Voluntary Liquidation

Prepared by Baskar P

A voluntary liquidation is a self-imposed wind-up and dissolution of a company that has been approved by its shareholders. Such a decision will happen once a company’s leadership decides that the company has no reason to continue operating. The purpose of a voluntary liquidation is to terminate a company’s operations, wrap-up its financial affairs, and dismantle its corporate structure in an orderly manner. 

Reasons 

• when the entity has been formed for a particular purpose and the purpose has been fulfilled or 

• where the articles provide that the entity shall be liquidated on the happening of an event and the event has happened or  
• where it is unable to carry on the business. 

Modes 

Voluntary winding up, classified into three, 

• Forced or Compulsory liquidation. 

• Members’ voluntary winding up. 

• Creditors’ voluntary winding up. 

Liquidator: 

A liquidator is a person with the legal authority to act on behalf of a company to sell the company’s assets before the company closes in order to generate cash for a variety of reasons including debt repayment. Liquidators are generally assigned by the court, by unsecured creditors, or by the company’s shareholders. 

Order of Payments: 

• Legal Charges 
• Liquidation Expenses 
• Debenture Holders 
• Creditors 

• Preference Shareholders 
• Equity Shareholders 

Overriding Preferential Payments 

• Workmen’s due 

• Secured creditors. 

Preferential Creditors: 

• Government Taxes 

• Salary wages 

• Holiday Remuneration 

• Contribution under ESI 

• Compensation in respect of death 

• PF, Pension & Gratuity fund 

• Expenses of Investigation 

Taxation Aspect 

Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not Deemed dividend in the hands of shareholder under IFOS. 

 Dividend does not include, 

• A distribution made in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets. 

•  A distribution made in accordance with sub-clause in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders. 
• Accumulated profits do not include capital gains earned by the company. 

 

Capital gain, 

For Company 

Where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer and not taxable for the company. 

For Shareholder 

Where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend. 

For Foreign Investor 

• Section 9 of the Act provides that any dividend paid by an Indian company outside India shall be deemed to accrue or arise in India.  

• The shareholder will be chargeable to capital gain tax. Further, TDS and withholding tax provisions may also be applicable on asset distribution to shareholders. [accordance with Double Taxation Avoidance Agreement, if there is any]. 

GST Aspect 

Sec29(1) The proper officer may either on his own motion or an application filed by the registered person or by his legal heirs, in case of death of such person, cancel the registration, in such manner and within such period as may be prescribed, having regard to the circumstances where, 

• The business has been discontinued, transferred fully for any reason including death of the proprietor, amalgamated with other legal entity, demerged or otherwise disposed of 
• There is any change in the constitution of the business. 

The taxable person is no longer liable to be registered. 

Insolvency and Bankruptcy Code, 2016 Section 59 

Provision for a company with respect to Voluntary Liquidation 

A Declaration of Solvency shall be given by majority of the Directors duly verified by an Affidavit stating that they have made an enquiry into the affairs of the company, and they have formed an opinion that the company has no debts or that it will be able to pay its debts in full from the proceeds of the assets to be sold in the voluntary liquidation and the company is not being liquidated to defraud any person. Section 59(3)(a) and (b) of the Code 

The above declaration shall be accompanied by: 

•   Audited financial statements and record of business operations of the corporate person for the previous two years or since its incorporation whichever is later.
•  Report of the valuation of assets of the corporate person, if any, prepared by a registered valuer.
•   If the company owes any debt, approval of creditors representing two-third of the value of debt of the company on resolutions passed for Voluntary Liquidation of the company and appointment of liquidator within 7 days from the date of members meeting. 

A meeting of Board of Directors of the company be convened for taking on record the Declaration of Solvency given by the Directors of the company. (Section 173 of the Companies Act,2013) 

The following resolutions be passed at the Board meeting: 

• Voluntary liquidation of the company subject to approval of members by passing special resolution and creditors and taking on record Declaration of Solvency. 
• Appointment of insolvency professional to act as liquidator and fixation of remuneration along with other terms and conditions, subject to approval of members by passing special resolution and creditors. 
• Fixation of time, date, place and agenda of the general meeting seeking members’ approval. 
• For convening the General Meeting by giving notice in writing proposing the Special resolutions with Explanatory Statement. (Section 101 of the Companies Act,2013) 
• Filing of Form MGT-14 (one) with the Registrar of Companies within 30 days from the date of passing of resolution for registration of following documents: 

• Board Resolution for approval of Voluntary liquidation of the company and taking on record Declaration of Solvency. (Section 117(3)(f) of the Companies Act, 2013) Board Resolution passed for appointment of insolvency profession to act as liquidator. 
• Convene Members Meeting within maximum 4 weeks of Declaration of Solvency and pass Special resolution for Voluntary Liquidation and appointment of insolvency professional to act as liquidator. Voluntary Liquidation commences from the date of passing the said resolution.  
• Liquidator shall make public announcement in Form A of Schedule I of Insolvency and Bankruptcy Board of India Regulations, 2017 within 5 days from his appointment inviting stakeholders to submit their claims (as on date of liquidation) within 30 days from the date of commencement of liquidation.              
• The aforesaid public announcement shall be published in English and Regional language newspaper with wide circulation at the location of the registered office or principal office of the company and any other location where in the opinion of the liquidator, the company conducts material business operations. The announcement shall be published on the website, if any, of the corporate person and also on the website, if any, designated by the Board for this purpose. 
• Liquidator shall disclose his relationship with professionals engaged by him through relevant web portal of Insolvency Professionals Agencies within 3 days of such appointment. Public Announcement also to be uploaded in this web portal. 

• Clarification issued by Insolvency and Bankruptcy Board of India regarding filing of intimation with Income Tax Department within 1 month from the date of passing of special resolution regarding voluntary winding up of the company and obtaining No Objection Certificate in this respect. (Section 178 of the Income Tax Act, 1961) 
• Liquidator shall open bank account within 1 month from the date of passing of special resolution in the name of the company followed by words “in voluntary liquidation” in a scheduled bank, for receiving all moneys due to the corporate person and for meeting all the liquidation cost. 
• Creditors to submit their claim in prescribed Forms within 30 days from the date of commencement of liquidation. The liquidator shall verify the claims submitted within 30 days from the last date for receipt of claims and may either admit or reject the claim, in whole or in part. 
• The liquidator shall submit a Preliminary Report to the company within 45 days from the liquidation commencement date, detailing as given below. 
• The capital structure of the company 

• The estimates of its assets and liabilities as on the liquidation commencement date based on the books of the company. 
• Whether he intends to make any further inquiry into any matter relating to the promotion, formation or failure of the company or the conduct of the business thereof; and the proposed plan of action for carrying out the liquidation, including the timeline within which he proposes to carry it out and the estimated liquidation costs. 

• The Liquidator shall prepare a list of stakeholders within 45 days from the last date for receipt of claims stating therein: 

• • Amount of claim admitted. 
  • Extent of dues to which the debts dues are secured or unsecured. 
  • Details of stakeholders and 
  • Proof admitted or rejected in parts, and the parts wholly rejected. 

• The Liquidator shall realize the assets and distribute the proceeds from the realization within 6 months from the receipt of realization to the stakeholders (liquidation costs shall be deducted before such distribution). 
• The liquidator shall endeavor to complete the liquidation process within twelve months from the liquidation commencement date. In the event of the liquidation process continuing for more than twelve months, the liquidator shall- 

• Hold a meeting of the contributories of the corporate person within fifteen days from the end of the twelve months from the liquidation commencement date, and at the end every succeeding twelve months till dissolution of the corporate person; and 
•  Shall present an Annual Status Report indicating progress in liquidation. 

On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of 

• Audited accounts of the liquidation, showing receipts and payments pertaining to liquidation since the liquidation commencement date 
• A statement demonstrating that- 

(i) The assets of the corporate person have been disposed of. 

(ii)The debt of the corporate person has been discharged to the satisfaction of the creditors. 

(iii)No litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation. 

• A sale statement in respect of all assets containing – 

(i)The realized value 

(ii)Cost of realization 

(iii)The manner and mode of sale 

(iv)An explanation for the shortfall, if the value realized is less than the value assigned by the registered valuer in the report of the valuation of assets. 

(v)The person to whom the sale is made. 

• The liquidator shall send the Final Report forthwith, to the Registrar and the Board. 
• The liquidator shall submit the Final Report to the Adjudicating Authority along with the application under section 59(7). 
• Before the order of dissolution is passed, the liquidator shall apply to NCLT for an order to pay into the Companies Liquidation Account in the Public Account of India, any unclaimed proceeds of liquidation or undistributed assets or any other balance payable to the stakeholders in his hands on the date of the order of dissolution. 

• Where the Tribunal is satisfied with the application, NCLT shall pass an order that the company shall be dissolved from the date of that order and the company shall be dissolved accordingly. 
• The copy of order shall be filed with the Registrar of Companies and Insolvency and Bankruptcy Board of India and Insolvency Professionals Agencies within 14 days from the date of such order. 

Preservation of Records 

• The copy of the reports and books of account (physical or electronic) shall be preserved for atleast 8 years after dissolution either with himself or with an information utility.