More disclosures, status report now part of voluntary liquidation plan

Company directors filing for voluntary liquidation process under the Insolvency and Bankruptcy Code (IBC) must disclose pending proceedings, assessments and litigations before the statutory authorities, the modified rules by the Insolvency and Bankruptcy Board of India (IBBI) have said.

The directors must also declare beforehand that sufficient provisions have been made to meet the likely obligations arising on account of the pending proceedings.

IBBI has amended the regulations “to streamline the voluntary liquidation process and facilitate the distribution of unclaimed proceeds to the stakeholders before the dissolution of the corporate person.”

In the amendments dated February 5, the IBC regulator has also said that stakeholders claiming entitlement to funds in the corporate voluntary liquidation account can apply to the liquidator for withdrawal.

This can be done in the period after submission of the final report but before the company is dissolved. 

“Upon receiving such a request, the liquidator shall verify the claim and request the board to release the funds to him/her for onward distribution,” IBBI said.

The revised rules also require the liquidator to hold a meeting of contributories of the corporate person if the process is not completed within 90 to 270 days.

It has to present a status report within 15 days from the end of such a period, specifying the reasons for delay.

The liquidator, IBBI said, should “apprise the meeting about additional time required for completing the process.”

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 some people were trying to abuse the process and close the liquidation process on their own without informing the adjudicating authority. The Amendment Regulations are effective from January 31, 2024.

“These regulations could pose some implementation challenges, such as estimating provisions, holding meetings, and verifying claims,” Jidesh Kumar, managing partner, King Stubb & Kasiva, Advocates and Attorneys, said. 

A company can initiate voluntary liquidation proceedings if the majority of directors or designated partners make a declaration that the company has no debt or will pay its debt in full from the proceeds of assets to be sold under the proposed liquidation. 

It also has to declare that the company is not being liquidated to defraud any person. 

Till financial year 2022-23, 1,562 companies initiated voluntary liquidation, of which final reports were submitted in 1,039 cases and 17 of these were withdrawn, according to the IBBI data. 

Around 69 per cent of companies entered voluntary liquidation for not carrying out business operations, while 16 per cent said they were commercially unviable. Others cited reasons such as contract termination or promoters unable to manage affairs of the company.