IBBI proposes mechanism to allow withdrawal from voluntary liquidation

The Insolvency and Bankruptcy Board of India (IBBI) has proposed a statutory mechanism that will allow a company to withdraw from the process of voluntary liquidation at any point after its initiation.
 

Unlike the corporate insolvency resolution and liquidation process of a stressed company, voluntary liquidations are not supervised by a committee of creditors or a stakeholders’ consultation committee.
 

In the absence of such rules, there were concerns that certain corporate persons may be abusing the process and closing the liquidation process on their own without informing the adjudicating authority.
 

The IBBI said, “The proposed amendment provides an orderly framework for withdrawal from the process, by way of insertion of new regulation, which also ensures adequate checks and balances so that the process is not misused.”
 

The rules propose that a corporate person be allowed to seek approval of the adjudicating authority for withdrawal from voluntary liquidation.
 

The process to rescind would be the same as was followed to initiate it - approval by a special resolution, passed by members or partners. This should be supplemented either by the  approval of creditors representing two-third in value of the debt if no asset of the corporate person has been realised by the liquidator or the approval of all unpaid creditors.

 

The bankruptcy regulator has also suggested that the application for withdrawal be filed by the liquidator before the National Company Law Tribunal (NCLT) with the assurance that due process for closure had been followed, and that the closure was not initiated to defraud any person.

IBBI in its discussion paper has said that the move could help in saving a potentially viable company from dissolution, avoiding destruction of value of resources and adverse effect on other stakeholders such as workmen, employees, raw material suppliers.
 

In a dynamic market economy, the market situation may evolve from being unfavourable at the time of initiation of the voluntary liquidation process to advantageous and promising justifying continuation of the operations subsequently. “If there is a business opportunity, closure of the voluntary liquidation process midway may serve the interests of stakeholders and the economy better,” IBBI said.
 

Voluntary liquidation can take upwards of six months from a procedural perspective. “The proposed amendment is to allow for a fresh start if tides were to turn during the process. If Covid has taught anything, it is that there is indeed no certainty. It is therefore likely that hopes of revival emerge post the decision to liquidate has been taken,” Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas & Co, said.
 

While the law was silent on this subject, withdrawal of voluntary liquidations has happened in the past. Eight such processes were cancelled, according to IBBI till October 2020. In five of them it was done through a special resolution while in others it was either the liquidator or the corporate person initiating the process, who approached the NCLT.
 

“The proposed amendment will bring clarity about the process of withdrawing the company from voluntary liquidation. Withdrawals have happened earlier too, but there was no uniformity in the law. Making it part of the Code will bring certainty,” said Manoj Kumar, partner, Corporate Professionals.
 

IBBI has invited public comments on the proposed amendments by December 15, 2020.