) & (b) (iii) of Voluntary Liquidation Regulations Amendment, 2024, effective from 31st January 2024, which amends the Regulation 3 sub regulation (1) of IBBI Regulation, 2017]. The declaration shall be accompanied with the following documents namely: (i) Audited financial statements and record of business operations of the Company for the previous two years or for the period since its incorporation, whichever is later; (ii) Valuation Report prepared by a registered valuer regarding the assets of the company (iii) details of the all the existing Directors.

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Within four weeks of the declaration, as per the provision of the Companies Act 2013, a special resolution needs to be passed by a special majority of the partners or contributories, as the case may be, of the Corporate Person requiring the Corporate Person to be liquidated and appointing a resolution professional as the Liquidator [required U/s.59(3)(c)(i) as per IBBI Regulation 3(3)(i) and 3(4): 2017], following which the Company shall cease to carry on its business operations except as far as required for the beneficial winding up of its business. The legal status of the corporate entity continues to exist during the period of liquidation, until it is finally and formally dissolved [IBBI Regulation 4: 2017].

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?Though the meaning of the term “special resolution” can be easily deciphered from the Companies Act, 2013; however, what constitutes “special majority” of partners/ contributories has not been defined under the IBBI Regulation 2017.

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Approval of Creditors

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If the Corporate Person owes any debt to any person, creditors representing two-thirds in value of the debt of the Corporate Person also need to approve the resolution passed by the partners or contributories within seven days of such resolution [Proviso S.59(3)(c)] as per IBBI Regulation 3 proviso: 2017].

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Commencement of Liquidation Proceedings

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?S.59(5) of the Code says the liquidation proceedings shall be deemed to have commenced from the date of passing of the shareholder’s resolution, subject to the creditor’s approval and the company appoints a registered insolvency professional (IP) as the Liquidator, under Regulation 5, who is eligible under Regulation 6 of IBBI Regulation 2017, to act as the Liquidator of the Company.

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Similarly, as stated under Regulation 3(3) of IBBI Regulation 2017, the voluntary liquidation proceedings in respect of the Corporate Person (other than a company) shall be taken to commence from the date on which the partners, or contributories (as the case may be) resolve as such, subject to the creditor’s approval.

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Application of Sections 35 to 53 of the IBC

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?Section 59(6) states that sections 35 to 53 of Chapters III and VII shall apply to voluntary liquidation proceedings of Corporate Persons.

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Chapter III deals with the liquidation process of a Corporate Person in case of failure of the insolvency resolution process to receive a resolution plan and the subsequent order by the Adjudicating Authority for liquidation of Corporate Persons. Chapter VII deals with offences and penalties.

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Hence, provisions in the IBC relating to the powers and duties of the Liquidator, claim verifications, the conduct of the liquidation process, and offences and penalties that apply to a post-CIRP liquidation also apply to voluntary liquidation.

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Intimation, Public Announcement and Claims

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In compliance of Section 117 of the Companies Act, 2013, the Liquidator shall notify and filed the Board Resolution passed by the Directors and the Special Resolution passed by the Shareholders for Voluntary Winding up with the Registrar of Companies (vide e-form MGT 14 and Form GNL-2) and the IBBI, [sub section (4) S.59 of Code] to liquidate the company within seven days of such resolution. This means, the role of government regulators is restricted since the Corporate Person is merely required to notify them. This ensures that there should be no delay in commencing the liquidation process.

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The Liquidator makes a public announcement within five days from his appointment calling upon stakeholders to submit their claims along with the proof within thirty (30) days from the liquidation commencement date. The announcement is published in one English and in one regional language newspaper and on the website, if any, of the Corporate Person and on the website, if any, designated by the Board for this purpose [in Form A of Schedule I as per IBBI Regulation 14(1)(2) and (3): 2017].

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The copy of public announcement is to be send to IBBI with request to place it on its website and same is to be published on the website of IBBI.

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Then the Liquidator has to addressed a letter to Income Tax Dept., under Section 178 of the Income Tax Act 1961, intimating the initiation of Voluntary Liquidation of the Company and appointment of the Liquidator.

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The Liquidator submits a preliminary report to the directors of the Corporate Person within a prescribed time limit of forty-five (45) days from the liquidation commencement date, detailing the capital structure of the Corporate Person, estimates of its assets and liabilities as on liquidation commencement date, the proposed plan of action, etc.

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He verifies the claims submitted within thirty days from the last date for receipt of claims and prepares the list of stakeholders within forty-five (45) days from the last date for receipt of claims [IBBI Regulation 29 and 30: 2017].

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Realisation of Assets & Completion of Proceedings

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He endeavours to recover and realise all assets of and dues to Corporate Person in a time-bound manner for maximisation of value for the stakeholders [IBBI Regulation 31 and 32: 2017].

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He shall open a liquidation bank account in the name of the Corporate Person followed by the words ‘in voluntary liquidation’, in a scheduled bank, for purpose of depositing/realisation by the Corporate Person and payments as per S.53 with IBBI Regulation 34: 2017. The Liquidator distributes the proceeds from realisation within thirty days from the receipt of the amount to the stakeholders [Regulation 35(1) of Voluntary Liquidation Regulations Amendment, 2022 (effective from 05 April 2022) r/w S.53 of the Code].

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After making payments towards the liquidation expenses of the Company, distribution to the shareholder, payment of taxes, other charges and expenses, the Liquidator shall close the said Bank Account and accordingly, this date marks the completion of Voluntary Liquidation Process.

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He endeavours to complete the liquidation process within 90 days (in certain specified cases) and in other cases, in 270 days (if the company has creditors who have approved the special resolution under clause (c) of sub section (3) of section 59 or clause (c) of sub-regulation (1) of regulation 3).

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If the Liquidator fails to liquidate the Corporate Person within stipulated period of 90 days or 270 days as the case may be, he shall hold a meeting of contributories of the Corporate Person and present a status report within fifteen days from the end of such period and thereafter at the end of every such succeeding period, specifying the reasons for not completing the process within the stipulated time period and apprise the meeting about additional time required for completing the process [Regulation 37 of Voluntary Liquidation Regulations Amendment, 2024].

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Thus, the role of Liquidator is principally akin to the role of a liquidator in compulsory liquidation, to manage the process, verify and collate claims, and to oversee the realisation and distribution of assets.

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In Swiss Ribbons Private Limited & Another Vs. Union of India & Others [(2019) 4 SCC 17], the Supreme Court noted that there is a distinction between the roles of an RP and a liquidator under the IBC, especially in respect of claim verification and determination. The court held that the RP has to vet and verify claims made, and ultimately determine the amount of each claim. As opposed to this, the Liquidator has to consolidate and verify the claims, and either admit or reject such claims under sections 38 to 40 of the IBC. Referring to sections 41 and 42, the Supreme Court held that when the liquidator determines the value of claims admitted under section 40, such determination is a decision that is quasi-judicial in nature, and it can be appealed against before the Adjudicating Authority (NCLT) under section 42 of the IBC.

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Final Report

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On completion of the liquidation process, Liquidator prepares the final report consisting of audited accounts of the liquidation, disposal of the assets of the corporate person, sale statement, etc.

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Before dissolution, the Liquidator has to submit its Final Report to the Registrar of Companies in Form GNL-2 and to IBBI through speed post and electronically through an email [IBBI Regulation 38: 2017].

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Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the Liquidator shall submit the Final Report and the compliance certificate in Form-H along with the application under sub-section (7) of section 59 to the Adjudicating Authority for the dissolution of such Corporate Person.

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Application to Adjudicating Authority

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On the said application, the Adjudicating Authority passes an order that the Corporate Person shall be dissolved from the date of that order and the Corporate Person shall be dissolved accordingly [S.59(8)].

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A copy of the order shall within fourteen days from the date of such order, is forwarded to the concerned Registrar of Companies, Income Tax Department, and IBBI for information and necessary action as well as with other Statutory Authorities for information [S.59(9)].

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Under the IBC, the average time taken for dissolution of companies after submission of final report by the liquidator has been in the range of 7-9 months. The average time taken by Liquidator to submit final report for Adjudication to NCLT has been about 14 months

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Fraud Detection or Insolvency

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If at any time, the Liquidator is of the opinion that the liquidation is being done to defraud a person or the Corporate Person will not be able to pay its debts in full from the proceeds of the assets to be sold in the liquidation, he makes an application to the Adjudicating Authority to suspend the process of liquidation and pass any orders as it deems fit [IBBI Regulation 40: 2017].

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Preservation of Records

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Under Regulation 41 IBBI (Voluntary Liquidation Process), a mandatory duty has been cast upon the Liquidator to preserve a physical or electronic copy of the reports, registers, books of account including Bank’s statement evidencing closure of the Bank Account(s) and other documents referred to in Regulation 8 and 10 for at least eight years for electronic copy and at least three years for physical copy after the dissolution of the company at a secure place.

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?Process’s Drawbacks

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Evidently, though this process has its own advantages, however, there are serious concerns about its potential misuse for fraudulent intentions, particularly to defraud creditors. Even though it is incumbent upon the company to satisfy the solvency test by fully paying its creditors, what if the company fails to recognise its creditor’s claim based on false contentious issues, fabricated legal defences or contested facts? Whether the IBC provides complete justice to such a creditor remains a concern.

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Section 33(5) of the IBC, covering ‘moratorium’, is not applicable by virtue of Section 59(6), while the rights of the creditors to bring legal proceedings, including recovery suits, against the company are generally suspended in view of the whole scheme of the IBC, particularly Section 63. Thus, creditors resort to remedies available under the Code. In doing so, the claim is brought before the liquidator. However, since the liquidator’s role is primarily to review and verify claims, claims involving disputed facts, contentious issues, or those not backed by sufficient proof are likely to be rejected.

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As per Section 42 of the Code, such rejection of claims can be appealed before the NCLT. However, the NCLT’s role and procedures are distinct from those of a civil court. The NCLT operates within a specialised legal framework, and adjudication processes do not involve evidentiary hearings, cross-examination, discovery by interrogatories, etc. Thus, it heavily relies on documents, financial records, and submissions made by the parties involved. The NCLT ruling is further contestable, but the adjudication's limited scope remains unchanged. This limitation can highly prejudice the creditors’ claims and their right to receive just and fair treatment. This potential and probable misuse defeats the fundamental aspect of voluntary liquidation, which is that the company must pay its debts.

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The Liquidator is also expected to investigate the company’s affairs, including fraudulent transactions and preferential payments. However, voluntary liquidation generally lacks the transparency and scrutiny that are typically associated with formal insolvency. The Liquidator is required to suspend the process of liquidation if he believes that it is being carried out to deceive or defraud creditors or if he believes the company will be unable to fully repay its debts from the proceeds of its liquidated assets. However, the company-appointed liquidator is likely to be beholden to the interests of his appointee and so partisanship cannot be ruled out.

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The likelihood of fraud or unjust treatment of creditors increases further because throughout voluntary liquidation proceedings, up to the time a Liquidator submits a dissolution application, the NCLT has no regulatory or supervisory role.

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Speed Breaker & Challenges in dissolution of corporate person

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• Delay in passing dissolution order by Adjudicating Authorities U/s.59(8) of Code

• Often, the Bank policies plus compliances related to opening the liquidation bank account till closing it, is cumbersome, complex and undefined, mostly causes prolonged delays, many times, disturbs the process’s statutory timeline(s) majorly, which leads to restlessness for the Liquidator to complete the process on time.

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Solutions & Suggestions

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• Considering the necessity of voluntary liquidation while at the same time protecting the rights of creditors, it is essential to be vigilant by introducing proper checks and balances and having regulatory measures providing for stringent oversight.

• Also, the claim verification process in cases of voluntary liquidation and involuntary liquidation must be distinct, considering the objectives of each type of liquidation. In voluntary liquidation, the verification process must be completely transparent, and the liquidator needs to cooperate and be held accountable (if required) to ensure a fair and equitable outcome for creditors.