Before the introduction of Insolvency and Bankruptcy Code (“IBC”) in 2016, there were multiple overlapping statutes to govern the insolvency proceedings like Sick Industrial Companies, Act, 1985, Provincial Insolvency Act, 1920, Code of Civil Procedure, 1908, and SARFAESI Act, 2002, all these legislations apparently failed to address the bankruptcy issues. So, the Government of India in 2016 introduced IBC to improve the insolvency and bankruptcy process and to alleviate the distressed credit markets. IBC was a historic step by the Modi’s regime as it postulated a new set of regulations, both substantial and procedural, to deal with the insolvency proceedings. It has been five/ six years since the enactment of IBC and the Code faced multiple challenges in its effective implementation but through constructive interpretation by the judiciary and adequate amendments by the legislature, it resolved many teething issues. 

IBC prescribes both voluntary and involuntary form of liquidation. So, in this article, the author has discussed the ways to simplify the voluntary liquidation mechanism enshrined under the IBC.

Section 59 Of The IBC

IBC enshrines the mechanism of voluntary liquidation in Section 59 of IBC, 2016. It says, “a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of Chapter V of the Code.” In other words, voluntary liquidation is a process in which a corporate person voluntarily wound up and dissolved with the approval of the owners and the creditors. Voluntary liquidation aims to terminate any business entity, settle outstanding debts, and pay back the creditors in the order which they were originally listed. Thus, it can be inferred that in voluntary liquidation, the liquidator is the ‘supreme commander.’

Issues In The Voluntary Liquidation Process

As of September 2022, 1,351 corporate person initiated voluntary liquidation, out of which 827 voluntary liquidations completed and 524 are ongoing. Further, 411 days were required for the closure of 814 voluntary liquidation proceedings. This shows that the procedure of voluntary liquidation needs to be streamlined. Following are the issues:

First, although the Code does not mandate obtaining NOCs from regulating authorities, but it is implicitly understood to take NOCs from the Income Tax Department and other regulating authorities. The Code does not address this issue directly which results that the regulators, liquidators, etc., are ambiguous as to the correct method to opt.

Second, the Standard Operating Procedures (SoPs) of regulating authorities do not necessitate granting NOCs. The same applies in case for applying NOCs in voluntary liquidation. As per the standard procedure, the liquidators send a letter to the department heads requesting any claims against the firm and granting NOCs. The department then evaluates and replies to the application. As there are no SoPs, the departments’ claims are submitted late and not within the required time frame.

Third, in the present scenario, Insolvency and Bankruptcy Board of India (IBBI) regulations and Income Tax Act prescribes different time frames. Also, the timeline mentioned in the IBC is conflict with other legislations. For e.g., Sec. 14 (2) of Voluntary Liquidation Regulations prescribes, “last date for submission of claims, which shall be 30 days from the liquidation commencement date,” in contrast to this, Sec. 178 (2) of the Income Tax Act says, “the assessing officer shall within three months from receipt of notice of appointment from the Liquidator provide details of any tax arrears.”

Fourth, the National Company Law Tribunal (NCLT) benches do not provide a set guideline on requirements. Interactions with market players reveal that some benches of the NCLT require a NOC from the appropriate RoC to be provided prior to recording a dissolution application, even though this requirement is not derived from legislation. This causes delays in the procedures, as the corporation must return to get the necessary permissions.

Fifth, there is reluctance on the part of banks to close old bank accounts and to create a new liquidation bank account, which is an essential step in the liquidation process. The bank staff lack complete knowledge of the procedures which results in delay.

Possible Solutions

First, the Code should explicitly mention the requirement of obtaining NOCs from the regulating authorities.

Second, in each department, there should be a requirement for well-defined SOPs which prescribes clear timelines which are in not conflict with any other existing laws. There should be a single application form for NOCs that is published on the IBBI and MCA websites. If no response has been received from the department concerned within the prescribed timeframe, then it would be assumed that they have no objection and no outstanding claims. SoPs should be effectively distributed to field officers and evaluators and prominently placed on each department’s website. A senior-level officer should be responsible for ensuring that the procedure is followed.

Third, NCLT benches should provide a set of guidelines of requirements in form of SOPs which should be uniform in each department, this will help bringing the clarity among the regulators, liquidators, etc. regarding the requirements they need to adhere to. The requirement to involve NCLT in liquidation proceeding may not be necessary if the involved business entity does not have any pending litigation against it, the liquidation proceeding may directly be referred to the Adjudicating Authority, say IBBI. This practice is followed in countries like UK, Singapore, and Malaysia.

Fourth, the Department of Financial Services should provide a checklist to the banks so that they would be aware about nuances of liquidation proceedings, and the right of the liquidator to open new liquidation account and closure of existing accounts.

IBBI (Voluntary Liquidation Process) (Amendment) Regulations, 2022

Insolvency and Bankruptcy Board of India introduced IBBI (Voluntary Liquidation Process) (Amendment) Regulations, 2022, to further streamline the process of voluntary liquidation. The most important changes are:

First, if no claims have been received from creditors, the liquidator must produce a list of stakeholders within 15 days of the last day for receipt of claims; if claims have been received from creditors, the list must be created within 45 days of the last date for receipt of claims. Prior to this amendment, whether or not claims were received from the creditors, the liquidator was required to create a list of the stakeholders within 45 days.

Second, the money from the sale of assets must now be given to the people who have a stake in the matter within 30 days of getting the money, instead of waiting 6 months.

Third, if no claims are received from any creditors, the deadline for submitting the final report may be set at 90 days from the date of commencement of liquidation. On the other hand, if claims are received from creditor(s), then the deadline for submitting the final report may be extended to 270 days from the date of commencement of liquidation.

The economic analysis of the above amendment is that the proposed amendments curtail unnecessary time spent on different activities, the proposed changes aim to speed up the voluntary liquidation process, make the exit of the corporate persons easier, and remove the idle resources so that they can be put to good use. Also, the proposed reduction in the amount of time it takes to distribute the money would result that the money would be given to the stakeholders sooner, which would encourage people to start their own businesses and make credit easier to get. Since the main reason for the delay in the voluntary liquidation process was the delay of granting NOCs from regulating authorities even though there is no such mandate given in the Code, and this issue has been solved by the IBBI by issuing a circular on November 15, 2021, which could result that the voluntary liquidation process would take much less time to finish.

In voluntary liquidation, the liquidator oversees the liquidation proceedings. In addition to being the final authority in the voluntary liquidation process, is also responsible for drafting various reports and records, such as the Final Report, Annual Status Report, Minutes of the Consultation with Stakeholders, etc. The competence of the insolvency resolution expert to liquidate the corporate debtor, realise the assets, and distribute the profits to the stakeholders of such a corporation without fear of personal culpability or lawsuit is crucial for the effective implementation of the Code.

In conclusion, process of voluntarily liquidation is a much easier process as the claims from the creditor(s), involved assets and pending litigations are low. Thus, voluntary and involuntary liquidation should be not on the same level as the time taken to complete the proceedings in both the cases are different.

Views are personal