Voluntary Liquidation under the Insolvency and Bankruptcy Code

The outer limit of one year is a recent addition and should be stated: a voluntary liquidation is not to be left open indefinitely.

The conditions for a company: section 59(3)

The declaration of solvency

A declaration from a majority of the directors of the company, verified by an affidavit, stating:

• (i) that they have made a full inquiry into the affairs of the company and have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of the assets to be sold in the voluntary liquidation; and
• (ii) that the company is not being liquidated to defraud any person.

Note three things. It is a majority of the directors, not all; it is verified by affidavit, so it is sworn; and it contains two statements, of solvency and of good faith, not one.

The accompanying documents

• (i) audited financial statements and a record of the business operations of the company for the previous two years, or for the period since its incorporation, whichever is later; and
• (ii) a report of the valuation of the assets of the company, if any, prepared by a registered valuer.

The resolution, within four weeks

Within four weeks of the declaration there shall be either:

• (i) a special resolution of the members in general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
• (ii) a resolution of the members in general meeting requiring the company to be liquidated voluntarily as a result of the expiry of the period of its duration fixed by its articles, or on the occurrence of any event on which the articles provide that the company shall be dissolved, and appointing such a liquidator.

The difference between the two is the majority required. Clause (i) needs a special resolution, three fourths; clause (ii), where the articles themselves have brought the company to its end, needs only a resolution.

The creditors' approval

The proviso: where the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the resolution within seven days of it.

Seven days, and two-thirds in value. Not in number.

Intimation, commencement and termination: section 59(4) to (5C)

Section 59(4). The company shall inform the Registrar of Companies and the Board about the resolution within seven days of the resolution or of the subsequent approval by the creditors, as the case may be.

Section 59(5). Subject to the creditors' approval, the proceedings are deemed to have commenced from the date of passing of the resolution under sub-clause (c) of sub-section (3).

Section 59(5A): termination. At any time after commencement but before the dissolution application under sub-section (7) is filed, the proceeding shall be terminated if:

• (a) the members have passed a special resolution for terminating it;
• (b) where the company owes debt on the date of that resolution, creditors representing two-thirds in value have approved it within seven days; and
• (c) such other conditions as may be specified are satisfied.

Section 59(5B) and (5C). The liquidator shall intimate the Board and the Registrar within seven days of the special resolution or of the creditors' subsequent approval; and the proceeding is deemed terminated from the date of that intimation, which brings the liquidator's term to an end and has such other consequences as may be specified.

The termination provisions are the newest part of the section, and they answer a real problem: a solvent company that changed its mind used to have no way back.

What law applies to the liquidation: section 59(6)

The provisions of clause (b) of section 18 of Chapter II, sections 35 to 53 of Chapter III, and Chapter VII, shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary.

So three bodies of the Code's own law are borrowed.

Section 35 gives the liquidator his powers and duties: to maintain an updated list of claims; to take custody or control of all the assets, property, effects and actionable claims; to evaluate the assets and prepare a report; to protect and preserve them; to carry on the business for beneficial liquidation; to sell the immovable and movable property and actionable claims by public auction or private contract, or in parcels, but not to a person ineligible to be a resolution applicant; to draw, accept, make and endorse negotiable instruments; to take out letters of administration to a deceased contributory; to obtain professional assistance; and to settle claims and distribute the proceeds in accordance with the Code.

Sections 36 to 52 carry the liquidation estate, the consultation with stakeholders, the claims procedure and the treatment of secured creditors.

Section 53 supplies the order of distribution, and it should be learned as a list because it is what replaces sections 326 and 327 of the Companies Act:

• (a) the insolvency resolution process costs and the liquidation costs, paid in full;
• (b) ranking equally, workmen's dues for the twenty-four months preceding the liquidation commencement date and debts owed to a secured creditor who has relinquished his security under section 52;
• (c) wages and unpaid dues of employees other than workmen for the twelve months preceding that date;
• (d) financial debts owed to unsecured creditors;
• (e) ranking equally, amounts due to the Central and State Governments in respect of the two years preceding that date, and debts owed to a secured creditor for any amount unpaid following the enforcement of his security;
• (f) any remaining debts and dues;
• (g) preference shareholders; and
• (h) equity shareholders or partners.

And section 53(2) forbids contracting out. Any contractual arrangement between recipients of equal ranking which disrupts that order shall be disregarded by the liquidator, and the Code's own illustration is an agreement that the secured creditors be paid before the workmen, which is to be disregarded.

Chapter VII of Part II supplies the offences and penalties: concealment of property, transactions defrauding creditors, misconduct in the course of the process, falsification of books, and wilful and material omissions from statements relating to the affairs.

Dissolution: section 59(7), (8) and (9)

Section 59(7). Where the affairs of the corporate person have been completely wound up and its assets completely liquidated, the liquidator shall apply to the Adjudicating Authority for dissolution.

Section 59(8). The Adjudicating Authority shall, on that application, pass an order that the corporate debtor shall be dissolved from the date of that order, and it shall be dissolved accordingly.

Section 59(9). A copy of the order shall, within fourteen days from its date, be forwarded to the authority with which the corporate person is registered, which for a company is the Registrar of Companies.

And who is the Adjudicating Authority? By section 60(1) of the Code, the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.

A worked example

Kharghar Software Private Limited has completed its only project, holds three crore rupees in bank deposits and owes forty lakh rupees to three suppliers and a bank. Its members want it wound up.

Which statute? The Insolvency and Bankruptcy Code, 2016, section 59. The Companies Act's Part II on voluntary winding up no longer exists.

Is it eligible? It must have committed no default. Its debts are current and none is overdue, so it may proceed. Had it defaulted on the bank loan, section 59 would be closed to it and the route would be the corporate insolvency resolution process.

The declaration. A majority of its directors make a declaration verified by affidavit that they have made a full inquiry into the affairs and are of opinion that the company will be able to pay its debts in full from the proceeds of the assets to be sold, and that it is not being liquidated to defraud any person. With it go the audited financial statements and record of business operations for the previous two years and, there being assets to value, a registered valuer's report.

The resolution. Within four weeks of the declaration the members pass a special resolution to liquidate voluntarily and appoint an insolvency professional as liquidator.

Had the articles fixed a duration that had just expired, a resolution, not a special resolution, would have sufficed.

The creditors. The company owes debt, so creditors representing two-thirds in value of forty lakh rupees, that is holders of at least twenty-six lakh sixty-seven thousand rupees of it, must approve the resolution within seven days. Note that it is value, not number: the bank alone, if owed thirty lakh, could carry it.

Intimation and commencement. The company informs the Registrar of Companies and the Board within seven days of the creditors' approval; and the liquidation is deemed to have commenced on the date of the members' resolution, not on the date of the approval.

A change of mind. Three months later a buyer offers to purchase the business. Before the dissolution application is filed, the members may pass a special resolution to terminate the proceeding; creditors representing two-thirds in value must approve within seven days; the liquidator intimates the Board and the Registrar within seven days; and the proceeding is deemed terminated from the date of that intimation, ending the liquidator's term: section 59(5A) to (5C).

If it goes on. The liquidator takes custody of all the assets and actionable claims, evaluates them and prepares a report, protects and preserves them, carries on the business so far as beneficial, sells the assets by auction or private contract, though not to a person ineligible to be a resolution applicant, and settles claims and distributes: section 35.

The order of distribution. Under section 53: first the liquidation costs in full; then, ranking equally, workmen's dues for twenty-four months and any secured creditor who relinquished his security; then other employees' wages for twelve months; then financial debts of unsecured creditors; then, equally, Government dues for two years and secured creditors' shortfalls after enforcing security; then remaining debts and dues; then preference shareholders; and last, the equity shareholders, who here receive the substantial surplus.

A contract to jump the queue. The bank's loan agreement says it is to be paid before the employees. That is a contractual arrangement between recipients disrupting the order of priority, and the liquidator disregards it: section 53(2).

Not the Companies Act's waterfall. A student who applies sections 326 and 327 of the Companies Act here is wrong, because section 327(7) disapplies them in the event of liquidation under the Code.

The end. When the affairs are completely wound up and the assets completely liquidated, the liquidator applies to the National Company Law Tribunal, which orders that the company be dissolved from the date of the order; and a copy goes within fourteen days to the Registrar of Companies.

Distinctions that carry marks

What this does NOT mean

It does not mean a company in difficulty may liquidate voluntarily. The corporate person must have committed no default.

It does not mean the members alone decide. Where the company owes any debt, creditors representing two-thirds in value must approve within seven days.

It does not mean all the directors must declare. A majority of them, verified by affidavit.

It does not mean the resolution is always a special resolution. Where the articles' fixed duration has expired or an event of dissolution has occurred, an ordinary resolution suffices.

It does not mean the Companies Act's preferential payments apply. Section 327(7) disapplies sections 326 and 327 to a liquidation under the Code; section 53 of the Code governs.

It does not mean a voluntary liquidation cannot be stopped. It may be terminated before the dissolution application by a special resolution with the creditors' two-thirds approval.

Quick revision

• 59(1) and (2): available to a corporate person intending to liquidate voluntarily which has committed no default, on specified conditions and procedural requirements, and to be completed within a period not exceeding one year as specified.
• 59(3)(a) and (b): a declaration by a majority of the directors, verified by affidavit, of full inquiry, of no debt or ability to pay debts in full from the proceeds of the assets to be sold, and that the company is not being liquidated to defraud any person, with audited financial statements and a record of business operations for the previous two years or since incorporation, whichever is later, and a registered valuer's report on the assets.
• 59(3)(c) and proviso: within four weeks, a special resolution to liquidate voluntarily and appoint an insolvency professional as liquidator, or a resolution where the articles' period has expired or an event of dissolution has occurred; and where the company owes any debt, approval by creditors representing two-thirds in value within seven days.
• 59(4) and (5): intimation to the Registrar of Companies and the Board within seven days; commencement deemed from the date of the members' resolution, subject to the creditors' approval.
• 59(5A) to (5C): termination before the dissolution application on a members' special resolution, creditors' two-thirds approval within seven days where there is debt, and specified conditions; the liquidator intimates the Board and the Registrar within seven days; and the proceeding is deemed terminated from that intimation, ending the liquidator's term.
• 59(6): section 18(b), sections 35 to 53 and Chapter VII of the Code apply with necessary modifications, giving the liquidator his powers and duties, the claims and distribution machinery, and the offences.
• Section 53 waterfall: liquidation costs; workmen's dues for twenty-four months with relinquishing secured creditors; other employees for twelve months; unsecured financial debts; Government dues for two years with secured creditors' shortfalls; remaining debts; preference shareholders; equity shareholders. Contractual arrangements disrupting the order are disregarded.
• 59(7) to (9): on the affairs being completely wound up and the assets completely liquidated, the liquidator applies to the Adjudicating Authority, which orders dissolution from the date of the order, a copy going within fourteen days to the registering authority; the Adjudicating Authority is the National Company Law Tribunal with jurisdiction over the registered office: section 60(1).

Test yourself

1. Which company may liquidate itself voluntarily? A corporate person who intends to liquidate itself voluntarily and has not committed any default: section 59(1) of the Insolvency and Bankruptcy Code, 2016.

2. What must the directors declare? A majority of the directors, by declaration verified by affidavit, must state that they have made a full inquiry into the affairs and formed the opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of the assets to be sold, and that the company is not being liquidated to defraud any person: section 59(3)(a).

3. What resolution is needed, and within what time? Within four weeks of the declaration, a special resolution of the members requiring voluntary liquidation and appointing an insolvency professional as liquidator; or, where the period fixed by the articles has expired or an event on which the articles provide for dissolution has occurred, a resolution to the same effect: section 59(3)(c).

4. What say have the creditors? Where the company owes any debt to any person, creditors representing two-thirds in value of the debt must approve the resolution within seven days of its passing: proviso to section 59(3). The same approval is needed to terminate the proceeding under section 59(5A).

5. In what order are the assets distributed? Under section 53 of the Code: liquidation costs in full; then, equally, workmen's dues for twenty-four months and secured creditors who relinquished security; then other employees' wages and dues for twelve months; then financial debts of unsecured creditors; then, equally, Government dues for two years and secured creditors' unpaid amounts after enforcing security; then remaining debts and dues; then preference shareholders; and finally equity shareholders or partners. Sections 326 and 327 of the Companies Act do not apply: section 327(7).

6. How does a voluntary liquidation end? When the affairs are completely wound up and the assets completely liquidated, the liquidator applies to the Adjudicating Authority, the National Company Law Tribunal, which orders that the corporate debtor be dissolved from the date of the order; a copy of the order is forwarded within fourteen days to the authority with which the corporate person is registered: section 59(7) to (9).