Practical Issues in Voluntary Liquidation under IBC 2016

Voluntary Liquidation Practical Issues

Posers 1) Whether the provisions of the Companies Act, 2013 are applicable to Voluntary Liquidation under IBC, 2016 2) Whether initiation of Voluntary Liquidation under IBC, 2016 is deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor 3) Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the AA. If yes, what will be the starting point of look back period? 4) Is it possible to dissolve the company while avoidance applications are pending for adjudication 5) What will be the treatment of any recoveries made out of avoidance transactions

Process

1. Who can initiate: a corporate person who intends to liquidate itself voluntarily and has not committed any default; default means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be Section 3(12); 2. Conditions and procedural requirements: specified in Regulation 3 to 41 of IBBI (Voluntary Liquidation Process) Regulations, 2017 3. Main conditions: without prejudice to above, the following conditions must be complied: a) declaration from majority of the directors of the company verified by an affidavit (+)Audited F.S. (+) Valuation Report; b) within 4 weeks of (a) ~ pass SR for VL and liquidator's appointment ~ he needs to intimate IBBI within 7 days; c) get approval of above SR within next 7 days ~ from creditors representing 2/3rd value of debt

4. Notify RoC and IBBI: within 7 days of SR or the subsequent approval by the creditors, as the case may be.; 5. VL Commencement Date: deemed to have commenced from the date of passing of the resolution; 6. PUFE transactions and Offences & Penalties: sections 35 to 53 of Chapter III and Chapter VII shall apply, mutatis mutandis; 7. Application to AA: where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the AA for the dissolution of such corporate person; 8. Dissolution Order: AAwill thereafter pass Dissolution Order 9. Filing with RoC or relevant authority: within 14 days of such order

Reporting [Regulation 8] The liquidator shall prepare and submit Minutes of consultations with stakeholders Preliminary Report Status Report Final Report With 45 days of VLCD Periodically when VL gets delayed

Claims [Regulation 16, 17, 18, 19 and 20] Operational Creditors Financial Creditors Workmen and Employees Other Stakeholders Form D/ Form E Form B Form C Form F Evidence Evidence Evidence Evidence

Completion of liquidation [Regulation 37] Liquidator shall endeavour to complete the liquidation process of the corporate person and submit the Final Report within 270 days from VLCD where creditors have approved SR 90 days in other cases Where the process is delayed Hold first meeting of contributories within next 15 days Hold subsequent meeting(s) at the end of every succeeding 270 days/ 90 days Present Status Report with audited accounts of the liquidation showing the receipts and payments pertaining to liquidation since VLCD File Status Report with IBBI also within next 7 days

Preservation of records [Regulation 41] electronic copy of all records (physical and electronic) minimum period of 8 years physical copy of records minimum period of 3 years

Process and Timelines ~ at a glance

Process Initiation Steps Days Requires a declaration from majority of Directors/ Designated Partners to be verified by anAffidavit To be accompanied by latest two years audited financial statements or incorporation as the case may be Report of valuation of the Company, if any, by Registered Valuer Sending notice of General Meeting To approve Voluntary Liquidation 28 days before the Voluntary liquidation is commenced for a period since Convening General Meeting T (Liquidation Commencement Date) To appoint liquidator and fix his remuneration

Process Public Announcement in Form A Steps Days T + 5 To be made within 5 days from the date of appointment of liquidator To be published in one English and one Regional language newspaper, on the website of Corporate Person and at IBBI Website (public.ann@ibbi.gov.in) To specify the last date of claim which shall be 30 days from liquidation commencement date The Liquidator shall intimate about the resolution passed for voluntary liquidation of the company to IBBI and ROC NOC from creditors representing 2/3rd of value of debt The liquidator shall open a bank account in the name of corporate person followed by the words, In voluntary liquidation in a Scheduled Banks, for the receipt of all moneys due to the Corporate Person Intimation of Commencement of Voluntary Liquidation Opening of bank account T + 7

Process Intimation and NOC Steps Days T + 30 Intimation to Income Tax Department within One month of passing resolution regarding Voluntary Winding up of the Company and to obtain NOC for the same Last date for submission of claim shall be mentioned in the public announcement made by the liquidator. Submission of preliminary report will be done by the liquidator detailing the Regulation 9 Liquidator shall verify the claims submitted and may either admit or reject the claim, in whole or in part. Liquidator to prepare list of stakeholders within 45 days from the last date for receipt of claims Receipt of Claims Preliminary Report T + 30 T + 45 contents mentioned in Verification of claims and preparing a list of stakeholders T + 60 T + 75

Process Realization of Assets Steps Days The liquidator shall endeavor to recover and realize all assets and dues of the corporate person in a time bound manner for maximization of value for the stake holders The liquidator shall distribute the proceeds from realization within 6 months from the receipt of the amount to the stakeholders The liquidator shall endeavor to complete the process within 270 days/ 90 commencement date Liquidator shall apply to NCLT for an order to pay into the Companies Liquidation Account in the public account of India any unclaimed proceeds on the date of order of dissolution Distribution of proceeds Completion of liquidation process Unclaimed proceeds of liquidation or undistributed assets T + 270/ 90 days from liquidation

Process Final Report Steps Days Submission of Final Report to be made to ROC, IBBI and NCLT Application to NCLT has to be moved by the liquidator along with Final Report for the dissolution of Corporate Person NCLT shall pass an order and the Corporate Person shall be dissolved from the date of such order. The copy of the order to be forwarded to the authority with which the Corporate Person is registered Order of Dissolution Within 14 days from the date of order

Posers

Posers Whether the provisions of the Companies Act, 2013 are applicable to Voluntary Liquidation under IBC, 2016 winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable Section 2(94A) of the CompaniesAct, 2013; Chapter 20 Winding Up Part 1 [Section 271 to 303], Part 2 [Section 304 to 323], Part 3 [Section 324 to 358], Part 4 [Section 359 to 365]

Posers Whether initiation of Voluntary Liquidation under IBC, 2016 is deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator Section 33(7); The provisions of sections 35 to 53 of Chapter III and Chapter VII shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary Section 59(6)

Posers Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the AA. If yes, what will be the starting point of look back period? The provisions of sections 35 to 53 of Chapter III and Chapter VII shall apply to voluntary liquidation proceedings for corporate persons with such modifications as may be necessary Section 59(6); A crucial question relates to payment of fee of forensic auditor, if appointed by the liquidator. Who pays it? Can the liquidator claim it as part of liquidation cost? The answer to this pertinent question depends on negotiated fee of the voluntary liquidator. No separate fee can be charged if the liquidator has not factored it in the negotiated fee. In other words, if negotiated fee provides for separate payment to be made for this effort, then it may be charged, else the voluntary liquidator will have to bear expenses of this effort out of his/her fee.

Look Back Period for non-related party transactions Look Back Period for related party transactions 2 years prior to insolvency commencement date 2 years prior to insolvency commencement date Section Nature of Transaction 1 year prior to insolvency commencement date 43 Preferential Transaction 1 year prior to insolvency commencement date 45 Undervalued Transaction Transactions defrauding creditors 49 No look back period No look back period 2 years prior to insolvency commencement date 2 years prior to insolvency commencement date Extortionate Credit Transactions 50

Posers Is it possible to dissolve the company while avoidance applications are pending for adjudication In the context of liquidation process, this question is easy to answer. Regulation 44(1) of the Liquidation Regulations reads as under: "The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before theAdjudicatingAuthority or any action thereof." In Form H, details of pending avoidance application are to be stated. Thus, it can be concluded that regardless of pendency of the applications for avoidance transactions, the company can be dissolved by the Adjudicating Authority after completing all other activities under liquidation.

Regulation 38(b)(iii) of Voluntary Liquidation Regulations, reads as under: "38 (1) On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of - xxxxx (iii) No litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation." xxxxx This Regulation has caused confusion as in the final report, the liquidator has to make an affirmative statement that no litigation is pending. If avoidance application is pending for adjudication, the liquidator cannot make this kind of affirmative statement as pending avoidance application is in the nature of a pending litigation.

Posers What will be the treatment of any recoveries made out of avoidance transactions This aspect has not been dealt in by the Code or the Regulations framed thereunder. However, relying upon the following suggestions in Para 5.5.7. of the BLRC Report, it is judicious to distribute the recoveries made in accordance with the distribution waterfall under section 53 of the Code. The Code will give the Liquidator the power to file cases for recovery. Some jurisdictions set such recoveries aside for payment to the secured creditors. Given the extent of equity financing in India, all recoveries from such transactions will become the property of the trust, and will be distributed as described within the waterfall of liabilities.

Posers Is a no-dues certificate from the IT Department is required to be submitted along with the dissolution application IBBI vide circular dated November 15, 2021, has clarified that NoC from the IT Department is not required.

Posers Can voluntary liquidation process be withdrawn once it has commenced There is no provision for withdrawal from the voluntary liquidation process once it has been initiated.

Posers What action should be taken if it is detected that the voluntary liquidation process has been initiated to defraud a person or the corporate person shall not be able to pay its debts completely from realization of assets If it is detected that the voluntary liquidation process has been initiated to defraud a person or the corporate person will not be able to pay its debts completely from the realization of assets, the liquidator shall make an application to the Adjudicatory Authority to suspend the process of liquidation and pass appropriate orders (regulation 40 of the Voluntary Liquidation Regulations).

Posers Where should the liquidator keep proceeds received during voluntary liquidation process The liquidator is required to open a separate bank account in the name of the corporate person followed by the words in voluntary liquidation for receipt of all money received by him as the liquidator (regulation 34(1) of Voluntary Liquidation Regulations). All payments out of the account by the liquidator above five thousand rupees shall be made by cheques drawn or online banking transactions against the bank account.

Posers How to realize uncalled capital or unpaid capital contribution The liquidator shall be entitled to call and realize the uncalled capital of the corporate person and to collect the arrears if any due on calls made prior to the liquidation commencement date, by providing a notice to the contributory to make the payments within 15 days from the receipt of the notice (regulation 33(2) of Voluntary Liquidation Regulations). All payments out of the account by the liquidator above five thousand rupees shall be made by cheques drawn or online banking transactions against the bank account.

Posers Can mutual dealings between corporate person and creditors be set-off Regulation 28 of the Voluntary Liquidation Regulations provides that where there are mutual dealings between the corporate person and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate person or to the other party.

Posers Can a creditor appeal the admission or rejection of claims by the liquidator Acreditor has the option to file an appeal to the Adjudicating Authority against the decision of the liquidator within 14 days of receipt of such decision (section 42 of the Code)

Posers Whether valuation of assets of the corporate person get conducted during voluntary liquidation process Section 59(3)(b) of the Code read with regulation 3(1)(b) of the Voluntary Liquidation Regulations provides for submission of valuation report, if any prepared by registered valuer, of assets of the corporate person at the time of declaration of its solvency by majority of directors, designated partners, or individual constituting the governing board, as the case may be, of the corporate person. Further, Regulation 31 of Voluntary Liquidation Regulations provides that the liquidator may value and sell the assets of the corporate person in the manner and mode approved by the corporate person.

Posers Are there any disclosure requirements regarding appointment of professionals Regulation 11(3) of the Voluntary Liquidation Regulations provides that a professional appointed or proposed to be appointed by the liquidator shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders, or the concerned corporate person as soon as he becomes aware of it, to the liquidator.

Posers When should the liquidator deposit unclaimed dividends and/ or undistributed proceeds into Corporate Voluntary LiquidationAccount The unclaimed dividends and / or undistributed proceeds, if any, needs to be deposited into Corporate Voluntary Liquidation Account by the liquidator prior to submission of application for dissolution of the corporate person to Adjudicating Authority under section 59(7) of the Code (regulation 39(2) of the Voluntary Liquidation Regulations).