An Overview of Voluntary Liquidation Process of Corporate Entities in India – By Sanskriti Shrivastava

An Overview of Voluntary Liquidation Process of Corporate Entities in India

– By Sanskriti Shrivastava,
Final Year Student at School of Law, UPES

The concept of perpetuity of a company is constant in company law jurisprudence around the globe. A company is never presumed to end except when this option is exercised as a last resort, i.e., when a company is at the verge of insolvency and have lost hope. However, many a times, winding up  or ‘liquidation’ of a company may not be a result of its demeriting financial heather, rather, it could be a mutual decision of its members due to various underlying factors other than incapacity to pay the debt.

Before 2016, India’s company law regime was run by the Companies Act, 2013, which comprehensively dealt with the incorporation, running and winding up of the company. Later on, in 2016, India had its separate law on insolvency- The Insolvency and Bankruptcy Code. Interestingly, this code, pursuant to section 59 gives an option to the company to voluntarily liquidate itself subject to the prescribed conditions therein. The working of this provision is further assisted by the Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017.

The present article aim to present a comprehensive analysis over the concept of voluntary liquidation of corporate entities in India along with highlighting the relevant provisions of law. In doing so, it also presents a jurisprudential aspect of the concept based on the judicial pronouncements.

I. Introduction

A company is considered to be perpetual until it is wound up or liquidated by the authority of law[1]. Liquidation is a process of last resort usually carried out, once all the strategy to revive a company fails[2]. It is a general perspective that liquidation occurs only when the company is in financial distress, however, when a company wish to liquidate itself with the consent of its shareholder, not because of an underlying debt but as a consequence of a business decision[3], such process is called voluntary liquidation[4]. Therefore, voluntary liquidation is a tax efficient method for distributing the assets of a company which runs by the consent of members’ where the company stands solvent[5].

This concept was first introduced under Section 484 of the Companies Act, 1956. Thereafter, it found itself a spot under one of the modes of winding up under Section 270 of the Companies Act, 2013 (“Act”). Section 304-325 of the Companies Act, 2013 was in fact detailed provision as to voluntary liquidation, but they were never notified.  However, by the introduction of the Insolvency and Bankruptcy Code (“Code”), it was scrabbled out of the Companies Act, 2013 and inserted under Section 59 of the Code, which is read with IBBI (Voluntary Liquidation) Regulations 2017 [“Regulation(s)”], which came into force on 1 April 2017[6].

This provision is made applicable only to corporate persons, namely Companies and LLPs. The Bankruptcy Law Reform Committee and the Expert Committee[7] was of the view that the old acts were time consuming and degraded investor’s confidence. Thus, the Code came into force which made the process simple, time efficient and gained confidence among the investors[8]. Further the present provisions are inherently same to that of United Kingdom and the United States of America. The quarterly newsletter published by IBBI in March 2019 is a conclusive proof of successful achievements of what the Code had aimed for, wherein it provided that about 450 Companies has filled for voluntary liquidation till the quarter.

Therefore, the aim of this article is to critically evaluate the development and current position of  voluntary liquidation process in India along with relevant provisions and case law and its comparison with other jurisdictions.

Evolution and Development

Voluntary liquidation is not a very newly introduced concept, a whole chapter in the Companies Act, 2013 was dedicated to it, and however, it was never notified. Thus, it became as one of the modes of winding up u/s 270 of the Act. Further, after the introduction of the Code the provision under the Act was omitted by virtue of Section 255 and Schedule XI of the Code. The duration between 1st April, 2017 and enforcement of Schedule XI, voluntary Winding up was governed under the Companies Act, 1956. However, the provisions of the code came into effect only after the Regulations were notified in 2017.  Thus, these regulations are applicable under Chapter V of Part II of the Code. Apart from the Act, the Code has a significant relation to the Tax Statues as well, both of which is discussed below.

• Impact over the Act- The process under the Code was a much-needed change which both the investors, members and the legal fraternity admired. Some of the Key Changes and impact of the Code can be listed below as-

1. The most significant change is the strict time frame under the Code, previously under the Act, the cases could go for as long as 10 years, whereas now it takes just 2 years.
2. The MCA notified Transfer Rules[9] in December 2016, provides for, the transfer of proceedings pending before a court prior to 1 April, 2017 with respect to Voluntary Winding up would continue before the High Court under the 1956 Act.
3. Reading of Section 59 with Section 434(1)(c) and 465 of the Act, the fresh proceedings would be instituted before NCLT under the Code.
4. Under the 1956 Act, the process of voluntary liquidation could be initiated either by the company, its creditors or its contributories or the Registrar, whereas now the it can be done by either the director or designated partner as the case maybe.
5. Another striker feature of the code is that it provides for a mandatory approval by the creditors representing the company’s 3/4^TH of the debt within 7 days of passing of contributories resolution.

• Impact over the Income Tax Act- This may be divided into two parties, the companies and the LLP’s:
• Companies- The accumulated profits tax is understood as “deemed dividend” and is payable by the company[10]. Further the amount received pursuant to voluntary liquidation is taxable as “capital gains”[11].
• LLP’s- The profit arising pursuant to transfer of capital assets is taxable[12].

Critical Analyses of Articles with Judicial Pronouncements

This is divided into three parts, understanding the present provisions and voluntary liquidation process in brief [A], Evaluating the regulatory bodies impacted, i.e., the IBBI and NCLT [B], and the relevant case laws [C]-

A. Present Legal Framework-

Presently, we have Section 59 of the Code r/w Regulations, which provide for a comprehensive procedure under the code, the same could be divided into the following steps:

1. Declaration verified by Affidavit, by the directors or designated partners[13]– That, the company is not wound up to defraud any creditor[14], it has no debt or is able to pay its debt from the proceeds of sold assets. Such declaration muse be submitted to the ROC in e-form GNL-2.
2. Relevant Attachments with the declaration- The declaration shall be accompanied with audited financial statements of previous 2 years, or period of incorporation, whatever the case maybe, [the latter one] and a report by a registered valuer[15].
3. Initiation of the Process- This can be done by way of passing a special resolution at the general meeting, in pursuance of expiry of duration [if any, provided in the AOA] or occurrence of a certain pre-determined event. In case of LLP, by majority of partners[16]. The condition being, such company must be solvent, after 4 weeks of making the stipulated declaration, such resolution must be filled with the ROC in e-form MGT-14
4. Approval by the creditors, in case the company is under debt- a mandatory approval by the creditors representing the company’s 2/3^rd of the debt[17] within 7 days of passing of special resolution.
5. Commencement- The date on which such resolution is passed the process of voluntary liquidation is deemed to have commenced[18] and as an effect of such commencement the corporate debtor must cease to carry its business[19].
6. Necessary Public Announcement – The liquidator will make a public announcement[20] within 5 days of his appointment in Form A, Schedule I. Such announcement shall call claims of stakeholders[21] and shall be published in English and vernacular Language newspaper, of the website of such corporate person and on the website of the
7. Proceeding by Liquidator- The liquidator conducts a preliminary examination and submits its report within 45 days from the commencement date, and preserve its copy for a period of 8 years. The report must include matters like, capital structure, proposed plan of action etc. Further, he must also maintain the prescribed registers and books[22] and the expenses incurred by him. Furthermore, he shall also maintain a list of all stakeholders[23] within 45 days of receipt of claims.
8. Verification of Claim- The liquidator verifies the claims within 30 days of their receipt[24]. In case of rejection, a creditor may appeal to the adjudicating authority[25].
9. Voluntary Liquidation Bank Account- The liquidation must open a bank account in a scheduled bank and all payments made above Rs. 5000/- shall be in an online transaction form or through a cheque[26].
10. Distribution- Distribute the proceeds after realization within 6 months. After deducting the costs incurred by him.
11. Completion- The liquidator must attempt to wind up the corporate entity within 1 year of commencement and in case of extension of such time, he must call a meeting, submit a status report and proceed accordingly.
12. Preparation, Submission of Final Report with NCLT- The liquidator must prepare a final report[27] in the prescribed format after completion of the proceedings[28] and then first submit it with the contributories, registrar and the board and then with the NCLT.
13. Order by NCLT and Filling of such order with the Registrar- Once the NCLT is satisfied and it passes an order[29], the corporate person stands dissolved in effect from the date of NCLT’s order. Further the act makes it mandatory for a copy of NCLT order to be submitted to the ROC within 14 days.

B. Recent Amendments-

1. Amendment of 2019[30]– Substituted “Company secretaries” to the words “secretarial auditors” under Regulation 6, Sub-Regulation (1).
2. Amendment of 2020[31]– This provides an option to the corporate person to replace the liquidator by another insolvency professional by a resolution of its members or partners, as it may apply.

D. Regulatory Bodies Impacted-

1. NCLT- The NCLT has been assigned the role of adjudicating authority in such matters. It has the declaratory powers to name a corporate person ‘dissolved’[32]. However, it comes into the liquidation process at its last stage only after the Liquidator has made an application for dissolution after following all the compliances of the Code and the Regulation.
2. ROC- The role of ROC is that of a guardian in whole proceeding, as after the tribunal passes an order, he must be necessarily intimidated.
3. IBBI- The Board serves a passive role throughout the proceeding. The liquidator is a professional, who indirectly works under the authority of the Board itself. Other functions as to publishing the notice of claims also rest with the board.

E. Case Laws-

1. Viyes Consultancy (P.) Ltd. vs. Registrar of Companies[33]

It was held that when no claims were received pursuant to notice of claims by the liquidator and all the compliances were duly made u/s 59 of the Code, the Tribunal held the company to be liquidated.

2. GTS COIL (P.) Ltd. vs. NCLT[34]–

The Directors and the members of the company decided to voluntarily liquidate itself on the ground that it was not financially viable for them to continue the business, The NCLT held the company was to be dissolved, provided statutory compliances are met.

3. RAD-MRO Manufacturing (P.) Ltd., In re[35]

The directors made a declaration, the required majority approval of members was received and the company had no debt, the tribunal held, the company was eligible for ‘instant dissolution’.

4. Elnet Software City Ltd., In re.[36]

A special resolution was passed in extraordinary general meeting, thereafter, the liquidator took over the assets of corporate debtor, paid cash balance after deducting the incidental expenses, the Tribunal had the power u/s 59(8) to instantly dissolve the company on facts.

5. Tarun Jaggi, In re.[37]

Where the liquidator failed to make a public announcement as required by the Regulations and continued with the auditors who were the same prior to company’s initiation of voluntary liquidation proceeding, the Board considered it a violation of the Regulations.

Comparative Analysis with Other Countries

1. The United States of America –

The process in the United States is inherently similar to what is provided in India. Chapter 7 of the U.S. Bankruptcy Code deals with the liquidation process. It may be initiated by an individual, corporate, LLP, trust, a not-for-profit organization and in fact an unincorporated association also, on occurrence of a specified event, by the board of directors. Thereafter, a liquidator is appointed who is made answerable to the creditors and shareholders. Further, the condition with respect to company’s solvency remains the same, if it is free of debts, only the shareholders supervise the process along with the liquidator. If it is in debts, the Creditors along with the shareholders are in the controlling power, which is concluded by the order of the court.  However, financial institutions, insurance companies and railways are explicitly excluded by the Chapter 7 from the header of debtors.

2. The United Kingdom-

Here, the process is somewhat different to that of India. It is governed by the Insolvency Act, 1986.  It is divided into two sub-heads. One, voluntary liquidation initiated by the creditors, that is when the company is in a state of insolvency. Second, the voluntary liquidation initiated by the members, this requires a just a declaration of the bankruptcy by the corporate entity itself. Here, there is no doubt with respect to the corporate person’s insolvency rather, the corporate person is solvent, only thing it wishes to liquidate itself to meet the future obligations. Similar to India, voting by 3/4^TH of the majority is required to pass the resolution.

Conclusion

The introduction of the Code has brought with itself, a time efficient, simpler, systematic reform. It facilitates viability of assessment and protects organizational goal with maximizing the assets. The one specific intent of repealing the voluntary winding up process and incorporating it under the code was, an expedited process. What happened before it was considered ‘burdensome’ and ‘complex’ by the corporate entities and thus resulted in a lack of confidence by the investor.

However, the Code never initially provided for a liquidation procedure under its initial 2016 enactment, it was only in 2017, when the IBBI notified Section 59 of the Code and the IBBI (Voluntary Liquidation) Regulations, 2017, that India had a mechanism which was also in par with the U.K. and the U.S.A. The voluntary winding up in the previous acts were very much time consuming, the cases would go on and on for 15 years, however, now a strict time frame of 2 years, is the change, welcomes by the legal fraternity. The new rules provide of a 1-year time frame and a 90 days’ time for any compromise to happen between the stakeholders. The latest amendment provides that in case the company lacks resources the financial creditor would contribute subject  to such contributions being recoverable at a later stage.

Therefore, voluntary liquidation under the code has provided for an easy exit  and a time bound process for the willing corporate persons who are in a solvent stage or at least able to pay their debts[38].  Apart from this, the code creates a balanced situation between the debtor and creditor, in case the liquidator rejects a claim, the creditor has an option of appeal, which is another striking feature of the code[39].

VI. Suggestions

The Insolvency Code, as of now, requires no change. It is successful in achieving the aims of Bankruptcy Reform Committee and the Expert Committee as well. This may be concluded with a backing of recent trends[40]. It shows-

Further, the companies initiated the Voluntary liquidation process on the following grounds-

(a).  The Company cease to operate its business, it was incorporated for.

(b). The business had become commercially unviable

(c). Minimal or No revenue.

Therefore, the companies, especially the small companies with a paid-up share capital of less than Rs. 1 crore, has been active in making use of Section 59 of the Code along with the Regulations, as they believe, it offers an easy exit.

Reference

[1] Gopalpur Tea Co. Ltd. v. Peshok Tea Co. Ltd. (1982) 52 Comp Cas 239.

[2] Swiss Ribbons Pvt. Ltd. vs. Union of India and Anr. [2019] ibclaw.in 03 SC

[3] GIPCL Projects & Consultancy Co. Ltd.  vs. Registrar of Companies [2020] 117 taxmann.com (NCLT- Ahd.)

[4] Bhaskar Gensets (P.) Ltd. In re. [2020] 114 taxmann.com 145 (NCLT- New Delhi).

[5] [2017] 80 taxmann.com 166.

[6] Notification No. IBBI/2016-17/GN/REG010 dated 31st March, 2017

[7] Ministry of Corporate Affairs, Report of ‘Expert Committee on Company Law on Restructuring and Liquidation’.

[8] [2020] 119 taxmann.com 44

[9] Rule 4, Companies (Transfer of Pending Proceeding) Rules 2016.

[10] Section 2(22)(d) Income Tax Act, 1961 (Ind.).

[11] Section 46, Income Tax Act, 1961 (Ind.).

[12] Section 45(4), Income Tax Act, 1961 (Ind.).

[13] Reg. 3, IBBI (Voluntary Liquidation) Regulations, 2017.

[14] §59(3)(a), Insolvency and Bankruptcy Code of India, Act No 31 of 2016, 2016.

[15] Reg. 3(2), IBBI (Voluntary Liquidation) Regulations, 2017.

[16] Rule 3(3), IBBI (Voluntary Liquidation) Regulations, 2017.

[17] Reg. 4, IBBI (Voluntary Liquidation) Regulations, 2017.

[18] Reg. 5, IBBI (Voluntary Liquidation) Regulations, 2017.

[19] Reg. 6, IBBI (Voluntary Liquidation) Regulations, 2017.

[20] Reg. 14, IBBI (Voluntary Liquidation) Regulations, 2017.

[21] Reg. 15, IBBI (Voluntary Liquidation) Regulations, 2017.

[22] Reg. 10 , IBBI (Voluntary Liquidation) Regulations, 2017.

[23] Reg. 30, IBBI (Voluntary Liquidation) Regulations, 2017.

[24] Reg. 29, IBBI (Voluntary Liquidation) Regulations, 2017.

[25] §42, Insolvency and Bankruptcy Code of India, Act No 31 of 2016, 2016.

[26] Reg. 34, IBBI (Voluntary Liquidation) Regulations, 2017.

[27] Reg. 9, IBBI (Voluntary Liquidation) Regulations, 2017.

[28] Reg. 38, IBBI (Voluntary Liquidation) Regulations, 2017.

[29]  §59(8), Insolvency and Bankruptcy Code of India, Act No 31 of 2016, 2016.

[30] Notification No. IBBI/2019-20/GN/REG039 – Dated 15-01-2019

[31] Press Release No. IBBI/PR/2020/09 – Dated -5-08-2020.

[32] T.V. Balasubramanian, In re. [2020] 114 taxmann.com 346 (NCLT-Beng.).

[33] Viyes Consultancy (P.) Ltd. vs. Registrar of Companies [2020] 115 taxmann.com 277 (NCLT- Beng.)

[34]GTS COIL (P.) Ltd. vs. NCLT [2020] 113 taxmann.com 476 (NCLT- Beng.)

[35]RAD-MRO Manufacturing (P.) Ltd., In re [2019] 102 taxmann.com 270 (NCLT-Del.).

[36] Elnet City Software Ltd. [2020] 116 taxmann.com 913 (NCLT- Chennai).

[37] Tarun Jaggi, In re. [2020] 117 taxmann.com 181 (IBBI).

[38] Harish Khurana vs. Engineers (India) Ltd. [2020] 117 taxmann.com 342 (NCLAT).

[39] Ibid

[40] Quarterly Newsletter by the IBBI

Keywords: Voluntary Liquidation, Insolvency, Corporate Entity, Voluntary winding up