In the words of Henreitta Newton Martin, a common law advocate and writer, “A Company’s curve will never grow flat for a good number of years and may only meet merger or acquisitions and rarely, a winding up”. Winding up of Companies refers to the process by which the life of a Company comes to an end and its property is administered for the benefit of its members and creditors.
Winding up does not essentially mean that the Company is insolvent. A Company may be wound up at any time with the approval of the members. The assets of the Company are distributed among the creditors and the surplus if any is distributed among the members. The winding up of companies is governed by the Companies Act, 2013 and the Insolvency and Bankruptcy Code (IBC), 2016 (“Code”).
So far as the Code is concerned, it fundamentally provides for two methods to facilitate winding up i.e., a) by way of voluntary liquidation which can be initiated by a corporate entity that has not committed any default in repayment of debts, for reasons including but not limited to change in market environment, technological obsolescence, change in objectives etc., and b) by way of Corporate Insolvency Resolution Process (CIRP) which aims to revive the companies under debt, by assisting them in settling their dues and continuing as a going concern.
VOLUNTARY LIQUIDATION
In order to invoke Voluntary liquidation[1] under the IBC, the following are the conditions required to be satisfied by the Company:
- Convene a board meeting for approval of voluntary liquidation and appointment of liquidator whereby a declaration of solvency shall be filed by the majority of directors in an affidavit, that they have inquired into the affairs of the Company and that the Company has no debt or will be able to repay its debts upon sale of assets in the process of voluntary liquidation and, that the Company is not liquidated to defraud any person.
- The declaration by the directors shall be accompanied by the following documents:
- Audited financial statements and record of business operations of the company for the preceding two financial years or from the date of incorporation and
- A valuation report of the assets of the Company, if any, prepared by a registered valuer.
- The declaration of solvency shall be filed with the registrar within 7 days of the board meeting in Form GNL-2.
- Within four weeks from the declaration, the Company shall pass a special resolution in the general meeting approving the voluntary liquidation and also providing for the appointment of a liquidator. Provided that if the Company owes any debt to any person, creditors representing two-third in value shall approve the resolution passed within seven days of passing such resolution.
- The Company shall notify the Registrar and the Insolvency Board after the resolution is passed. The proceedings of voluntary liquidation shall be deemed to have commenced on the date of passing the resolution.
- The liquidator shall then undertake the following steps to liquidate the corporate person:
- Make a public announcement within 5 days of appointment inviting stakeholders for submission of claims within 30 days from the liquidation commencement date.
- Submission of a preliminary report within 45 days of liquidation commencement date consisting of the capital structure of the Company, estimated assets and liabilities, proposed plan of action etc.
- Opening of a separate bank account with a scheduled bank in the name of the corporate person followed by ‘in voluntary liquidation’.
- Realization of assets and distribution of proceeds within 30 days of receipt of the amount to the stakeholders.
- Preparation of final report after completion of the liquidation process.
- The liquidation process shall be completed within a period of 270 days from the liquidation commencement date.
- After the affairs of the Company are wound up and the assets of the Company are completely liquidated, the liquidator shall make an application to the adjudicating authority for dissolution of the corporate entity.
CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)
With the introduction of the Code, the whole process of corporate insolvency resolution and subsequent liquidation was streamlined with a concrete mechanism. The Code introduced Corporate Insolvency Resolution Process (CIRP) as a recovery mechanism to revive the corporate debtor and continue as a going concern. CIRP can be initiated by a Financial Creditor, Operational Creditor or Corporate Debtor itself.
- Financial Creditor is any person to whom a financial debt is owed. Section 5(8) of the Code stipulates the definition of financial debt and what comes within its purview. Banks and financial institutions are examples of financial creditors.
- Operational creditor is a person to whom an operational debt is owed on account of any goods or services provided by them. Vendors and suppliers, employees, government etc. are examples of operational creditors.
- Corporate debtor refers to the Company for whom the process of CIRP is being initiated.
How to Apply for CIRP?
Step 1: Application to NCLT
The financial creditor, operational creditor or corporate debtor can make an application to the NCLT for initiation of CIRP. The creditors have to satisfy separate requirements as provided in the Code and also prove the presence of a debt and default for acceptance of application.
The NCLT may accept or reject the application within 14 days of receipt of the application. In a recent judgment of the Hon’ble Supreme Court titled Vidarbha Industries Power Limited v. Axis Bank Limited,[2]it has been ruled that in cases of financial debt, even where the Adjudicating Authority is convinced about the existence of a debt and default, it may still reject the application for CIRP on other grounds.
Step 2: Appointment of Interim Resolution Professional
Once the application is accepted and the corporate debtor is accepted into the CIRP, an interim resolution professional is appointed. The management ceases to have any control over the functioning of the Company and is placed under the interim resolution professional who verifies the claims of the debtors and within 30 days of commencement of CIRP, constitutes a Committee of Creditors to take over the affairs of the Company. The Committee of Creditors takes all major decisions with respect to the Company.
Step 3: Moratorium
Further, the adjudicating authority also imposes a moratorium restricting the corporate debtor from taking certain actions like disposing/transfer of assets, continuation of legal proceedings etc. until the completion of CIRP.[3]
Step 4: Appointment of Resolution professional and acceptance of Resolution Plan
The Committee of Creditors appoints a resolution professional who may be the same person as that of the interim resolution professional or a separate independent person.
A resolution applicant then submits a resolution plan to the resolution professional for settlement of the debt. The resolution professional then submits that resolution plan approved by the Committee of Creditors by a vote of not less than 60%, to the adjudicating authority.
If the plan is approved by the adjudicating authority, it becomes legally operative on the corporate debtor, its employees, stakeholders etc. and implemented accordingly. The resolution professional is required to obtain necessary statutory approvals within one-year from the date of approval by the adjudicating authority.
However, where the resolution plan fails to satisfy the requirements of the Code, the adjudicating authority shall pass an order for liquidation of the corporate debtor.
Furthermore, the adjudicating authority may pass an order for liquidation of the corporate debtor in such other circumstances;
- Where the resolution plan required under Section 30(6) of Insolvency Code, 2016 is not received before the expiry of the insolvency resolution process or the maximum period permitted for completion of the CIRP under Section 12 of the Code;
- Before approval of the resolution plan by the adjudicating authority, the resolution professional communicates the decision of the Committee of Creditors to liquidate the Company;
- Where the resolution plan approved by the adjudicating authority is contravened by the Corporate Debtor, any other person other than the corporate debtor whose interests are prejudicially affected may make an application to the adjudicating authority for liquidation of the Corporate Debtor.
Step 5: Time limit for completion of CIRP:
As a thumb rule, the process of CIRP should be completed within 180 days or within the extended period of 90 days. However, under no circumstances shall the time frame exceed 330 days. [4]
The pertinence of the above rule was also reiterated in SBI v Jet Airways (India) Ltd[5] , where the NCLT observed that despite the Code providing for a time limit of 180 days for completion of CIRP, every effort shall be made by the resolution professional and the members of the Committee of Creditors to expedite the matter and finalize the resolution plan at the earliest.
Thus, it is amply clear that the concept of perpetuity of a Company is one of the core principles of the Company law jurisprudence and this has been further intensified by the introduction of the Insolvency and Bankruptcy Code 2016, which has brought about significant contributions to facilitate the process of winding up of companies and also to seek liquidation only as a last resort after exhausting all efforts to continue as a going concern.
Blog Author – Varsha Shivaraj
[1] Section 59 of IBC.
[2] Civil Appeal No. 4633 OF 2021
[3] Section 14 of the Insolvency and Bankruptcy Code, 2016
[4] Section 12(1) of the Insolvency and Bankruptcy Code, 2016
[5] Company Appeal (AT) (Insolvency) No. 707 of 2019
