Insights into Voluntary Liquidation Procedures under Section 59 of IBC

Introduction: Delving into the complexities of voluntary liquidation procedures under Section 59 of the Insolvency and Bankruptcy Code (IBC) offers a comprehensive understanding of the regulatory framework, procedural intricacies, and recent amendments. From initiation to dissolution, this exploration sheds light on the essential steps and considerations for corporate entities navigating the voluntary winding-up process.

Section 305: Declaration of solvency in case of proposal to wind up voluntarily Omitted by the Eleventh Schedule (Sec. 255) to the Insolvency and Bankruptcy Code, 2016, w.e.f. 15.11.2016 [S.O. 3453(E) dated 15.11.2016]

Voluntary Liquidation under section 59 of IBC, 2016

An overview of section 59 has been provided in the following points –

1. Section 59 deals with voluntary winding up of corporate persons. Financial service providers (excluded from the definition of corporate person) cannot avail this route. However, according to section 227, the Central Government may, if it considers necessary, in consultation with the appropriate financial sector regulators, notify financial service providers or categories of financial service providers for the purpose of their insolvency and liquidation proceedings, which may be conducted under this Code, in such manner as may be prescribed.

2. It is not necessary that the corporate person must owe a “debt” – reference is to “corporate persons” and not “corporate debtors”.

3. Two pre-conditions for initiating voluntary liquidation under section 59 are –

(i)  the corporate person intends to liquidate itself voluntarily; and

(ii)  the corporate person has not committed any default.

4. Sub-section (2) of section 59 requires that the voluntary liquidation of a corporate person shall be carried out in accordance with the conditions and requirements specified by the IBBI. The VL Regulations have been issued pursuant to this provision.

5Where the corporate person is a company, the following procedure must be observed –

(i) Majority of the directors of the company shall make a declaration of solvency verified by an affidavit. (Regulation 3 of VL 2017)

As per point 2 (II) (III) of VL Regulations amendment 2024 (effective from 31st Jan 2024) which amends the regulation 3 sub regulation 1 of VL Regulations 2017

Disclosure about pending proceedings or assessments before statutory authorities, and pending litigations:
Directors of the corporate person, while initiating the voluntary liquidation process, are required to make disclosure about pending proceedings or assessments before statutory authorities and pending litigations, also declare that sufficient provision has been made to meet the likely obligations arising, if any, on account of the pending proceedings.

As per the VL 2017 Regulation 3

i)  The declaration shall be accompanied by audited financial statements and records of business operations, and a report of the valuation of assets.

(ii)  Within 4 weeks of declaration, shareholders’ approval shall be obtained by ordinary or special resolution, as the case may.

(iii)  Where the company owes debt to any person, creditors’ approval is also required. The approval shall be obtained from creditors representing at least 2/3rd in value of the debt of the company.

(iv)  The company shall notify the Registrar of Companies and the IBBI of such resolution(s).

(v)  Once the affairs of the company are being fully wound up, application shall be made to the NCLT) for the dissolution of the corporate person.

The corporate person shall be deemed to be dissolved from the date of the order of the adjudicating authority.

Note that –

(i) The voluntary liquidation shall commence from the date of passing the shareholders’ resolution, subject to the creditors’ approval.

(ii) The shareholders shall appoint an insolvency professional to act as liquidator for the purpose of conducting the voluntary liquidation proceedings.

(iii) The provisions of sections 35 to 53 (relating to liquidation under the Code in respect of insolvent entities) shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary.

These provisions are listed below –

(a) section 35 – powers and duties of liquidator;

(b) section 36 – formation of liquidation estate, inclusions in and exclusions therefrom;

(c) section 37 – power of liquidator to access information systems;

(d) sections 38 to 42 – consolidation, verification, admission/rejection of claims; determination of value of claims; application against the decision of the liquidator;

(e) sections 43 to 51 – provisions relating to avoidable transactions, namely, preferential transactions, undervalued transactions, transactions defrauding creditors, extortionate credit transactions;

(f) section 52 – rights of secured creditors in liquidation proceedings; and (g) section 53 – distribution of assets, priority of payment of debts.

The VL Regulations and the amended portion

A brief summary of the VL Regulations has been given as below:

• Liquidation commencement date – Liquidation commencement date has been defined under section 5 (17) of the Code to mean the date on which the proceedings for liquidation commence in accordance with section 33 or section 59, as the case may be. As stated under section 59 (5), voluntary liquidation shall be deemed to have commenced from the date of passing the shareholders’ resolution, subject to the creditor’s approval. .Similarly, as stated under regulation 3 (3) of the VL regulations, the voluntary liquidation proceedings in respect of the corporate person (other than a company) shall be taken to commence from the date on which the partners, or contributories (as the case may be) resolve as such, subject to the creditors’ approval.
• “Special majority” of partners – Section 59 requires special resolution of the shareholders for voluntarily liquidating the company in some cases – sub-section (3) (c) (i); requires special majority of partners/contributories. Though the meaning of the term “special resolution” can be easily deciphered from the Companies Act, 2013; however, what constitutes “special majority” of partners/contributories has not been defined under the VL Regulations.
• Approval of creditors – It is possible that the creditors refuse to approve such a resolution or refuse to accept the liquidator nominated by the shareholders. Approval of creditors’ being a pre-condition in case a company owes a debt, the only option left with the company is to move an application under section 271 of the Co Act, 2013.

On Liquidators:

• Remuneration of the liquidator – The Code requires the shareholders to appoint an insolvency professional to act as liquidator. However, unlike the provisions relating to remuneration of the liquidator under the Liquidation Regulations, 2016, there is no prescription as to the manner in which the remuneration of the liquidator shall be determined. The Liquidation Regulations (reg. 4) allow the committee of creditors to determine the remuneration in some cases; while in other cases, the liquidator’s fee is a function of the amount realized net of other liquidation costs, the amount distributed, and the time period within which the amounts are realised and distributed. In the case of voluntary liquidator, the VL regulations require that the remuneration shall be fixed by the shareholders/partners/ contributories (as the case may be) under the same resolution as passed under section 59 (3) (c) or regulation 3 (1) (c). Hence, there is no mathematical formula for computation of liquidator’s fee as in case of liquidation of insolvent companies, which is understandable.
• Eligibility for appointment as liquidator – The eligibility conditions are the same as those for a resolution professional under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations) and the liquidator under the Liquidation Regulations. Basic criterion is “independent of corporate debtor”.
• Liquidator to step down on conflict of interests – Regulation 6 (4) of the VL Regulations requires the liquidator to step down from acting as a liquidator in two cases –
  • If the insolvency professional entity of which he is director/ partner represents other stakeholder in the same liquidation proceeding; or
  • Any other director/ partner of such insolvency professional entity represents any other stakeholder in the same liquidation proceeding.
• Public announcement of liquidation – The public announcement of voluntary liquidation shall be made by the liquidator within 5 days of his appointment. The time limit is the same under the Liquidation Regulations. However, in case of insolvency resolution, the public announcement shall be made within three days of the appointment of interim resolution professional.
•  Claims – Chapter V of the VL Regulations provide for the manner of submission of claims by creditors (including workmen and employees and secured creditors), determination of amount of claims, foreign currency claims, mutual credits ad set-off, verification of claims, etc.
• Realisation of assets – Note that the VL Regulations allow the liquidator to value and sell the assets of the corporate person in the manner and mode approved by the corporate person. The provisions are stricter and more specific under the Liquidation Regulations.
• Reporting requirements – Pursuant to regulation 8, a liquidator is required to prepare and submit viz., preliminary report, annual status report, minutes of consultations with stakeholders and final report.

Preliminary report:

• Submission of preliminary report – within 45 days from the liquidation commencement date.
• Content of the report – the preliminary report shall provide details of following –

» the capital structure of the corporate persons;

» estimates of its assets and liabilities as on liquidation commencement date based on  the books of the corporate persons;

» intention to make any further inquiry in to any matter relating to the promotion, formation or failure of the corporate person or the conduct of the business;

» the proposed plan of action for carrying out the liquidation, including the timeline within which he proposes to carry it out and the estimated liquidation costs.

• Annual status report:

» If liquidation process continues for more than 12 months

» Status report shall indicate progress in liquidation and shall inter alia include the following –

1  settlement of list of stakeholders,

2 details of any assets that remains to be sold and realized,

3 distribution made to the stakeholders, and

4 distribution of unsold assets made to the stakeholders;

5 developments in any material litigation, by or against the corporate person;

6 filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II of the Code and

7 enclose audited accounts of the liquidation.

Minutes of consultations with stakeholders:

• The stakeholders shall extend all assistance and cooperation to the liquidator to complete the liquidation of the corporate person;
• Any consultation with the stakeholders shall be recorded.
• Final report: When to prepare – on completion of the liquidation process

» Final report shall consist of –

• • audited accounts of the liquidation, showing receipts and payments pertaining to liquidation since the liquidation commencement date; and a statement demonstrating that-
  • the assets of the corporate person has been disposed of;  the debt of the corporate person has been discharged to the satisfaction of the creditors;
  • no litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation.
  • a sale statement in respect of all assets containing –
  • the realized value;
  • cost of realization, if any;
  • the manner and mode of sale;
  • an explanation for the shortfall, if the value realized is less than the value assigned by the registered valuer in the report of the valuation of assets under section 59(3)(b)(ii) or Regulation 3(1)(b)(ii), as the case may be;
  • the person to whom the sale is made; and
  • any other relevant details of the sale Final report shall be sent to? – the Registrar, the Board and the Adjudicating Authority.

Time period for completion of liquidation

As per the Point 4 (1) (b) (a) of the VL amendment 2024

> Meeting of contributories of the corporate person and present a status report:

If the liquidator fails to liquidate the corporate person within 90 days or 270 days, he shall hold a meeting of contributories of the corporate person and present a status report within 15 days from the end of such period.  he/she must specify the reasons for not completing the process within the stipulated time

– Regulation 37 of the VL Regulations requires that the liquidator shall endeavor to complete the liquidation process of the corporate person within 12 months from the liquidation commencement date. In case the process continues beyond, the liquidation shall call meeting(s) of contributories at intervals specified. The time period suggested under the Liquidation Regulations is 2 years.

–  Rights of members inter-se in case of distribution – Sections 304 to 323 of the Companies Act, 2013 have been omitted; however, an important part missed in section 59 and the VL regulations is the provision relating to distribution of property of company among the members according to their rights and interests in the company. While in case of an insolvent company, the possibility of shareholders getting a surplus might be bleak; such a provision is of crucial importance in case of liquidation of a solvent company.

–  Suspension of liquidation – There is a provision under regulation 40 which states that where the liquidator detects insolvency, he shall make an application to the adjudicating authority to suspend the process of liquidation and pass any such orders as it deems fit.
As per the Point 5, 7 of VL 2024 Amendment:

> Provision for withdrawal of funds prior to closure:

In the period after submission of the final report but before a corporate person is dissolved, stakeholders claiming entitlement to funds in the Corporate Voluntary Liquidation Account can apply to the liquidator for withdrawal. Upon receiving such a request, the liquidator shall verify the claim and request the Board to release the funds to him/her for onward distribution.

–  Dissolution of corporate persons – On affairs of the corporate persons being completely wound up, the liquidator shall make an application to the Adjudicating Authority for dissolution of corporate persons. The Corporate persons shall be dissolved from the date of order and a copy of the same shall be forwarded to the authority within a period of fourteen days with which such corporate persons are registered.

Conclusion: Navigating voluntary liquidation procedures under Section 59 of the Insolvency and Bankruptcy Code (IBC) demands meticulous adherence to regulations, thorough documentation, and strategic decision-making. With insights into prerequisites, procedural requirements, and recent amendments, stakeholders gain a deeper understanding of the process’s nuances and implications, facilitating informed decision-making in corporate restructuring endeavors.