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

The Insolvency and Bankruptcy Board of India ('IBBI') was established under Insolvency and Bankruptcy Code, 2016 ('Code'). On 31st March 2017, IBBI in exercise of its powers under the said Code notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017 ('Regulation'). It came into force with effect from 1st April 2017. The Regulation provides for a complete framework for the voluntary liquidation of any corporate person.

Corporate person is defined under Section 3(7) of the Code as any company incorporated under the Companies Act and includes limited liability partnership or any other person incorporated with limited liability but does not include any financial service provider. However, the explanation attached to Regulation 3(3) of the Voluntary Liquidation Regulation specifies that the Regulation 3(1) to 3(3) applies to corporate person other than a 'company'. The procedure for voluntary liquidation of a company has been provided under Section 59 of the Code.

The regulations inter alia, specify the manner and content of public announcement, receipt and verification of claims of stakeholders, reports and registers to be maintained, preserved and submitted by the liquidator, realization of assets and distribution of proceeds to stakeholders, distribution of residual assets, and finally dissolution of corporate person.

Procedure for Voluntary liquidation by a Corporate Person-

  • Majority of designated partners or the persons exercising power in the corporate person give a statement of declaration in form of affidavit accompanied by audited financial statements and other such documents to the effect that-

    • The corporate person in question is under no debt or he will be able to pay all its debts in full from the proceeds of its assets and
    • The initiation of liquidation process is not to defraud others.
    If the liquidator is of the opinion that the voluntary liquidation is being done to defraud others or the corporate person will not be able to pay its debt in full from the proceeds of the assets, then he shall make an application to the Adjudicating Authority to suspend the process.1
  • Within 4 weeks of declaration of such statement, the corporate person may pass

    • A resolution by special majority is to be passed validating the corporate person to be liquidated voluntarily and appointment of insolvency professional to act as liquidator; or
    • A special majority resolution may also be passed mandating the liquidation of corporate person on the happening of any event or on expiry of certain duration and appointment of insolvency professional to act as liquidator2.
  • Further, creditors representing 2/3rd of the debts of the corporate person must approve such resolution within 7 days of its passing.
  • The process shall be deemed to commence from the date of passing of resolution. Upon the commencement of the voluntary liquidation process the corporate person shall cease to conduct any business but it will still bear all corporate powers until its dissolution is complete.
  • The liquidator shall make a public announcement according to Performa specified in Form A Schedule I to call upon the claims from the stakeholders within 5 days of his appointment. The last date for making such claim shall be within 30 days from the commencement date.3
  • Such public announcement shall be published in the Official Gazette, in English and in a regional newspaper having wide circulation, on the website of the corporate person, if any and on any such other website provided by IBBI for this purpose.

Eligibility of Insolvency Professional to be appointed as a 'liquidator' under Voluntary Liquidation Regulation-

  • According to Section 3(19) of the Code 'insolvency professional' means a person enrolled with insolvency professional agency and registered under IBBI as an insolvency professional.
  • He must be independent of the corporate person. He would be considered as being independent when-

    • He is eligible to be appointed as an independent director under Section 149 of the Companies Act 2013.
    • He is not a related party of the corporate person.
    • He has not been an employee/proprietor or partner of the firm of auditors, Company secretaries, etc. of the corporate person or of a legal consultancy firm having transactions with the corporate person contributing to 10% or more than gross turnover of the firm in the last three financial years4.

Duties of Liquidator-

The liquidator is obliged to make continued disclosures if he gains any interests in the corporate person. The liquidator is also obliged to preserve a physical or an electronic copy of the reports, registers and books of account for at least eight years after the dissolution of the corporate person, either with himself or with an Information Utility (IU).

Any public company can act as an Information Utility provided it is registered under the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017. Such IU stores financial information that help to establish defaults as well as verify claims expeditiously, thereby facilitating completion of transactions under the Code in a time bound manner.

Procedure for making claims-

  • A person, who claims to be a stakeholder, must prove his claim for debt or dues to him, including interest, if any, as on the liquidation commencement date. Debt payable at future time can also be claimed, however if debt has not fallen due as on the date of distribution of the claims, the claimant is entitled to reduced claim.
  • The stakeholders shall include financial creditors, operational creditors, workmen & employees along with other stakeholders.
  • Financial creditor means a person against whom any financial debt is owed such as interest upon money borrowings, debentures, etc. while an operational creditor means a person against whom an operational debt is owed with respect to goods and services.
  • Operational creditors, financial creditors, workmen & employees and other stakeholders can make claim in Form B, C, D and F of Schedule I respectively.5
  • The liquidator has the power to call for any documents and information from the claimant as he may deem necessary to substantiate the claim.
  • The claimant shall bear the costs of proving his claim, but the cost of verification and determination of claim shall form part of liquidation costs if such claim is proved.

Verification of Claims-

  • The liquidator shall verify the claims within 30 days from the last date for receipt of claims. He may either admit or reject the claim in whole or in part.6 The liquidator shall then prepare the list of stakeholders within 45 days from the last date for receipt of claims7
  • In case a claim is rejected the creditor has the right to appeal to the Adjudicating Authority ('National Company Law Tribunal-NCLT') against the decision of the liquidator with respect to such rejection.

Completion of Liquidation proceedings-

  • The liquidator shall endeavor to wind up the affairs of the corporate person within one year from the voluntary liquidation commencement date.8
  • When the affairs of the corporate person are fully wound up then the liquidator shall present a final report to the contributories, the Registrar of Companies, the IBBI and the NCLT showing relevant details such as audited financial reports showing receipts and payments with respect to liquidation, statement of no pending litigation, sale statement in respect of all assets, etc.9 The corporate person shall then be dissolved accordingly by order of the NCLT.
  • A copy of the order shall be sent to the authority with which the entity is registered within 14 days of the date of such order.
  • Before the order of liquidation is passed by the Adjudicating Authority, the liquidator shall apply by application for transfer of unclaimed proceeds or undistributed assets or any balance payable to the stakeholders into the Companies Liquidation Account (Public Account of India). Any person claiming under Companies Liquidation Account may apply to the IBBI for the same. If the monies remain unclaimed thereafter for a period of fifteen years, shall be transferred to the general revenue account of the Central Government.

Footnotes

1 Regulation 40

2 Regulation 3

3 Regulation 14

4 Regulation 6

5 Regulation 16-19

6 Regulation 29

7 Regulation 30

8 Regulation 37

9 Regulation 38

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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