Modes of closing a business - Series IV: Voluntary winding-up

Winding up means a proceeding by which a company is dissolved. The assets are disposed-off, the liabilities are paid-off and the surplus, if any, is then distributed among the members in proportion to their holdings in the company.
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This is the last post in our four-part blog series. We had earlier written about ‘Summary procedure for liquidation’ wherein the Regional Director of the ROC presides over and the orders can be obtained comparatively faster; ‘Fast Track Exit’ (Striking off the name of a company) when a company has been inoperative/ defunct; and keeping a company ‘dormant’ while the founders plan to pivot, thereby providing fewer compliances.

In this blog, we delve into voluntary winding up and liquidation.

It takes a long time to shut down a company in India. The procedural aspects are lengthy and there can be delays in these processes. Further, ensuring that the many stakeholders such as creditors, tax departments, employees are not left in the lurch, does take time.

About winding up

Winding up means a proceeding by which a company is dissolved. The assets are disposed-off, the liabilities are paid-off and the surplus, if any, is then distributed among the members in proportion to their holdings in the company.

Winding up proceedings are governed by the provisions of the Companies Act 2013 as well as Insolvency and Bankruptcy Code 2016. Sections 271 to 275 of the Act govern the mode and process of winding up of companies. The three modes of winding up are (a) Winding up by the National Company Law Tribunal (b) Voluntary winding up under Section 59 of the Code (c) ‘Fast Track Exit Scheme’ applicable to defunct companies under Section 248 of the Act.

Voluntary winding up process:

Below is a description of the process and there are many nuances involved in each of these steps.

Declaration of solvency:

The Board of Directors of a company will have to submit a declaration of solvency to the Registrar of Companies, stating that: (i) the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the liquidation process; (ii) the entity is not being liquidated to defraud any person, along with audited financials and valuation report by a registered valuer.

Corporate resolutions:

Upon submission of declaration of solvency, the company, within four weeks from the date of declaration of solvency will have to pass a special resolution passed by shareholders of the company stating that the company be liquidated, and an insolvency professional be appointed to act as the liquidator.

If the company has debts, creditors representing two-third of the value of the total debt of the corporate person must approve the winding up resolution passed by the company. This approval must be given within seven days of the resolution.

Appointment of Insolvency Professional as Liquidator:

The eligibility criteria to act as insolvency professional is provided in the Insolvency and Bankruptcy Code 2016 and insolvency professionals can act as liquidators to carry out the liquidation proceedings under the code.

The shareholders of the company shall pass shareholders special resolution to appoint the insolvency professional to act as the liquidator of the company.

Intimation to RoC and IBBI

The company shall notify the RoC and the Insolvency and Bankruptcy Board of India (IBBI) about the resolution to liquidate the corporate person, within seven days of such resolution or the subsequent approval by the creditors, as the case may be.

Publication of the appointment in local newspaper

Within five days of the liquidator’s appointment, he/she shall carry out a newspaper publication regarding his/her appointment in one English newspaper and one regional language newspaper having wide circulation where the registered office and the principal office if any, of the company is situated. This publication is primarily to bring to the notice of public and other stakeholders about the impending liquidation.

Maintenance of separate bank account

Liquidator should open a separate bank account in the name of the company for the purposes of liquidation process. This account will be used exclusively for the purposes of receiving and making payments during the course of liquidation.

Liquidation proceedings by liquidator

Upon appointment of liquidator, he/she shall take over the control of the company and initiate the liquidation proceedings of the company. This shall include the following:

  • Submission of preliminary report by the liquidator.
  • Maintenance of books and records of the company.
  • Ascertainment and verification of claims received from the stakeholders which shall include creditors, employees, workmen and other stakeholders.
  • Recovery of monies due to the company.
  • Sale of assets of the company.

Preferential Payments

The Insolvency and Bankruptcy Code 2016 provides for priorities of payment to be made in case of liquidation of a company. The preferential payment shall be made in order of priority as below. This will be followed by the liquidator, irrespective of what is covered in the shareholders agreements.

  1. The insolvency resolution process costs and the liquidation costs paid in full
  2. Following payments shall rank equally:
  3. Workmen’s dues for the period of 24 months preceding the liquidation commencement date.
  4. Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52 of the Code.
  5. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.
  6. Financial debts owed to unsecured creditors.
  7. The following dues shall rank equally:
  8. Any amount due to the Central government and the state government in respect of the whole or any part of the period of two years preceding the liquidation commencement date.
  9. Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.
  10. Any remaining debts and dues.
  11. Preference shareholders, if any, and
  12. Equity shareholders, as the case may be.

Final report of liquidator, application to the tribunal and order for dissolution

Upon completing the liquidation proceedings, the liquidator shall prepare a final report to be submitted to the tribunal. The liquidator should mention all important facts concerning liquidation of the company in his/her final report. After completion of liquidation of the company, the liquidator would submit his/her final report to the tribunal and an application would be made for the dissolution.

On the basis of this, the tribunal will pass an order that the company shall be dissolved from the date of that order and the company shall be dissolved accordingly. This order has to be further intimated to ROC, as well.

Conclusion

The processes for various kinds of shutdown/winding up is prescriptive and lengthy. It also takes a long time to shut down an entity.

Earlier, the courts were overburdened with other matters and could not dispose off the winding up cases.

India enacted the IBC with great speed. Separately, with the establishment of the National Company Law Tribunal, the time taken for winding up has reduced substantially from many years to a few years. There is certainly more that can be done. Many processes need to be further streamlined and it helps if various government departments and the tribunal itself adheres to stipulated timelines.

Please Note: In the process of simplifying the reading of this blog, we have excluded many technical aspects/document description, filings, timelines etc to be followed. Please obtain legal advice, since the specific requirements of your company have to be considered.

The series was written with the help and research of the team at NovoJuris Legal.

Edited by Javed Gaihlot

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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