There are different groups of people with different interests involved in the liquidation of a company. These include directors, shareholders, creditors who hold a security interest in the company’s assets, unsecured creditors, employees and customers. It is the duty of the liquidator to ensure fair treatment to all groups and in accordance with their legal rights.
On initiation of the liquidation process of a corporate person, the powers of the management/board stand suspended and get vested in the Insolvency Professional who is entrusted with the management of the operations and assets of the corporate debtor.
To achieve the objective of judicial and economic efficiency and to ensure that insolvency professionals/ liquidators perform their duties efficiently, the entire structure of the IBC Code has been based on a model of “checks and balances”.
The monitoring of the affairs of the Insolvency Professionals (‘IPs’) is broadly overseen by three bodies –
The regulations which are being formulated for managing the affairs of the IPs prescribe the events which are required to be reported to the IBBI and IPA. These reportings ensure that the professionals are acting within their powers and performing their duties diligently. In cases of non-compliance, the disciplinary committee investigates the case and has the power to initiate necessary adjudications in this regard.
Recently, the disciplinary committee imposed a penalty on an insolvency professional where he had failed to appoint an independent auditor as per Regulation 11 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“VLP Regulation”)
The shareholders of the company in their general meeting held on 08th May 2018 decided to close down the operations of the company because there was no commercial and economic viability in the near future. They passed the relevant resolution for initiating the voluntary liquidation of the company and the appointment of a liquidator to carry on the voluntary liquidation process.
Now, as per Regulation 14 of the VLP regulations, the Liquidator is required to publish a public announcement within 5 days of his/her appointment as liquidator, calling upon the stakeholders to submit their claims and providing the last date for such submission (which shall be 30 days from the date of commencement of the liquidation).
The said public announcement shall be published in:
In the instant case, the Liquidator had failed to make the required public announcement in the newspapers within the prescribed time limit. There was a delay of about 18 months in the publication of the aforementioned public announcements. The assignment of Voluntary Liquidation needs to be concluded in a time-bound manner and an IP must sincerely adhere to the prescribed timelines and must not be negligent while performing his duties during insolvency resolution or liquidation, as the case may be.
In addition to this, the liquidator had also failed to comply with the provisions of Regulation 11(2) of the VLP regulations, which states that “The liquidator shall not engage a professional who is his relative, is a related party of the corporate person or has served as an auditor to the corporate person at any time during the five years preceding the liquidation commencement date”.
In the given case, the Liquidator had appointed the existing auditor of the company for the audit of financial statements for the liquidation period.
(a) The delay in making the required publications was inadvertent and he had made the publication on the website of the IBBI within the prescribed time limit. He had himself informed the Board that there has been a delay in the publication and requested the board (IBBI) to grant him additional time for making good the compliance. Moreover, the company did not have any creditors and hence there was no harm caused to any stakeholder;
(b) the existing auditors were group auditors of the Company and it has been decided by the members of the company under voluntary winding up to use the existing auditors for audit services of the company under liquidation because of the trust reposed on them.
(a) The provision regarding publication has been made to intimate the public at large about the liquidation proceedings of the corporate person so that an opportunity is accorded to all stakeholders to file their claims, if any, as on the liquidation commencement date. The submission of the Liquidator, during the personal hearing, that there were no creditors of the corporate person, cannot be a ground for not making a public announcement in newspapers as per Regulation 14(3)(a) of Voluntary Liquidation Process Regulations.
Further, the belated publication cannot hold good for the compliance of the provisions of aforesaid Regulation.
(b) The Liquidator compromised his independence and conceded to the decision taken by the members of the company under voluntary winding up to continue the services of the existing auditors for auditing the financial information of the company under liquidation in disregard to the provisions contained in the Code.
The DC imposed on the liquidator a monetary penalty of Rs.1,00,000/- (Rs. One Lakh only) and barred him from taking any new assignments until the penalty had been duly deposited with the IBBI.
Through this article, we shall be trying to decode the provisions that were contravened, more specifically Regulation 11 of the VLP regulations. What is its significance and the role it plays in the completion of an effective voluntary liquidation process?
Section 141 (3) of the Companies Act, 2013 provides with sufficient elaboration as to disqualification of an auditor. Certain category of persons who, directly or indirectly, are related or have conflict of interest, are therefore, not eligible to be appointed as an auditor of the company, As per sub-section (4) of section 141, where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) of section 141 after his appointment, he shall vacate his office as such auditor.
Section 144 of the Act states that an auditor cannot provide certain non-audit services, directly or indirectly, to the company or its holding company, subsidiary company or associate company. An Auditor, through this provision, has been prohibited from rendering accounting and book keeping, Internal Audit, Investment banking, actuarial and management services.
Therefore, there is no ambiguity on the intent and the provisions are well laid to ensure that only an independent Chartered Accountant who has no conflict of interest can be appointed as the Statutory Auditors of the company.
Regulation 11 of IBBI (Voluntary Liquidation Process) Regulation 2017 relates to the appointment of professionals and provides as under:
The provisions of Regulation 11 the Code are very clear. A relative of the liquidator or a related party of the company in liquidation are not eligible to be appointed as professionals. An auditor who has served as an auditor anytime during last five years is also not eligible. Relative or related party, though have originated from conflict of interest but conflict of interest can be due to other factors as well. It seems, independence / no-conflict, which has not resulted from being a related party, is not a criteria. Clearly, the law has singled out auditor among professionals though they are independent.
However, given the law the way it stands, the auditor of the company is certainly not eligible to be appointed for any services to the company (under liquidation). The members of the corporate person under voluntary liquidation may take various decisions, however, it is the duty of the Liquidator to act by the provisions of the Code and the regulations made thereunder.
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