[Manas Rohilla and Smruti Kulkarni are 3rd year B.A., LL.B. (Hons.) students at the Gujarat National Law University, Gandhinagar]
On 5 October 2023, the Insolvency and Bankruptcy Board of India (IBBI) took a proactive stance by releasing the Discussion Paper on Streamlining the Voluntary Liquidation Process (Discussion Paper), proposing amendments to the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (IBBI Regulations). The proposals of the IBBI soliciting public feedback on six key aspects of the reforms is indicative of a collaborative approach that seeks to streamline the framework for voluntary liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC).
This post provides an overview of the voluntary liquidation process and analyses the recently proposed requirements. As the landscape of voluntary liquidation undergoes potential changes, this analysis seeks to shed light on the key aspects of the proposals, examining their potential implications on corporate entities, and highlighting the need to address the identified challenges.
Voluntary Liquidation Process: An Overview
A voluntary liquidation, as the name suggests, is a voluntary or self-initiated winding up and dissolution of a company, that has been approved by its shareholders. According to section 59 of the IBC, any corporate entity that intends to liquidate itself voluntarily and has not committed any default, has no debt, or, if it does have debt, will be able to pay its debts in full from the sale of its assets, may initiate the voluntary liquidation process. The provision read with the IBBI Regulations provides for a structured procedure to be undertaken by an entity for its voluntary liquidation.
At the outset, the entity must incorporate provisions for voluntary liquidation in its articles of association or modify them accordingly. Subsequently, the board of directors issues a solvency declaration supported by audited financial statements and asset valuation, affirming the ability of the company to clear debts. Upon obtaining a special resolution, an insolvency professional is appointed as the liquidator, and this resolution is filed with the Registrar of Companies and IBBI. The liquidator verifies creditor claims, distributes asset sale proceeds within 30 days, maintains records, and reports to the IBBI and the National Company Law Tribunal (NCLT). The process, having a mandated requirement for completion within 270 days, unless NCLT extends, concludes with the liquidator seeking NCLT dissolution approval, contingent on settled claims and IBBI confirmation, followed by an official notification of the Registrar of Companies.
The Proposed Framework
The discussion paper puts forth six major revisions that deal with directors’ disclosures, liquidators’ timetables, how financial service providers (FSPs) are handled, pre-dissolution distribution orders, electronic filings, and submission of dissolution orders.
The first proposal provides for disclosure of pending proceedings or litigation. The directors of the corporate person who want to initiate voluntary liquidation process must disclose any pending proceedings or litigation involving the corporate person and make sufficient provision to meet the obligations arising from them. This will ensure that the liquidator and the corporate person are aware of the potential risks and liabilities that may affect the liquidation process.
The second proposal requires a status report from the liquidator in case of delay. If the liquidator fails to complete the liquidation process within the stipulated period of 90 days or 270 days, depending on the case, he must hold a meeting of the contributories of the corporate person and file a status report to the IBBI explaining the reasons for the delay and the additional time required. This enables the IBBI to monitor the progress and efficiency of the liquidation process.
The prerequisite for prior permission of regulator for financial service providers is provided in the third proposal. If the corporate person falls under the category of financial service provider, it must declare that it has been notified by the Central Government under section 227 of the IBC, and that it has obtained prior permission of the appropriate regulator for initiating voluntary liquidation process. This ensures that only eligible financial service providers can initiate voluntary liquidation process in accordance with the IBC.
The fourth proposal deals with withdrawal of unclaimed or undistributed amount after dissolution application. If a claimant requests for withdrawal of unclaimed or undistributed amount deposited into the Corporate Voluntary Liquidation Account, which was introduced through an amendment in 2020, after the submission of dissolution application but before the order of dissolution, the IBBI will direct the liquidator to verify and report on such claim.
A new addition has also been recommended in the form of submission of Form H and final report on electronic platform by the fifth proposal. The liquidator must submit Form H and final report on an electronic platform to be notified by circular by the IBBI. This ensures that all the reports and compliance certificates submitted by the liquidator are available in one place and can be easily accessed by the IBBI. The final proposal encompasses forwarding the order of dissolution to the IBBI on an electronic platform. The liquidator must forward a copy of an order of dissolution to the IBBI within seven days from the date of such order on an electronic platform to be notified by circular by the IBBI.
Decoding the Implications of the Proposals
The proposed amendments in the Discussion Paper aim to instil greater transparency, accountability, and efficiency in the voluntary liquidation process. One significant stride is the upfront disclosure requirements for directors, aligning with their fiduciary duties. This provision prevents the undervaluation of assets due to undisclosed risks and ensures stakeholders are promptly informed about potential hurdles faced in the process.
The suggested outline also has far-reaching implications on corporate entities and their governance. Extending beyond existing requirements, directors are mandated to disclose not only their interests in other entities but also pending matters that may impact the liquidation process or asset distribution, significantly broadening the scope of directorial disclosures. This move fortifies the responsibility and liability of directors, ensuring a more comprehensive understanding of potential hurdles in the liquidation journey. However, a blanket approach may not always be prudent. For instance, penalizing directors for bona fide errors made without negligence may discourage responsible risk-taking. Providing room for flexibility in the event of unpredictable impacts or prospective legal disputes may be justified.
The requirement for directors to seek prior approval for related party transactions during or post-liquidation aligns with section 188 of the Companies Act, 2013 which upholds transparency and accountability in related-party transactions. This serves the dual purpose of ensuring compliance with existing regulations and preventing any undue advantages or disadvantages to related parties during the intricate process of liquidation. Additionally, the proposal empowers the liquidator to rectify errors or omissions in the register of members, in consonance with section 189 of the Companies Act. According to this provision, every corporate entity is required to maintain a register recording the particulars of other legal entities on which the directors are interested. This enhances accuracy in the identification and verification of shareholders, a critical aspect in the liquidation process.
Addressing the Lacunae
Despite the progress made, there are still obstacles to overcome. In proposal one, the absence of clarity regarding what comprises “sufficient provision” for meeting obligations arising from pending matters creates ambiguity. This could potentially contribute to confusion among directors and liquidators, undermining the efficacy of the amendments. In addition, the absence of a mechanism for authenticating or validating director disclosures leaves the door open to the possibility of misrepresentation, particularly when directors have vested interests. In terms of prescribing consequences or penalties for non-disclosure or false disclosure by directors, the proposals fall short. This deficiency diminishes the effect of the deterrent and may encourage noncompliance. While the proposals seek to increase transparency, they impose additional responsibilities and expenses on directors and liquidators. It would also be resource-intensive to maintain and update more records and comply with increased reporting and filing requirements.
Conclusion and Way Forward
The proposed amendments to strengthen the voluntary liquidation process are consistent with existing regulations and seek to increase transparency and safeguard the interests of stakeholders. However, as discussed, the ambiguity of the provisions and the absence of consequences for non-disclosure require careful consideration. The way forward entails proactive efforts to mitigate increased operational burdens on directors and liquidators, possibly by streamlining processes. As the regulatory environment evolves, it is essential to strike a balance between enhanced disclosure requirements and pragmatic implementation. Only through comprehensive and well-calibrated reforms can the voluntary liquidation process truly reflect the principles of openness, fairness, and accountability. If implemented after resolving concerns regarding interpretation, the proposed measures have the potential to increase efficiencies while maintaining transparency and fairness.
– Manas Rohilla & Smruti Kulkarni