Voluntary liquidation under Companies Act, 2013 & IBC, 2016

The recent amendment to the IBBI regulations for voluntary liquidation, dated
31.01.2024, has marked a significant milestone in enhancing the
transparency, efficiency, and expediency of the voluntary liquidation process.
Alongside these improvements, the amendments have instituted additional
safeguards aimed at safeguarding the interests of stakeholders. A notable
provision introduced by these amendments is the mandatory requirement to
convene a contributories meeting if the voluntary liquidation remains
unresolved within the specified period of 90 or 270 days, depending on the
circumstances.

This article aims to provide a comprehensive overview of the voluntary

liquidation process, encompassing its background, eligibility conditions, and
the intricate steps involved. From exploring the underlying reasons prompting
companies to opt for voluntary liquidation to delineating the detailed process
timeline, this guide serves as a valuable resource for stakeholders embarking
on the voluntary liquidation journey.

Background
Companies are established in accordance with the regulations stipulated by
the Companies Act of 2013. Once incorporated, a company assumes the
status of a legal entity, separate and distinct from its shareholders, commonly
referred to as an artificial person. However, the journey of a company doesn't
end with its inception; rather, its existence may culminate in dissolution,
governed by the provisions outlined in the Insolvency and Bankruptcy Code
(IBC) of 2016. There are several avenues through which a company may reach
its termination, or dissolution, under the purview of the IBC. These include

I. Striking Off (Fast Track Exit) under Section 248 of the Companies Act,
2013:

 This provision allows for the removal of a company's name from the
register of companies maintained by the Registrar of Companies.

 The Registrar or the company itself may apply for striking off if the
company has not conducted business operations for a period of two
years or more.
II. Merger or Amalgamation under Sections 230-232/233 of the Companies
Act, 2013:
 Companies can undergo dissolution through merger or amalgamation,
wherein a transferor company merges with a transferee company,
resulting in the dissolution of the former.

III. Winding-up by Tribunal under Sections 271-272 of the Companies Act,

2013:
 The Tribunal may order the winding-up of a company under various
circumstances, such as by special resolution of its members, on the
application by the Registrar for non-filing of financials for five
consecutive years, or on just and equitable grounds.

IV. Summary Liquidation under Section 361 of the Companies Act, 2013:
 Regional Directors are empowered to order the winding-up of a
company under summary procedures if it meets specific criteria,
including having assets with a book value not exceeding one crore
rupees.

V. Liquidation of a Company under Section 33 of IBC, 2016:

 When a company fails to secure a resolution plan under the Corporate
Insolvency Resolution Process (CIRP) or does not comply with the
terms of an approved resolution plan, the Tribunal may order its
dissolution under Section 33 of the IBC.

VI. Voluntary Liquidation pursuant to Section 59(7) of IBC, 2016:

 Solvent companies may opt for voluntary liquidation without court or
National Company Law Tribunal (NCLT) intervention under Section
59(7) of the IBC.

 Members and creditors, if any, appoint a liquidator to realize assets,

settle debts, and distribute surplus funds among shareholders,
adhering to the regulations prescribed by the Insolvency and
Bankruptcy Board of India (IBBI).

Each of these methods offers a structured approach to the dissolution of

companies, catering to various circumstances and objectives while ensuring
compliance with regulatory requirements and safeguarding the interests of
stakeholders.
A. Reasons for voluntary liquidation are as follows:

a. Special Purpose Vehicle (SPV): A company can be voluntarily liquidated

once the objective for which it was established is achieved. For example,
SPVs created for specific real estate or toll projects, which are formed
with a single purpose in mind.

b. Lack of Potential Opportunities (Unfeasible Operations or Poor

Operating Conditions): A company may decide to voluntarily liquidate if
there are no potential business opportunities or if it is economically
unfeasible to continue operations due to technical obsolescence,
unfavorable environmental conditions, or changes in the legal
framework.

c. Tax Planning Strategy: Companies may opt for voluntary liquidation to

take advantage of certain tax benefits. Additionally, companies may
liquidate to offset capital losses. For instance, if a holding company
realizes a capital gain from the sale of shares in one transaction, it may
liquidate loss-making subsidiaries or associate companies to book
capital losses, which can then be set off against the capital gains,
thereby reducing the capital gains tax for the holding company.

B. Conditions for Voluntary Liquidation:

i. Company must be solvent.
ii. Company must have resolved to wind up voluntarily through a special
resolution passed by its shareholders and creditors, if any.

C. Process of Voluntary Liquidation:

1. Solvency Declaration: The Board of Directors must file a Declaration of
Solvency (DoS) in the form of an affidavit stating that:

a. They have made a thorough inquiry into the company's affairs and
have formed the opinion that either the company has no debt or it will
be able to pay its debts in full from the proceeds of assets to be sold
in the liquidation;

b. The company is not being liquidated to defraud any person; and

c. The company has made sufficient provision to meet obligations arising

from pending matters.

The declaration must be accompanied by:

 i. Audited financial statements and records of business operations for
the last two years or since the company's incorporation, whichever
is later;

ii. A report on the valuation of the company's assets, if applicable. (A

valuation report is not required if the company only has cash and
cash equivalents.)

Within four weeks of making the declaration, shareholders must pass

a special resolution approving the winding up of the company and
appoint an Insolvency Professional (IP) to act as liquidator to complete
the process. If the company has any debt, creditors representing two-
thirds in the value of the debt must confirm the resolution for voluntary
winding-up within seven days of its passage.

2) Intimation to ROC and IBBI: The Company shall intimate to ROC and IBBI
about the commencement of voluntary liquidation within seven days of
approval of resolution by shareholders or creditors as the case may be. The
declaration of solvency shall be filed with the Registrar of Companies in Form
GNL-2. Effect of liquidation: The company shall from the liquidation
commencement date cease to carry on its business. However, the company
shall continue to exist until it is dissolved.

3) Liquidator to take over the Management control: Liquidator shall take over
the Management control of the company and proceed with liquidation process.
He is responsible for management of affairs of the Company from the
liquidation commencement date and to ensure timely legal compliances.

4) Public Announcement: Within five days of his appointment, the liquidator

must cause public announcement in Form A requesting claims from the
stakeholders. Claims must be filed within 30 days and publication is to be
made in English and regional language newspaper having wide circulation in
the area where the company’s registered office is located and if the Company
has website, the copy of publication also to be uploaded on its website.

5) Submission and verification of claims: Creditors either financial or

operational including employees are required to submit their claims in the
prescribed form attaching proof of claim. The liquidator shall verify the claims
within thirty days from the last date for receipt of claims and may either admit
or reject the claim, in whole or in part. If the liquidator rejects the claim, then
the creditor may file an appeal before Adjudicating Authority within 14 days.
6) Preliminary Report: The liquidator shall submit a preliminary report to the
Company within 45 days from liquidation commencement date and
preliminary report to include capital structure, estimate of its assets and
liabilities and other relevant information.

7) Separate Bank Account: The liquidator is required to open a separate bank

account in the company’s name, specifically designated as 'in voluntary
liquidation', to receive all owed money. All transactions exceeding Rs 5000
must be conducted via cheque or through the internet banking channel.

8) NOC from Tax Authorities: The liquidator shall inform to assessing officer
about the commencement of liquidation. If the claims are not received or no
NOC is received from the tax authorities, it is presumed that they do not have
any outstanding claims.

9) Assets Realization: The liquidator shall liquidate all assets and realize the
money on timely basis in order to maximize the stakeholders’ value. The
money realized is required to be deposited in a separate bank account opened
for this purpose.

10) Distribution: Before distributing money to stakeholders, the liquidation

costs must be paid in full. The remaining balance amount shall be distributed
to stakeholders according to the mechanism provided under Section 53 of the
Insolvency and Bankruptcy Code (IBC). This distribution must be completed
within 30 days from the date of receipt.

If a particular asset cannot be realized due to its nature or other conditions,

the liquidator may distribute such assets to stakeholders with the necessary
approval.

11) Preservation of records: The liquidator shall maintain records and

registers according to the formats prescribed in Schedule II of the Voluntary
Liquidation Regulations. If the books of accounts are incomplete as of the
liquidation commencement date, the liquidator shall ensure they are
completed and brought up to date. The records shall be preserved as follows:

a) An electronic copy of all records for a minimum period of 8 years;

b) A physical copy of records for a minimum period of 3 years.

12) Completion of liquidation: The liquidator shall endeavour to complete the

liquidation process and submit the Final Report
a) Within 90 days – if the company does not have creditors.

b) Within 270 days – if the company has creditors.

If the liquidation process is not completed within the stipulated period (i.e.,
90 days or 270 days, as applicable), the liquidator shall hold a meeting of the
contributories within fifteen days from the end of the stipulated period and
submit a status report. Thereafter, the liquidator shall conduct contributories'
meetings at the end of every succeeding 270 days or 90 days, as applicable,
until the application for dissolution is submitted. The status report shall
contain:
 Settlement of the list of stakeholders;
 Details of any unsold assets;
 Distribution to the stakeholders;
 Distribution of unsold assets to the stakeholders;
 Developments in any material litigation, by or against the company;
 Filing of and developments in applications for the avoidance of
transactions.

13) Corporate Voluntary Liquidation Account: Unclaimed dividends and

undistributed proceeds, if any, shall be deposited into the ‘Corporate
Voluntary Liquidation Account’. The liquidator must notify the Registrar of
Companies (ROC) and the Insolvency and Bankruptcy Board of India (IBBI),
attaching a statement in Form-G that includes the names and last known
addresses of the stakeholders entitled to receive the unclaimed dividends or
undistributed proceeds.

14) Final Report: After the liquidation process is concluded, the liquidator
shall prepare and file a Final Report containing the following information:

 Audited statement of accounts;

 Declaration: A statement that all assets have been sold, all debts have
been paid off, and no legal action is pending;
 Asset Sale Statement: Detailed information on the asset sales, including
the realized value, cost, manner and mode of sale, any shortfall, and
the identity of the buyers.

The liquidator shall file the Final Report with the Registrar of Companies
(ROC) and the Insolvency and Bankruptcy Board of India (IBBI). Additionally,
a copy of the Final Report must be submitted to the National Company Law
Tribunal (NCLT), along with a compliance certificate in Form H.
15) Petition to NCLT for dissolution order: The liquidator shall submit a
petition to the National Company Law Tribunal (NCLT) seeking a dissolution
order. Upon receiving the order from the Hon'ble NCLT, the liquidator must
file Form INC-28 with the Registrar of Companies (ROC). Once Form INC-28
is approved, the company is officially dissolved, and the company's status in
the ROC master data will be updated to "Dissolved under section 59(8)."

Article prepared by Yash Dalmia, Advocate, Calcutta High Court & NCLT.

[Disclaimer: The views expressed in this article are those of the author and do
not necessarily reflect the official policy or position of any agency or
organization. This article is for informational purposes only and does not
constitute legal advice.]