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India Company Liquidation

Businesses may opt for the liquidation procedure due to a set of factors, such as voluntary winding up, economic issues, low demand, among others. The liquidation procedure is given by the Insolvency and Bankruptcy Code and the procedure refers to the way the company’s assets and liabilities are terminated and distributed to the entitled parties.

The liquidation may be triggered voluntarily by company or by creditors and members or by NCLT (National Company Law Tribunal).

Starting the liquidation procedure

The procedure is initiated by filing a petition for insolvency. The steps are prescribed under the Insolvency and Bankruptcy Code. The company’s creditors or the company’s owners can take the initial steps. The company’s contributors or the Registrar of Companies (ROC) may also start the proceedings

Voluntary liquidation

A voluntary liquidation procedure can be initiated by a corporate person in a no-default situation, where the corporate debtor has not defaulted on any debt to any person.

Conditions for voluntary liquidation

  • The company’s management must follow the requirements imposed under the Indian Companies Act.
  • The majority of the company’s directors must approve the liquidation procedure by signing a board resolution. They have to make a declaration verified by an affidavit stating:
    • They have made a full inquiry into the affairs of the company, and they are of the opinion that either the company has no debt or that it will be able to pay its debts in full of the proceeds of assets to be sold in the voluntary liquidation; and
    • The company is not being liquidated to defraud any person.
  • This declaration must be supported by the following documents –
    • Audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later; and
    • A report of the valuation of the assets of the company, if any, prepared by a registered valuer of assets of the corporate person at the time of declaration of its solvency by majority of directors, designated partners, or individual constituting the governing board, as the case may be, of the corporate person.

Procedure

  • The company’s management must follow the requirements imposed under the Indian Companies Act.
  • The majority of the company’s directors must approve the liquidation procedure by signing a board resolution. They have to make a declaration verified by an affidavit stating:
    • They have made a full inquiry into the affairs of the company, and they are of the opinion that either the company has no debt or that it will be able to pay its debts in full of the proceeds of assets to be sold in the voluntary liquidation; and
    • The company is not being liquidated to defraud any person.
  • The majority of the company’s shareholders must approve triggering the liquidation procedure by signing a special resolution. The special resolution must be signed by at least three quarters of the company’s shareholders. The company’s creditors must state that they agree on the wind up within seven days of the resolution passed in the general meeting. The commencement date of the liquidation process will be date of the resolution, subject to approval of creditors.
  • The company will notify the ROC within seven days of passing the general meeting resolution or creditors approval, whichever the case may be.
  • Once the liquidator is appointed by the shareholders, they will perform their duties under the Insolvency and Bankruptcy Code. These include inviting and verifying claims against the company, taking custody of all assets of the company, selling the liquidation estate, and distributing the assets to the stakeholders as per the prescribed waterfall mechanism. Once the assets have been completely liquidated, the liquidator makes an application to the NCLT for dissolution of the company. Once the dissolution order is passed by the NCLT, the company stands to be dissolved.

Key points for voluntary liquidation

  • The term “corporate debtor” is substituted with “corporate person”
  • Timeline for preparation of the list of stakeholders if no claims are received is within 15 days from the last date for receipt of claims;
  • The time period for distribution of proceeds from realization to the stakeholders is 30 days from the receipt of the amount;
  • Time taken for completion of liquidation process:
    • 270 days from the date of the initiation of the process – in cases where claims have been received from creditors.
    • 90 days in cases where no claims have been received from any creditor.
  • The liquidator shall submit the final report and the compliance certificate in Form-H; and
  • Time limit for intimating the IBBI about the appointment of the insolvency professional as a liquidator is seven days.

Compulsory liquidation

The compulsory liquidation procedure falls under the supervision of the local courts and is prescribed under the Insolvency and Bankruptcy Code of India.

The procedure can be started when one of the company’s creditors requests the payment of a debt of at least INR 100,000. The creditor can request the beginning of the compulsory insolvency procedure at the National Company Law Tribunal (NCLT).

A period of 180 days is prescribed once the creditor submits their application with the NCLT. During this period – the recovery of assets or enforcement procedures cannot be initiated. This 180-day period can be extended by an additional 90 days. In general practice, the compulsory liquidation procedure  can take up to two years (calculated since the application was made).

Liquidation of dormant company

A shelf company or dormant company can also be shut down. A fast-track procedure has been introduced to close a defunct or dormant company via the STK-2 form. The Registrar of Companies must file the STK-2 form and  the director of the company must sign it upon due authorization by its board.

Under this scheme, a dormant or defunct company is defined as one that:  

  • Has no assets or liability;
  • No business activity since incorporation; or
  • No business activities carried out in the year prior to applying for the Fast Track Exit (FTE) Scheme.

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