1March 2018

Winding-up under the Insolvency and Bankruptcy Code, 2016

March 11, 2018

Shridhar Kulkarni (shridhar.kulkarni@legalogic.co.in)

Co-Founder – LegaLogic Consultingwww.legalogic.co.in

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Winding-up of the Company was regulated by the Companies Act, 1956. Companies Act, 2013 (“Act”) also had provisions pertaining to winding-up of companies.

However, by notification of the Insolvency and Bankruptcy Code, 2016, (“Code”) winding-up will now be governed by the Code and not by the Act.

Under new regime, winding-up will be governed by National Company Law Tribunal (NCLT).

The code deals with two different concepts viz:

➢ Voluntary Winding-up

➢ Involuntary Winding-up - Winding-up for default in payment of dues

3March 2018

Voluntary Winding-up

Process:

Eligibility: Any Company who has not committed any default can initiate voluntarywinding-up.

Board meeting: Board resolution be passed for winding-up of operations of theCompany and filing of winding-up application.

Declaration of solvency: Company must file a declaration of solvency signed bymajority of the Directors of the Company and it shall be accompanied with thefollowing documents:

▪ audited financial statements and record of business operations of the company forthe 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.

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Process:

Affidavit: Declaration of solvency must be verified by an affidavit by majority ofDirectors, to state that:

▪ they have made full inquiry into the affairs of the company and have formed anopinion that either the Company has no debt or that it will be able to pay its debtsin full from the proceeds of assets to be sold in the voluntary liquidation; and

▪ the company is not being liquidated to defraud any person.

General Meeting: Pass Special Resolution for voluntary winding-up within 4 weeksfrom signing of declaration of solvency.

Approval from creditors: In case company has any creditors, it must obtain approval from at least 2/3rd of its creditors within 7 days of passing special resolution.

March 2018 5

Appointment of Liquidator:

Eligibility: (Rule 7 of Insolvency and Bankruptcy Board of India (Voluntary Liquidation)Regulations, 2017)

Insolvency Professional shall be eligible to be appointed as a liquidator.

Insolvency professional who is going to be appointed as liquidator, and every partner or director of the insolvency professional entity of which he is a partner or director must be independent of the company.

The remuneration due to the liquidator shall form part of the liquidation cost. (Rule 8 of Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017)

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Intimating of Special Resolution for winding-up:

The company must notify about passing of resolution for voluntary winding-up within 7 days from passing of resolution or obtaining approval from creditors, as the case may be to:

▪ Registrar of Companies; and

▪ Insolvency Board.

Liquidator, on his appointment, shall inform Income Tax and other authorities (including other tax authorities) about the passing of resolution for winding-up within 30 days from date of his appointment.

Commencement of Winding-up: Subject to approval of the creditors, if any required, the voluntary liquidation proceedings in respect of a company shall be to have commenced from the date of passing of the special Resolution.

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Public Announcement by Liquidator:

The liquidator shall make a public announcement in Form A of Schedule I within fivedays from his appointment.

The public announcement shall call upon stakeholders to submit their claims as on theliquidation commencement date and thirty days time to stakeholders for claiming theirdues.

The announcement shall be published-

▪ in one English and one regional language newspaper;

▪ on the website, if any, of the corporate person; and

▪ on the website, if any, designated by the Board for this purpose

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Submission of Claims:

(Rules 16 to 19 of Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017)

Claims to be submitted in forms provided in Schedule I to Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017 in manner as followed:

Operational creditors to submit claims in Form B;

Financial creditors to submit claims in Form C;

Workmen and employees to submit claims in Form D;

Authorised representative, in case of there are many workmen and employees tosubmit claims in Form E;

Other stakeholders to submit claims in Form F.

Claims in foreign currency shall be valued in Indian currency at the official exchangerate as prescribed by the Reserve Bank of India as on liquidation commencement date.

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Claims:

Liquidator shall verify claims within 30 days from last date of receipt of claims and shall communicate within 7 days of such admission or rejection of claim.

Liquidator shall prepare list of stakeholders within a period of 45 days from last date of receipt of claims

The liquidator shall submit a Preliminary Report to the Company within 45 days from the liquidation commencement date, detailing:

▪ The capital structure of the Company;

▪ The estimates of its assets and liabilities as on the liquidation commencement date;

▪ 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.

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Separate bank account:

The liquidator shall open a bank account in the name of the corporate person followedby the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of allmoneys due to the corporate person.

The liquidator shall pay to the credit of the bank account all moneys, including chequesand demand drafts received by him as the liquidator of the company, and therealizations of each day shall be deposited into the bank account without anydeduction not later than the next working day.

All payments out of the account by the liquidator above five thousand rupees shall bemade by cheques drawn or online banking transactions against the bank account.

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Realisation of Assets and Distribution of Proceeds:

Liquidator to value and sell assets of the company in any manner and through anymode as approved by the company.

The liquidator shall distribute the proceeds from realization to the stakeholders withinsix months from the receipt of the amount.

The liquidation costs shall be deducted before such distribution is made.

The liquidator may, with the approval of the company, distribute amongst thestakeholders, an asset that cannot be readily or advantageously sold due to its peculiarnature or other special circumstances.

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Completion of Winding-up

The liquidator shall endeavor to wind up the affairs of the company within one year from the liquidation commencement date.

In the event of the voluntary liquidation continuing for more than one year, the liquidator shall:

➢ call a meeting of the contributories of the company within fifteen days from the end of the year in which he is appointed, and at the end of each succeeding year; and

➢ shall present a Status Report indicating progress in liquidation.

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Completion of Winding-up

The Status Report shall include:

➢ settlement of list of stakeholders

➢ details of any property that remain to be sold and realized

➢ distribution made to the stakeholders

➢ distribution of unsold property made to the stakeholders

➢ developments in any material litigation, by or against the corporate person

➢ filing of, and developments in applications for avoidance of transactions in accordance with Chapter III of Part II of the Code.

The Status Report shall enclose an audited account of the voluntary liquidation showing the receipts and payments pertaining to liquidation since the liquidation commencement date.

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Preparation of Final report:

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

an audited account of the voluntary liquidation, showing the receipts and payments pertaining to liquidation since the liquidation commencement date;

a statement demonstrating that

the assets of the corporate person have been disposed of;

the debt of the company has been discharged to the satisfaction of the creditors;

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

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Submission of Final Report:

The liquidator shall send the Final Report by registered post at their registered addressand by electronic means to the following:

▪ The contributories of the company;

▪ The Registrar; and

▪ The Insolvency Board.

The liquidator shall submit the Final Report to the Adjudicating Authority (NCLT) alongwith the application for the dissolution of the Company under section 59(7).

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Order by NCLT:

The Tribunal after hearing the petition and on being satisfied to pass an order that theCompany shall be dissolved from the date of that order.

The order of the Tribunal shall be filed with the Registrar by the company within aperiod of 14 days of the receipt of the copy of order, or such other time as may be fixedby the Tribunal.

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18March 2018

Involuntary Winding-up:

Default in repayment of debts

Process:

Eligibility: Company who has committed default in repayment of a debt, whether in whole or in part, which has become due and payable by a Corporate Person.

Filing of application: Application for winding-up can be filed by any of the following:

▪ Financial creditor; or

▪ Operational creditor; or

▪ Corporate Debtor/ Company.

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By Financial Creditor:

A financial creditor either by itself or jointly with other financial creditors may file anapplication for initiating corporate insolvency resolution process before the NCLT.

The financial creditor shall, along with the application furnish:

▪ record of the default recorded with the information utility or such other record orevidence of default as may be specified;

▪ the name of the resolution professional proposed to act as an interim resolutionprofessional; and

▪ any other information as may be specified by the Board.

NCLT shall, within fourteen days of the receipt of the application, ascertain theexistence of a default from the records of an information utility or on the basis of otherevidence furnished by the financial creditor.

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By Financial Creditor:

NCLT shall admit or reject the application taking into consideration the applicationmade, existence of default and pendency of any disciplinary proceedings againstresolution professional.

In any case, before rejecting the application, NCLT shall give a notice to the applicant torectify the defect in his application within seven days of receipt of such notice fromNCLT

The corporate insolvency resolution process shall commence from the date ofadmission of the application.

The NCLT shall communicate admission or rejection of application within seven days ofadmission or rejection of such application, as the case may be.

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By Operational Creditor:

An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in the default to the Company.

Company shall, within a period of ten days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor:

▪ existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

▪ the repayment of unpaid operational debt.

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By Operational Creditor:

After the expiry of the period of ten days from the date of delivery of the notice orinvoice demanding payment, if the operational creditor does not receive payment fromthe company or notice of the dispute, the operational creditor may file an applicationbefore the NCLT for initiating a corporate insolvency resolution process.

NCLT shall admit or reject application within fourteen days from receipt of application.

In any case, before rejecting the application, NCLT shall give a notice to the applicant torectify the defect in his application within seven days of receipt of such notice fromNCLT

The corporate insolvency resolution process shall commence from the date ofadmission of the application.

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By Corporate Debtor/ Company:

Company on committing default in payments, may file an application for initiatingcorporate insolvency resolution process with NCLT along with the following:

▪ its books of account and such other documents relating to such period as may bespecified; and

▪ the resolution professional proposed to be appointed as an interim resolutionprofessional.

The application as mentioned above shall be made by any of the following:

▪ By the members, if Articles of Association provide for power to member for makingsuch an application for winding-up; or

▪ By those in control of operations of the Company, effectively to say the Board ofDirectors.

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By Corporate Debtor/ Company:

NCLT shall accept or reject application within fourteen days from date of filing ofapplication.

In any case, before rejecting the application, NCLT shall give a notice to the applicant torectify the defect in his application within seven days of receipt of such notice fromNCLT

The corporate insolvency resolution process shall commence from the date ofadmission of the application

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Persons not entitled to make application:

A company undergoing a corporate insolvency resolution process;

A company having completed corporate insolvency resolution process twelve monthspreceding the date of making of the application;

A company or financial creditor who has violated any of the terms of resolution planwhich was approved twelve months before the date of making of an application;

A corporate debtor in respect of whom a liquidation order has been made.

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Time Limit for completion of insolvency process:

Corporate insolvency resolution process shall be completed within a period of onehundred and eighty days from the date of admission of the application to initiate suchprocess.

The resolution professional shall file an application to the NCLT to extend the period ofthe corporate insolvency resolution process beyond one hundred and eighty days, ifinstructed to do so by a resolution passed at a meeting of the committee of creditorsby a vote of seventy-five percent of the voting shares.

On receipt of an application for extension, if NCLT is satisfied that the subject matter ofthe case is such that corporate insolvency resolution process cannot be completedwithin one hundred and eighty days, it may by order extend the duration of suchprocess beyond one hundred and eighty days by such further period as it thinks fit, butnot exceeding ninety days.

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Appointment of Interim Resolution Professional and his tenure:

Eligibility: (Rule 3 of Insolvency and Bankruptcy Board of India (Insolvency ResolutionProcess For Corporate Persons) Regulations, 2016)

NCLT must appoint interim resolution professional within fourteen days frominsolvency commencement date.

The term of the interim resolution professional shall not exceed thirty days from dateof his appointment.

Insolvency Professional shall be eligible to be appointed as a Interim ResolutionProfessional .

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Public Announcement by Interim Resolution Professional:

The Interim Resolution Professional shall make a public announcement in formprescribed in this respect within three days from his appointment.

The announcement shall be published-

▪ in one English and one regional language newspaper;

▪ on the website, if any, of the corporate person; and

▪ on the website, if any, designated by the Board for this purpose.

The public announcement shall provide the last date for submission of claim, whichshall be fourteen days from the date of appointment of Interim ResolutionProfessional.

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Declaration of Moratorium:

NCLT shall by order declare moratorium for prohibiting all of the following:

➢ the institution of suits or continuation of pending suits or proceedings against thecorporate debtor including execution of any judgment, decree or order in any courtof law, tribunal, arbitration panel or other authority;

➢ transferring, encumbering, alienating or disposing of by the corporate debtor any ofits assets or any legal right or beneficial interest therein;

➢ any action to foreclose, recover or enforce any security interest created by thecorporate debtor in respect of its property including any action under theSecuritisation and Reconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002;

➢ the recovery of any property by an owner or lessor where such property is occupiedby or in the possession of the corporate debtor.

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Declaration of Moratorium:

Supply of essential goods or services to the corporate debtor as may be specified shallnot be terminated or suspended or interrupted during moratorium period.

The order of moratorium shall have effect from the date of such order till thecompletion of the corporate insolvency resolution process.

Provided that where at any time during the corporate insolvency resolution processperiod, if NCLT approves the resolution plan under sub-section (1) of section 31 orpasses an order for liquidation of corporate debtor under section 33, the moratoriumshall cease to have effect from the date of such approval or liquidation order, as thecase may be.

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Management of Company during moratorium period:

From the date of appointment of the interim resolution professional:

➢ the management of the affairs of the company shall vest in the interim resolutionprofessional;

➢ the powers of the board of directors of the company shall stand suspended and beexercised by the interim resolution professional;

➢ the officers and managers of the company shall report to the interim resolutionprofessional and provide access to such documents and records of the company asmay be required by the interim resolution professional;

➢ the financial institutions maintaining accounts of the company shall act on theinstructions of the interim resolution professional in relation to such accounts andfurnish all information relating to the company available with them to the interimresolution professional.

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Committee of Creditors:

The interim resolution professional shall after collation of all claims received againstthe company and determination of the financial position of the company, constitute acommittee of creditors.

The committee of creditors shall comprise all financial creditors of the corporatedebtor.

In case company, does not have any financial creditor or all financial creditors arerelated parties, committee shall comprise only of operational creditors.

The first meeting of the committee of creditors shall be held within seven days of theconstitution of the committee of creditors.

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Preparation of Information Memorandum and Resolution Plan:

Interim Resolution Professional or Resolution Professional shall submit informationmemorandum to each member of committee before its first meeting with such itemsinformation as may be specified within 14 days from date of first meeting ofcommittee.

Resolution applicant shall submit Resolution Plan to the Resolution Professional, thirty days before the expiration of statutory period mentioned under the Act for insolvency.

The resolution professional shall present to the committee of creditors for its approval.

Upon receipt of approval from committee of creditors, the resolution professional shall submit the resolution plan as approved by the committee of creditors to NCLT.

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Order of Liquidation Process:

NCLT may approve or reject resolution plan.

NCLT may pass order for liquidation under following circumstances:

➢ Resolution Plan is not received within the prescribed time limit; or

➢ Resolution Plan is rejected by NCLT; or

➢ Where the resolution professional, at any time during the corporate insolvencyresolution process but before confirmation of resolution plan, intimates the NCLT ofthe decision of the committee of creditors to liquidate the company; or

➢ Where the resolution plan approved by the NCLT is contravened by the concernedcompany, any person other than the company, whose interests are prejudiciallyaffected by such contravention, may make an application to the NCLT for aliquidation.

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Claims of Creditors:

On order of liquidation by NCLT, the resolution professional appointed for thecorporate insolvency resolution process shall act as the liquidator for the purposes ofliquidation unless replaced by the Adjudicating Authority.

The liquidator shall receive or collect the claims of creditors within a period of thirtydays from the date of the commencement of the liquidation process and shall verifythe same within such time as specified by the Board.

The liquidator may, after verification of claims, either admit or reject the claim, inwhole or in part, as the case may be. Provided that where the liquidator rejects a claim,he shall record in writing the reasons for such rejection.

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Realisation of Assets and Distribution of proceeds:

Liquidator to value and sell assets of the company in any manner and through anymode as approved by the company.

The liquidator shall distribute the proceeds from realization within six months from thereceipt of the amount to the stakeholders.

The liquidation costs shall be deducted before such distribution is made.

The liquidator may, with the approval of the company, distribute amongst thestakeholders, an asset that cannot be readily or advantageously sold due to its peculiarnature or other special circumstances.

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Final order of Dissolution:

Where the assets of the company have been completely liquidated, the liquidator shallmake an application to the NCLT for the dissolution of company.

NCLT shall on application filed by the liquidator order that the company shall bedissolved from the date of that order and the company shall be dissolved accordingly.

A copy of an order shall within seven days from the date of such order, be forwarded tothe authority (Registrar of Companies) with which the corporate debtor is registered.

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Q&A

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March 2018

Thank you

Shridhar Kulkarni (shridhar.kulkarni@legalogic.co.in)

Co-Founder – LegaLogic Consultingwww.legalogic.co.in

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