Voluntary Winding Up and the Legislative Policy

Introduction:

Winding up is a process whereby a company is dissolved. The properties are disposed off and the loans and debts are paid and cleared and any profit left is then divided among the stakeholders of the company in accordance with the proportion to their holdings. Winding up proceedings in India comes under the provisions of the Companies Act, 2013 (the Act) and the Insolvency and Bankruptcy Code, 2016 (the Code).

Before November 2016, the concept of winding up was not specified under the Companies Act, 1956 or the Companies Act, 2013. By virtue of the Insolvency and Bankruptcy Code, 2016 the laws relating to insolvency of companies, partnership firms, limited liability partnership were all incorporated and amended into a single law. It intends to provide time-bound resolution and authorize creditors to start the process of insolvency resolution if a default occurs. Pursuant to Section 255, the Companies Act is amended and the new term “winding up” is introduced in section 2(94A). The 2 major amendments by the Code to the 2013 Act are the exclusion of clauses of ‘voluntary winding up’ and ‘inability to pay debts’ as they will be now governed under the Insolvency and Bankruptcy Code.[1]

The method and procedure of liquidation of corporations are regulated by Section 271 to 275 of the Act. The three winding-up methods are (a) Winding Up by the National Company Law Tribunal (the Tribunal) (b) Voluntary Winding Up subject to section 59 of the Code; (c) the ‘Fast Track Exit Scheme’ applicable to dissolve companies under section 248 of the Act.

Voluntary Winding Up

Voluntary winding-up or voluntary liquidation of a company is governed under the Insolvency and Bankruptcy Code in India, 2016 which refers to ‘a corporate person’. Voluntary winding-up is the method of liquidating the company with the consent of all the shareholders. Usually, a company goes for a voluntary liquidation when its shareholders decide not to further continue their business activities. The key aim is to discontinue activities and allocate their assets while still paying off their debts. By Section 59(1) any corporate person who has not committed any default may initiate the proceeding for voluntary winding ups.[2]

New Compliance

New regulations require the following additional requirements which were not previously mentioned in CA 1956:

1. Declaration by the company that it is not winding up to defraud anyone.
2. A liquidator has to be appointed who is an insolvency professional and meets the eligibility criteria as specified under New Regulations
3. Registers to be maintained and preserved in the prescribed manner.
4. Preparation by the liquidator of different records to be forwarded to a corporate person, the Registrar of Companies (“ROC”), and the Insolvency and Bankruptcy Board of India(“Board”).
5. Receipt of claims from liquidator from involved parties only in specific forms
6. The liquidator shall attempt to terminate the company of the corporate entity within 12 (twelve) months of the date of initiation of voluntary liquidation

Process of Voluntary Winding Up

• Declaration of Solvency

Section 59(3)(a) of IBC:- A declaration has to be made in an affidavit to Registrar of Companies by the major directors of the company stating that:

1. That the company has no debts or;
2. That the company will clear all its debts from the proceeds of assets to be sold in the liquidation process;
3. The company is not winding up to defraud anyone.

Section 59(3)(b) of IBC:- The Company will list all the Audited financial statements and record of business operations of the company for the previous 2 years or for the period of its incorporation and valuation report by a Registered Valuer of the assets of the company with the declaration.[3]

• Passing of resolution

It is mentioned under Sec.59(3)(c) of IBC that within 4 weeks of declaration of solvency, the members of the company need to pass a special resolution for the proposal of voluntary liquidation and appoint a liquidator registered with Insolvency and Bankruptcy Board of India (IBBI). If the company owes a debt to anyone then within 7 days the creditors representing two-thirds in value shall approve the resolution.[4]

• Public Announcement

A public announcement is to be made by the liquidator within 5 days from his appointment asking creditors to send their claims within 30 days of the initiation of the liquidation.

A public announcement is to be carried out in one English newspaper and regional language newspaper, on the website of the corporate person and IBBI.

• Reports

Under Regulation 8 IBBI (Voluntary Liquidation Process) Regulations, 2017 report shall be prepared and submitted by the liquidator

1. Preliminary report
2. Annual Status report
3. Minutes of consultation with stakeholders
4. Final report

Preliminary report to be prepared by the liquidator within 45 days from the date of commencement of liquidation stating estimates of assets and liabilities, capital structure proposed plan of action etc to a corporate person.

• Opening separate bank account

For the receipt of all money due to the corporate person and realized to meet liquidation cost, the liquidator shall open a bank account in a scheduled bank in the name of the company followed by the word ‘in voluntary liquidation’.

The money in the credit of the bank account shall not be used except in accordance with section 53(1).

• No- Objection from Tax Authorities

The liquidator has to obtain a letter of no objection from the respective Tax authorities where the registered office of the company is located.[5]

• Realization of assets

The liquidator shall collect and realize the company’s properties in a time-limited manner optimizing the stakeholder interest. The money realized for this reason shall be deposited into the bank account established.

• Distribution

After deduction of the liquidation expenses, the money generated from the proceeds shall be allocated to the stakeholders within 6 months of obtaining the amount.

The liquidator may distribute, with the permission of the corporate person an asset that cannot be realized easily or advantageously by virtue of its specific nature or certain unique circumstances within the stakeholders.

According to Section 53 of IBC proceeds from the sale of liquidation assets shall be distributed in a precise manner of priority as specified:

1. the insolvency resolution process costs and the liquidation costs paid in full;
2. the following payment shall be ranked equally;
3. Workers’ wages for the 24-month duration preceding the day of the start of the liquidation.
4. Debts owed to a secured creditor in case that secured creditor has withdrawn security in the method set out in section 52 of the Code.
5. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date
6. Financial debts owed to an unsecured creditor.
7. Following dues shall rank equally;
8. Any amount due to the Central Government and the State Government for the entire or any part of the two-year duration prior to the date of initiation of liquidation.
9. Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.
10. Any remaining debts and dues.
11. Preference shareholders, if any, and
12. Equity shareholders, as the case may be. 

• Final Report

After the completion of liquidation proceeding liquidator shall prepare the final report to be submitted to the corporate person, the Registrar and the IBBI which would include:

1. Audited accounts of liquidation.    
2. A declaration showing the disposition of the properties, debts settled and no lawsuits pending.
3. A statement of selling assets showing realized value, its cost, method and mode of sale and any shortfall, to whom it is sold etc.[6] 

• Application to NCLT

When the company’s operations are wrapped up completely, the liquidator has to apply to NCLT for the company’s dissolution.

• Order by NCLT

An order shall be passed by NCLT dissolving the company from the date of the order.

• Filing of the order

Submission to the ROC within 14 days of the receipt of the order from NCLT concerning the dissolution.

Conclusion

In order to promote the process of voluntary liquidation, Government had recognized New Legislation as the voluntary liquidation policy under the Companies Act, 1956 was time-intriguing Code delegates that insolvency professionals are to be appointed as liquidators, such a change is accepted by corporate and professionals.

Earlier the courts were swamped with other matters and were unable to dispose of the winding-up cases. With the introduction of Code and Regulations and establishment of the National Company Law Tribunal process of winding up has increased greatly. Many procedures need to be simplified further, so it helps if separate government agencies and the tribunal itself stick to the deadlines laid out.

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References:

[1] Sridharan, A. (n.d.). voluntary winding up. Retrieved August 7, 2020, from https://www.icsi.edu/media/portals/71/members/CS%20Sridharan%20A%20M,%20Voluntary%20Winding%20up%20under%20IBC%20(002).pdf

[2] Companiesinn. (2019, December). Procedure of Voluntary Liquidation or Voluntary Winding up of a Company under Insolvency and Bankruptcy Code, 2016. Retrieved August 9, 2020, from companiesinn.com website: https://companiesinn.com/articles/procedure-for-voluntary-liquidation-under-ibc

[3] Bhat, A. (2020, June 4). Modes of closing a business – Series IV: Voluntary winding-up. Retrieved August 8, 2020, from YourStory.com website: https://yourstory.com/2020/06/modes-closing-business-series-four-voluntary-winding-up

[4] parmani, aman. (2017, March 3). winding uplegal position under companies act 2013 vis vis insolvency and bankruptcy code 2016. Retrieved August 10, 2020, from lakshmisri.com website: https://www.lakshmisri.com/insights/articles/winding-uplegal-position-under-companies-act-2013-vis-vis-insolvency-and-bankruptcy-code-2016

[5] novo juris legal. (2020, June 22). MODES OF CLOSING A BUSINESS Series IV: Voluntary Winding-up – Corporate/Commercial Law – India. Retrieved August 8, 2020, from www.mondaq.com website: https://www.mondaq.com/india/shareholders/956228/modes-of-closing-a-business-series-iv-voluntary-winding-up

[6] Tadla, S. (2019, November 11). Voluntary Liquidation: A Comparison between Companies Act & Insolvency and Bankruptcy Code. Retrieved August 8, 2020, from https://ezresolve.in/blog/2019/11/11/voluntary-liquidation-a-comparison-between-companies-act-amp-insolvency-and-bankruptcy-code