Voluntary Liquidation Process of Corporate Persons
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Introduction
Companies all across the world, whether big or small, needs to be kept under the checks and balance of law, in order to maintain efficiency and transparency towards the public. While the growth of the company and its good future prospects are what drives public and other lenders to invest their money in the company, poor management or bad decision can sometimes result in the company becoming not capable of working successfully.
Therefore, when the times comes when the company is not able to operate at its full capability, that is the time to close the operations of the company, in order to protect the interest of the lenders and general public. However, there might be times when even in worse situations, company and its management are refusing to close down their business and the company. Thus, at such point of time, it becomes the duty of the law to shut down the company and its operations, in order to protect the interest of the company.
There comes the concept of liquidation. Liquidation is the process of bringing the business to the end by selling its assets and distributing the proceeds from the sale to the claimants.
Liquidation of Company vis-à-vis Liquidation of Corporate Persons
Pre-Conditions for Voluntary Liquidation Process
Process of Voluntary Liquidation of Corporate Persons
Power and Duties of Liquidator
Conclusion
Liquidation of Company vis-à-vis Liquidation of Corporate Persons
Section 304 of the Companies Act provides for voluntary winding up of the company. It provides for either general resolution or special resolution in the company’s meeting, for voluntarily winding up of the company. However, such voluntary winding up of the company is different from liquidation of corporate persons.
Voluntary Liquidation of Corporate Persons have been defined under Section 59 of the Insolvency and Bankruptcy Code, 2016. Furthermore, under the Insolvency and Bankruptcy Code, 2016, Corporate Person tend to state the power and responsibilities given to the corporations, that in turn allow them to have status to that of a real person.
Further, Section 59(1) of the Insolvency and Bankruptcy Code provides that when a corporate person has voluntarily decided to go under the liquidation process, it shall have to prove that it has not committed any default and is further required to go through the voluntary liquidation process.
Pre-Conditions for Voluntary Liquidation Process
Section 59(3) of the Insolvency and Bankruptcy Code provides for certain pre-requisites that a Corporate Person has to go through before undergoing the process of voluntary liquidation.
- Declaration of Insolvency: The first and foremost pre-requisite in the process of voluntary liquidation is that the corporate person is required to declare its insolvency, through affidavit, which should be accompanied by the majority of the director’s signatures, and have to further state the entire affairs of the company viz. no debt on the company or repayment of the debt from the proceeds to the sale of company’s assets after the liquidation process. Furthermore, Insolvency and Bankruptcy Board has to list out every debt due by the corporate person, in order to safeguard interest of the debtors.
- Necessary Documentation: After the corporate person has declared insolvency, next pre-requisite is completion of the necessary documents. Section 59(3) of the Insolvency and Bankruptcy Code provides for essential documents that are needed to be attached with the voluntary liquidation process, which are:
- Audited financial statements for previous two years or if the company is less than two years old, for the period when the company is incorporated or established;
- And, the valuation of the company’s assets;
Process of Voluntary Liquidation of Corporate Persons
Provisions of Insolvency and Bankruptcy Code, 2016 provides for the process of Liquidation Process of Corporate Persons:
- Appointment of Liquidator – Once the company has furnished its declaration, declaring voluntary liquidation of the corporate person, an official liquidator is appointed to carry out the liquidation process. Under the Insolvency and Bankruptcy Code, only an eligible insolvency professional should be appointed for voluntary liquidation process.
- Public Announcement by Liquidator – After the liquidator have been appointed, he has to make a public announcement of the liquidation process within 5 days of his appointment. After the public announcement, the official liquidator has to request the stakeholders to make their respective claims within 30 days, starting from the date of commencement of liquidation process. Once the public announcement have been made, liquidator has to publish such announcement in one English newspaper and one regional newspaper.
- Submission of proof of claim by Creditors – After the liquidator have invited the stakeholders, the stakeholders have the submit and prove their claims, by annexing the documents as required under the Insolvency and Bankruptcy Code, 2016.
- Verification of claims – After the stakeholders have made their claim, liquidator have 30 days to either accept or reject their claim. Liquidator is at its discretion, and he further can ask for any information, if required.
- Preparation of list of stakeholders – After the liquidator have received their claims and have either accepted or rejected their claims, liquidator have to make a list to those stakeholders, whose claims he has verified. Furthermore, this list has to be prepared within 45 days from the date of receipt of stakeholder’s claim.
- Realization of assets of the Corporate Persons – Once the process of inviting claims and accepting and preparing the final list is completed, liquidator has to commence the process of realizing corporate person’s assets. Thereafter, the sale of the corporate person’s assets will start taking place as per the prescribed mode under the Insolvency and Bankruptcy Code.
- Opening of separate bank account of a corporate person – Once the liquidator has started realizing the assets, he has to open a separate bank account in the name of “involuntary liquidation”. He is supposed to deposit all the money received in excess of Rs. 5000/- in the bank account and can further receive the money in excess of Rs. 5000/- either through cheque or online modes.
- Distribution of realized proceeds – After realizing the proceeds from the sale of the assets, the liquidator has to deposit such amount with the stakeholders within 6 months from the date of such realization. However, liquidator can deduct the cost incurred on the liquidation process before distributing the amount to the stakeholders. Furthermore, in case some assets are remained unsold, liquidator shall distribute such assets among the stakeholders, with the prior permission of the corporate person.
- Preparation of Final Report – Once the assets and the proceeds have been distributed, liquidator is supposed to prepare a final report, detailing the consolidated audited accounts used by him in the process of liquidation. However, when the draft final report is prepared by the liquidator, he has to submit such draft final report with the registrar of the companies, Insolvency and Bankruptcy Board and the National Company Law Tribunal.
- Application for dissolution of the Corporate Person – Once the entire process of liquidation have been completed by the liquidator, he has to apply to the adjudicating authority for the dissolution of the corporate person. After receiving the application, the adjudicating authority shall pass the order of dissolution of the corporate person. The dissolution order shall be made in favour of the Corporate Person and stating that the Corporate Person shall stand dissolved from the date of the order passed by the Adjudicating Authority.
Power and Duties of Liquidator
Under Section 290 of the Companies Act, liquidator derives its powers and duties, which he is required to carry on during the process of liquidation. These powers and duties are:
- He has to do all the deeds required during the process of liquidation, from inviting stakeholders claims to disbursing the proceeds from the sale of corporate person assets.
- Liquidator can further sell the undertakings of the company as well.
- Liquidator have been vested with the power to raise any money, if required, on company scrutiny.
- Liquidator can further inspect the records or the Company’s returns on the Registrar files or any other authority.
- When the Company Liquidator is unable to protect the assets of the Company, then he can take the assistance of any professional or appoint any other person to discharge the duties, responsibilities and obligations of the Company Liquidator, or he can appoint any person or an agent to do that business that Company Liquidator is unable to do himself in the Company.
Conclusion
Thus, corporate person being different from the status of the company, have been vested with the power to be dissolved as and when it feels that the business of the concern is not succeeding. However, the process of liquidation being similar to that of dissolution process of company, Insolvency and Bankruptcy Code provides for the safeguard of the stakeholders through the process of dissolution of the corporate person.