By - Smita Paliwal on June 9, 2022
The decision to close down a company is one made by a company’s leadership and occurs in consensus with management and shareholders. A business normally resorts to winding up business operations when it is unable to discharge its liabilities, is insolvent or has fulfilled its objectives as mentioned in its AOA. Since this process essentially means cashing out the business, it is known as voluntary liquidation. Once the winding-up proposal gets a 75% majority from its board of directors and shareholders, a special resolution is passed, followed by a publication in the Official Gazette and the city’s leading newspapers. This initiates the process of liquidation.
Chapter XX of the Companies Act, 2013 lays down the procedure for winding up a company. However, the eleventh schedule of the Insolvency and Bankruptcy Act, 20161 omitted voluntary winding up, which was laid down under sec 304 to 325 of the 2013 act. As a substitute for the omitted provision, chapter V of IBC, 2016 offers most of the information on the regulatory compliances for winding up and liquidation. Other compliances include provisions under the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017.
Under Chapter V (section 59) of the code, the procedure is as follows:
The IBBI regulations mostly pertain to the compliances a liquidator much adhere to when dissolving a company. Contrary to the act’s objective, it was recently observed that certain compliances under the act were causing a delay in the process. IBBI recently amended the regulations to speed up the process of liquidation. Here is a look at the amendments passed in the last two years.
IBBI (Voluntary Liquidation Process) (Amendment) Regulations, 20207
On 15th January 2020, the 2017 regulations were amended by the IBBI (Voluntary Liquidation Process) Regulations, 2020. The primary purpose behind this amendment was to include ‘unclaimed dividends and undistributed proceeds’ in the books of accounts and the procedure to be followed to balance the current liabilities and assets under it. As per the changes made under this amendment:
IBBI (Voluntary Liquidation Process) (Second Amendment) Regulations, 202010
On 5th August 2020, a second amendment was made to the voluntary liquidation process, regarding further regulations concerning the liquidator:
IBBI (Voluntary Liquidation Process) (Amendment) Regulations, 202212
On 5th April, 2022, IBBI notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Amendment) Regulations, 2022 to further hasten the process of liquidation. It introduced the following changes:
The IBC, 2016 had stated that, “The liquidator shall endeavour to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date”13
Despite this, it was deduced from IBBI records that around 52%14 of voluntary liquidation processes initiated in 2021 have not yet reached completion despite reaching the maximum stipulated time i.e., 12 months.
This data brings to light the major regulatory and practice-based hurdles prohibiting voluntary liquidation’s smooth functioning, resulting in unreasonable delays in the liquidation process. The recent amendments aim to bridge the time gap between compulsory and voluntary liquidation. The amendments in 2020 mostly focused on introducing regulations to address areas that had regulatory gaps, such as the appointment of a replacing liquidator, ensuring deposits in the Corporate Voluntary Liquidation Account, etc. The 2022 amendment, however, aims to directly resolve the delay in the process by regulations lessening the time limit for those steps in liquidation that stall the process the most.
The recent amendments in the regulations indicate that the Insolvency and Bankruptcy Board of India continues to take cognizance of the procedural hurdles that cause a delay in voluntary liquidation and is well-equipped with regulatory changes to deal with them. The recent amendments will allow early release of corporate persons, faster distribution, and other benefits such as lesser liquidation costs. The reduction in time taken to deliver proceeds should guarantee an early pay-out to the stakeholders, promoting entrepreneurship and credit availability and also assist the Adjudicating Authority in processing dissolution applications at a swifter pace.