Voluntary Liquidation: Companies May Soon Be Allowed A Rethink
A gavel sits on a stage. (Photographer: Daniel Acker/Bloomberg)

Voluntary Liquidation: Companies May Soon Be Allowed A Rethink

The bankruptcy regulator wants to give companies that have voluntarily sought liquidation an opportunity to change their mind. Companies and Limited Liability Partnerships undergoing voluntary liquidation may soon be allowed to withdraw or close such proceedings before they are dissolved. While welcoming this proposal by the Insolvency and Bankruptcy Board of India, experts pointed to certain procedural aspects that will require clarity.

So far, under the insolvency law, more than 750 corporate persons have initiated voluntary liquidation. The Insolvency and Bankruptcy Code, 2016 allows companies and LLPs to voluntarily liquidate if no default has been committed in payment to creditors and the purpose isn’t to defraud any person.

Such entities are required to make payments to all creditors, obtain requisite approval from members (shareholders), appoint a liquidator and then approach the dedicated insolvency tribunal for dissolution. The company or an LLP ceases to exist once the National Company Law Tribunal grants approval.

A Second Chance

Through its discussion paper, the IBBI is aiming to address circumstances where the board of a corporate person may want to revive the business after initiating voluntary liquidation.

This may be due to instances like a new business opportunity arising as a result of economic turnaround or the management’s intention to sell the corporate person as a going concern. Such revival would require withdrawal or closure of the liquidation process. But as things stand, there is no comprehensive legal framework to deal with such situations.

To be clear, the Supreme Court and insolvency law tribunals have allowed corporate persons to withdraw, suspend or cancel voluntary liquidation in as many as 10 cases due to reasons like potential for revival or pending litigation for recovery of money against a corporate person.

The bankruptcy regulator is now proposing to codify such withdrawals. It has suggested that : -

  • Members, partners or contributories of a corporate person - which has not initiated the sale of its assets - can pass a special resolution to withdraw from the liquidation process. However, in cases where a corporate person owes any debt, creditors representing two-thirds of the value of debt should approve such a resolution within 7 days.
  • Where sale of assets has begun, members, partners or contributories can pass a resolution for withdrawal with special majority after such a resolution is either approved by all unpaid creditors or if all of their dues have been settled.
  • After obtaining consent of creditors and members in either scenario, the liquidator can approach the NCLT for seeking approval to withdraw from liquidation.

Procedural Clarity

Insolvency experts that BloombergQuint spoke with welcomed the change but pointed to certain gaps that need to be addressed.

Arka Majumdar, partner at law firm Argus Partners, said one missing aspect in the proposal relates to the unresolved question of determination of creditors for the purpose of voting. Approval by creditors representing two thirds of value of debt will be required for both - initiation as well as withdrawal of voluntary liquidation. But, the question is, how do you ascertain which creditors?, Majumdar said.

Do you go by the same list of creditors who had approved the initial proposal? Or do you go by the list of creditors determined by the liquidator, who is required to invite claims from all the stakeholders? The regulation should clarify this important and specific aspect.
Arka Majumdar, partner, Argus Partners

The role of a liquidator, post the NCLT sanction for withdrawal of the liquidation process, needs guidance as well.

For instance, would the order automatically discharge the liquidator from his role? Who gets control over the bank account? And more importantly, how does the liquidator recover the liquidation cost which have been incurred, Majumdar said.

Stakeholders can provide comments on the proposed changes till Dec. 15.

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