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Voluntary liquidation allows a company to liquidate its assets and wind up the business; this is becoming a popular choice for the promoters to shut unprofitable companies. A total of 3774 companies have been admitted for the process of Voluntary liquidation till March 2020. Voluntary Insolvency is a fast process and it can be clearly inferred by the data. As of March 2020, about 2170 companies have been liquidated; liquidation of 914 companies has commenced; and resolution plans for 221 companies have been approved.
The code aims for a time bound resolution for the insolvency process and it would not be wrong to conclude that the government is able to achieve the set target of reducing the time period. The chapter 2 of the code contains the provisions for the process of Corporate Insolvency Resolution Process.
Section 59 of the code provides the details for the Voluntary Liquidation of a Corporate Person. Here, when a person wants to liquidate its business having no debt or a debt which could be paid by liquidating the assets can initiate voluntary liquidation proceedings under the provisions of Chapter 5 of the code.
Application for voluntary liquidation
A Company who plans to initiate voluntary liquidation should not have caused any default on any obligation to any individual may initiate voluntary liquidation procedures. A Company may decide to wound up wilfully under a several situations including end of of expiry of time of activity fixed in its Articles of Association or event of an occasion provided in its Articles of Association for its dissolution.
To initiate the voluntary liquidation proceeding, the corporate person registered as a company have to meet the following conditions:
- An affidavit verified from majority of the directors of the company declaring that:
- A full inquiry has been made regarding the affairs of the company and the company has no debt or the debt which exists will be paid by the proceeds of the liquidation of the assets of the company.
- The company is not being liquidated to defraud a person
- Along with the declaration, the following documents shall be furnished:
- audited financial statements and record of business operations for the last 2 years of for the period of incorporation whichever is later
- a report of the valuation of the asset of the company, if any by a registered valuer
- In 4 weeks of declaration under sub-clause 59(a)
- a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the Official Liquidator
- a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the Official Liquidator.
In case the company owes any debt to any person, creditors representing more than 75% of the value of debt of the company and the same should be passed by the company within 7 days of such resolution.
A notification of the resolution shall be issues within seven days of such resolution or the subsequent approval by the creditors, whichever is earlier. Once, the resolution has been passed, subject to the approval of creditors, and shall be deemed to be commenced from the date of resolution being passed. The provisions of chapter 3 and 4 i.e. Section 35 to 53 shall apply to the voluntary liquidation proceeding, provided with some modification in case required.
Appointment of the Official Liquidator
When the Adjudicating authority passes an order of liquidation of the corporate debtor u/s 33 of the code, the resolution professional appointed under chapter 2 shall act as the Official Liquidator for the purpose of liquidation unless substituted by the Adjudicating authority u/s 34(4). The adjudicating authority can replace the resolution professional if the resolution plan submitted was rejected to meet the requirement as stated in section 30(20) or the Board recommends the replacement of the resolution professional due some reason which needs to be specified to the Adjudicating authority.
Once, an application is furnished the Board shall propose the name of another insolvency professional who would be appointed as the official liquidator and shall be submitted within 10 days of direction issued by the Adjudicating Authority. The fees to be charged by resolution professional shall be in proportion to the value of the liquidation estate, as may be specified by the board. Such fees shall be paid by the proceeds from the Official Liquidator estate.
Powers and Duties of the Official Liquidator
The liquidator for the purpose of resolution is required to submit the following:
(a) Preliminary Report;
(b) Annual Status Report;
(c) Minutes of consultations with stakeholders; and
(d) Final Report
As specified under the regulation.
The preliminary report is to be submitted by the liquidator to the corporate person within 45 days of commencement of the liquidation, highlighting:
- the capital structure of the corporate person;
- the estimated assets and liabilities as of on the date of commencement of the liquidation based on the books of accounts of the corporate person. (The official liquidator is allowed to make an estimate of the asset and liabilities from source other than the books of account of the corporate person if he believes and submit in writing that the books are not credible)
- Whether the liquidator intends for any further inquiry in any matter relating to the promotion, formation or failure of the corporate person or the conduct of the business thereof.
- It is the responsibility of the liquidator to complete the incomplete books of accounts as of the date of commencement of the liquidation and shall maintain the following books and registers of the corporate debtor:
(a) Cash Book; (b) Ledger; (c) Bank Ledger; (d) Register of Fixed Assets and Inventories; (e) Securities and Investment Register; (f) Register of Book Debts and Outstanding Debts; (g) Tenants Ledger; (h) Suits Register; (i) Decree Register; (j) Register of Claims and Dividends; (k) Contributories Ledger; (l) Distributions Register; (m) Fee Register; (n) Suspense Register; (o) Documents Register; (p) Books Register; (q) Register of unclaimed dividends and undistributed proceeds; andBefore substitution, it stood as: “Register of unclaimed dividends and undistributed properties deposited in accordance with Regulation 39; and”; 7 (r) such other books or registers as may be necessary to account for transactions entered into by him in relation to the corporate debtor.
The liquidator is required to keep all the receipts of payments or expenses incurred during the liquidation process of the corporate person.
On the direction of the adjudicating authority, the Official Liquidator shall verify the claims of the creditors and collect all the information of the corporate debtor’s asset, finance and operations which include financial and operational payments and business operations. The Official Liquidator takes over the custody of any asset over which the corporate debtor has ownership rights as documented in the balance sheet. The resolution professional shall evaluate the assets and property in a manner specified by the Board and prepare a report. Also, to protect and preserve the assets and property and to carry out business activities of the corporate debtor which he may consider necessary.
The Official Liquidator is allowed to draw, accept, make and endorse any negotiable instruments including bill of exchange, hundi or promissory note on behalf of the corporate debtor, having a same effect had these been drawn by the corporate debtor itself. The Official Liquidator can appoint or take assistance from any person, and take all such steps or sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument under a common seal, while performing of his duties, obligations and responsibilities. He can, on behalf of the corporate debtor, institute or defend any legal proceedings, civil or criminal in nature as required.
The Official Liquidator can consult any stakeholder entitled for the distribution though such consultation shall not be binding u/s 53 of the code.
Apart from the above, the Official Liquidator has the authority to access the information u/s 37 of the act. The act states that Official Liquidator has the power to access any piece of information of the admission of claims and for identifying the liquidation estate like
- an information utility
- credit information systems
- a Central, State or Local Government agency inclusive of registration authorities
- Database being maintained by the board and other information as may be specified by the board
Such information should be provided by the Official Liquidator to the creditor requested for the information within seven days of receipt of such request or provide the reason or delay or inability to submit the information.
The announcement should be made regarding the liquidation of the corporate debtor in the following way:
- In regional language newspaper with wide circulation at the registered office and any other location which the liquidator deems to be appropriate along with one English newspaper
- It shall be mentioned on the website (if any) of the corporate debtor
- On the website designated by the board of the sole purpose
Effect of Liquidation
The corporate person shall cease to carry on the regular business activity. The corporate person is allowed to carry on the business only which is required or beneficial for the winding up of its business. Notwithstanding the provision enlisted, the corporate shall continue to exist till it dissolved under-section 59(8).
Completion of liquidation
Once, the liquidation of the company has been done, i.e. all the assets of the company are sold, the Official Liquidator shall make an application to adjudicating authority for dissolving the said identity. Then the adjudicating authority pass an order when an application is made by the Official Liquidator where the company is dissolved from the date of order. A copy of the order is made to the Registration authority where the company is registered.
Explaining the process: Insolvency Resolution Professional v. Raay Hospitality Pvt. Ltd.
In the above petition, the Company operating under the name of Raay Hospitality Pvt. Ltd. filed a petition through the Insolvency Professional u/s 59(7) of the code. The company failed to initiate and run the business as intended in India, but was not successful to do. The company did not have any debt on or dues remaining and had INR 60,61,744 as mutual funds in ICICI bank. The company gave the declaration regarding the debt and not person is being defrauded by dissolution of the company. An Extra Ordinary General Meeting was held after 4 weeks of the declaration wherein the company appointed the Insolvency professional to act as the liquidator of the company.
Within 7 days following the Extra Ordinary General Meeting, a notification was send Registrar of Companies, Pune (being the company registered in Pune, Maharashtra) of initiation of liquidation proceedings. It was noted that as the business had not taken up, there was no issue regarding the continuation of the business (Compliance of Section 59(4) and (5) of the code).
Public announcements were made according of the liquidation, and no creditors were reflected upon. The only asset with the company was the mutual funds in ICICI bank. The liquidator obtained a No Objection Certificate from Income Tax department for any default in income tax. The liquidator opened another account in HDFC bank and transferred the funds in the same and this was done as per the regulation 32 of IBBI.
One the liquidation and distribution of assets, the liquidator filed an petition along with the final report having sent a copy of the final report to the Registrar of Companies, Pune and IBBI (Compliance of Section 59(6) of IBC read with Regulation 32 and 34-38 of IBBI.
The adjudicating authority noticed that the corporate person has been liquidated with due laws and thus here by order that the corporate person has been dissolved and directed the liquidator to file this order before the Registrar of the Companies (Pune).