Deciphering the liquidation proceedings under Indian law
Updated: Sep 1, 2022
Liquidation brings about the formal end to a company, in case it has been insolvent or impotent to pay its responsibilities. It is a procedure of terminating the affairs of a company by the virtue of realizing the assets, discharging the liabilities, and distributing the surplus, among the shareholders. For such a proceeding to take place, an administrative person namely, a liquidator has to be appointed by the board of directors. Ultimately, the name of the company is stricken out from the register of companies. In this article, we’ll be dealing with the liquidation proceedings of a company with reference to Indian Law.
A liquidator is a person who liquidates assets and is appointed by a court, unsecured creditors, or stakeholders of a specific company. The appointment of a liquidator is deemed necessary when the company has been insolvent/ bankrupt. Following the appointment, he gains control of all the properties of a company and its associated persons. The liquidator is authorized to vend the assets of the company in a cash market or for that matter any other thing equally consequential.
The most prominent role of the liquidator is to scrutinize all the proceedings of a company. He is required to discern if any assets can be redeemed granting that they have been misplaced or sold at a lower value than the market price. The liquidator has the privilege to reverse such sorts of transactions.
Insolvency: In this situation, a company is unable to pay its debts or dues. A company becomes insolvent when it is incompetent to manage its quality, reputation, etc. with the contemporary market conditions.
Bankruptcy: Bankruptcy is a legal procedure wherein the person or other entities are inefficacious in repaying their outstanding debts to the creditors. It provides financial relief to individuals and corporations with profound debt burdens by suspending the legal actions of creditors (better-known as a stay of proceedings).
TYPES OF LIQUIDATION
Liquidation can be generally classified into three types: Compulsory Liquidation, Voluntary Liquidation, and Creditor's voluntary liquidation.
I.) A Creditors’ Voluntary Liquidation (“CVL”) is an Insolvent Liquidation, which means that a company is unable to pay its debts.
II.) A Members’ Voluntary Liquidation (“MVL”) is a Solvent Liquidation, which means that a company is capable of paying its debts in full, besides the interest. This proceeding takes place when the shareholders of a company choose to retire, realize their investments, or when the company is surplus to the stipulations.
III.) Compulsory liquidation (WUC) is an insolvency procedure that may result in the closure of the company. This process is conventionally initiated by aggrieved or outstanding creditors of a limited company through a court order referred to as Winding Up Petition (WUP). Winding up by the Tribunal can be conducted on the condition that any provisions laid down under section 271 of the Companies Act are fulfilled.
In Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. 1971, it was held that if the court is satisfied and the adequate reasons prevail in the petition for winding up, then it may pass an order for winding up of the company.
PROCEDURE FOR LIQUIDATION OF A COMPANY
The procedure for the liquidation of a company is formulated under the Insolvency and Bankruptcy Code (IBC) and winding-up for other grounds under the Companies Act 2013.
Liquidation Process Under The Companies Act
On January 24th, 2020 the Companies Rules, 2020 were apprised by the Ministry of Corporate Affairs by conscientiously particularizing the liquidation process of the companies.
The procedure for winding up the company is delineated under Section 270 of the Companies Act 2013. The Companies (winding up) rules, 2020 were applicable from 1 April 2020. According to these rules, the liquidation of the company will be carried out by the official liquidator, who in return will take charge of the assets and examine the claims of the company.
The noticeable feature with reference to the Winding-up Rules is the ‘Summary Procedure for Liquidation’ set forth in Part V which provides for summary stratagem for liquidation of small companies enlisted as the Specified Companies. The Winding-up Rules notified by the MCA additionally clarify the provisions of Section 361 of the Companies Act, 2013.
Before the establishment of the Insolvency and Bankruptcy Code, the winding up of a company was initiated by the means of voluntary winding up (Section 304 to Section 323 of Companies Act) and winding up by the tribunal. The former has been eliminated with the advancement of the code and the latter still exists under the Companies Act, 2013.
Liquidation Process Under The Insolvency And Bankruptcy Code
Under the Insolvency and Bankruptcy Code (IBC), 2016, when a liquidation proceeding takes place, a Liquidator is appointed by the Committee of Creditors (CoC). Section 29A of the Code was inserted with retrospective effect from November 23, 2017, and stipulated a list of individuals who were legally disqualified to be resolution applicants. The inclusion of Section 29A redressed a discrepancy in the IBC which permitted an escape hatch in the Corporate Insolvency Resolution Process (CIRP). The Insolvency and Bankruptcy Board of India has issued the Liquidation Process Regulations which were amended on July 25, 2019, conforming to which Regulation 2B was inserted. Regulation 2B (1) entails a settlement or arrangement propounded under Section 230 of the Act to be concluded within 90 days of the order of liquidation issued under the IBC. On January 06, 2020, further amendment was made in the Regulations and a provision was inserted to Regulation 2B (1) through which it was unambiguously proclaimed that a party incompetent to propose a resolution plan cannot be a party to a compromise or arrangement under Section 230 of the Companies Act.
The IBBI has amended the liquidation process regulations in order to tackle irresolution in cases involving numerous liquidators, This amendment elucidates that in a situation where the liquidator realizes any amount but fails to dispense the same, he/she shall be entitled to a fee in terms of the amount realized by him.
The voluntary liquidation proceeding with reference to a corporate person shall be adjudged to be set in motion from the date of passing of the special resolution. After the passing of such a resolution by the shareholders, the company would be incapable of carrying out any business apart from the finalization of the liquidation. The liquidator devises an application to the National Company Law Tribunals (NCLT) for the dissolution of the company after the assets have been entirely liquidated. Following the order by NCLT, the company stands dissolved. The NCLT took into consideration of approximately 283 companies into insolvency amidst the coronavirus pandemic following the announcement of nationwide lockdown in 2020.
Recently, the Supreme Court in the case of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr (“Arun Kumar Decision”) reviewed the correlation between liquidation proceedings under Section 230 of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. The issue before the apex court was to determine whether a person unqualified to submit a resolution plan under Section 29A of the IBC is restricted to propose a scheme under Section 230 of the Companies Act. The Court held albeit in the absence of Regulation 2B, upon a harmonious interpretation of the IBC and the Act, it would be comprehensible that a scheme of compromise under Section 230 of the Act will occur in the spirit of the underlying objects of the IBC. Hence, the underlying object would then safeguard the company from termination. The Court further emphasized that it would result in an apparent absurdity in case the same persons who are unqualified for submitting a resolution plan, take part in the sale of assets of the company during liquidation proceeding, and by fair means or foul allowed to propose a compromise or arrangement under Section 230 of the Act.
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