Chapter 25 Voluntary Liquidation – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.
Voluntary Liquidation – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material
Question 1.
The Board of Directors of PCM Limited desires to proceed for voluntary winding up of the company and therefore is required to file ‘Declaration of Solvency’. Referring to the provisions of the Relevant Act, answer the following:
(i) What is meant by Declaration of Solvency? Also state the contents of such declaration.
(ii) What procedure is required to be followed by the company to give effect to such declaration.
(iii) What are the provisions of penalty, if the declaration of solvency is made by the directors without any reasonable grounds? [CAFG-I] (May 2015, 8 marks)
Answer:
Declaration of solvency and procedures there of as per insolvency and Bankruptcy Code, 2016.
As per Sec. 59(3), Voluntary liquidation proceedings of a corporate person registered as a company shall meet the following conditions, namely:
(a) a declaration from majority of the directors of the company verified by an affidavit stating that—
- they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
- the company is not being liquidated to defraud any person;
(b) the declaration under sub-clause (a) shall be accompanied with the following documents, namely:
- audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
- a report of the valuation of the assets of the company, if any prepared by a registered valuer;
(c) within four weeks of a declaration under sub-clause (a) there shall be-
(i) a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
(ii) a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:
Provided that the company owes any debt to any person, creditors representing two thirds in value of the debt of the company shall approve the i resolution passed under sub-clause (c) within seven days of such resolution. Punishment for wilful and material omissions from statements relating to affairs of corporate debtor. (Sec.72)
Where an officer of the corporate debtor makes any material and wilful omission in any statement relating to the affairs of the corporate debtor, he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.
Question 2.
The procedure to be followed for voluntary liquidation proceedings is largely similar to the procedure to be followed for insolvent liquidation. However, there are differences between them. What are such marked differences? (Dec 2019, 5 marks)
Answer:
Though the procedure to be followed for voluntary liquidation proceedings under Chapter V Part II of the Insolvency and Bankruptcy Code, 2016 is largely similar to the procedure to be followed for liquidation under Chapter III Part II bf the Code yet there are marked differences as mentioned below:
1. To initiate voluntary liquidation proceedings, where the corporate person is registered as a company, the directors have to provide a declaration of solvency and a declaration that the company is not being liquidated to defraud any person.
2. The declarations have to be accompanied by (a) the audited financial statements of the company and (b) a record of its business operations for the previous two years or the period since its incorporation whichever is later.
3. Further, a report of the valuation of the assets of the company prepared by a registered valuer has to be provided.
4. A resolution in favour of the voluntary winding-up of the company and appointment of an insolvency professional as the liquidator has to be passed within four weeks of the declaration under clause (a) of sub-section (3) of section 59 of the Code.
5. Where the company owes any debt to any person, creditors representing two thirds in value of the debt of the company shall approve the resolution passed under clause (c) of sub-section (3) of Section 59 of the Code within seven days of such resolution.
Question 3.
An insolvency professional shall be eligible to be appointed as a liquidator if he, and every partner or director of the insolvency professional entity of which he is a partner or director is independent of the corporate person. How will you judge that a person is independent of the corporate person? (Dec 2019, 5 marks)
Answer:
According to Regulation 3 (1) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, a person shall be considered independent of the corporate person, if he –
(a) is eligible to be appointed as an independent director on the Board of the corporate person under section 149 of the Companies Act, 2013, where the corporate person is a company;
(b) is not a related party of the corporate person; or
(c) has not been an employee or proprietor or a partner –
- of a firm of auditors or secretarial auditors or cost auditors of the corporate person; or
- of a legal or a consulting firm, that has or had any transaction with the corporate person contributing ten percent or more of the gross turnover of such firm, in the last three years.
Question 4.
What are the powers and obligations of a Liquidator regarding ‘uncalled capital’ or ‘unpaid capital contribution’? (Dec 2020, 3 marks)
Answer:
Regulation 40 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 lays down the provisions relating Liquidator to realize uncalled capital or unpaid capital contribution.
According to Regulation 40:
(1) The liquidator shall realize any amount due from any contributory to the corporate debtor.
(2) Notwithstanding any charge or encumbrance on the uncalled capital of the corporate debtor, the liquidator shall be entitled to call and realize the uncalled capital of the corporate debtor and to collect the arrears, if any, due on calls made prior to the liquidation, by providing a notice to the contributory to make the payments within fifteen days from the receipt of the notice, but shall hold all moneys so realized subject to the rights, if any, of the holder of any such charge or encumbrance.
(3) No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporate debtor.
Question 5.
‘Initiation of voluntary liquidation at the instance of Members or Creditors of the Corporate person intended to be liquidated but dissolution only subject to the orders of Adjudicating Authority National Company Law Tribunal”. Examine the truth in the statement. (Aug 2021, 5 marks)
Answer:
Section 59 of the Insolvency and Bankruptcy Code, 2016 provides details process from initiation to closing of voluntary liquidation of Corporate Person whether solvent or insolvent.
Solvent bodies need to file declaration of solvency test consent of creditors having two-third in value by a suitable resolution needs to be filed with Registrar of Companies.
The liquidator, being a registered Insolvency Professional, is appointed who shall issue public announcement within 5 days of appointment for inviting claims. Thus, voluntary liquidation is initiated at the instance of members or creditors.
The liquidator on completion of liquidation process shall make an application to the National Company Law Tribuna! for seeking orders for dissolution of the corporate person in voluntary liquidation in terms of Section 59(7). The Tribunal having been satisfied passes orders for dissolution as per Section 59(8). A copy of such order is forwarded within 14 days to Registrar of Companies by the Tribunal.
Question 6.
Explain the provisions related to presentation of Annual Status Report by Liquidator during completion of liquidation. (Dec 2021, 5 marks)
Answer:
As per regulation 37 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017-the Liquidator shall present an Annual Status Report(s) indicating progress in liquidation, includingi.
- settlement of list of stakeholders; ‘
- details of any assets that remains to be sold and realized;
- distribution made to the stakeholders; and
- distribution of unsold assets made to the stakeholders;
- developments in any material litigation, by or against the corporate person; and
- filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II of the Code.
The Annual Status Report shall enclose the audited accounts of the liquidation showing the receipts and payments pertaining to liquidation since the liquidation commencement date.
Question 7.
The Directors of Welldone Company Limited are required to file declaration of solvency as they desire to proceed for voluntary winding up of the company. Advise them about the requirements to be followed for the said purpose. [CMAFG – III] (June 2014, 6 marks)
Answer:
Subsection (3) of section 59 lays down that without prejudice to sub-section (2), voluntary liquidation proceedings of a corporate person registered as a company shall meet the following conditions:
(a) a declaration from majority of the directors of the company verified by an affidavit stating that – .
- they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has ho debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
- the company is not being liquidated to defraud any person;
(b) the declaration under sub-clause (a) shall be accompanied with the following documents:
- audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
- a report of the valuation of the assets of the company, if any prepared by a registered valuer;
(c) within four weeks of a declaration under sub-clause (a), there shall be –
(i) a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
(ii) a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:
The proviso appended to sub-section (3) of section 59 lays down that if the company owes any debt to any person, creditors representing two thirds in value of the debt of the company shall approve the resolution passed under sub-clause (c) within seven days of such resolution.
Question 8.
A liquidator is entitled to receive remuneration at 2% on the assets realized, 3% on the amount distributed to Preferential Creditors and 4% on the payment made to Unsecured Creditors. The assets were realized for ₹ 18,50,000 against which payments were made as follows:
| Amount in ₹ | |
| Liquidation Expenses | 18,000 |
| Secured Creditors | 7,50,000 |
| Preferential | 82,000 |
| The amount due to Unsecured Creditors | 12,00,000 |
You are asked to calculate the total remuneration payable to the Liquidator. (Dec 2021, 5 marks)
Answer:
Calculation of remuneration payable to Liquidator
Step I : Calculation of amount available for unsecured creditors
| Amount (₹) | |
| Assets realised | 18,50,000 |
| Less: Liquidation expenses | 18,000 |
| Payment to Secured Creditors | 7,50,000 |
| Payment to Preferential Creditors | 82,000 |
| Amount available for unsecured creditors | 10,00,000 |
Step II : Calculation of Remuneration to Liquidator
| Amount (₹) | |
| Remuneration on realisation of assets (2% of (₹) 18,50,000) | 37,000 |
| Remuneration on amount distributed to Preferential Creditors (3% of (₹) 82,000) | 2,460 |
| Remuneration on payment made to Unsecured Creditors (10,00,000 × 4/104) | 38,462 |
| Remuneration payable to Liquidator | 77,922 |
Question 9.
Though the procedure to be followed for voluntary liquidation proceedings under Chapter III is largely similar to the procedure to be followed for insolvent liquidation under Chapter III of the Code yet there are marked differences. Point out some differences between two.
Answer:
1. To initiate voluntary liquidation proceedings, where the corporate debtor is a company, the directors have to provide a declaration of solvency and a declaration that the company is not being liquidated to defraud any person.
2. The declarations have to be accompanied by (a) the audited financial statements of the company and (b) a record of its business operations for the previous two years or the period since its incorporation whichever is later.
3. Further, a report of the valuation of the assets of the company prepared by a registered valuer has to be provided.
4. A resolution in favour of the voluntary winding up of the company and appointment of an insolvency professional as the liquidator has to be passed within four weeks of the declaration under clause (a) of sub-section (3) of section 59.
5. Where the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the resolution passed under sub-clause (c) within seven days of such resolution.
Question 10.
Explain the provisions related to presentation of kAnnual Status Report” by liquidator?
Answer:
Liquidator shall present an Annual Status Report(s)indicating progress in liquidation, including –
- settlement of list of stakeholders,
- details of any assets that remains to be sold and realized
- distribution made to the stakeholders, and
- distribution of unsold assets made to the stakeholders;
- developments in any material litigation, by or against the corporate person; and
- filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II of the Code.
The Annual Status Report shall enclose the audited accounts of the liquidation showing the receipts and payments pertaining to liquidation since the liquidation commencement date.
Voluntary Liquidation Notes
Voluntary Liquidation of Corporate Persons
- Section 59 in Chapter V of Part II of the Insolvency and Bankruptcy Code, 2016 provides for the initiation of voluntary liquidation proceedings by a corporate debtor which has not defaulted on any debt due to any person
- a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings
Conditions for voluntary liquidation proceedings of corporate person registered as company
(a) a declaration from majority of the directors of the company verified by an affidavit stating that:
- they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation
- the company is hot being liquidated to defraud any person
(b) the declaration under sub-clause (a) shall be accompanied with the following documents:
- audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
- a report of the valuation of the assets of the company, if any prepared by a registered valuer
(c) within four weeks of a declaration under sub-clause (a), there shall be
a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator
Requirement of notification
Sub-section (4) lays down that the company shall notify the Registrar of Companies and the Board about the resolution under sub-section (3) to liquidate the company within seven days of such resolution or the subsequent approval by the creditors, as the case may be.