Dissolution without Liquidation: A Disguised Strike-off under the IBC?

[Megha Mittal is an Associate at Vinod Kothari & Co]

In a first of its kind, the National Company Law Tribunal, Bengaluru Bench (‘NCLT’), by way ofits order dated 16 November 2020 in Synew Steel Private Limited, has ordered for direct dissolution from a corporate insolvency resolution process (‘CIRP’), thereby waiving the mandatory requirement to undergo the liquidation process.

The said order was inspired by the fact that the corporate debtor had nil assets, which in turn made it certain that the liquidation process would not have been successful. Hence, to save the unfruitful costs that would have been incurred, the corporate debtor was allowed a direct dissolution.

In this post, the author makes an attempt to analyse this rather path-breaking order, and the implications it can carry.

Background

The Insolvency and Bankruptcy Code, 2016 (‘Code’ or ‘IBC’) lays down an established process flow for distressed companies, which entails a compulsory insolvency resolution process prior to liquidation, and the final dissolution only after completion of such liquidation process. Thus, according to the widely accepted understanding of this hierarchy of processes, every company dissolved pursuant to the Code has to mandatorily undergo the preceding CIRP and liquidation process.

However, there may be some cases wherein the CIRP and/ or liquidation process would not be purposeful, and hence not warranted at all, with a common example being nil assets in the company. Where the company has nil assets, there is practically nothing left to resolve or realise. As a result, the odds of receiving a resolution plan during CIRP, or realization during liquidation seems certainly negative.

In view of the said state of affairs, section 33(2) of the Code provides:

Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors [approved by not less than sixty-six per cent. of the voting share] to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1)[1]

Further, regulation 14 of the IBBI (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’) provides for an “early dissolution”, by which, where the assets of the corporate debtor are sold, and realization and distribution thereof are complete before the stipulated liquidation period of one year,[2] the liquidator is entitled to file an application for early dissolution of the corporate debtor.

However, while regulation 14 of the Liquidation Regulations allows early completion of the CIRP and liquidation period, respectively, the sequence of processes is not compromised. Hence, irrespective of the outcome, the liquidation process shall necessarily ensue.

Analysis

In this backdrop, it may be appreciated that where the corporate debtor has no asset, the liquidation period of one year only implies zero returns with superfluous costs such as liquidator’s fee and public notice which, in fact, is in deviation with the Code’s cardinal principle of value maximization.

On a similar line, in Synew Steel Private Limited, the NCLT held that …the ultimate objective of the Code is either to resolve the issue by way of a Resolution Plan or to dissolve the Corporate Debtor, as expeditiously as possible. If the facts and circumstances of a case justify that no purpose would be served to keep the Corporate Debtor under regular CIRP proceedings, and thereafter under Liquidation proceedings, under the provisions of the Code, the Adjudicating Authority, by exercising its inherent powers conferred under the Act, may pass appropriate order(s) in the interest of speedy justice.

While the basis and rationale behind the direct dissolution comes clear from the above observation, it may be interesting to see the various provisions of law that drive the stance adopted by the Bench:


A conjoint reading of the aforementioned provisions suggests that an application for dissolution shall be made where the assets of the corporate debtor are completely sold. Hence, it may be naturally implied that where the corporate debtor has no assets at the very commencement of liquidation, the liquidation period may not be required at all.

Implications: A disguised strike off?

While the order, a first of its kind, seems to be in sync with the objectives of the Code, another perception of a direct dissolution may be that it is a disguised “strike-off”. Amongst the several exit routes available for a company, the IBC is the mode opted by distressed companies; whereas, the other modes including striking off is available for solvent companies.

In the context of this post, one may note that a direct dissolution is very similar to striking off under section 248 of the Companies Act, 2013. However, it does not carry the pre-requisite of having nil liabilities, thus making it more convenient for distressed companies.  For filing an application under section 248(2), a company is required to extinguish all its assets and third party liabilities, with the objective being to ensure that no stakeholder of the company prejudiced on account of the striking-off.

However, if a direct dissolution were to be standardized, companies having nil assets, but significant outstanding dues (greater than Rs. 1 crore), could simply file an application under section 10 of the Code, obtain the benefit of the moratorium and thereafter proceed for direct dissolution. In such circumstances, it would be crucial for the resolution professional, upon commencement of CIRP, to check for avoidance transactions, if any, falling under the purview of sections 43, 45, 49 and 66 of the Code. If it so happens that the assets are hived off to jeopardize the interests of the creditors, it would be necessary to recoup the assets to the corporate debtor, to be distributed to the creditors during the liquidation process.

Conclusion

While the order of NCLT seems to be in line with the objectives of Code and saves cost and time incurred in the unfruitful dissolution process, it becomes necessary to ensure that the nil-asset status of the corporate debtor is genuine and not a wrongful disposal to wash off unpaid liabilities.

Megha Mittal





[1] According to the explanation to section 33 (2), the decision for early liquidation of the corporate debtor can be taken by the committee of creditors (CoC) any time between after its constitution and before preparation of the information memorandum

[2] Regulation 44 (1) of the Liquidation Regulations.

About the author

1 comment

  • Dear Ma’am,

    I’d like to congratulate you for this interesting article, which I thoroughly enjoyed reading.
    Based on the analysis undertaken in the article, I have a couple of questions and I would be very grateful to hear your opinion on them:

    1. In the present case, where an order of direct dissolution without liquidation has been given by the NCLT, what happens thereafter to the outstanding dues of the corporate debtor, can the creditors or stakeholders against whom a debt has been owed by the corporate debtor initiate separate proceedings against the personal guarantor to recover their dues? Or is there a different remedy available under law.

    2. In a slight change of circumstances, if, an order of direct dissolution has been given against a corporate debtor, which has remaining assets although not sufficient to go through the CIRP, how will such assets then get distributed amongst the creditors? Would it still be distributed as per the waterfall mechanism envisaged under Section 53 of the IBC or is there be a different process/remedy available under law?

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

Topics

Recent Comments

Archives

web analytics

Social Media