Voluntary Winding Up: Dawn of the new regulations

Introduction

The winding up process leads to dissolution of the corporate entity from its existing stature of a functioning body to a dormant one. Majorly it is done to unburden the corporate entity of the debts it has previously incurred from various stakeholders, which it can’t repay under the normal functioning of its day to day business. The assets belonging to such an entity have to be sold and the resulting proceeds from the sale shall be distributed to the underlying stakeholders or the creditors.

The Central Government notified Section 59 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the code”), on 30^th of March 2017. This provision of the code provides for the procedure to be followed in a voluntary winding up process. Subsequently, the Insolvency and Bankruptcy Board of India (hereinafter referred to as “the board”) has notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016 (hereinafter referred to as “the regulations”) by exercising its powers accorded by Section 59, 196 and 208, read with Section 240 of the code, on 31^st of March 2017[1].

Background

Before the official formulation of the aforesaid regulations, the procedure of voluntary winding up was to be governed in accordance with Section 468 (3) of the Indian Companies Act, 2013 (hereinafter referred to as “ICA”), since Section 59 of the aforesaid code was not notified by the central government. It meant that the rules framed by Hon’ble Supreme Court, before the commencement of ICA, shall prevail over the procedure governing voluntary winding up[2]. It effectively meant that the newly formed National Company Law Tribunal (hereinafter referred to as “NCLT”) can’t entertain any application pertaining to voluntary winding up.

High Courts remained the sole authority to adjudicate upon such matters, that too in accordance with the Companies Court Rules, 1959, since these were the rules formulated by the Hon’ble Supreme Court before the commencement of ICA.

The Code

The recently notified Section 59 stipulates that, any corporate person can voluntarily liquidate itself, if it has not committed any default, i.e. fraud or owes non-payable debt.

A company shall meet the following conditions for the process of voluntary winding up:

1. A verified declaration from the majority of its directors, asserting that after their inquiry, they are satisfied that the company has no debt and even if it has, it will be fully repaid through the proceeds resulting from the sale of its assets. They shall also state that the company is not being liquidated to defraud anyone.
2. The aforesaid declaration shall be accompanied by the following documents:
   1. Audited financial statements and record of business operations for last 2 years or from the year of its incorporation, whichever is later.
   2. A report of its valuation of the assets which shall be prepared by a registered valuer.[3]

Once the aforesaid declaration has been made, a ‘special’ resolution needs to be passed by the members of the company whereby they shall resolute that the company needs to be wound up voluntarily and shall also appoint an insolvency professional to act as the official liquidator.[4]

A resolution passed by the members of the company shall be passed in a general meeting, in the case where the company is getting wound up voluntarily because of the expiry of its period of existence. This period is either fixed by a constitutional document or an event has occurred, happening of which leads to winding up, as per the constitutional document. The resolution shall address the case and shall appoint the insolvency professional.

Permission of the Creditor

If the company owes any debt, then the creditors which constitute two-thirds of the value of the debt shall approve the aforementioned resolution within 7 days of its passage.

The company shall inform the Registrar of Companies and the Board about the resolution, within 7 days of its passage or its approval by the creditors.

The Date of Commencement

The process of voluntary winding up shall commence from the date of passage of the aforesaid resolution.

The provisions of Section 35 to 53 of the code, shall apply to the voluntary winding up process of the companies.

 

The Regulations

Newly formulated regulations, by the board, have laid down the procedure for voluntary winding up of a corporate person. It is pertinent here to point out that Regulation 3 (1) to 3 (3) do not apply to companies, it means that initiation of the voluntary winding process for a company shall be derived from the code, which has been discussed above. It consists of 7 chapters and 2 schedules, which spread over 42 pages.

How will the procedure begin/initiate/commence?

A corporate person intending to wind itself up, shall acquire a verified declaration from the majority of the designated partners, in case of a limited liability partnership (hereinafter referred to as “LLP”), or from the persons who exercise its corporate powers. In the declaration, the aforesaid partners or persons shall state that, the corporate person has no debt over itself or even if it has, the same will be repaid from the sale of assets during the process of voluntary winding up[5].

The aforesaid declaration shall be accompanied by:

1. Audited financial statements and record of business operations for last 2 years or from the year of its incorporation, whichever is later.
2. A report of the corporate person’s valuation of the assets which shall be prepared by a registered valuer.[6]

Once the aforesaid declaration has been made, a resolution needs to be passed by the ‘special’ majority or majority of the partners or persons. The special majority shall resolute that the corporate person needs to be wound up voluntarily and shall also appoint an insolvency professional to act as the official liquidator.

A resolution passed by a majority of the partners or contributories[7] shall suffice, in the case where the corporate person is getting wound up because of the expiry of its period of existence. This period is fixed by any constitutional document or an event has occurred, happening of which leads to winding up, as per the constitutional document. The resolution shall address the case and shall appoint the insolvency professional[8].

These resolutions shall contain the terms and conditions of the appointment of the insolvency professional, in addition to its remuneration.

Permission of the Creditor

If the corporate person owes any debt, then the creditors which constitute two-thirds of the value of the debt shall approve the aforementioned resolution, presented to it by the board of directors or the designated partners, within 7 days of its passage.[9]

The Date of Commencement

The process of voluntary winding up shall commence from the date when partners or contributories pass the aforesaid resolution[10].

The corporate person is prohibited to continue with its business activities, once the voluntary winding up commences. It is permitted to do such activities which are required during the process of winding up.

What are the eligibility requirements to be appointed as a liquidator?

Both, the insolvency professional and the insolvency professional entity to which he belongs, shall be independent of the corporate person.

An insolvency professional shall be considered independent of the corporate person, in the following circumstances:

1. If he is eligible to be appointed as an independent director on the board of the corporate person (company) under Section 149 of ICA in the last three financial years.
2. Is not related to the corporate person in the last three financial years.

• Was neither an employee, partner, proprietor in any of the corporate person’s auditors, cost auditors or companies secretaries firms, nor of a legal or consulting firm, which had any transaction with the corporate person which led the corporate person contributing 10 % or more of the gross turnover of such firm in the last three financial years.[11]

The liquidator shall reveal any pecuniary or personal relationship with any of the concerned corporate person or its stakeholders, to the board and the registrar. Also, where anyone from his professional entity is involved in the winding up process, for example representing any of the stakeholders involved, he shall not continue as the liquidator.[12]

The liquidator’s remuneration forms part of the winding up cost.[13]

What are the powers and functions of the liquidator?

The liquidator has to prepare and submit the status report and the final report before the company winds up. The liquidator is also mandated to preserve the actual (physical) and electronic copy of the reports for eight years after the winding up takes place[14].

The liquidator shall also complete the corporate person’s books of account, in case of them being incomplete on the commencement date of winding up process. He shall also maintain a list of 18 books and registers, under Regulation 10 (2), and shall preserve them for a period of 8 years after the corporate person winds up.[15]

The liquidator is allowed to appoint any professional to assist him in the winding up process except where:

1. He is a relative
2. Is related to the corporate person

• Has served as an auditor to the corporate person, five years from the commencement of winding up.[16]

The appointed assistant shall reveal any pecuniary or personal relationship with any of the concerned corporate person or its stakeholders, to the liquidator, as soon as he becomes aware of it[17].

The liquidator shall make an announcement to call upon the stakeholders to submit their claims as on the commencement date of the winding up process, accompanied by the last date for submission of claim, which shall be 30 days from the liquidation commencement date.

The aforesaid announcement shall be published in the official gazette, one English and one regional language newspaper, on the corporate person’s and the Board’s website.[18]

What is the procedure for ascertaining claims?

All the stakeholders, whether claiming for debts or dues, shall prove their claim, as on the date of commencement of winding up.

An operational creditor can prove his claim of existence of debt to the liquidator by post, in person or electronic means in Form B of Schedule I, by specifying:

1. The records available with any information utility;
2. An invoice demanding payment

• An order of court or tribunal, that adjudicated upon the matter of non-payment of debt, and

1. Financial accounts[19]

A financial creditor can prove his claim of existence of debt to the liquidator by post, in person or electronic means in Form C of Schedule I, by specifying:

1. The records available in an information utility,
2. A financial contract supported by financial statements as evidence of the debt,

• A record which proves that the amount transacted to the corporate person by the financial creditor under a facility was drawn by the corporate person.

1. Financial statements showing the non-payment of debt, and
2. An order of court or tribunal that adjudicated upon the matter of non-payment of debt.[20]

A workman or an employee of the corporate person can claim existence of dues to the liquidator by post, in person or electronic means in Form D of Schedule I ( if employees are numerous then under Form E of Schedule I), by specifying:

1. Records available in an information utility
2. Proof of employment

• Evidence of notice demanding payment of unpaid dues, and

1. An order of the court or tribunal, that adjudicated upon the matter of non-payment of debt.[21]

Any other person claiming to be a stakeholder other than those under Regulations 16, 17 and 18, can prove his claim to the liquidator by post, in person or electronic means in Form F of Schedule I, by specifying:

1. Records available in an information utility
2. Other relevant documents which adequately establish the claim, for example:

Notice, evidence of shareholding, or an order of court or tribunal, that adjudicated upon the matter of non-payment of debt.[22]

To prove security interest

Security interest can be proved by a Secured creditor through:

1. Records available in an information utility
2. Certificate of registration of charge issued by the Registrar of Companies

• Proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India; or

1. Other relevant documents which adequately establish the security interest.[23]

The liquidator can also call for additional evidence or clarification for the proof or substantiation of claim.[24] The claimant shall bear the cost of proving its claim, while the costs borne by the liquidator in inquiring into the claims shall form part of the winding up cost.[25]

The liquidator shall make the best possible estimate of the claim amount in those situations where the precise claim amount is not ascertainable.[26]

If the debt is in foreign currency, then it shall be valued in Indian currency at the prevailing exchange rate on the day of commencement of winding up process.[27]

Where a debt has to be paid in the future, the regulations provide for a mathematical formula to assist the liquidator in calculating the amount of claim.

X/ (1+r) ^ n

where–

(a) “X” is the value of the admitted claim;

(b) “r” is the closing yield rate (%) of government securities of the maturity of “n” on the date of distribution as published by the Reserve Bank of India; and

(c) “n” is the period beginning with the date of distribution and ending with the date on which the payment of the debt would otherwise be due, expressed in years and months in a decimalized form.[28]

In case of mutual credits between the corporate person and another party, shall be set off against the sums due from both and subsequently the net amount shall be accordingly adjusted.[29]

Section 40 of the Code, empowers the creditor to accept or reject the claim within 30 days of its receiving, and the appeal against the same can be filed by the creditor in the NCLT, as per Section 42 of the code.[30]

The liquidator shall prepare a list of stakeholders, within 45 days of the last date for receipt of claims and the list shall include:

(a) The amounts of claim admitted, if applicable,

(b) The extent to which the debts or dues are secured or unsecured, if applicable,

(c) The details of the stakeholders, and

(d) The proofs admitted or rejected in part, and the proofs wholly rejected.

This list shall be made available for inspection by the persons submitting the proof, members, partners, directors and guarantors of the corporate person or shall be displayed on the corporate person’s website, if available.[31]

How assets will be realized?

The liquidator is empowered to sell the corporate person’s property in any manner and through any mode, which shall be approved by the corporate person[32].

The liquidator should realize any amount due to the corporate person from any contributory, by providing a notice to the said contributory to make payments within 15 days from the date of receipt of the notice.[33]

How proceeds of the winding up process will be distributed?

A bank account has to be opened in the name of the corporate person, followed by the words ‘in voluntary liquidation’, by the liquidator in a scheduled bank. All the money due to the corporate person shall be duly deposited by the liquidator in the aforesaid account, including cheques and demand drafts received by him, within next working day. Any payment, above INR 5000, shall be made by drawing cheques or thorugh online banking transactions against the bank account.[34]

The liquidator is bound to distribute the aforesaid proceeds to the concerned stakeholders, within 6 months from the date of receipt of the amount. In case of an asset that could not be sold due to its peculiar nature, such an asset could be distributed among the stakeholders, with permission from the corporate person.[35]

The liquidator is bound to return any sum received by him during the winding up process, which he wasn’t entitled to at the time of distribution or subsequently, shall be returned forthwith[36].

The liquidator shall try to liquidate the corporate person, within one year from the commencement of the winding up process. If he fails to do so, then:

1. he shall call a meeting of the contributories of the corporate person within 15 days from the end of the year of his appointment and at the end of each succeeding year,
2. he shall present a status report of the ongoing winding up process, which shall include:
   1. settlement of list of stakeholders,
   2. details of any unsold and unrealized property,
   3. distribution made to the stakeholders,
   4. distribution of unsold property made to the stakeholders,
   5. developments in any litigation, involving the corporate person; and

The aforementioned status report shall be accompanied with an audited account of the voluntary winding up process, reflecting the receipts and payments pertaining to liquidation since its commencement[37].

Unclaimed proceeds and undistributed assets of liquidation

All unclaimed proceeds and undistributed assets or any other balance payable to the stakeholders shall be transferred to the Companies Liquidation Account in the Public Account of India, pursuant to NCLT’s order before it passes an order of dissolution under Section 59 (8) of the Code[38].

Any person claiming to be entitled to any money paid into the Companies Liquidation Account, shall avail the said amount after applying to the Board, which, if satisfied, can pass an order to that effect.[39]

If the amount deposited to the Companies Liquidation Account, remains unclaimed for a period of 15 years, shall get transferred to the general revenue account of the Central Government.

In case of fraud or insolvency

If the liquidator believes that the voluntary winding up process is done under a garb of defrauding a person, or the entire debt of the corporate person can’t be realized by the sale of assets, he shall apply to the NCLT for the suspension of the entire process.[40]

 

Analysis

The notification of Section 59 and subsequent Regulations, will now govern the process of voluntary winding up of a corporate person. The aforesaid regulations, specifically point out which of its provisions will not apply to companies, viz. Regulation 3 (1) to 3 (3). Hence it can be said that the initiation of voluntary liquidation process for a company shall be derived from the code and not from these regulations.

Another aspect of this notification pertains to its heavy reliance on information utilities, so as to enlighten the liquidator regarding a corporate person’s past, present and future. Information utilities in India remains a shadow area and quite less explored. Credit information systems like CIBIL have been accused of ‘strange collaborations’ in the past and are want of reliability[41]. There are few private players in this sector, viz. Equifax, but more might turn up, citing their relevance post-notification.

With fewer NCLT benches and even fewer judges to adjudicate upon the menace of surging corporate matters[42], and no stipulation of timeline for them to approve or reject a resolution plan, the NCLT might fail to meet the lofty objectives set during its inception. The central government needs to address this issue so as to realize its goal of expert and swift redressing of such matters.

The significant lack in resolution professionals’ populace is another worrying issue[43]. Hiring an expert resolution professional, for a job, which requires immense technical experience and knowledge, will be an arduous task for the corporate persons.

 

[1] Available at: http://www.ibbi.gov.in/IBBI%20(Voluntary%20Liquidation)%20Regulations%202017.pdf

[2] Section 468 (3) of the Indian Companies Act, 2013

[3] Section 59 (3) (b) of the Code.

[4] Section 59 (3) (c) of the Code.

[5] Regulation 3 (1)

[6] Regulation 3 (2)

[7] Regulation 2 (1) (b).

[8] Regulation 3 (3)

[9] Regulation 4

[10] Regulation 5

[11] Regulation 7 (1)

[12] Regulation 7 (2) and 7 (3)

[13] Regulation 8.

[14] Regulation 9.

[15] Regulation 10.

[16] Regulation 11 (2).

[17] Regulation 11 (3).

[18] Regulation 14.

[19] Regulation 16 (2).

[20] Regulation 17.

[21] Regulation 18.

[22] Regulation 19.

[23] Regulation 20.

[24] Regulation 22.

[25] Regulation 23.

[26] Regulation 24.

[27] Regulation 25.

[28] Regulation 27.

[29] Regulation 28.

[30] Regulation 29.

[31] Regulation 30.

[32] Regulation 31.

[33] Regulation 33.

[34] Regulation 34.

[35] Regulation 35.

[36] Regulation 36.

[37] Regulation 37.

[38] Regulation 39 (1).

[39] Regulation 39 (5).

[40] Regulation 40.

[41] Refer to: http://www.moneylife.in/article/credit-sudhaar-asking-rs16000-a-year-for-restoring-credit/33194.html and http://www.livemint.com/Money/uOmqdR7soBOl5TYDhxF1qN/Free-credit-information-reports-are-not-that-free.html

 

[42]Refer to: http://economictimes.indiatimes.com/news/economy/policy/will-shortage-of-judges-hurt-bad-loan-resolution/articleshow/59319321.cms

[43]Refer to:  http://www.thehindubusinessline.com/companies/first-test-of-new-bankruptcy-law-offers-cautionary-tale/article9758593.ece