11 July 2018 • Akshay Kapoor
Voluntary liquidation is the most compliant and convenient way of closing down the business both for operational or non-operational companies particularly in the following cases where:
- the business could not be commenced because of various reasons associated though investments were made in business
- the business had commenced but has served its purpose
- the legal entity is no more needed but has cash and bank balances
- there are considerable investments in assets but assets are no more required
- the value of the assets is significantly higher than existing liabilities of the company and surplus is to be distributed amongst all remaining stakeholders
The provisions of voluntary liquidation of corporate persons (company/ LLP) in India are covered under the Insolvency and Bankruptcy Code (“Code“) and Voluntary Liquidation Process Regulations. Liquidation (or “winding up”) is a process by which a company’s existence is brought to an end. The new Code is a single window legislative code under which closure of a company has become easier with a well-defined process.
Though there is also a process of closing down a company after a waiting period of two years of no business operations and after extinguishing all its liabilities by applying to Registrar for strike off/ deregister from Register of Companies but during this waiting period and during the restoration period thereafter, the Directors and Company remain exposed to liabilities/ demands.
STEPS FOR VOLUNTARY LIQUIDATION IN INDIA
ARE YOU ELIGIBLE FOR VOLUNTARY LIQUIDATION:
- The Company should be solvent and should remain so during the entire liquidation process
- The Company should not have committed any default (default means non-payment of debt that has become due and payable).
HOW TO START LIQUIDATION:
- BOARD MEETING FOR DECISION: The Company is required to hold Board Meeting for obtaining consent from the Board for the Voluntary Liquidation of the Company,
- DECLARATION OF SOLVENCY: Declaration of Solvency duly supported by audited financials, valuation report and list of debts, is required to be given by majority of Directors verified through an affidavit stating that they have made a full inquiry into the affairs of the company and it shall be able in meeting liabilities and not being liquidated to defraud people.
- Special Resolution passed in the General Meeting of members for voluntary liquidation and appointment of liquidator becomes Liquidation commencement date. The liquidator can only be an Insolvency Professional, registered with Insolvency & Bankruptcy Board of India (IBBI).
In case of a subsidiary of a foreign company is to be liquidated voluntarily both Board Meeting and General Meeting can be held outside India saving travelling costs but in such cases, it is required to get such declaration and affidavit apostil.
The resolution shall further be approved by 2/3rd of creditors and persons to whom any debts are due within 7 days. In our practical experience, it is better to speak to major Creditors well in advance and if possible to settle dissenting Creditors, where cash/ bank balance is available, before holding Board Meeting for voluntary liquidation.
- From Liquidation commencement, the company shall cease to carry on its business, except as required for the beneficial winding up of its business. Like, Company should not place orders for starting new production cycle but it may place orders for such raw materials as are required to utilize other raw materials in stock for better realization of values. The company continues to exist until it is dissolved by Order of National Company Law Tribunal (“NCLT”).
- Terms and conditions for appointment of the liquidator should also be approved by shareholders and the remuneration payable shall form part of the liquidation cost.
- The Liquidator selected should be such having a full support team and fully equipped office to ensure that timelines under the Code are adhered to and the process is completed in a time bound manner.
- Resolutions are to be filed with the Registrar of companies (ROC) and IBBI.
PROCEDURE FOLLOWED BY LIQUIDATOR FOR LIQUIDATION:
- Public Announcement for Claims: The liquidator shall be required to make Public Announcement within 5 days of his appointment for inviting claims from all stakeholders with the last date for submission of claim shall be thirty days from the liquidation commencement date.
- Preliminary Report: Preparation of preliminary report by the liquidator within 45 days of commencement of liquidation detailing capital structure, an estimate of assets and liabilities and proposed plan of action for liquidation.
- Liquidator shall get claims verified and then may admit/ reject claims in full or part
- Liquidator shall get Valuation and do the sale of the assets in a manner making recoveries of monies due to the Company in a time bound manner.
- Realised amount to be deposited in a separate bank account: The liquidator shall open a bank account in the name of the company followed by the words ‘in voluntary liquidation’, in a scheduled bank in India for the receipt of all moneys during liquidation. The money in the bank account shall be used in accordance with waterfall mechanism under the Code. All payments in excess of Rs. 5,000/- shall be made through banking channels.
- Distribution of funds to be done within 6 months from receipt of the amount in a preferential & sequential manner as per Code
COMPLETION OF LIQUIDATION:
- Final Report: On completion of the liquidation process, a Final Report will be prepared by liquidator which shall consist of audited accounts showing receipts & payments pertaining to liquidation since liquidation commencement date and a Statement from Liquidator on completion of Liquidation process covering exceptions like, in case of Pending litigations, a sufficient provision is made to meet future obligations.
- Submission of Final Report: The Final Report shall be sent to the ROC & IBBI. Thereafter, an Application along with Final Report to be made with NCLT for passing dissolution order.
- Filing of Dissolution Order: The order of Hon’ble NCLT shall be filed in Form INC-28 with the ROC within 14 days.
- Preservation of Records: The liquidator shall preserve a physical or an electronic copy of the reports, registers and books of account for at least eight years after the dissolution of the corporate person, either with himself or with an information utility.
The objective of amended law for Voluntary Liquidation is to close the process in a time bound manner and accordingly liquidator shall try his best to complete the liquidation process within 12 months and if all activities are planned, it can be completed in much smaller time frame with the distribution of proceeds to all entitled stakeholders. The new law is a major step in Government’s efforts in improving ‘Ease of Doing Business’ rankings of India by making both entry and exit smooth for business in India, a major concern for Investors committing Foreign Direct Investment (FDI) in India.
Except in cases of fraud or misrepresentation, with Liquidation, all liabilities, demands and claims would close forever against the Directors’ and business of the company.