Liquidation Procedures Eligibility
The eligibility norm for beginning the liquidation procedure
As per the IBC (i.e. Insolvency and Bankruptcy Code), the process of liquidation cannot be initiated by creditors as the first resort on default payment. In fact, the code prescribes that either a financial or an operational creditor can commence the corporate insolvency resolution process in case of failure by the corporate debtor to pay at least Rs100,000. In addition, the corporate insolvency resolution process can be initiated by the corporate debtor can. However, in case of failure to work out a resolution plan under the corporate insolvency resolution process prescribed under the code, the corporate debtor must be liquidated.
The voluntary liquidation proceedings can be initiated by the corporate debtor with the authorization of the board of directors, shareholders and creditors. Any corporate entity may commence a voluntary liquidation proceeding in case:
- any default has not been committed by it;
- majorly the designated partners or the directors of the corporate person make a declaration confirmed by an affidavit to the effect that:
- the corporate person either has no debt or he can pay its debts in full from the proceeds of the sale of the assets under the proposed liquidation; and
- liquidation is not initiated to defraud any person;
- such declarations are usually characterized by the audited financial statements as well as the valuation report of the corporate person;
- In the time span of four weeks of such declaration, a special resolution (in cases of voluntary liquidation by reason of expiry of its duration or occurrence of any dissolution event an ordinary resolution would suffice) is passed by the contributors needing the corporate person to be liquidated and appointing an insolvency professional as liquidator; and
- creditors representing two-thirds of the value of the total debt owed by the corporate person authorizes the resolution within seven days of its passage.
The process of voluntary liquidation is largely an out-of-court process. Once the incidents of the corporate person have been completely settled and its assets fully liquidated can the liquidator applies to the National Company Law Tribunal for its detachment along with a final report. Pursuant to this application, the tribunal ought to pass an order for dissolution and the entity will be dissolved from the date the order is passed.
A few questions that generally come to our mind are:
What are the elementary procedures used to liquidate an insolvent company in your jurisdiction? What are the key characteristics and necessities of each? Are there any regulatory or structural distinctions between voluntary liquidation and compulsory liquidation?
The process for the liquidation of a company (along with limited liability partnerships as well as other limited liability entities) on account of insolvency i.e. compulsory liquidation and on account of application made for voluntary liquidation is revered under the IBC except for winding-up for other grounds under the Companies Act 2013.
Step-1: Calling a meeting for the Board of Directors
First and foremost, the Company would have to call a meeting of the board of directors with the presence of a majority of its members. They would in turn, pass a resolution for the winding-up of the Company. They would have to formulate a statement in an affidavit that a complete analysis and examination has taken place about the debts that the Company has. The Company would pay all the debts from the revenue of the sale of its assets. The affidavit should also include that the liquidation of the Company is not taking place to defraud any person (applicable under Section 59(3) (a) of the Insolvency Code 2016).
Step-2: Summon the Shareholders for a meeting
Secondly, the Company has to call a meeting of its shareholders within 4 weeks of making this statement. During the meeting, the Company would conclude for the appointment of a liquidator. The details for the same would get mentioned in the resolution made during the meeting. The liquidator would make every effort to complete the work of liquidation within 12 months from the date of commencement of liquidation. He would keep the electronic or physical copy of all the important documents and papers for the next 8 years after the dissolution of the company.
Step-3: Approval of the Creditors
When the Company incurs any debts for different individuals, creditors comprising of two-thirds of the entire debt would have to give their consent in writing within 7 days of the making of the resolution by the shareholders for liquidation of the Company.
Step-4: A Public Statement by the liquidator
The liquidator has to make a public announcement in FORM-A of Schedule-I within 5 days of commencement of his duties. In order to give their claims within 30days from the date of commencement of the liquidation, the public statement shall make a request to all the stakeholders. The announcement of this would get broadcasted in one leading regional and English newspaper.
Step-5: Proceedings by the liquidator
The liquidator has to deposit a report to the Company within 45 days of the date of commencement of liquidation. He would keep evidences of registers as well as books regarding the process of liquidation. He would verify all the claims made by creditors for getting their dues.
Step-6: Money payment to the bank account
The liquidator ought to open a bank account in the name of a corporate person for the disbursement of money because of the creditors of the Company.
Step-7: Preparation as well as submission of final report
At length, the liquidator would make his final report. He has to mention all essential facts concerning liquidation of the Company in the report. After complete liquidation of the Company, the liquidator ought to submit his final report to NCLT in Form-1 concerning the complete dissolution of the Company.
Compulsory liquidation following corporate insolvency resolution process
An operational or financial or a corporate debtor may apply to the National Company Law Tribunal for the commencement of the insolvency resolution process following the default by the corporate debtor to pay dues of at least Rs100,000.
The code stipulates a timeframe of 180 days for the insolvency resolution process, which sets up from the date that the application is approved by the tribunal (but may be extended a further 90 days). During this time, no proceedings, suits, recovery or enforcement action can be initiated or continued against the corporate debtor. The committee of creditors shall contemplate and approve resolution plans which are placed before it for judgement and viability determination.
Once the liquidation triggers, the following may occur:
- the committee of creditors can’t settle on a workable resolution plan within 180 days (which can be extended once by 90 days);
- the committee of creditors makes a decision to liquidate the company;
- the tribunal scraps the resolution plan;
- the corporate debtor contradicts the resolution plan provisions; or
- the tribunal passes an order for the compulsory liquidation of the company.
With the approval of a majority of the directors of the board a company may initiate the voluntary liquidation process, it is then followed by the approval of the majority of its shareholders as well as creditors.
Formal approval of the liquidation procedures
The National Company Law Tribunal must approve any compulsory liquidation on the occurrence of any of the liquidation triggers. Under compulsory liquidation, the consent of all the parties: i.e. the company, its shareholders or directors is immaterial.
Voluntary liquidation mandates the process to be introduced by the corporate debtor itself, through its directors or partners, and it must be passed by both its shareholders (in the case of a company) as well as creditors.
Effects of liquidation procedures on existing contracts
For the purposes of liquidation, the liquidator forms a legacy of the assets. Later, it holds the liquidation estate as a fiduciary for the benefit of all creditors. The liquidation estate assets includes contractual rights.
Timeframe for completion of liquidation procedures
The timeframe for completion of a compulsory liquidation process is typically within two years of the date of initiation.
On the other hand, voluntary liquidation can be concluded in a shorter period. The regulations under the Insolvency and Bankruptcy Code set out that in the event that the liquidation process is not concluded within 12 months, the liquidator shall hold a meeting with the other contributors within 15 days of expiry of the 12-month period and by the end of every succeeding 12-month period thereafter until the dissolution of the corporate person. The liquidator also has to present an annual status report signifying the progress of liquidation during each meeting.
Role of liquidator
Process of appointment of the liquidator and defining the extent of his or her powers and responsibilities:
A resolution professional who is designated for conducting the corporate insolvency resolution process is usually made to act as the liquidator for the liquidation process unless the National Company Law Tribunal changes the resolution professional with different insolvency professional.
The liquidator is authorized to:
- validate the claims of all the creditors;
- take over in his or her custody or control and sell all of the corporate debtor’s assets;
- check out and take such measures to conserve and preserve the assets and property of the corporate debtor;
- until liquidation conduct the corporate debtor’s business;
- investigate the financial affairs of the corporate debtor; and
- defend any suits or legal proceedings.
After the National Company Law Tribunal appoints a liquidator for liquidation, it periodically administers the liquidation process. The law authorizes that a preliminary report should be submitted to the tribunal within 75 days of the commencement of the liquidation, describing the capital structure of the corporate debtor as well as the estimate of both assets and liabilities based on the corporate debtor’s books. As per the preliminary report, the liquidator must submit quarterly progress reports to the tribunal which in turn would indicate progress in liquidation, details of stakeholders and details of the property that remains to be sold or realized. Henceforth, both the sale as well as the distribution of assets to the claimants are also conducted under the tribunal’s supervision.
To what extent are the creditor’s involved the extent in the process of liquidation and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors are mostly involved in the corporate insolvency resolution process wherein the affairs of the corporate debtor are regulated under the supervision of the creditors. However, once the corporate debtor has ordered for liquidation, the liquidator ought to take control over the debtor’s assets, he only has to liquidate them and distribute the sale proceeds in accordance to the claims received under the supervision of the National Company Law Tribunal. The lenders have to submit their respective claims to the liquidator; yet, the liquidation process is administered under the supervision and control of the tribunal.
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