What aspects are to be kept in mind while preparing the statement of assets and liabilities to be submitted along with Declaration of Solvency?
A Declaration of Solvency is required from majority if the directors of the Company verifying that if there exists any debt in the Company then it will be able to pay its debts in full from the proceeds of the assets to be sold in liquidation. Apart from the available audited accounts with the directors, it is pertinent to note the following pointers, while making a declaration of solvency:
There is usually a substantial gap between the available financials of a company and the preparation of declaration of solvency in case the voluntary liquidation is commenced later in a financial year. Clearly, the directors would rely on such latest available accounts for determining the solvency status of the company. However, to enhance the credibility of such accounts, it is always prudent to consider foreseen and unforeseen liabilities that may be incurred by the company which may have a substantial bearing on the solvency status. Upon assessment for solvency, if there is any shortfall for solvency, the bank account needs to be adequately funded and necessary compliances done before initiating on Board Meeting for consideration of Voluntary Liquidation.
What documents are covered under ‘Record of business operations’ to be annexed to the Declaration of Solvency?
The record of the business operations is not defined anywhere in the IBBI (Voluntary Liquidation Process) Regulations, however, considering the intent of the law, it should refer to documents (including most recent ones) such as Financial Statements and notes thereto, Books of Accounts, Auditors Report, Directors Report and its annexures, statutory books and records, minutes books, trademarks, all original licenses, permissions and registrations, any contracts with Vendors/Creditors/ Suppliers, employees, or any other stakeholders which are still effective, any notices, demands, orders whether appealed, protested or not which may have contingent or statutory liability that may arise after the commencement of liquidation or any other business information or secret which could help in better realization of assets under the liquidation or is otherwise needed for beneficial liquidation. You shall be required to attach these records along with financial statement for the immediately preceding two financial years.
Can we approve the voluntary liquidation of a Company via Directors’ Circular Resolution?
Yes, it is possible to approve the resolution for Members Voluntary Liquidation by Circular Resolution as it is not prohibited specifically anywhere under the Companies Act, 2013. However, considering the gravity of the business to be transacted, it is advisable to convene a Board Meeting and pass the resolution.
What are the various intimations to be made upon the Company moving into liquidation?
To the Existing Bank: For not to accept any debit instruction signed by any previous signatory and to give effect to the change in signatories of the Bank from the previous signatory to the Liquidator or a person so authorized by him/ her. Once a new account for Liquidation is opened, a request be sent for closure of existing bank account
Note: It is recommended to have clear instructions in the closure letter regarding change of existing signatories to the Liquidation and thereafter transfer of funds from existing bank account to the new bank account. The closure process can be a little time-consuming depending on the policies of the Bank. Some banks do offer the facility to open up a bank account within 1 day of receipt of the requisite documents.
To the IBBI: Publication on the IBBI website in Form A of IBBI (Voluntary Liquidation Process) Regulations, 2017) i.e Public Announcement for disclosure of commencement of liquidation and appointment of liquidator.
To the Income Tax Department: Pursuant to Section 178 of the IT Act, the Liquidator has to intimate the IT Department about his appointment. Thereafter, the Department will raise demands, if any and issue a No Objection Certificate within a time window of 3 months.
Note: The Company cannot part away with its assets until this NOC is received from the IT Department.
To the ROC: Intimation of appointment of Liquidator in Form MGT 14; Intimation of commencement of Liquidation along with executed Declaration of Solvency in Form GNL-2.
To GST Department/Ward: Pursuant to Section 88 of the CGST Act, and Intimation is to be submitted with the jurisdictional GST Department with respect to appointment of Liquidator within 30 days of his appointment. The Departments can require provision of debt certificate from the Company and status of GST Returns, in order to ascertain the GST Liability and calculation of GST Refund, if any.
What effects do liquidation procedures have on existing contracts?
For the purposes of liquidation, the liquidator forms an estate of the assets and holds the liquidation estate as a fiduciary for the benefit of all the creditors. The liquidation estate assets include the contractual rights of the Company as well.
If any contractual liability is there, it needs to be exited either before commencement of liquidation by the then management of the company and such liability shall be made as part of Declaration of Solvency. If there is a requirement of goods or services under such contract during the liquidation for the beneficial liquidation, the liability for such future payments should also be covered under DOS. All other contracts come to end on commencement of liquidation.
Can the creditor’s claims ranking under Section 53 of the Code, be amended in any way?
The ranking or waterfall mechanism is prescribed by the Insolvency and Bankruptcy Code and cannot be amended. The liquidator who is responsible for distribution of liquidation proceeds is bound by the waterfall. However, any party may contractually agree to relinquish its claims or offer the proceeds payable to it to some other creditor. Nonetheless, the liquidator is not a party to or bound by any such arrangement.
Is the Company required to continue with ROC Filings post commencement of liquidation?
The e-filling status of the Company, on successful filing of Form GNL-2 and Form MGT-14, is changed to ‘Under Liquidation’. It should be pursued with office of concerned Registrar for change in status. However, we have seen in practice that hard copies are insisted by Registrar’s office for the attachments to the said Forms i.e hard copy of Declaration of Solvency executed by all the Directors, the Board and Special Resolution passed for approval of VL and appointment of Liquidator, Creditors Approval, if any, Public Announcement in Form A and any other document as may be deemed necessary.
Once the hard copies are taken on record by the ROC, the status of the Company is changed to ‘Under Liquidation’ and thereafter the Company is not required/ cannot file any e-forms except GNL Forms, if required.
Is the Company required to hold Annual General Meeting if VL has commenced but Dissolution order not obtained?
Pursuant to Regulation 4 of the IBBI( Voluntary Liquidation Process) Regulations, 2017, the effect of the commencement of liquidation of the Company is as follows:
Pursuant to Regulation 37 of the IBBI (Voluntary Liquidation Process) Regulations, 2017, the Liquidator shall endeavor completion of process in 12 months and if continuing for more than 12 months, hold a meeting of the contributories (shareholders) within 15 days from end of 12 months to update progress of liquidation.
Thus, in view of the above provisions, the requirement of meeting with shareholders comes only upon completion of twelve months from liquidation commencement date, and the fact that now the management of the Company rests in the hands of the liquidator and no decisions are to be taken by the shareholders with respect to the company or for approval of accounts, it is understood that the requirement to hold an Annual General Meeting of the Company is no longer applicable to the Company.
Can there be a change in Directorship post commencement of Liquidation?
It is not advisable for a Director who has provided his Declaration of Solvency to resign from his post when the Company is undergoing liquidation. However, in un-avoidable situations, if a Director resigns, Form DIR-12 cannot/ is not required to be filed as the status for e-filing is ‘Under Liquidation’. The Company may submit a hard copy of hand-filed form DIR-12 with the concerned Registrar along with necessary attachments.
Note: This will not bring an effect on the Master Data of the Company.
Do the statutory auditors continue to hold position post commencement of liquidation?
The tenure of the statutory auditors shall continue to remain same as it was prior to commencement of liquidation of the Company. The requirement of audit of the accounts of the Company until commencement of the liquidation is advisable to be served by the present statutory auditors of the Company, nonetheless, the Liquidator hold the power to appoint any other professional to audit the accounts of the Company until commencement of liquidation and for the liquidation period.
Does the Company need to make financials and do filings for the March 31 ending even if VL has commenced before 31st March?
It is advisable to have audited accounts for the period upto Liquidation commencement date and these can be used for the filings of the respective Financial Year even if these are for a period ending before 31st March.
Further, from the Liquidation commencement date, a separate accounting is to be done for the Liquidation period (period from Liquidation commencement date till dissolution) as prescribed in the Voluntary Liquidation process Regulations.
What will happen to the tax registrations such as GSTIN, PAN, TAN, etc after the Company is dissolved?
Once, the dissolution order is passed by the NCLT, the Company ceases to exist hence, it has to surrender its PAN and TAN registrations with the concerned departments.
Surrender of PAN can be done online through NSDL TIN website as well as through off-line mode.
Surrender of TAN can be done by making an application to the jurisdiction Assessing Officer (TDS) requesting the reasons for surrender.
Similarly, the GST refund to be claimed and GSTIN of the Company to be surrendered post passing of dissolution order of NCLT.
As per the amendment to IBBI (Voluntary Liquidation) Process Regulations, dated 05.08.2020, the corporate person may replace the liquidator by appointing another insolvency professional as liquidator by a resolution of members or partners, or contributories, as the case may be. Earlier, the Regulations did not provide such tool to the corporate to get itself released from an inefficient liquidator or to get itself out of a situation where it was unfortunately left without a liquidator. This omission to replace the liquidator during voluntary liquidation, has now been addressed in the updated regulations.
This flexibility can come to use in times like, death of present liquidator or to replace a liquidator which was not working in the best interest of the corporate or under any other circumstance where the stakeholders of the corporate desire to change the liquidator, for smooth liquidation process. This should also result in a rather more diligent liquidation process with the risk of being replaced, hanging on the Liquidator.
The IBBI has also clarified that in event of replacement of liquidator, where a Liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Likewise, in case the replaced Liquidator distributes any amount which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.
Regulation 33(3) of VL Regulation states that “No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporate person”, so what happens in case only part subscription money has been received (MOA subscription money). Can we still proceed with VL and distribute the assets to such contributory (assuming he is the only contributory).
Regulation 33(3) of Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017 strictly prohibits distribution to such contributory who has not made his contribution towards the uncalled or unpaid capital of the Company. The liquidator has to strictly adhere to the said regulation while distributing the funds. Since in the given scenario, the contributory has paid only part of the subscription money as specified in the Memorandum and therefore, even though he is the only contributory, no distribution will be made to him.
Based upon our understanding, the liquidator shall deposit the undistributed proceeds into the Public Account of India in terms of Regulation 39.
In a case where voluntary liquidation has started and there is income tax assessment going on for a few AYs, would the assessee be entitled to receive pending refunds in its own bank account or the same needs to be deposited in a separate account? Also, does the company need to change its name and add “(under voluntary liquidation)” to its name?
In terms of the provisions of Section 238 of the Income Tax Act, 196, the liquidator is entitled to claim or receive any refund due to the Company, which is under liquidation.
Further, if the existing bank account of the Company:
a) has not been closed yet: the refund can be claimed in such bank account, which shall further be transferred to the bank account opened for the purpose of voluntary liquidation as per the Regulation 34(1) of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (“VL Regulations”);
b) has been closed: the refund shall be received in the new bank account opened for the purpose of voluntary liquidation in terms of aforesaid regulation. The liquidator shall be required to update the details of such bank account and nominate such bank account for refund on the Income Tax portal.
Re addition of “in Voluntary Liquidation” after the name of the Company, please note that the same is not mandatory by any law or regulation. The VL Regulations only require to open a separate bank account in the name of the corporate person followed by the words ‘in voluntary liquidation’. However, as good corporate governance, the practice is adopted by the Companies to make the general public aware about the status of the Company.
First of all, let me express my sincere thanks for putting up such a nice Q&A. The best part is that you dealt with intricacies or tricky situations arising into it; rather that just writing what is said in Regulations (which can be read and understood by all).
I have few queries:
– Suppose voluntary liquidation commences on 16th Sept 2020. The company does not require to get accounts audited under the companies Act provisions after commencement of liquidation. Only annual receipt and payment / final receipt and payment will get audited. The company does not fall into tax audit limits also for FY2020-21. In such circumstances, no audit for FY2020-21 will take place i.e. either statutory or tax audit and the IT return will be filed based on unaudited accounts only. Can u pls share your views.
– From liquidation commencement date till distribution of all assets, annual / final audit will be done and presented to members. What about period from 1-04-2020 till 15-09-2020 which will not be audited in my case? It is always advisable to get that period also audited but legally, is it ok if audit for such period is not done as there is no provision mandating to get those accounts audited? Please correct me if I am wrong, Sir.
– What will happen to ongoing litigation during liquidation period?
Thanks for your kind words, and we feel delighted that we have been able to address the possible practical queries.
Further, please note our response to your queries:
As there are no creditors and Holding co. holds more than 99% shares can we instead of realising out of the assets, directly transfer the assets to the holding co. under VL?
As per Regulation 31 of Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017, the liquidator may value and sell the assets of the corporate person in the manner and mode as approved by the corporate person.
However, the liquidator may, with the approval of the corporate person, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances. The law has not prescribed the special circumstances; thus, we need to interpret the same on case to case basis.
Hence, the liquidator may directly transfer the assets to the shareholders of holding company under Voluntary Liquidation in special circumstances after obtaining prior approval of the Corporate Person.
Sir, Any audit report of company which liquidation order passed before end of FY
The financials of the Company after the commencement of Voluntary Liquidation shall constitute receipt and payment account. The Audit Report shall clearly state the fact company is not a going concern.
Re- your query on any Audit Report, request to connect any professional.
How to file financials of the company (Under Liquidation) because form AOC-4 showing error Company under Liquidation so said form cannot be filed for the said status.
Once the status of the Company is changed to ‘Under Liquidation’, the Company is not required/ cannot file any e-forms except GNL Forms