The liquidation procedure is given by the Insolvency and Bankruptcy Code. Businesses may opt for the liquidation procedure due to a set of factors, such as faulty management, economic issues, low demand, among others. According to Indian legislation, the liquidation procedure refers to the way the company’s assets are terminated and distributed to the entitled parties. The liquidation can be triggered on a voluntary basis through the intervention of the company’s creditors or other members. In this case, the procedure can be completed without the intervention of a local court.
Starting the liquidation procedure
It is initiated by filing a petition for insolvency. The steps are prescribed under the Insolvency and Bankruptcy Code. The initial steps can be taken by the company’s creditors or the company's owners. Proceedings may also be started by the company’s contributors or by Indian institutions, such as, the Registrar of Companies (ROC).
Once a petition has been filed, it is legally required to publish it in a local newspaper for a period of minimum 14 days. The advertisement must be in the language of the Indian region where the company is located as well as in English.
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 an entity to initiate voluntary liquidation generally refer to the below:
- The company’s management must follow the requirements imposed under the Indian Companies Act.
- The majority of the company’s directors have to approve the liquidation procedure by signing a board resolution. They have to make a declaration verified by an affidavit stating – a) 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 b) the company is not being liquidated to defraud any person.
- This declaration must be supported by the following documents – a) 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 b) a report of the valuation of the assets of the company, if any prepared by a registered.
Steps for voluntary liquidation procedure:
- The company must pass a special resolution in a general meeting within four weeks of issuing the following declaration – a) the company is liquidating voluntarily and appointing an insolvency professional to act as the liquidator; or b) the company’s liquidation is a result of the expiry of the period of its duration fixed by its articles, or on the occurrence of any event that is prescribed as conditions for dissolution in the company articles – as the case may be and appointing an insolvency professional to act as the liquidator.
- The majority of the company’s shareholders have to 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.
The liquidator must complete the liquidation process within 12 months from the commencement date. If the liquidation proceedings are extended beyond this period, the liquidator shall hold a meeting of the contributories of the corporate body within 15 days from the end of the twelve month-period, and at the end of every subsequent 12-month period till the complete dissolution of the corporate body.
IBBI streamlines and fast-tracks the voluntary liquidation process
On April 5, 2022, IBBI, India’s key implementing agency for the Insolvency and Bankruptcy Code, amended the voluntary liquidation process, making it investor friendly through reduced timelines as well as introduction of a compliance certificate.
The Insolvency and Bankruptcy Board of India (IBBI), the apex regulatory body for implementing the Insolvency and Bankruptcy Code (IBC), has introduced various changes to streamline and fast track the voluntary liquidation process.
The amendment ensures that the idle assets are released expeditiously for better productive uses without substantial value erosion.
On April 5, 2022, IBBI notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Regulations, 2022 to amend the 2017 Regulations. Additionally, it also introduced a compliance certificate – Form H.
Key amendments to the voluntary liquidation process
Term “corporate debtor” substituted with “corporate person”
As per the amendment in Regulation 10(2)(r), the word “corporate debtor” is substituted with “corporate person”. The liquidator shall maintain such other books or registers as may be necessary to account for transactions entered into by them concerning the corporate person.
Reduction in the timeline for preparation of the list of stakeholders if no claims are received
As per the amendment in Regulation 30 (2), a new clause has been inserted where the liquidator shall prepare the list of stakeholders within 15 days from the last date for receipt of claims, in case no claim from creditors has been received.
Reduction in the timeline for distribution of the proceeds from realization
Regulation 35(1) has been amended to reduce the time period for distribution of proceeds from realization to the stakeholders from the current six months to 30 days from the receipt of the amount.
Reduction in time taken for completion of liquidation process
Regulation 37(1) has been amended to reduce the time frame for completion of the voluntary liquidation process and submission of the final report from the initial one year to:
- 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.
This amendment has enhanced the freedom of exit for corporates, furthering the ease of doing business in India.
Introduction of compliance certificate – Form H
As per Regulation 38(3), the liquidator shall submit the final report and the compliance certificate in Form-H.
Increase in time limit for intimation of appointment as liquidator to IBBI
Regulation 5(2) has been amended to increase the time limit for intimating the IBBI about the appointment of the insolvency professional as a liquidator from the earlier three days to now seven days.
The compulsory liquidation procedure falls under the supervision of the local courts. The compulsory liquidation procedure 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).
Under Indian law, 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 in India 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, which must be filed with the Registrar of Companies and signed by the director the company upon due authorization by its board. Under this scheme, a dormant or defunct company means it a) has no assets or liability; b) no business activity since incorporation; or c) no business activities carried out in the year prior to applying for the Fast Track Exit (FTE) Scheme.