An update on the Voluntary Winding-up Regulations – Insolvency/Bankruptcy

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The decision to close a business is taken by the management of the business and is done by consensus with the management and the shareholders. A company normally resorts to winding up its business activities when it is unable to pay its debts, is insolvent or has achieved its objectives as mentioned in its AOA. Since this process basically involves cashing out the business, it is referred to as voluntary liquidation. Once the liquidation proposal obtains a 75% majority of its board and shareholders, a special resolution is passed, followed by publication in the Official Gazette and major city newspapers. This triggers the liquidation process.

Procedure

Chapter XX of the Companies Act 2013 sets out the procedure for winding up a company. However, the Eleventh Schedule of the Insolvency and Bankruptcy Act 20161 omitted voluntary liquidation, which was provided for in sections 304 to 325 of the 2013 Act. liquidation. Other compliances include the provisions of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations 2017.

Under Chapter V (Article 59) of the Code, the procedure is as follows:

  1. Declaration: Since an entity cannot be liquidated without taking into account its stakeholders, a declaration of the majority of the directors of the company is mandatory. The statement is evidenced by an affidavit attesting2:
    • They have made sufficient inquiries into the affairs of the company and have concluded that either the company is debt free or it will be able to pay its debts from the proceeds of the assets which will be sold in the voluntary liquidation.

    • The company is not liquidated to defraud anyone.


  2. The following documents must accompany the declaration:
    • Audited financial statements and a statement of business operations of the company for the previous two years or for the period since incorporation, whichever is later;

    • A report on the valuation of the company’s assets drawn up by a chartered appraiser3. The Solvency Statement must be filed on Form GNL-2 with the Registrar of Companies.4


  3. Board meeting: To appoint the liquidator, the board must identify an insolvency practitioner registered with the Insolvency and Bankruptcy Board of India (IBBI). Once the resolution is approved, the company notifies the Registrar and IBBI5 of all its remaining debts, if any, and organize a general meeting of the company for the next steps.

  4. Shareholders’ meeting: the code mandates the adoption of a general resolution (for voluntary liquidation) or a special resolution (end of the fixed term of the entity) by the partners at a shareholders’ meeting concerning the beginning of the liquidation process before the appointment of the liquidator.6 If the organization is in debt, two-thirds of the creditors must also approve the resolution within seven days of its passing. This should be done within four weeks of the declaration of solvency.

  5. Duties of the liquidator: The liquidator must file the resolutions with the Registrar of Companies and the IBBI. From now on, all the powers of the board of directors, the main managers and the partners of the debtor company cease. The powers are instead vested in the liquidator who takes charge of the process from that moment on.

Recent Changes to Voluntary Liquidation Processes

The IBBI regulations primarily relate to the compliances a liquidator adheres to when dissolving a business. Contrary to the intent of the law, some compliance with the law has recently been found to delay the process. IBBI recently changed the rules to speed up the liquidation process. Here is an overview of the changes adopted over the past two years.

IBBI (Voluntary Liquidation Process) Regulations (Amendment), 2020seven

On January 15, 2020, the 2017 Regulations were amended by the IBBI (Voluntary Liquidation Process) Regulations, 2020. The main purpose of this amendment was to include “unclaimed dividends and undistributed proceeds” in the books of accounts and the procedure to be followed to balance the current liabilities and the assets which depend on them. As amended by this amendment:

  • The liquidator must keep the register of accounts.8

  • The Board of Directors shall maintain the Corporate Voluntary Liquidation Account in the Public Accounts of India. If the liquidator fails to deposit, he will be paid with interest at the rate of 12% per annum from the due date of the deposit until the date of the deposit.

  • New forms, namely FORM-G and FORM-I, have been introduced for submitting proof of deposit and clarifying the nature of deposit (FORM-G) and withdrawal from corporate voluntary liquidation account (FORM-I) through this amendment.9

IBBI (Voluntary Liquidation Process) Regulations (Second Amendment), 2020ten

On August 5, 2020, a second change was made to the voluntary liquidation process, concerning other regulations concerning the liquidator:

  • The amendment assumes that the chosen liquidator is a business professional eligible to be appointed as an independent director under the Companies Act11.

  • They must be free of any legal, personal, pecuniary, professional relationship or any other point that could constitute a conflict of interest in the liquidation process.

  • The amended regulations allow the company to replace the existing liquidator by appointing another insolvency practitioner as the replacement liquidator by resolution of the partners/partners.

IBBI (Voluntary Winding Up Process) Regulations (Amendment), 202212

On 5 April 2022, IBBI notified the Indian Board of Insolvency and Bankruptcy (Voluntary Liquidation Process) (Amendment) Regulations 2022 to further expedite the liquidation process. It introduced the following changes:

  • The liquidator draws up the list of stakeholders
    within 15 days from the deadline for receipt of claims if no claim from creditors has been received by the deadline. Previously, the stipulated time was 45 days.

  • The liquidator distributes the proceeds of realization
    within 30 days receipt of the amount to the stakeholders. Previously, the stipulated time was
    six months.

  • As stated earlier, the organization passes a general or special resolution to announce the liquidation process, followed by subsequent approval by the board of directors and creditors if the entity has debt. In this case, the liquidator completes the liquidation procedure of the legal person within 270 days from the date of commencement of liquidation. In all other cases, the limit is 90 days from the beginning. The previously scheduled time was 12 months in all cases.

  • Since checking documents in bulk leads to unnecessary delays, the amending regulation specifies a Certificate of conformity who must be submitted, who
    abstract the acts of the liquidator.

Analysis

The IBC, 2016 had stated that, “The liquidator will endeavor to complete the process of winding up the legal person within twelve months from the date of commencement of liquidation”13

Despite this, it was inferred from IBBI records that approximately 52%14 voluntary liquidation procedures initiated in 2021 have not yet been completed despite reaching the maximum period provided for, i.e. 12 months.

These data shed light on the main regulatory and practical obstacles preventing voluntary liquidation from working properly, leading to unreasonable delays in the liquidation process. The recent amendments aim to bridge the time lag between compulsory liquidation and voluntary liquidation. The 2020 amendments mainly focused on introducing regulations to address areas that had regulatory gaps, such as appointing a replacement liquidator, guaranteeing deposits in the company’s voluntary liquidation account, etc. . The 2022 Amendment, however, aims to directly address the backlog in the process through regulations reducing the timeframe for the winding-up steps that most block the process.

Final remarks

Recent regulatory changes indicate that the Indian Insolvency and Bankruptcy Board continues to be cognizant of the procedural hurdles that delay voluntary liquidation and is well equipped in regulatory changes to deal with them. Recent changes will allow for the early release of corporations, faster distribution and other benefits such as lower liquidation costs. Reducing the time required to remit funds should ensure rapid disbursement to stakeholders, promoting entrepreneurship and credit availability. It should also help the contracting authority process dissolution requests more quickly.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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