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In the instant case, the respondent financial creditor had extended a certain 'Credit Facility to the corporate debtor. Appellant-bank had also extended 'financial facility' to the corporate debtor.
The appellant issued a 'loan recall' notice due to the defaults committed by the corporate debtor and issued a demand notice under section 13(2) of the SARFAESI Act, 2002 to the corporate debtor. By said notice, the appellant called upon the borrower to pay the bank dues within a period of 60 days from the date of notice together with interest.
The respondent's financial creditor filed a petition under section 7 for initiation of the Corporate Insolvency Resolution Process against the corporate debtor. The application was listed before the Court.
In consequence of the notice under section 13(2) of the SARFAESI Act, 2002, the appellant issued a Possession notice under section 13(4) of the 2002 Act, and the possession was claimed to have been taken by the appellant. Thereafter an application was filed by the financial creditor under section 7 praying for restraining the corporate debtor and the appellant from selling, alienating, or creating any 3rd party rights on the assets of the corporate debtor.
The Appellant filed an application for vacating the ex parte impugned order and the Adjudicating Authority by the impugned order continued the status qua order. The appellant preferred an appeal contending that before admission of an application under section 7, the Tribunal had no jurisdiction to pass any injunction order.
The NCLAT observed that the Adjudicating Authority had taken into consideration taking possession by the appellant before the expiry of 60 days. The possession having not been taken in accordance with the law, the title of the property still vests in the corporate debtor, which needs to be protected to safeguard the interests of the corporate debtor as well as other creditors.
“The Order passed by the Adjudicating Authority indicates that the status quo order had been continued till the next date of hearing. Therefore, it was not necessary to express any final opinion regarding the various issues raised by the parties regarding title and ownership of the immovable properties whether it was still in the ownership of the corporate debtor or stand transferred to the applicant Bank. All these issues had to be considered and decided by the Adjudicating Authority finally. The Adjudicating Authority had only continued Interim Injunction till the next date of hearing fixed before the Adjudicating Authority. There was no ground to interfere with the order at this stage.”, ruled NCLAT
Introduction
The Insolvency and Bankruptcy Code, 2016 was passed by the Parliament on 11th May 2016 and obtained the Presidential assent along with getting notified in the Official Gazette of India on 28th May 2016. The Insolvency and Bankruptcy Code of 2016 "The Code" has been enacted to set out a streamlined jurisprudence on issues relating to insolvency and bankruptcy and to strengthen the regime of insolvency proceedings of a corporate entity. The term "Winding up" is not defined under the Code, nor was it defined under the Companies Act, 2013 as well. "Liquidation" or "Winding up" is the closure of a business or business segment. This article highlights the regime of the voluntary liquidation process under the Code, and how it is different from compulsory liquidation and has analysed threadbare the recent amendments relating to it.
Meaning of Dissolution
Dissolution of a company means that a corporate debtor will cease all of its assets and a proper resolution process in case of insolvency the company then undergoes the process of Corporate Insolvency Resolution Process (CIRP) to finally close down a company. The process of winding up a company has been stipulated under Section 255 of the Companies Act, 2013. But since the introduction of the Code, which encompasses the procedure of passing a creditors resolution, the appointment of a liquidator, the making of accounts statements, distribution of assets, disbursement, final call for adjudicating authority etc. are some of the processes which will be observed and needed in order to initiate the winding up of a corporate entity. Further, there are also provisions for voluntary liquidation of a solvent company under the Code, which makes it even more convenient for the entities who are not ready to continue their business as a result of a mutual decision.
Types of liquidation process of a Corporate Entity
(a) Compulsory Liquidation: It is the creditors who forced the company to initiate the process of liquidation. There is no choice left with the corporate entity except to go for liquidation. The reasons for triggering the compulsory liquidation process may include deteriorated financial conditions, inefficient management by the directors, loss of faith by creditors in further carrying out the business etc.
(b) Members' Voluntary Liquidation: It is the type of liquidation, wherein the board of directors call for a resolution of formally dissolving a solvent company, which is conducted by mutual discussion amongst the members of the company. The possible reasons for the same may include that the directors wish to step down or retire, the company wants to discontinue its business, etc. In this process, upon receipt of the creditor's vote for the resolution and the required number of votes are in favour of the voluntary liquidation, the process then starts by appointing a liquidator to get the final authorization from National Company Law Tribunal ("NCLT"), which is the adjudicating authority that governs the voluntary liquidation process.
(c) Creditor Voluntary Liquidation: In this type of voluntary liquidation, instead of the directors of a company, the creditors are the ones who chose to dissolve a solvent company. The process is the same i.e. getting the votes in favour of liquidation and based on the outcome if it meets the requirements prescribed by the law, the liquidation process is carried forward. After completing the requirements and process, the claims of the creditors are settled, assets are realized, and then after the final verification by the adjudicating authority, the company gets liquidated. It is to be noted that the distinction between "members voluntary liquidation" and "creditors voluntary liquidation" existed while the liquidation was governed by the Companies Act, 2013. Now, there are no distinctions and these distinctions have been eliminated by bringing on board a single governing Section 59 of the Code.
Voluntary liquidation process
Prior to the Code, Voluntary Liquidation was regulated by provisions laid down under Chapter XX - Part – II which consisted of Sections 304 to 323 of the Companies Act, 2013 which are about twenty sections governing the process of voluntary winding up. Before, the inception of the Code, the liquidation proceedings could be instituted before the NCLT as well as before the High Court. Section 59 of the Code which came into effect w.e.f. 1st April 2017 deals with the provisions of voluntary liquidation. Thereafter, the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 also came into force on 1st April 2017.
Process of Voluntary Liquidation under the Code
1. Eligibility and Pre-Essentials: As aforementioned, any corporate person which may include any company, partnership, limited liability partnership, etc who wilfully desires to dissolve itself, may initiate the liquidation proceedings according to the provisions as mentioned under the Code and the regulation thereof. The first condition for making an application under Section 59 of the Code is that those corporate persons who wish to liquidate, should not have committed any default in terms of repaying debts, or should be in a position wherein the corporate person is able to repay the legitimate debts. Section 3(12) of the Code has clearly defined the meaning of default and has termed it to be non-payment of debts when the due date of such payment has lapsed, and when such payment is not settled by the debtor it is said to have committed default.
2. Declaration of Solvency: The declaration solvency test is to be complied with by the corporate entity. Section 59(3)(a) and (b) of the Code read with Regulation 3 of the Regulations, 2017 states that any corporate person who wishes to opt for voluntary winding up must make a declaration passed by the majority of directors of the company or majority of the designated partner in case of LLP or the majority of individuals constituting governing body in case of other corporate persons and the said declaration must be verified by an Affidavit stating that the company officials have made a full inquiry into the company's affairs and they have formed an opinion that either the company has no debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation. The Affidavit should also contain a statement that the company is not being liquidated to defraud any person. According to Section 59(3), (b) of the Code read with Rule 3(1)(b) of the Regulation, the said declaration affidavit should be accompanied by the list of audited financial statements and record of business operations of the corporate person for the previous two years or for the period since its incorporation, whichever is later along with a report of the valuation of the assets of the corporate person, if any, prepared by a registered valuer.
3. Passing of Resolution and Appointment of Liquidator: Once the declaration affidavit is submitted, the board meeting is convened for getting the decision of voluntary liquidation approved by members of the board. They may deliberate upon the appointment of an insolvency professional to act as the liquidator of the company. The liquidator can be a private individual, who may not be a government-serving liquidator. It is very pertinent to note that, since the Code is in action, only insolvency professionals accredited by the Insolvency and Bankruptcy Board of India (IBBI) can be appointed as a liquidator of the company. As per the Reg. 3(4) of the Regulations, 2017 a resolution must be passed under section 59(3)(c) of the Code, as the case may be, shall contain the terms and conditions of the appointment of the insolvency professional, including the remuneration due to him. The other criteria as to the past work of the liquidator, the dos and don'ts the liquidator needs to follow are explicitly mentioned in Reg. 6 of the Regulation. The remuneration to be provided to the liquidator shall form part of the liquidation cost.
4. Approval of the shareholders: After the Board's approval, the resolution for convening a general meeting is being passed and the date and time are fixed within four weeks from the date of the board meeting. In the general meeting, if the corporate persons hold any debt, then a meeting for resolution by the creditor is also convened to get the approval of the creditors, followed by approval of the liquidator appointment. In case the corporate person owes any debt to any creditor then 2/3rd of the creditors to vote in favour of liquidation within 7 days of passing such a resolution. All of these resolutions are to comply with Regulation 3(3) and Rule 4 of the Regulations, 2017. Regulation 4 provides that a corporate person shall from the liquidation commencement date cease to carry on its business except as far as required for the beneficial winding up of its business and that the corporate person shall continue to exist until it is dissolved under section 59(8).
5. Notice to ROC and IBBI, Commencement of Liquidation and Public Announcement: After successful approval of the resolution by members and creditors, as the case may be, it is the duty of the corporate person to intimate the Registrar of Companies ("ROC") and IBBI within seven working days of such resolution. Once, the intimation to ROC and IBBI is done, the voluntary liquidation shall be deemed to have commenced from the date the resolution gets approved by the creditors. The official liquidator should make a public announcement in Form A of Schedule I of the Regulations, 2017 within 5 days of his appointment, calling for creditors and stakeholders to submit their claims within thirty days of the commencement of the liquidation process. According to Regulation 14(3) of the Regulations, 2017 the announcement should be published in the official gazette, in one English and one regional language newspaper, or in any other location where in the opinion of the Liquidator, the Corporate Person conducts material business operations, and on the website, if any of the corporate person
6. Submission of claims: All the persons who claim to be the creditors or the stakeholders of a corporate person which is to be liquidated must prove their claims for their respective debts and dues including interest to be paid within the specified time limit. The claims are mainly divided into 4 types: (1) Claims by Operational Creditors; (2) Claims by Financial Creditors; (3) Claims by Workman and Employees; and (4) Claims by other Stakeholders. All of these creditors and stakeholders have to compulsorily submit the legitimate proof of their claims by virtue of Form B, Form C, Form D and Form F of Schedule I of the Regulations, 2017 respectively. The liquidator may call for the requisite evidence or clarifications as he/she deems fit from a Claimant to substantiate the whole or part of their claims. The liquidator will verify these claims within 30 days of receipt of the claims. The cost of proving their claims is levied on the claimant. On the other hand, the cost of verification of the claims made by the claimant is to be incurred by the liquidator which in turn is to be compensated from the part of the liquidation cost. After final scrutiny, the liquidator may reject or accept the claims with the proper statement as to why the particular claims are being rejected or accepted.
7. Preparation of list of stakeholders: The liquidator must prepare a complete list of stakeholders based on the results after the verification of the claims of the stakeholders and the creditors, on the basis of what all claims and dues are bound to be settled. As per Regulation 30 of the Regulations, 2017, the liquidator is provided with a time period of 45 days to submit the final list of stakeholders. Once the final list is being prepared it is thereon sent for inspection to the board of directors, guarantors, to persons who submitted their claims, and it is also to be published on the website of the corporate person. Proviso to Regulation 30(2) of the Regulations, 2017 states that where no claim from creditors has been received till the last date for receipt of claims, the liquidator shall prepare the list of stakeholders within fifteen days from the last date for receipt of claims.
8. Realisation of the Assets of the Corporate Person: After the list of stakeholders gets the final approval of the parties having an interest in the company to be liquidated, the liquidator starts with the process of realising the assets of the company, as per the manner and mode approved by the corporate person and as per the applicable statute. The liquidator might take help from a registered valuer to calculate the real value of assets and thereon initiate making further sales of assets in order to settle the claims and dues of the corporate person. The liquidator may also initiate a recovery process when there are possibilities of recovering of assets in the near future.
9. Opening of Separate Bank Account: A separate bank account in the 'name of the corporate person- for Voluntary Liquidation' is to be opened for the sole purpose of making all the transactions related to the voluntary liquidation of a company. All the transactions related to the settlements of the company are done through the bank account. All cheques and demand drafts shall be deposited in the bank account by the liquidator. The transactions worth more than five thousand rupees shall be made only by cheque or by way of online banking.
10. Distribution of Claims and Settlement: According to Regulation 35 of the Regulations, 2017 the distribution process begins once all the assets of the corporate person are realised by the liquidator. The liquidator may take a time period of 30 days to distribute the settlement amount from the date of realisation. The cost incurred by the liquidator shall be added to the total cost of liquidation.
11. Completion of Liquidation: As per the provisions of Regulation 38 of the Regulations 2017 read with the said notification dated 5th April 2022, the liquidator of the company must endeavour to complete the liquidation process within two hundred and seventy days from the liquidation commencement date where the creditors have approved the resolution under clause (c) of sub-section (3) of section 59 or clause (c) of sub-regulation (1) of regulation 3, and within ninety days from the liquidation commencement date in all other cases.
12. Submission of Final Report: After the completion of the liquidation process, the liquidator must submit the final report of liquidation to the ROC and to the IBBI. The final report must consist of the duly audited accounts of the company, a statement demonstrating that all the assets of the company are disposed of, no pending debts or dues are yet to be paid, and that there are no pending litigation proceedings against the company.
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13. Role of NCLT and Final Order: The liquidator must make an application seeking the dissolution of the corporate person to the adjudicating authority i.e., the NCLT. The NCLT after hearing the party and after proper scrutiny shall then pass an order that the company shall stand dissolved from the date of the order. The liquidator then is ought to forward the copy of the order to the ROC and the IBBI. The liquidator must also preserve the records and documents of the company getting voluntarily dissolved for at least eight years from the date of passing of orders by NCLT.
Salient features of the amendments of IBBI(Voluntary Liquidation Process) Amendment Regulations, 2022 (w.e.f. 5th April 2022)
(a) The timeline for preparation of the list of stakeholders by the liquidator where there are no claims submitted by the creditors is reduced to fifteen days, by substituting the existing time limit of forty-five days.
(b) The time limit for the distribution of proceeds to the creditors and stakeholders after the realization of assets has also been amended to thirty days from the earlier limit of 6 months
(c) The IBBI has also proposed that the liquidator should submit the final report of the liquidation along with the application to NCLT, within Two Hundred and Seventy Days, when claims are submitted, and within Ninety days when there are no claims received from creditors and stakeholders.
(d) As previously mentioned, the liquidator should endeavour to complete the liquidation within a period of twelve months, owing to the pendency of the company opting for voluntary liquidation.
(e) Earlier, if a corporate person wishes to voluntarily liquidate, it should seek a 'No Objection Certificate' ("NOC") or 'No Dues Certificate' ("NDC") from the Income Tax Department by liquidators during the process, also it was not mandated in the Code. Hence, to resolve this issue and make it hassle-free for the corporate person opting for liquidation, the IBBI has clarified that when a corporate person voluntarily intends to liquidate itself NOC and NDC are not required as a mandate.
Case Laws:
(a) Jurong Engineering (India) (P.) Ltd., In Re 2021 SCC OnLine NCLT 229.
In the aforesaid case, the NCLT was of the view that since there were no significant business operations in the Company for the last many years and since no revival plan could be worked out for the Company, it passed an order declaring the official winding of a company under Section 59 of the Code.
(b) Daily Bread Gourmet Foods (India) (P.) Ltd., In Re 2020 SCC OnLine NCLT 1383.
NCLT was of the opinion that since the assets of the corporate person had been disposed of, the debt of the corporate person had been discharged to the satisfaction of the creditors, and no litigation was pending against the corporate person, it was deemed fit and just to pass an order allowing the appeal and declaring the company as officially liquidated by the provisions of Section 59 of the Code.
Conclusion:
The IBC Code which is a significant achievement in Indian Legislation aims at reforming the process of insolvency and bankruptcy by bringing in various constructive and effective amendments that have changed the dimensions of the Indian legal system. The setting up of the Insolvency and Bankruptcy Board of India (IBBI) is considered a pathway to achieving the goals of the Code. Although the process of voluntary liquidation was in existence under the Companies Act, the process under the Code is well specified and it will be faster, efficient and transparent. Any solvent company can be liquidated with ease under the Code. Section 59 of the Code, read with the IBBI (Voluntary Liquidation) Regulation 2017, provides a consolidated framework for initiating the process of voluntary winding up of a company. In order to further streamline the process, the amendments introduced would pave the way for an efficient, faster and cost-effective liquidation procedure.
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