The Voluntary Liquidation Regulations provides that the liquidator shall endeavour to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date. As on 31st December, 2021, 1105 voluntary liquidation processes have been initiated; out of which only 546 voluntary liquidation cases have been completed (i.e., the Liquidator has submitted the final report with the Adjudicating Authority). While more than 50% (i.e., 559) cases are still ongoing. On closer scrutiny of the ongoing cases, it has been found that 293 cases (around 52%) of them have crossed the one-year time mark (per discussion paper issued by the Insolvency and Bankruptcy Board of India (“IBBI”)). The report further states that out of the 546 cases where final reports have been submitted before NCLT, 263 cases (around 48%) are still pending for dissolution.
IBBI has been constantly working to ease and fasten the process of voluntary liquidation. Recently, IBBI has brought several amendments in the VL Regulations with the introduction of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Regulations, 2022. You can refer to our blog on Accelerating Corporate Exits through Voluntary Liquidation to read the amendments introduced in the VL Regulations.
Through this write-up, we wish to analyse the amendments introduced in VL Regulations and its effect on the voluntary liquidation process.
Listed below are the notable causes which lead to delays in the voluntary liquidation process:
1. There is no stringent timeline for the authorities to respond on the voluntary liquidation matters:
Considerable amount of time is consumed by the Registrar of Companies (ROC) to update the status of the company on the Ministry of Corporate Affairs (“MCA”) website from “Active” to “Under Liquidation”.
For the companies which are under corporate insolvency resolution process (CIRP), the Ministry of Corporate Affairs requires them to file FCR (Formal Change Request) for updating the status of the company on MCA website ( vide its General Circular No. 8/2020 dated 6th March, 2020, has centralized the process of). This circular is not applicable on the companies which are under voluntary liquidation.
However, as per our practical experience, ROC is requiring FCR for companies which are under voluntary liquidation as well, and is advising the liquidators to take up the matter with IBBI.
Although, the process of voluntary liquidation is not directly affected by the delay in updation of the master data but the same adds as a catalyst in resolving next steps with other Regulators. The liquidator is required to provide the updated copy of the master data with the status “Under Liquidation” with the application petition to the Hon’ble National Company Law Tribunal for dissolution.
The requirement to seek a ‘No Objection Certificate’ (NOC) or a ‘No Dues Certificate’ (NDC) from several departments, such as the Income Tax Department, the Central Board of Indirect Taxes and Customs, the Employee Provident Fund Organization, and other sectoral regulators are major issues unduly prolonging the voluntary liquidation process.
Even though the Voluntary Liquidation Regulations and the Insolvency and Bankruptcy Code do not specifically mention the need for getting such NOCs and NDCs, the NCLT benches require them from the sectoral regulators. By means of Circular No. IBBI/LIQ/45/2021 15th November, 2021 the Board has eased out the requirement to seek NOC/NDC from the Income Tax Department. However, it has been observed in the ongoing VL cases that the adjudicating authority still insists on the requirement of NOC.
In accordance with VL Regulations, the Liquidator must notify the regulatory authorities at the onset of the VL process requesting them to check for any claims the department might have against the company. The department then takes its own time to evaluate the application and respond. Since there are no SoPs or internal guidelines with Government Departments, the claims raised by the departments come with a lag thereby delaying the whole process.
It has been observed that few Benches insist on Reports from ROC and IBBI with respect to the Voluntary Liquidation during the course of hearings on dissolution application for which no procedure or requirement is defined in the Regulations and this delays the process.
2. Recovery of refunds and security deposits:
3. No supporting provisions in other laws:
Per our practical experience, Authorized Dealer Banks sometime advise on the filing of Form FC-TRS upon repatriation of surplus balance to the stakeholders. Though, the same is neither applicable nor it is mentioned anywhere under the FEMA Regulations or Code or VL Regulations.
The Board needs to develop a road map for the liquidator to follow while dealing with various legislations applicable to the corporate person going through Voluntary Liquidation. If the Voluntary Liquidation is to be completed in a timely manner, SoPs or Guidance Notes must be established for dealing with various agencies and statutes.
Post Scenario: Analysing the Impact of Voluntary Liquidation procedure on Ongoing/ Future applications:
| Sl. No. |
Amendment |
Intent of Lawmaker |
Comments |
| 1. | v Reduction of period of distribution of proceeds to the stakeholders from 6 months to 30 days.
|
The Board is of the view that distribution to the creditors and the stakeholders (who are the shareholders of the Company), should take less time, as the liquidation process is commenced with the approval of the creditors and the shareholders.
|
This amendment will require the liquidator to make provisioning of any future expense(s) in order to calculate the amount to be distributed to the stakeholders. For eg. provisioning is required in case of any pending filing(s) with authorities which may attract fines and penalties in addition to normal filing fees.
Also, there is no clear definition of realization of assets where there are no assets to be realized but simply a cash balance lying in the account of the Corporate person. Will the mere transfer of funds from the existing bank account of the company to the VL Bank account amount to the realization of assets?
If the answer to the above is yes, the Liquidator would be under obligation to execute the distribution within 30 days of the transfer, regardless of whether all other steps have been completed.
|
| 2. | Reduction of time for completion of voluntary liquidation process from twelve months to ninety days or two hundred and seventy days
|
This amendment aims to ensure early completion of the voluntary liquidation process by curtailing the unwarranted time spent on various activities, thereby, providing a quicker exit for the corporate person, releasing the idle resources faster, and putting them into productive use. |
Here, the Legislators failed to consider the time involved in dealing with various regulators, be it for refund or NoC or to complete pending compliances, which results in delayed completion of VL process. |
| 3. | Applicability of Amended VL Regulations |
The amended regulations have come into force from the date of publication in the official gazette, i.e., 5th April, 2022. |
Will the amendments be applicable on ongoing cases? There is no clarity on the effective date of applicability of VL Regulations. However, it has been observed that the Adjudicating Authority is taking a retrospective view on the amended VL regulations in cases where dissolution petition is pending. Still early stages but environment of extremely conservative approach is taken which actually has led to many additional requirements by various Hon’ble NCLT Benches like NOC from Income Tax Department, Report from ROC, Report from IBBI etc. |
| 4. | Submission of Form H Compliance Certificate by Liquidator |
It is not possible for the Adjudicating Authority (AA) to go through bulky documents in each case to verify the compliances by the liquidator. Thus, form H will serve as a checklist of compliances to AA for expeditious resolution of cases. In case there are any non-compliances, they could also get flagged through such checklist so that findings regarding them could be recorded by AA. |
There are already certain reporting requirements in VL Regulations that capture the compliances made by the liquidator during the VL process such as Preliminary Report, Final Report, List of events, etc. However, it would be interesting to see if this additional reporting requirement would actually help in early and expeditious resolution of the cases listed before AA. |
The IBBI is certainly aware about these hurdles and is trying hard to appropriately address the delays in the voluntary liquidation procedure. However, mere amendment in the voluntary liquidation regulations won’t help unless it is duly reciprocated by suitable amendments in other laws which a company is required to interact with. The many arms of the Government have to act in unison.
Very nice summery of VL process. Five-six years have gone-by but many ends are still open. The regulator needs to take leaf out of practical difficulties faced by liquidators to fill the regulatory gaps.
A nice summary on present difficulties being faced by Liquidators in fast closure of Voluntary Liquidation matters. Creating and amending law is one thing but this has to be educated, explained and percolated through with all pillars of the Government for getting the intended benefit.