Voluntary Liquidation under the Insolvency and Bankruptcy Code

In one line

A company that has committed no default may liquidate itself voluntarily on a declaration of solvency by a majority of its directors, a special resolution of its members appointing an insolvency professional as liquidator, and, where it owes anything, the approval of creditors representing two-thirds in value; the liquidator then realises and distributes under the Code's own waterfall and applies to the Tribunal for dissolution.

In exam wording: section 59 of the Insolvency and Bankruptcy Code, 2016 is the whole of voluntary liquidation, and section 53 of the Code supplies the order of distribution.

Why the law has this at all

A solvent company that has finished what it was formed to do should be able to end itself without a court. Under the Companies Act, 1956 and the 2013 Act as first enacted, it did so by a members' voluntary winding up, with a declaration of solvency and a liquidator appointed by the members.

The Code did not abolish that idea; it moved it. The reason is that after 2016 one statute deals with all corporate insolvency and liquidation, and it was untidy to leave a solvent liquidation in a different Act, administered by different officers, with a different order of distribution.

But the move changed three things, and they are the examinable differences.

The liquidator is an insolvency professional, registered and regulated by the Insolvency and Bankruptcy Board of India, not a person of the members' choosing.

The creditors have a veto. Where the company owes anything, creditors representing two-thirds in value must approve the members' resolution within seven days.

And the distribution follows the Code's waterfall in section 53, not the preferential payments in sections 326 and 327 of the Companies Act, which section 327(7) expressly disapplies to a liquidation under the Code.

Some words this chapter uses

A corporate person includes a company, a limited liability partnership and any other person incorporated with limited liability, but not a financial service provider. Default means non-payment of a debt when it has become due and payable. The Board is the Insolvency and Bankruptcy Board of India. The Adjudicating Authority for corporate persons is the National Company Law Tribunal: section 60 of the Code. Specified means specified by regulations made by the Board.

Who may do it: section 59(1) and (2)

A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter.

Two conditions, and the second is decisive. An intention to liquidate voluntarily, and no default committed.

Section 59(2). The voluntary liquidation shall meet such conditions and procedural requirements, and be completed within such period, which shall not be more than one year, as may be specified.