The first part of the series discussed winding-up of a company under the Companies Act, 2013 the concluding section will focus on Insolvency and Bankruptcy Code, 2016 and Winding-up Rules, 2020.
Companies (Winding-Up) Rules, 2020
It is necessary to understand that while the winding-up is conducted as per the sections of the Companies Act, 2013 ('Act'), the procedure is governed as per the National Company Law Tribunal Rules, 2016, as there were no specific rules of winding up under the Companies Act, 2013. But, the Ministry of Corporate Affairs vide notification dated 24.01.2020 has notified the Companies (Winding-Up) Rules, 2020, ('Rule/s') with a perspective to systemize the winding up of a company under the Act. There are in total 191 Rules and 95 Forms in the Rules to govern and regulate the procedure of winding up. These Rules are valid from 01.04.2020.
The Companies Act, 2013, lays down the sections, which states about winding up of the Company and its procedure, whereas the Rules play an essential role, in governing and guiding the application of these sections. These Rules apply to Companies going into winding up as per Section 271 of the Act, as well as going under liquidation through a summary procedure, as mentioned under Section 361 of the Act.
Various Forms accompany these Rules; such Forms act as an aid for executing the process of winding up. Among such 95 Forms, some of them are mentioned below:
- Form WIN 1 or WIN 2- Petition for winding up under section 272(1)
- Form WIN 3- Affidavit verifying the petition
- Form WIN 4- Statement of affairs as required to be filed under section 272(4) or 274(1)
- Form WIN 5- Affidavit verifying such statement of affairs
- Form WIN 6- Advertisement of notice of petition before the date fixed for hearing
- Form WIN 9- Notice of appointment of provisional Liquidator
- Form WIN 10- Disclosures by provisional or Company Liquidator
- Form WIN 11- Winding up order
- Form WIN 14- Advertisement of order of winding up
- Form WIN 16- Report by company liquidator
- Form WIN 17- Provisional list of contributories
- Form WIN 23- Report of result of a meeting of creditors and contributories to determine the members of the advisory committee.
- Form WIN 38A to 38T- Registers and books of accounts to be maintained by Liquidator
- Form WIN 41- Company liquidator's final account
- Form WIN 43- Advertisement of notice to creditors to prove their claim
- Form WIN 44- Affidavit of proof of debt
- Form WIN 45- Proof of debt of workmen
- Form WIN 47- Notice of rejection of debt
- Form WIN 48- Notice of admission of proof
- Form WIN 49- Appeal by creditor
- Form WIN 50- List of creditors whose claims are admitted or rejected by the Liquidator
- Form WIN 94- Statement of unclaimed dividends or undistributed assets furnished to ROC, by the Liquidator when making any payments of such dividends or assets into the Company Liquidation Dividend and Undistributed Assets Account.
These Forms are provided in the Rules which can be relied upon as ready reckoners, thereby making this overall entangled process of winding up, effortless and straightforward.
The rules governing the summary procedure for liquidation is an essential feature of this Rule, as it permits winding up of small businesses without going to the Tribunal. The small businesses are the ones that have assets of book value not exceeding Rs.1 Crore as stated under section 361(1)(i) of the Act. The class of companies that is considered as a small business under section 361(1)(ii) of the Act are as below, based on the latest audited Balance Sheet:
- The Company which has taken a deposit
and total outstanding deposits
not exceeding Rs.25 lakh
- The Company which has total
outstanding loan including secured loan-
not exceeding Rs.50 lakh
- The Company which has a turnover of upto Rs.50 crore
- The Company which has paid up
not exceeding Rs.1 crore
The powers and functions of the official Liquidator relating to the summary procedure are highlighted as below:
- Maintain the Registers and books of accounts in which it shall mention the minutes of all proceedings and resolutions passed at any meeting of the creditors or contributories or of the advisory committee. (Rules 79 and 80)
- Filing and audit of the company liquidator's accounts as per the procedure laid down under Rules 91 to 99, shall be followed and all the assets shall be disposed of as per Rules 165 to 167, with a modification that the word 'Tribunal' shall be considered as 'Central Government.'
- Monies received by the Liquidator, as referred in section 349 of the Act, shall be paid by him into the public account of India in the Reserve Bank of India, as mentioned in that section not later than the next working day of the said Bank.
- Creditors shall prove their claim as per section 363 of the Act against the Company, and if the proof of such debt gets rejected by the company liquidator, the creditor can appeal to the Tribunal. (Rules 100 to 125)
Therefore, these Rules, along with the forms, are quite explicit, which very well describes the procedure of winding up by the Tribunal as well as the summary procedure for liquidation. The exceptional feature of this Rule is the involvement of the Central Government in the summary procedure for liquidation, thereby reducing the burden of the Tribunals.
Liquidation under IBC
Insolvency and Bankruptcy Code, 2016 ('IBC / Code') is a time-bound legislative framework which initially encourages resolution of the Corporate Debtor ('Company') which has failed to pay its debts, but if such a resolution fails, the Adjudicating Authority ('Tribunal') eventually orders for liquidation of the Company, as a last resort under Section 33 of IBC.
The liquidation proceedings run from Sections 33 to 54 of the Code, which are based on similar lines of winding up by the Tribunal when the Company is unable to pay debts. After the order for liquidation is passed by the Tribunal, a liquidator is appointed to manage the affairs of the Company. The Resolution Professional ('RP') appointed during the Corporate Insolvency Resolution Process ('CIRP'), shall act as a liquidator for liquidation upon submission of written consent to the Tribunal.
The Liquidator carries out its obligations to accomplish the liquidation process smoothly, which involves, ensuring no suit or legal proceeding be instituted by or against the Company unless approved by the Tribunal, verifying the claims of all the creditors, taking into custody all the assets, property, effects and actionable claims of the Company, ensuring maximization of value of the assets to keep the Company a going concern and performing such other functions as prescribed by the Insolvency and Bankruptcy Board of India ('Board').
The Liquidator performs diverse functions, it also calls for claims from the stakeholders following the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ('Regulations'), the claims when submitted, are verified and then either admitted or rejected by the Liquidator.
These claims should be submitted before the Liquidator within 30 days from the commencement of liquidation. After the whole process of collating the claim is done, the Liquidator prepares a list of stakeholders, based on proofs of claims submitted and accepted. Further, the Liquidator shall form an estate of the assets, which is called as the Liquidation Estate of the Company, upon which the Liquidator prepares an asset memorandum, providing details of the assets intended to be realized by way of sale. This memorandum is not accessible to any person during the course of liquidation unless permitted by the Tribunal.
It is interesting to observe here, that the secured creditors under the liquidation proceedings have to make a choice under Section 52, either to relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the Liquidator as per section 53 or else to realize its security interest as per the provision of the Code. It is under section 53 of IBC, the order of priority has been laid down for the distribution of the assets of the Corporate Debtor, which is popularly known as the 'waterfall mechanism'. The following is the sequence in which the debts are repaid:
- Insolvency Resolution Process costs and Liquidation Costs
- Workmen's dues (for 24 months) and secured creditor's dues, if the security has been relinquished
- Employees dues other than workmen (for 12 months)
- Unsecured financial creditors
- Government dues and unpaid dues to secured creditor, if the security has been realized
- Remaining debts and dues (unsecured operational debts)
- Preference shareholders
- Equity shareholders
Thereafter, the Liquidator shall deposit the amount of unclaimed dividends, if any and undistributed proceeds if any, into the Corporate Liquidation Account in the Public Accounts of India before applying for dissolution, so that if a person claiming to any money paid into the Corporate Liquidation Account, may apply to the Board for withdrawal of the amount along with evidence to satisfy the Board.
This whole Liquidation process shall be completed within 1 year from the liquidation commencement date. Thus after completing the entire liquidation process, the Liquidator shall submit an application along with the final report and a compliance certificate to the Tribunal for the closure of the liquidation process where the Company has been sold as a going concern; or for dissolution of the Company. Ultimately, the Company is dissolved and a copy of order of dissolution shall be forwarded to the authority with which the Company is registered within 7 days from the date of such order.
The Code has separately and vividly stated under Section 59 the procedure of Voluntary Liquidation, which is to be read with Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process), Regulations, 2017. A corporate person registered as a company make a declaration verified by an affidavit to initiate voluntary liquidation under two conditions:
- 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 voluntary liquidation; and
- The Company is not being liquidated to defraud any person.
Such a declaration has to be accompanied by the audited financial statements and valuation report of the corporate person. Within four weeks of such a declaration, there shall be:
- A special resolution of members of the Company in a general meeting requiring the Company to be liquidated voluntarily and appointing an insolvency professional to act as a liquidator; or
- A resolution of the members of the Company in a general meeting requiring the Company to be liquidated as a result of expiry of the period of its duration, if any fixed by its articles, provided 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 for voluntary liquidation within 7 days of such resolution.
Thereupon, the Company notifies the Registrar of Companies ('ROC') and Board about the resolution to liquidate the Company within 7 days of such resolution or the subsequent approval by the creditors, as the case may be. The voluntary liquidation proceedings are deemed to have commenced from the date of passing of the resolution by the members subject to creditor's approval and hence all the powers of the Board of Directors, key managerial personnel and the partners of the Company shall cease to have effect and shall vest in the Liquidator.
The Liquidator within 5 days of his appointment has to make a public announcement for calling upon the claims from the creditors and other stakeholders to be submitted within 30 days from the date of commencement of liquidation. After verifying such claims, accordingly, a list of stakeholders is prepared within 45 days from the last date of receipt of claims by the Liquidator. Thereafter, the Liquidator is required to make a preliminary report within 45 days from the date of commencement of liquidation regarding the capital structure of the corporate person, the estimates of its assets and liabilities, claims received etc.
The Liquidator needs to sell all the assets by auction or through a direct party and realize the amount from the creditor and thereafter, distribute proceedings among all the stakeholders. Thereby a final report containing liquidation proceedings is prepared by the Liquidator and submitted to the ROC, Board, and Tribunal. After examining the final report the Tribunal passes an order for dissolution of corporate entity. Therefore, a copy of such order shall be forwarded to the authority with which the corporate person is registered. It is to remember that the Liquidator has to preserve the reports, registers, and books of accounts for at least 8 years after the dissolution of the corporate person either with himself or with an information utility.
Overall, the winding-up procedures, which were initially governed only by the Companies Act, 1956, slowly grew with the need for clarity, and more sections were inserted under the Companies Act, 2013. These laws of winding up of the Company do not have a straight-jacket formula, it includes a lot of technicalities, and hence it is complicated. But after the introduction of IBC and its Regulations relating to liquidation process, the understanding of the concept of winding up has become more straightforward with respect to the Companies Act, 1956 and 2013, whereas, on the other hand, it has also raised the difficulty bar in applying these provisions, as when placed simultaneously, it is tough to decide which supersedes the other. Hence, it will now be intriguing to observe how the Companies (Winding-Up) Rules, 2020 would affect the mechanism of winding up under the Companies Act, 2013, and how the Tribunal, as well as the Central Government, would deal with such applications.
This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.