Voluntary liquidation under Insolvency and Bankruptcy Code (IBC), 2016, provides a structured and efficient mechanism for solvent companies in India to wind up their operations voluntarily. This process, governed by Section 59 of the IBC and the Insolvency and Bankruptcy Board of India (IBBI) (Voluntary Liquidation Process) Regulations, 2017, ensures transparency, fairness, and timely closure. It is designed for companies that can pay their debts in full, allowing them to cease operations without legal disputes. This article explains the process, eligibility, steps, timelines and implications in simple terms for a general audience.
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Why Companies Choose Voluntary Liquidation under Insolvency and Bankruptcy Code
Companies may opt for voluntary liquidation for several reasons.The process ensures that assets are sold, debts are settled, and remaining funds are distributed fairly to stakeholders:
Completion of Purpose: Some companies, like those set up for specific projects (e.g., real estate or infrastructure), no longer have a purpose once the project is complete.
Lack of Business Viability: Market changes, technological obsolescence, or legal restrictions may render a business unfeasible, prompting closure.
Tax Planning: Liquidation can help offset capital losses against gains and hence, providing tax benefits.
Eligibility for Voluntary Liquidation
Only solvent companies with no outstanding defaults or the ability to pay debts fully from asset sales can initiate voluntary liquidation under IBC, 2016. Eligible entities include:
Public or private companies (listed or unlisted).
Limited Liability Partnerships (LLPs).
Other corporate entities with limited liability.
Financial service providers, however, follow separate regulations under the Companies Act, 2013, or other applicable laws. The liquidation must not be intended to defraud any person, ensuring ethical closure.
Also read about Section 12A of IBC, 2016.
Conditions for Initiating Voluntary Liquidation
To initiate voluntary liquidation under IBC, 2016, a company must be solvent, with directors declaring no debts or the ability to pay debts fully from asset sales. A special resolution by shareholders (75% vote) is required, and if debts exist, creditors representing two-thirds of the debt value must approve within seven days. The declaration must confirm no intent to defraud. Let’s look into detail:
1. Declaration of Solvency: The majority of directors (or designated partners for LLPs) must submit an affidavit declaring that the company has no debts or can pay all debts from asset sale proceeds. This declaration must include:
Audited financial statements for the last two years or since incorporation, whichever is later.
A valuation report of assets by a registered valuer, if applicable.
2. Shareholder Approval: A special resolution, requiring at least 75% of shareholder votes, must be passed to approve liquidation and appoint an insolvency professional as the liquidator.
3. Creditor Approval: If the company has debts, creditors representing at least two-thirds of the debt value must approve the resolution within seven days.
4. No Fraudulent Intent: The declaration must confirm that the liquidation is not to defraud anyone.
The Voluntary Liquidation Process
The voluntary liquidation process under IBC, 2016, allows a solvent company to wind up its operations by passing a shareholder resolution, appointing a liquidator to sell assets and settle debts and obtaining NCLT approval for dissolution. It ensures a transparent, time-bound closure, which is generally within 90–270 days, depending on involvement of the creditor:
Board Meeting and Declaration: The board of directors meets to issue the Declaration of Solvency, accompanied by financial statements and a valuation report if needed.
Shareholder Resolution: Within four weeks of the declaration, shareholders pass a special resolution to liquidate and appoint a liquidator.
Notification: The company notifies the Registrar of Companies (ROC) and IBBI within seven days of the resolution or creditor approval, using Form GNL-2 for the Declaration of Solvency.
Public Announcement: The liquidator publishes an announcement in English and regional newspapers, and on the company’s website (if applicable), within five days of appointment, inviting creditor claims within 30 days.
Claim Verification: The liquidator verifies claims within 30 days, admitting or rejecting them. Rejected claimants can appeal to the NCLT within 14 days.
Asset Realization: The liquidator sells assets through auctions or contracts and collects any outstanding payments.
Distribution of Proceeds: Proceeds are distributed within 30 days of realization, after deducting liquidation costs, following the priority order in Section 53 of IBC.
Final Report and Dissolution: The liquidator submits a final report, including audited accounts and a statement confirming all assets are sold and debts paid, to the ROC, IBBI and NCLT. The NCLT issues a dissolution order, and the company’s name is struck off the ROC register.
Role of the Liquidator
The liquidator, an independent insolvency professional, is central to the process. Their responsibilities include:
Taking custody of the company’s assets and managing its affairs.
Ensuring compliance with legal requirements.
Verifying and settling creditor claims.
Selling assets and distributing proceeds.
Maintaining records, such as cash books and ledgers, for eight years post-dissolution.
Preparing reports (preliminary, status and final) and applying for dissolution.
The liquidator must be independent, not a related party, and not have been an employee, auditor, or consultant of the company in the last three years.
Timelines and Key Deadlines
The voluntary liquidation process under IBC, 2016, is time-bound, typically completing within 90 days for companies without creditors or 270 days with creditors. Key deadlines include a 7-day notification to ROC and IBBI, a 5-day public announcement, 30 days for claim submissions, and 30 days for claim verification and asset distribution.
Activity | Timeline |
Declaration of Solvency | Within 4 weeks before resolution |
Shareholder Resolution | Within 4 weeks of declaration |
Creditor Approval (if applicable) | Within 7 days of resolution |
Notification to ROC and IBBI | Within 7 days of resolution/approval |
Public Announcement | Within 5 days of liquidator appointment |
Claim Submission by Stakeholders | Within 30 days of liquidation start |
Claim Verification | Within 30 days of claim submission |
Preliminary Report | Within 45 days (or 75 days with creditors) |
Distribution of Proceeds | Within 30 days of realization |
Completion of Liquidation | 90 days (no creditors) or 270 days (with creditors) |
Final Report and Dissolution | By day 90 (no creditors) or 270 (with creditors) |
Find out the Difference Between Insolvency and Bankruptcy
Distribution of Assets
Assets are distributed according to Section 53 of IBC, 2016, in the following order. Unsold assets may be distributed with approval if they cannot be sold due to their nature:
Priority | Recipient |
1 | Liquidation costs (including liquidator fees) |
2 | Workmen’s dues (24 months prior to liquidation) |
3 | Employee dues (12 months prior to liquidation) |
4 | Unsecured financial creditors |
5 | Government dues (2 years prior to liquidation) |
6 | Unsecured operational creditors |
7 | Preference shareholders |
8 | Equity shareholders or partners |
Tax Implications
Voluntary liquidation has tax consequences under the Income Tax Act. These are:
Deemed Dividend: Distributions to shareholders are treated as dividends under Section 2(22)(c), subject to 10% tax deducted at source (TDS) per Section 194.
Capital Gains: Shareholder gains from distributions, after deducting deemed dividends, are taxable as capital gains under Section 46.
Liquidator’s Duty: The liquidator must inform the income tax officer within 30 days of appointment, with personal liability for non-compliance (Section 178).
Stamp Duty: Distributing immovable property requires a sale deed, attracting state-specific stamp duty.
Summary
Voluntary liquidation under Insolvency and Bankruptcy Code, 2016 provides a clear and efficient path for solvent companies to close their operations. By following a structured process with defined timelines, it makes sure fairness to creditors, employees and shareholders. The involvement of an independent liquidator and oversight by the NCLT and IBBI ensures transparency. Understanding this process is crucial for company directors, shareholders, and creditors to navigate business closure effectively.
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Voluntary Liquidation Under Insolvency and Bankruptcy Code: FAQs
Q1. What is voluntary liquidation under Insolvency and Bankruptcy Code?
Voluntary liquidation under Insolvency and Bankruptcy Code (IBC), 2016, allows a solvent company to wind up its affairs voluntarily by appointing a liquidator to settle debts and distribute assets, as per Section 59.
Q2. What is Regulation 37 of voluntary liquidation?
Regulation 37 of the IBBI (Voluntary Liquidation Process) Regulations, 2017, requires the liquidator to prepare a final report detailing the liquidation process, assets sold, debts paid, and distribution of surplus, and submit it to stakeholders and the IBBI.
Q3. What is Section 233 of the Insolvency and Bankruptcy Code?
Section 233 of the IBC allows consolidation of related insolvency proceedings (like cross-border cases) to be handled by a single adjudicating authority for efficiency, subject to court approval.
Q4. What is voluntary liquidation under Companies Act 2013?
Under the Companies Act, 2013, voluntary liquidation (Section 304) allows a company with no debts or ability to pay debts to wind up by passing a special resolution and appointing a liquidator to manage the process.
Q5. What is voluntary liquidation?
Voluntary liquidation is when a company chooses to close its operations, settle all debts, and distribute remaining assets among shareholders, managed by a liquidator, without court intervention.
