Note On Voluntary Liquidation Of An Indian Company

The India Companies Act, 2013 (CA, 2013) and the Insolvency and Bankruptcy Code, 2016 (IBC) together being the 'Voluntary Liquidation Regulations' are the main legislations dealing with winding up / liquidation of an Indian private limited company.

This note briefly deals with:

1. The list of authorities involved in the voluntary liquidation process.
2. The mandatory pre-requisites for voluntary liquidation.
3. The voluntary liquidation process.
4. The prescribed timelines for the liquidation process.
5. The expenses involved in the voluntary liquidation process.
6. Company strike-off option.

A. List of authorities involved in the voluntary liquidation process:

1. Insolvency and Bankruptcy Board of India (IBBI): IBBI is the statutory regulator who oversees the entire process of the liquidation and ensures that the prescribed process is being undertaken efficiently. The Insolvency Resolution Professional (mentioned below) is responsible to update the progress of the liquidation to the IBBI.
2. Insolvency Resolution Professional (IRP/Liquidator): Independent and qualified professionals are enrolled and registered as an Insolvency Resolution Professional (IRP) with the IBBI. Such a professional is to be appointed by the liquidating company to undertake the voluntary liquidation process in accordance with the process laid down by the Voluntary Liquidation Regulations. Once the IRP is appointed, the company's board of directors is dissolved, and the IRP is responsible to ensure compliance with the prescribed Voluntary Liquidation Regulations and complete the liquidation process.
3. National Company Law Tribunal (NCLT): The NCLT is a quasi-judicial body in India. The application/petition for dissolution of the Indian entity is to be made to the NCLT. The Indian entity is dissolved/liquidated only upon receiving the formal order from the NCLT.
4. Registrar of Companies (RoC): The RoC is the jurisdictional office established under the (Indian) Ministry of Corporate Affairs to ensure that companies registered in India are adhering to the requirements as prescribed under the CA, 2013.
5. Other Statutory Authorities: Once appointed, the IRP will need to inform all the other statutory authorities such as the Income Tax, Goods & Service Tax, Employees Provident Fund Organization, Employees State Insurance Corporation, Reserve Bank of India etc., regarding the liquidation of the Indian entity and obtain their clearance/no-objection, where necessary.
6. Statutory Auditors: The liquidating company's Statutory Auditors will need to provide the updated and latest audited financial statements as of March 31 and confirm the unaudited accounts post the said period to determine the financial standing and solvency of the Indian entity.

B. Mandatory pre-requisites for voluntary liquidation:

1. Amendment to the Articles of Association (AOA): The liquidating company's charter document being the AOA needs to authorize voluntarily liquidation of the company. If no such authorization has been provided, the AOA is to be amended by the shareholders to commence the voluntary liquidation process.
2. Regularization of defaults / compounding of offences: It is recommended that a limited due diligence be undertaken to check the compliance health of the liquidating company. If there are any outstanding non-compliances, these are to be regularized prior to initiating the voluntary liquidation process. The said checks are to be undertaken with respect to all the Statutes applicable to the liquidating company.
3. Solvency of the Indian entity: It is crucial for the liquidating company to be solvent i.e., it should be financially sound to extinguish claims from third parties and statutory non-compliances, if any. Prior to the commencement of the voluntary liquidation process, the liquidating company's board of directors will need to ensure the above and thereafter provide an undertaking that the entity is solvent.
4. Creditors: The liquidating company is required to identify its creditors before the commencement of the voluntary liquidation process and extinguish its liabilities; else, where there are creditors, such creditors representing two-thirds in value of the debt will need to approve the voluntary liquidation. Creditors can either hold a meeting to approve the resolution or provide their consent/no-objection by way of a certificate.

C. Voluntary liquidation process:

In brief, the steps involved in the voluntary liquidation process are as follows:

1. Declaration of solvency of the Indian entity.
2. Convening the board and shareholders meetings to approve the voluntary liquidation and appointment of IRP/Liquidator.
3. Seeking approval from creditors for the voluntary liquidation of the Indian entity, where external creditors are identified.
4. Making necessary filings with the RoC and publication of notice of voluntary liquidation in English and regional language newspapers.
5. Opening of the liquidation bank account and transfer of balance of funds in liquidating company's India bank account.
6. Clearance of claims raised by third parties or statutory authorities, if any.
7. Intimation to various statutory authorities regarding the voluntary liquidation of the entity and seeking for their no-objection.
8. Submission of a preliminary report by the Liquidator to the IBBI.
9. Holding an annual contributories meeting, if the period as specified under the IBC for completion of the liquidation process has not been adhered.
10. Distribution of the funds available in the company's account, after clearing the claims/liabilities, if any, to the shareholders.
11. Audit of liquidator's accounts and preparation of the final report.
12. Submission of the final report with the RoC, IBBI and NCLT.
13. Filing a petition with the NCLT seeking their final approval for liquidating company's dissolution.
14. Attend hearings at the NCLT and seek the dissolution order.
15. Filing a copy of the order received from NCLT for liquidation with the RoC and IBBI.

D. Prescribed timeline for the liquidation process:

The Voluntary Liquidation Regulations mandate the IRP/Liquidator to complete the liquidation process within:

1. 270 days from the liquidation commencement date/first shareholders meeting, where there are creditors; and
2. 90 days from the liquidation commencement date/first shareholders meeting in all other cases.

Where the process of liquidation has exceeded beyond the abovementioned timelines, the liquidator will need to hold the annual contributories meeting and present the status report on progress of the liquidation to the IBBI.

It is well known that the above timelines are very difficult to comply with. In most cases, the voluntary liquidation process takes in excess of 9 months.

E. Expenses involved in the voluntary liquidation process:

The liquidating company and/or its shareholders need to budget expenses towards counsel fees, IRP/Liquidator's fees, valuation costs, newspaper advertisement, certification fees, regulatory filing fees, statutory liabilities (if any) and other incidental costs.

The liquidating company is required to set aside the aforesaid expenses separately in its India liquidation bank account. Upon commencement of the liquidation process, the IRP will make the necessary payments and thereafter remit any remaining monies to the liquidating company's shareholders.

F. Company strike-off option:

An alternate approach to winding up of the liquidating company, is the option of striking off the Indian company from the register of the RoC.

This option requires the Indian company to qualify for one of the eligibility criteria below:

1. That the Indian company has not commenced business within one year of its incorporation.
2. The Indian company has not carried on any business for two financial years and has not applied for dormant status.
3. The subscribers of the Indian company have not paid the subscription amount they agreed to contribute at the time of incorporation, and a declaration to this effect has not been filed within 180 days of incorporation.
4. The Indian company is found to be non-operational following a physical verification of its registered office.

Please see below some key concerns that are to be considered with the strike-off option:

1. The Indian company's bank account ought to have been closed and there should not be any pending litigations, tax dues, or disputes.
2. The Indian company's board of directors must provide personal indemnity by way of an affidavit, which results in their personal liability continuing even after the entity's name has been struck off for a period of 20 years. If any liability or claim arises after the Strike Off has been approved, the directors will be held personally liable.
3. The CA, 2013 enables any member, creditor or workman to apply to the NCLT to enable restoration of the company's name within 20 years. If the NCLT is satisfied that the company was (at the time of its name being struck off) carrying on business or in operation, or otherwise, the company can be restored.
4. The Indian company's corporate records and documentation must be retained for the next 20 years.

For the reasons mentioned above, especially the risk of personal indemnity of the directors for a period of 20 years, the strike-off option is not usually adopted in India. Winding up/voluntary liquidation remains the most prevalent option even though it is cumbersome and expensive as it results in a complete closure of the Indian company.

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.