VOLUNTARY LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

There can be circumstances wherein although a Corporate Person is not in financial stress or in default, but it may want to liquidate itself voluntarily. A Corporate Person may want to liquidate voluntarily due to business reasons or duration of its life has expired or an event has occurred requiring the Corporate Person to be liquidated.   In such circumstances, exit has to be simple and less cumbersome as no default on the part of Corporate Debtor is involved.

The provisions for voluntary winding up were available to a company under Companies Act, 1956 as well as Companies Act, 2013. The provisions for voluntary winding up have been omitted from Companies Act, 2013 and now incorporated under the Code

Section 59 of the Code deals with Voluntary Liquidation of Corporate Persons. It has been supplemented by IBBI (Voluntary Liquidation Process) Regulations, 2017.

Section 59 reads as under:

59. Voluntary liquidation of corporate persons. –

 (1) A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter.

(2) The voluntary liquidation of a corporate person under sub-section (1) shall meet such conditions and procedural requirements as may be specified by the Board.

(3) Without prejudice to sub-section (2), voluntary Liquidation Proceedings of a corporate person registered as a company shall meet the following conditions, namely: –

(a) a declaration from majority of the directors of the company verified by an affidavit stating that –

 (i) they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and

 (ii) the company is not being liquidated to defraud any person;

 (b) the declaration under sub-clause (a) 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) a report of the valuation of the assets of the company, if any prepared by a registered valuer;

 (c) within four weeks of a declaration under sub-clause (a), there shall be –

(i) a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or

 (ii) a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:

 Provided that the company owes any debt to any person, creditors representing two thirds in value of the debt of the company shall approve the resolution passed under subclause (c) within seven days of such resolution.

(4) The company shall notify the Registrar of Companies and the Board about the resolution under sub-section (3) to liquidate the company within seven days of such resolution or the subsequent approval by the creditors, as the case may be.

(5) Subject to approval of the creditors under sub-section (3), the voluntary liquidation proceedings in respect of a company shall be deemed to have commenced from the date of passing of the resolution under sub-clause (c) of sub-section (3).

 (6) The provisions of sections 35 to 53 of Chapter III and Chapter VII shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary.

(7) Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate person.

 (8) The Adjudicating Authority shall on an application filed by the liquidator under 76 sub-section (7), pass an order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.

(9) A copy of an order under sub-section (8) shall within fourteen days from the date of such order, be forwarded to the authority with which the corporate person is registered.

ELIGIBILITY TO INITIATE VOLUNTARY LIQUIDATION

According to Section 59 (1) a Corporate Person is eligible to initiate Voluntary Liquidation if such Corporate Person has not committed any default.

DECLARATION FROM MAJOIRTY OF DIRECTORS OR MAJORITY OF DESIGNATED PARTNERS

Voluntary Liquidation is initiated with declaration by a company under Section 59 (3) (a) and LLP and other Corporate Persons under Voluntary Liquidation Regulation 3.

Section 59 (3) (a) provides that in case of a company, a declaration from majority of the directors of the company has to be given in respect of Voluntary Liquidation of the company. Such declaration has to be verified by an affidavit stating that they have made full inquiry into affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of the assets to be sold in Voluntary Liquidation and the company is not being liquidated to defraud any person. 

Voluntary Liquidation Regulation 3 provides details of declaration in case of LLP and other Corporate Persons.  A declaration in respect of Voluntary Liquidation has to be given by majority of the designated partners, if a Corporate Person is an LLP and individuals constituting the governing body in case of other Corporate Persons. Such declaration has to be verified by an affidavit stating that they have made full inquiry into the affairs of the Corporate Person and they have formed an opinion that either the Corporate Person has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the liquidation and Corporate Person is not being liquidated to defraud any creditor. 

Such declaration has to be accompanied by audited financial statements and record of business operations of the Corporate Person for the previous two years or for the period since its incorporation, whichever is later and a report of the valuation of assets of the Corporate Person, if any, if prepared by a registered valuer.

The declaration has to list each debt of the Corporate Person as on that date and state that the Corporate Person will be able to pay all its debts in full from proceeds of assets to be sold in liquidation.

RESOLUTION FOR VOLUNATRY LIQUIDATION AND APPOINTMENT OF RESOLUTION PROFESSIONAL

Next step is passing of resolution by a Corporate Person for Voluntary Liquidation.

Under Section 53 (c) of the Code, in case of company, within four weeks of declaration, a special resolution has to be passed in a general meeting requiring the company to be liquidated voluntarily and appointing an Insolvency Professional as Liquidator. A special resolution can also be passed for Voluntary Liquidation of a company if period of duration of company fixed by articles of a company has expired or an event has occurred for which articles of a company provide that the company will be dissolved.  If the company owes any debt to any person, the creditors representing two thirds of value of the debt of the company has to approve the resolution within seven days of such resolution.

Under Voluntary Liquidation Regulation 3, in case of LLP and other Corporate Persons, within four weeks of a declaration, resolution has 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 an Insolvency Professional to act as Liquidator.  Such resolution can also be passed if Corporate Person is to be voluntarily liquidated as a result of expiry of period of duration fixed by constitutional documents or on occurrence of any event in respect of which constitutional documents provide for dissolution of Corporate Person. If a Corporate Person owes any debt to any person, creditors representing two thirds in value of the debt of the Corporate Person will approve the resolution passed within seven days of such resolution. 

The Liquidation Proceedings in respect of a Corporate Person are deemed to have commenced from the date of passing of the resolution.

NOTIFICATION TO THE REGISTRAR AND THE BOARD

Section 59 (4) provides that Corporate Person has to notify the registrar and IBBI about the resolution to liquidate Corporate Person within seven days of such resolution or the subsequent approval by the creditors as the case may be.

APPLICABILITY OF SECTION 35 TO 53 OF THE CODE

The provisions of Section 35 to 53 of Chapter III and Chapter VII will apply to Voluntary Liquidation Proceedings for Corporate Persons with such modifications as may be necessary. It is pertinent to mention that Section 35 to 53 deals with Liquidation Process of Corporate Debtor. Chapter VII deals with offences and penalties. IBBI has also framed IBBI (voluntary process regulations), 2017 to supplement voluntary liquidations provisions.

APPLICATION FOR DISSOLUTION

Section 59 (7) provides that the Liquidator has to file an application before the Adjudicating Authority for dissolution of Corporate Debtor along with relevant documents. From the date of order of dissolution, the Corporate Debtor is dissolved.

COMPARISON OF VOLUNTARY LIQUIDATION WITH COMPULSORY LIQUIDATION

In the case of Voluntary Liquidation, the role of the Adjudicating Authority is not as extensive as is the case in Compulsory Liquidation. In Voluntary Liquidation, the Insolvency Professional is appointed by Corporate Person as Liquidator and approved by creditors. Only at final stage of Voluntary Liquidation, the Adjudicating Authority comes into picture, when an application for dissolution of Corporate Person is filed before it along with requisite documents.

Voluntary Liquidation, being voluntary in nature, does not precede by resolution efforts.

The timeline to complete the Voluntary Liquidation Process is two hundred and seventy days in cases where the Corporate Person owes debt to a creditor and a resolution has been approved by creditors. In other cases, the timeline to complete voluntary liquidation is only ninety days. In compulsory liquidation timeline to complete such liquidation is one year extendable by ninety days in case of attempted sale as going concern under Regulation 32A.

In Voluntary Liquidation the Liquidator has to prepare Preliminary Report, Annual Status Report and Final Report. There is no concept of Quarterly Reports as is the case in Compulsory Liquidation. On completion of Liquidation Process, a Final Report has to prepared by the Liquidator which has to submitted to the registrar and IBBI.  A copy of this Report has to be accompanied with application before the Adjudicating Authority for approval of liquidation of the Corporate Person.

The procedure of public announcement and collation & verification of claims are mutatis mutandis the same. Public announcement has to be made within 5 days of liquidation commencement date. A creditor has to submit claim within thirty days of liquidation commencement date.

In Voluntary Liquidation, the Liquidator can sell the assets of the Corporate Person in the manner approved by Corporate Person.  Under Voluntary Liquidation all the debts are paid in full hence order of priority mentioned in Section 53 does not come in picture.

_______________________________________________________________