The Insolvency and Bankruptcy Code (IBC), 2016, is a law in India that helps manage financial difficulties for businesses by organizing how they resolve debts or close down. One part of this law, Section 59 of IBC, explains how a company or similar organization (called a "corporate person," like a company or limited liability partnership) can choose to close its operations on its own if it hasn't failed to pay its debts. This process is called voluntary liquidation, and it allows businesses to shut down in an orderly way without being forced to do so because they can't pay their bills. This article breaks down Section 59 of the IBC in simple terms, covering what it does, the steps involved, the conditions businesses must meet, and recent updates to the process. It’s designed to help business owners, legal professionals, and others understand how voluntary liquidation works.
Unlock new career opportunities with The Legal School’s Certification in Bankruptcy & Insolvency Law: Corporate Restructuring & Debt Resolution, in collaboration with IndusLaw. This six-month program, led by industry experts, equips you with critical skills in insolvency litigation, financial distress management, and corporate rescue strategies. Earn a prestigious certificate and elevate your expertise in a rapidly evolving field!
What is Section 59 of the IBC, 2016?
Section 59 of the IBC, 2016, provides a clear process for companies or limited liability partnerships that want to close down voluntarily. This applies only to businesses that are not in financial trouble which means that they haven’t missed payments or defaulted on their debts. The process ensures that the closure is legal, transparent and fair to everyone involved, such as employees, creditors, and shareholders.
The section outlines specific steps like getting approval from directors and members, submitting financial documents and appointing a professional to manage the closure. It also connects to rules set by the Insolvency and Bankruptcy Board of India (IBBI), which provides detailed guidelines through the IBBI (Voluntary Liquidation Process) Regulations, 2017.
Step-by-Step Explanation of Section 59
Section 59 lays out a structured process for voluntary liquidation. Here’s a clear breakdown of its key points:
1. Who Can Use This Process?
Any corporate person, such as a company or limited liability partnership, can start voluntary liquidation if they have not defaulted on any payments. This means the business must either have no debts or be able to pay all its debts by selling its assets.
2. Directors’ Declaration
The majority of the company’s directors must sign a sworn statement (called an affidavit) saying:
They’ve carefully checked and found the company either has no debts or can pay all its debts by selling its assets.
The liquidation is not being done to cheat or hide anything from creditors or others.
This affidavit must be supported by:
Audited financial statements and business records for the past two years (or since the company was formed, if it’s newer).
A valuation report (if needed) from a registered valuer to show the value of the company’s assets.
3. Approval from Members
Within four weeks of the directors’ declaration, the company’s members (like shareholders) must hold a general meeting and pass a special resolution. This resolution does two things:
Approves the decision to liquidate the company.
Appoints an insolvency professional (a trained expert registered with the IBBI) to act as the liquidator, who will manage the process.
4. Approval from Creditors (if There Are Debts)
If the company has any debts, creditors who hold at least two-thirds of the total debt value must approve the liquidation plan within seven days of the members’ resolution.
5. Notifying Authorities
Within seven days of the members’ resolution (or creditor approval, if needed), the company must inform two authorities:
The Registrar of Companies (RoC), which oversees company registrations.
The Insolvency and Bankruptcy Board of India (IBBI), which regulates insolvency processes.
6. When Liquidation Starts
The liquidation process officially begins on the date of the members’ resolution, or after creditor approval if debts exist.
7. Rules That Apply
The liquidation follows certain rules from other parts of the IBC (Sections 35 to 53 of Chapter III and Chapter VII), with adjustments as needed. These rules cover things like how assets are sold, how debts are paid, and penalties for wrongdoing.
8. Completing the Process
Once the company’s affairs are fully sorted out and its assets are sold, the liquidator applies to the National Company Law Tribunal (NCLT), a special court, to officially dissolve the company.
9. Dissolution Order
The NCLT reviews the application and issues a dissolution order, which legally ends the company’s existence. This order takes effect immediately.
10. Final Notification
Within 14 days of the dissolution order, a copy must be sent to the Registrar of Companies or other relevant authority.
Recent Updates to the Process
Section 59 itself hasn’t changed since it became effective on April 1, 2017. However, the IBBI made updates to the related regulations in 2022 to make the process faster and more efficient. These changes include:
Faster Distribution of Money: The time to distribute money from asset sales to creditors or members was reduced from six months to 30 days.
Quicker Final Reports: The liquidator must submit a final report within 90 days if there are no claims (debts or disputes) and 270 days if there are claims to settle.
These updates don’t change the main rules of Section 59 but make the process quicker while keeping it transparent and legal.
How Section 59 Fits with Other Laws
Section 59 of IBC is mentioned in other laws, like the Companies Act, 2013. For example, Section 117(3)(f) of the Companies Act, 2013 was updated to reference Section 59, showing that it’s part of India’s broader legal system for managing companies. This connection ensures that voluntary liquidation aligns with other corporate laws.
Summary
Section 59 of the IBC, 2016, provides a clear and organized way for companies and limited liability partnerships to close down voluntarily if they are not in financial trouble. Effective since April 1, 2017, it requires businesses to follow strict steps, such as getting director and member approvals, submitting financial documents, and appointing a liquidator. Recent updates in 2022 have made the process faster, but the core rules remain the same. Businesses and stakeholders should check official sources, like IBBI regulations, to ensure they follow the rules correctly, as there aren’t many recent court cases specifically explaining this section.
Related Posts:
Section 59 of IBC: FAQs
Q1. What is the purpose of Section 59 of the IBC, 2016?
Section 59 allows a corporate person (e.g., companies or LLPs) that has not committed any default to voluntarily liquidate its affairs. It provides a legal framework to wind up operations transparently to ensure that the debts are paid or assets are distributed appropriately, as per the IBBI (Voluntary Liquidation Process) Regulations, 2017.
Q2. What are the key requirements for initiating voluntary liquidation under Section 59?
The company must have a majority of directors declare (via affidavit) that it has no debts or can pay them fully from asset sales and is not liquidating to defraud anyone, provide audited financial statements and a valuation report (if applicable), pass a special resolution within 4 weeks to approve liquidation and appoint a liquidator and If debts exist, obtain approval from creditors representing two-thirds of the debt value within 7 days.
Q3. Who can act as a liquidator under Section 59, and what is their role?
An insolvency professional registered with the IBBI must be appointed as the liquidator through a special resolution. The liquidator manages the liquidation process, including selling assets, distributing proceeds, preparing a final report, and applying to the NCLT for the company’s dissolution.
Q4. How long does the voluntary liquidation process take under Section 59?
The process timeline depends on claims i.e., if no claims exist, the liquidator must complete the process and submit a final report within 90 days or if claims exist, the process must be completed within 270 days also, recent IBBI amendments (2022) require proceeds from asset sales to be distributed within 30 days.
Q5. What happens after the voluntary liquidation process is complete under Section 59?
Once the company’s affairs are fully wound up and assets liquidated, the liquidator submits a final report and applies to the National Company Law Tribunal (NCLT) for a dissolution order. Upon approval, the company is dissolved, and a copy of the order is sent to the Registrar of Companies within 14 days.
