under Insolvency and Bankruptcy Code, 2016 Step by Step Guidance

Meaning of Winding Up

When the Company life or a legal personality comes to an end due to inadequate capital, fraudulent business practices, management inexperiences and incompetence, failure to respond to change, recession, obsolescence/antiquity etc. At the end of Winding up, the company will have no assets or liabilities. 

Purpose of Winding Up

The main purpose of Winding up is to realize the assets and pay the debts of the company expeditiously in accordance with the law. However, the purpose must not be exploited for the benefit or advantage of any class or person entitled to submit petition for winding up of company.

It may be noted that on winding up of the company, the company does not cease to exist until the same gets dissolved. Even after the commencement of Winding up, the property and assets of the company belong to the company until the dissolution takes place. Once, the dissolution takes place the company is incapable of keeping property, suing or be sued.

Types of Winding- Up

  • Winding up by the National Company Law Tribunal pursuant to Companies Act, 2013 (Section 270 to 303)
  • Voluntary Winding up pursuant to Insolvency and Bankruptcy, 2016 (section 59)

Meaning of Dissolution of Company

When the life of separate Legal Entity comes/Company/ Legal Entity/Corporate Entity comes to an end. Dissolution can be attained from following types of process:-

  • Through Merger/Amalgamation
  • Through Striking Off Process
  • Through Winding up Process

Difference Between Dissolution of Company and Winding-up of Company

  • Stage Dissolution of Company is the Final Stage where the existence of legal person is removed from the Ministerial Records and has become inaccessible, whereas Winding-up of Company is the First stage in the process, wherein the assets and liabilities are realized (Conversion of assets, goods, or services into cash or receivables through sale), in-case there is any surplus that must be distributed among the members.
  • Who initiates Winding up proceedings – In Dissolution of Company the order of dissolution can be passed by court only whereas in liquidator appointed by the company or the court and carries out winding up proceedings.
  • Representation – In Dissolution of Company once the Court passes Dissolution order, the Liquidator can no longer represent the company whereas in Winding-up of Company liquidator represents company in the winding up process; however he will remain appointed unless changed otherwise by the court, until the order of dissolution is passed.
  • When can Creditors proves its debts towards company – In Dissolution of Company Creditors cannot prove its debts at the time of dissolution of the company whereas in Winding up of Company the creditors can prove its debts at the time of winding up proceedings of the company.
  • End Result – Dissolution is the end result and the life of corporate entity comes to an end whereas Winding Up does not necessarily to be the end result that is dissolution, even after paying all the creditors there may be still be surplus; company may earn profit during the course of beneficial winding up.

Voluntary Liquidation of Corporate Entities (Section 59 Insolvency and Bankruptcy Code, 2016)

Section 59 of the Insolvency and Bankruptcy Code, 2016 has to be read with Insolvency and Bankruptcy (Voluntary Liquidation Process) Regulations, 2017 which came into effect from 1st April, 2017 via Notification No. IBBI/2016-17/GN/REG010 dated 31st March, 2017.

It is the process by which by which Directors and shareholder(s) come onto consensus that they want to cease the workings of solvent Company or do not want to continue doing business in the same company.

Before proceeding with Voluntary Liquidation process, the Company Professional or the Company secretary should in advance comply or  may kept in mind the following considerations:-

  • Audited financial statements its latest position and Statement of affairs can be prepared as on practical date.
  • 2 years Record of Business operations, this will help to detect the preferential payments, concealment, defrauding creditors, misconduct, falsification of books etc
  • Valuation of assets by registered valuer.
  • Preparation of list of creditors and draft consent letters.
  • The company has Sufficient Assets to discharge all debts. If there are debts, the sales proceeds of the assets should be sufficient enough to pay the entire claims of creditors. Otherwise it can’t go for voluntary liquidation. It may need to invoke CIRP etc. If there are no debts in the company, still the company can go for voluntary liquidation even if the assets are not sufficient to pay off preference shareholders and equity shareholders.

Comprehensive Steps of Voluntary Winding Up

In pursuance of section 59 of the Insolvency and Bankruptcy Code, 2016 readwith Insolvency and Bankruptcy, following are the steps involved in order to achieve voluntary Liquidation Process:-

  • Conduct Board Meeting
    • Board meeting needs to called to pass a resolution for proposal of Voluntary Liquidation of the Company.
    • Declaration to be taken from majority of directors of the company by way of affidavit stating that the they have inquired about the affairs of the company and they have formed an opinion (can be two Circumstances either of it is applicable) Firstly, that the company has no debts to be given in voluntary liquidation or Secondly, that the company will be able to pay its debts from the proceeds of the assets to be sold in voluntary liquidation. The second declaration required to be given that the company is not being liquidated to defraud any person.
    • The declaration has to be filed with Registrar of Companies in e-form GNL-2 attaching the following documents
    • Along with the Declaration the audited financial statements and the record of business operations of the company for the previous 2 years or since incorporation whichever is later will also be filed;
    • A Report of valuation of assets of the company, (if any) prepared by the registered valuer.
  • Conduct General Meeting
    • After filing of declaration and within 4 weeks of passing of the same, hold the Shareholders meeting . For E.g., Board Meeting/Declaration date – 01.12.2019 Last date convening general meeting – 28.12.2019
    • Pass a special resolution for approving the proposal of winding up and appoint Insolvency Professional who will act as a liquidator for the company.
    • File the Resolution with Registrar of Companies in E-form MGT-14 within 7 days from passing of the resolution.
      • For E.g., Date of general meeting passing of Resolution– 28.12.2019
      • Last date to file form – 03.01.2020
    • If company owes debt to creditors, in that case the creditors shall approve the resolution within 7 days of passing the special resolution representing 2/3rd in value of the debt of the company.
      • For E.g, Date of general meeting passing of Resolution– 28.12.2019
      • Last date to approve the resolution terms– 03.01.2020
  • Commencement date of Voluntary Liquidation
    • Voluntary Liquidation deemed to have been commenced from the date of resolution was passed or incase the company owe debts to the creditors then the date when the creditors approve the special resolution in the 2/3rd value.
  • Public Announcement
    • Once the Liquidator is appointed he shall make public announcement as per Form A, Schedule – I within five days from the date of his appointment (i.,e, within 5 days from the date of passing the special resolution)
    • If the company does not get 76% of consent of creditors within 5 days it can’t go ahead for publication of public announcement.
    • The public announcement to be done in order to call the stakeholders to submit their claims within thirty days from the liquidation commencement date by mentioning the last date of submission.
      • For E.g., Date of Passing Special Resolution – 01.01.2020
      • Liquidation Commencement Date – 01.01.2020
      • Publication in the Newspapers – 03.01.2020 (has to be done within 5 days of passing Resolution)
      • Last date of submission of claim to be mentioned in newspaper – 30.01.2020
  • Publication of Public Announcement
    • The advertisement has to be made in one English newspaper and one regional language newspaper with wide circulation at the location of Registered Office and Principal Office if any of the company and in any other location where liquidator is of the opinion that the company conducts its material business operations.
    • The advertisement has to be displayed on the Website of the company if any or on the website designated by the board for this purpose.
    • Submission of Preliminary Report by the Liquidator
    •  The Liquidator shall submit Preliminary Report to the company within 45 days from the date of liquidation commencement date entailing about the Verification of Claims, List of Stakeholders, Separate Bank Account opened, distribution of proceeds, Return of Money etc.
      • For E.g. Date of Passing Special Resolution – 01.01.2020
      • Liquidation Commencement Date – 01.01.2020
      • Last date to submit Preliminary Report – 14.02.2020
  • Verification of Claims
    • The Liquidator shall verify the claims which has been submitted either reject it or admit it.
    • The Liquidator shall communicate its decision of admission or rejection of claims to the creditor and corporate debtor within 7 days of such admission of rejection of claims. Incase of rejection, the liquidator has to record reasons in writing for rejecting the claim. For e.g.,
      • Liquidation Commencement Date – 01.01.2020
      • Publication in the Newspapers – 03.01.2020
      • Last date of submission of claim to be mentioned in newspaper – 30.01.2020
      • Last date of communication of admission or rejection of claim – 06.02.2020
    • The Creditor can appeal to Adjudicating Authority against the decision of liquidator with in fourteen days from the date of receipt of such decision. For E.g.,
      • Date of receipt of communication of rejection of claim – 07.02.2020
      • Last date of filing appeal by the creditor – 20.02.2020
  • Submission of list of stakeholders
    • The liquidator shall prepare the list of stakeholders with in 45 days from the last date receipt of claims on the basis of proof of claims submitted and accepted which includes –
      • Details of stakeholders
      • Amount of claims admitted if applicable
      • Amount of Debts  or dues that are secured or unsecured
      • Proof partially admitted
      • Proofs wholly rejected
        • For E.g., Last date of communication of admission or rejection of claim – 06.02.2020
        • Last date of preparation of list of stakeholders – 21.03.2020
    • The submitted list of stakeholders are open for inspection by the persons who have submitted the claims, by the directors, by the member and guarantors of the company and is modified time to time and the same has to be displayed on the website of the company or the website authorized by the Board of the company.
  • All money to be paid in to bank account
    • The liquidator shall open a bank account in the name of the Company followed by the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of all moneys due to the company.
    • The liquidator shall pay to the credit of the bank account opened where all moneys, including cheques and demand drafts received by him as the liquidator of the company, and the realizations of each day shall be deposited into the bank account without any deduction not later than the next working day.
    • All payments above five thousand rupees are to be done by the liquidator from the scheduled bank account that shall be made by cheques drawn or online banking transactions against the bank account.
  • Distribution
    • The liquidator shall distribute the proceeds from realization within six months from the receipt of the amount to the stakeholders.
    • The liquidation costs shall be deducted before such distribution is made.
    • The liquidator may, distribute the asset amongst the stakeholders which cannot be readily sold due to its unusual nature or under other special circumstances only with the approval of the company.
  • Return of money
    • A stakeholder shall immediately return any monies received by him in distribution (proceeds from realization), which he was not entitled to at the time of distribution, or stakeholder shall immediately return any monies received by him subsequently became not entitled to it.           
  • Completion of liquidation
    • The liquidator shall endeavor to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date.
      • For E.g, Liquidation Commencement Date – 01.01.2020
      • Last date of liquidation of company – 31.12.2020
    • If the liquidation process continues for more than twelve months, in that case the liquidator shall-
      • hold a meeting of the contributories of the company within fifteen days from the end of the twelve months, the twelve months starts from the liquidation commencement date, and at the end every succeeding twelve months till dissolution of the corporate person; and
        • For E.g, Liquidation Commencement Date – 01.01.2020
        • Last date of liquidation of company – 31.12.2020
        • Last date of convening meeting with contributories – 14.01.2021
    • The liquidator shall present an Annual Status Report(s) indicating progress in liquidation, which includes settlement of list of stakeholders, and details of any assets that remains to be sold and realized, distribution made to the stakeholders, and distribution of unsold assets made to the stakeholders; developments in any material litigation, by or against the company ; and filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II i.e., Section 33 to 54 of the Insolvency Bankruptcy Code, 2016)
    • The Annual Status Report shall enclose the audited accounts of the liquidation showing the receipts and payments pertaining to liquidation starting from the liquidation commencement date.
    • Once liquidation process is complete, the liquidator shall prepare the Final Report which consists of –
      • (a) audited accounts of the liquidation, showing receipts and payments pertaining to liquidation since the liquidation commencement date; and
      • (b) statement demonstrating that-
        • (i) the assets of the corporate person that has been disposed of;
        • (ii) the debt of the company has been discharged to the satisfaction of the creditors;
        • (iii) there is no litigation pending against the company or incase the litigation is pending then sufficient provision has been made to meet the obligations arising from any pending litigation.
      • (c) a sale statement in respect of all assets containing –
        • (i) the realized value;
        • (ii) cost of realization, if any;
        • (iii) the manner and mode of sale;
        • (iv) an explanation for the shortfall, if the value realized is less than the value assigned by the registered valuer in the report of the valuation of assets
        • (v) the person to whom the sale is made; and
        • (vi) any other relevant details of the sale.
      • The liquidator shall preserved the records for eight years
  • Submission with NCLT
    • The liquidator shall make an application to the NCLT for the dissolution of the Company in form NCLT -1 along with supporting documents.
  • Order by National Company Law Tribunal
    • Once the National Company Law Tribunal is satisfied, it may pass the dissolution order and the same shall be filed with Registrar of Companies within 14 days, to the Registrar of Companies In E-from INC-28.
      • For E.g., Date of order passed by National Company Law Tribunal – 01.04.2021
      • Last Date for filing the Registrar of Companies – 14.04.2021

Concise Steps of Voluntary Liquidation

  • Conduct Board Meeting
  • The declaration to be filed with Registrar of Companies in e-form GNL-2
  • Conduct General Meeting
  • File the Resolution with Registrar of Companies in E-form MGT-14 within 7 days from passing of the special resolution to approve the Voluntary Liquidation and appointment of Liquidator
  • Creditors shall approve the resolution within 7 days of passing the special resolution representing 2/3rd in value of the debt of the company
  • Voluntary Liquidation deemed to have been commenced from the date of resolution was passed the company owe debts to the creditors approve the special resolution in the 2/3rd value
  • Public Announcement
  • Publication of Public Announcement
  • Verification of Claims by the Liquidator
  • Submission of list of stakeholders
  • All money to be paid in to separate bank account in the name of the Compan followed by the words ‘in voluntary liquidation’.
  • The liquidator shall distribute the proceeds from realization within six months from the receipt of the amount to the stakeholders.
  • Stakeholder immediately return monies received by him in distribution (proceeds from realization), which he was not entitled to at the time of distribution, or stakeholder shall immediately return any monies received by him subsequently became not entitled to it.
  • Liquidator shall endeavor to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date
  • Liquidator shall prepare the Final Report
  • Liquidator shall make an application to the NCLT for the dissolution of the Company in form NCLT -1 along with supporting documents
  • NCLT passes dissolution order
  • Order to be filed with Registrar of Companies within 14 days of passing of the order

Neerja Sharma (B.Com, LL.b)

Advocate

References: https://ibbi.gov.in//webadmin/pdf/legalframwork/2017/Jul/IBC%202016.pdf https://ibbi.gov.in/uploads/legalframwork/2020-01-20-134419-un9k7-f6996ec4d38ae089cd00027bc4071649.pdf

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