Voluntary liquidation is a process by which a company, which is otherwise financially viable, chooses to wind up its operations and dissolve its legal existence. Under the Insolvency and Bankruptcy Code (IBC), there are several safeguards in place to protect the rights of stakeholders during the voluntary liquidation process. A fair understanding on safeguards will give confidence to the management or promoters before initiating voluntary liquidation and thereby entrusting all assets including bank balance, cash and other important and valuable assets to a Liquidator so appointed for voluntary liquidation. These safeguards include provisions for the appointment of a liquidator, the protection of the rights of creditors and shareholders, and the orderly distribution of assets among stakeholders. In this article, we will discuss these safeguards in greater detail and examine how they work to protect the interests of shareholders during voluntary liquidation.
Stakeholders in a company that is being liquidated, may naturally have a number of concerns and worries. These may include:
It’s important for shareholders to understand their rights and the liquidation process, and to stay informed about the company’s status throughout the process.
In India, the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 (IBC) lay down the legal framework for voluntary liquidation and provides several safeguards to protect the interests of stakeholders.
Control over appointment of Liquidator. A Liquidator is appointed by the shareholders in their General Meeting to oversee the liquidation process. The liquidator is responsible for accepting claims, paying off its creditors, and distributing any remaining assets among the shareholders.
Power to replace the Liquidator. In the event the shareholders are not satisfied with the working of the Liquidator or they feel that the process is not being carried out in a fair and transparent manner, they have the right to replace the Liquidator by taking decision at a General Meeting.
Time-bound process. The IBC provides a time-bound process for liquidation, which ensures that the process is completed within a specific period of time, usually 270 days where there are claims received from creditors. In case there are no creditors, the liquidation process has to be completed within 90 days.
Verification of Creditor’s claim. Within 5 days of commencement of liquidation, the Liquidator publishes the Public Announcement for information of all stakeholders. Further, creditors are required to file their claims within a specified time frame, i.e. within 30 days of the Public Announcement. The Liquidator is responsible for verifying the claims and ensuring that the creditors are paid in a timely manner.
Status Report to Stakeholders. The Liquidator is accountable to the shareholders and other stakeholders of the company in the liquidation process. He / She is responsible for ensuring that the creditors are paid in a timely manner, and the remaining assets are distributed among the shareholders in proportion to their shareholding in the company. The liquidator should submit regular reports to the stakeholders (shareholders and creditors, if any), which allows shareholders to monitor the liquidation process and assess whether the same is being conducted in a fair and transparent manner. Shareholders can also raise any concerns which they may have with the liquidator or the NCLT if they believe that their interests are not being protected.
Reporting during Liquidation. The Liquidator is required to submit list of stakeholders and the preliminary report to the stakeholders and is also required to submit a final report of Liquidation to the Insolvency and Bankruptcy Board of India (IBBI) and the Registrar of Companies (ROC) and further a copy of the same is also required to be filed before the Hon’ble National Company Law Board (NCLT Court) along with dissolution petition application. The report must include details of the assets and liabilities of the company, the distribution of assets among the shareholders and creditors, and a statement of the liquidator’s actions and decisions during the liquidation process. The Liquidator is bound to declare his/ her interest or relationship with professionals appointed as part of the Voluntary Liquidation process. The Liquidator is also required to submit a detailed Compliance Certificate in Form H to the NCLT Court which details and tracks entire liquidation process with costs, timelines, filings and distribution of liquidation proceeds and is therefore is another yardstick for assessing the performance of the liquidator.
Fraud detection and prevention. The IBC provides for the detection and prevention of fraud during the liquidation process. The liquidator is required to take all necessary measures to detect and prevent fraud, and report preferential transaction, undervalued transaction, extortionate transaction, fraudulent transaction any suspicious activities to the NCLT. The NCLT also has the power to take necessary action against any person found to be involved in fraudulent activities.
Auditing. The liquidator appoints an auditor to conduct an audit of the company’s books of accounts and financial statements for the pre-liquidation period and Receipt and Payment account statement made for the period of liquidation. This helps to ensure that the liquidation process is conducted in a fair and transparent manner, and that the interests of shareholders and creditors are protected.
Monitoring of liquidation and control over Liquidator’s conduct. The IBBI is the regulatory body that oversees the insolvency and bankruptcy process including voluntary liquidation in India. It is responsible for issuing regulations and guidelines for the liquidation process, and for monitoring the actions of liquidator involved in the process. Besides reporting obligated as per IBC Code and IBBI Regulations, a detailed reporting is also taken by Voluntary Liquidation Division of IBBI from time to time during the course of Liquidation.
Audit or Verification of records maintained by Liquidator. Section 208 of the IBC empowers the IBBI to call for records from the Liquidator to ensure compliances by the Liquidator on appropriateness, propriety and integrity.
Penalties and sanctions. The IBC provides for penalties and sanctions by the IBBI against the Liquidator found to be violating the provisions of IBC or involved in fraudulent activities or misdeeds during the liquidation process. This includes fines, imprisonment, and disqualification from being appointed as Liquidator in further assignments.
Right to Information. Stakeholders have the right to access information about the liquidation process, including the status of the company’s assets and liabilities, the distribution of assets, and the appointment of the liquidator. The Liquidator as a good practice should share Bank Statements of all Bank Accounts including Liquidation Account with the stakeholders at regular intervals along with step wise details of liquidation through status reports, a format of which can also be pre-agreed before appointing a Liquidator at the AGM/ EGM.
Inspection of books of account. Stakeholders have the right to inspect the books of accounts of the company (showing all receipts and payments made by him) during the liquidation process. This allows stakeholders to verify that the liquidation process is being conducted in a fair and transparent manner.
Meeting of Stakeholders. The Liquidator is required to call a meeting of stakeholders in case the liquidation is not concluded within a period of 12 months, as prescribed under the law. This allows stakeholders to have an idea of roadblocks and control over the affairs of the liquidation process. They have the right to raise any concerns they may have about the liquidation process or the actions of the liquidator with the NCLT. They can also take legal action against the liquidator or the company if they believe that their interests have been prejudiced. In any case, Liquidator has to explain reasons for delays in all reporting to the Regulators.
Change in frequency of reporting. Stakeholders can request for change in the frequency of reporting by the liquidator. The frequency of reporting is determined by the Insolvency and Bankruptcy Board of India (IBBI) and the liquidator is required to submit regular reports to these bodies and stakeholders. However, stakeholders can request for change in the frequency of reporting if they feel that the current frequency is not sufficient for them to monitor the liquidation process. They can raise this request in the meeting of stakeholders, which is called by the liquidator. They can also address their request to the NCLT or the IBBI and they can also raise the request with the liquidator directly.
The National Company Law Tribunal (NCLT) plays a supervisory and adjudication role in the liquidation process and has the power to dissolve the company after filing of petition by the Liquidator. The NCLT also has the power to review the actions of the liquidator and take necessary action if it finds that the liquidator is not fulfilling his/her responsibilities in a fair and transparent manner.
1. How the IBBI comes to know about any Voluntary Liquidation and the concerned Liquidator for monitoring any assignment?
As mandated by Regulation 5(2), the liquidator intimates the IBBI of his appointment as the liquidator during voluntary liquidation process within 3 days and also submits public announcement for publishing the same on the IBBI website within 5 days from the commencement of Liquidation.
2. What is the process of replacing the liquidator?
The liquidator can be replaced by the same procedure as was followed for initial appointment of the liquidator under section 59(3)(c) of the Code and regulation 3(1)(c) (i) of the Voluntary Liquidation Regulations by a General Meeting resolution.
3. How the remuneration of the liquidator during voluntary liquidation process is determined?
The remuneration of liquidator shall be determined by the shareholders, by passing the resolution for initiation of voluntary liquidation process of the corporate person under section 59(3)(c) of the Code or regulation 3(1)(c) of the Voluntary Liquidation Regulations.
4. What are the duties of liquidator during voluntary liquidation process?
The duties of liquidator includes: –
5. Is it correct that all powers of the Board of Directors cease to have effect after appointment of liquidator?
The powers of the Board of Directors cease to have effect in all cases except for monitoring the voluntary liquidation process.
6. What is the process of filing claims as a stakeholder?
A stakeholder shall submit the claims to the liquidator in specified forms in the manner as mentioned below:
7. What options are available to creditors in case of rejection of claims by the liquidator?
A creditor has the option to file an appeal to the Adjudicating Authority against the decision of the liquidator within 14 days of receipt of such decision.
8. How the appointment of professional by the liquidator during the voluntary liquidation process is monitored?
The provisions of Regulation 11 the Code are very clear and mandates that a relative of the liquidator or a related party of the company in liquidation shall not be appointed as professionals. Further, as per Regulation 11(3) of the Voluntary Liquidation Regulations, a professional appointed or proposed to be appointed by the liquidator shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders, or the concerned corporate person as soon as he becomes aware of it, to the liquidator. For further clarity on this issue, you may visit our blog on Engagement of Independent Professional by Insolvency Professional.
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.
9. How the liquidation proceeds are taxed in the hands of shareholders?
Shareholders can speak to the Liquidator or liquidation consultants/ advisors beforehand to know the taxability of liquidation proceeds and what steps can be taken to avail the benefits of DTAA including obtaining of PAN, filing of Income Tax Return and surrender of PAN.
In India, where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend.
The liquidation of a company in India is a process that is governed by the Companies Act of 2013 and the Insolvency and Bankruptcy Code (IBC). These laws provide several safeguards to protect the interests of shareholders, including the appointment of a liquidator, the verification of creditor’s claims, the distribution of remaining assets, the inspection of books of accounts, and the meeting of shareholders. The IBC also provides for a time-bound process for liquidation. Shareholders have the right to access information about the liquidation process, the right to vote on the resolution plan and the appointment of the liquidator, the right to raise any concerns and request for changes in the frequency of reporting. The liquidator is accountable to the shareholders and other stakeholders of the company in the liquidation process and is required to take all necessary measures to detect and prevent fraud, appoint an auditor, and submit a liquidation report upon completion of the process. For non-compliances and for doing anything which casts doubts on the conduct, the Liquidator is at the risk of being penalized with fines and even losing his/ her license or his/ her registration getting suspended for certain duration by IBBI. Stakeholders should be aware of these safeguards and should move forward with ease and confidence on the process of voluntary liquidation where business is intended to be closed.
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