India: The Insolvency And Bankruptcy Board Of India (IBBI) Notifies Corporate Voluntary Liquidation Process Regulations, 2017

Last Updated: 10 April 2017
Article by SKP  

The Insolvency and Bankruptcy Code, 2016 (the Code) has consolidated the insolvency, bankruptcy and liquidation laws for companies, partnerships firms, limited liabilities partnerships and individuals in India, which came into effect on 28 May 2016.

With an aim to consolidate the law related to insolvency and bankruptcy, the Code seeks to shift the winding up process by creditors and voluntary winding up by members from the ambit of the Companies Act, 2013 to the Code.

In pursuance of that, on 30 March 2017, the Ministry of Corporate Affairs (MCA) notified Section 59 of the Code pertaining to voluntary winding up of a corporate person (companies and limited liability partnership) under the Code. Furthermore, the IBBI vide its notification dated 31 March 2017 issued the IBBI (Voluntary Liquidation) Regulations, 2017. The regulations provide the process from initiation of voluntary liquidation of corporate person till its dissolution. The key features of the same are:

  • A corporate person who has not committed any default1 can initiate the voluntary liquidation process.
  • The winding up process shall commence on the date on which a special resolution is passed by the members/partners of the corporate person to liquidate the corporate person and appoint an Insolvency Professional (IP) to act as the liquidator. On the appointment of a liquidator, the corporate person shall cease to carry on its business.
  • For initiating voluntary liquidation, the majority of Directors and Designated Partners of the corporate person have to make a declaration to the effect that:
    • The corporate person has no debts or it will be able to pay its debts in full from the proceeds of the assets to be sold in the voluntary liquidation; and
    • The corporate person is not being liquidated to defraud any person.
  • It provides the eligibility criteria for appointing an IP as a liquidator.
  • It specifies and provides for:
    • The manner and content of the public announcement of the appointment of a liquidator.
    • Invitation of claims from the stakeholders.
    • Receipt and verification of claims.
    • Various reports and registers to be made and preserved by the liquidator.
    • Realisation and distribution of the assets of the corporate person.
  • It also provides for the manner and procedure for dealing with extortionate credit transactions, unclaimed proceeds of liquidation/undistributed assets, detection of fraud, etc.
  • The liquidator is obliged to preserve a physical/electronic copy of the reports, registers and books of accounts for at least eight years after the dissolution of the corporate person, either with himself or with an information utility.
  • If the corporate person is unable to pay its debts in full from the proceeds of the assets sold in liquidation, the liquidator has to make an application to the National Company Law Tribunal (NCLT) to suspend the process of liquidation and pass any order as he deems fit.
  • On the completion of the liquidation process, the liquidator shall prepare and submit the final report to the NCLT and after the affairs of the corporate person are wound up, he will make an application to NCLT for dissolution of the corporate person.

SKP's comments

With the above notification, winding up the proceedings of solvent companies are omitted from the Companies Act, 2013 and are now governed by the Code. The forum to deal with the process will be the respective NCLT Benches from now on instead of the High Court. Winding up of insolvent companies is already being governed by the provisions of the Code. The IP who acts as the liquidator for the process of voluntary winding up assumes a key role in the process since the Code has given the authority to the liquidator for completely driving the process of winding up. Hence, the efficiency of the winding up process would be largely dependent upon the person who is appointed as the liquidator of the company.

Earlier, starting a business in India was easier, but their closure was a cumbersome and time-consuming process. The issue of voluntary winding up regulations is a step forward for easy closure of solvent businesses in India. The regulation aims at speedy winding up and protecting/balancing the interest of all the stakeholders of the company.

Footnote

1.  Section 3(12) of the Code defines 'default' as non-payment of debt, when whole, any part or an instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

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