Legal Framework Of Voluntary Liquidation Of Corporate Persons

INTRODUCTION

The process of voluntary liquidation for corporate entities in India is governed by Section 59 of the Insolvency and Bankruptcy Code (IBC) 2016, alongside the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017. These laws provide a comprehensive framework for Liquidation of the companies that have decided to exit the market voluntarily, setting forth an orderly process that protects the rights of the shareholders and creditors.

SECTION 59: VOLUNTARY LIQUIDATION OF CORPORATE PERSONS

Voluntary liquidation is a self-imposed process in which a solvent corporate entity decides to cease its operations and dissolve its existence. Section 59 provides the legal foundation for voluntary liquidation of solvent corporate entities.

1. Eligibility: A corporate person who intends to liquidate voluntarily and has not defaulted on any debt. The corporate person must fulfil the conditions and procedural requirements as per the specifications of the Board.
2. Declaration of Solvency: The company’s board of directors should declare that the entity is solvent and able to discharge its debts within a specific period. This declaration includes details on the entity’s assets, liabilities, and a confirmation that it will meet its financial obligations within a fixed timeframe.
3. The solvency declaration must be accompanied by an audited financial statements and record of business operations for a period of two years with a report of the valuation of the assets.
4. Appointment of Insolvency Professional as Liquidator: Within a period of four weeks a special resolution appointing a liquidator. A liquidator is appointed to oversee the process of asset liquidation, debt repayment, and distribution of any remaining assets to shareholders. The liquidator must be an insolvency professional registered with the Insolvency and Bankruptcy Board of India (IBBI).
5. Public Announcement: The company must make a public announcement regarding its voluntary liquidation within five days of the appointment of the liquidator. This announcement serves to inform creditors, allowing them to submit their claims within 30 days of the public notice.
6. Distribution of Assets: Following asset liquidation, the liquidator is responsible for settling debts in the order of priority specified by the IBC. Only after all debts are discharged can the remaining assets be distributed to shareholders.
7. Application to NCLT: Once the liquidation is complete, the liquidator must submit a final report and apply to the NCLT for a dissolution order. This dissolution order, once granted, formally ends the corporate entity’s existence.

IBBI (VOLUNTARY LIQUIDATION PROCESS) REGULATIONS, 2017

The IBBI (Voluntary Liquidation Process) Regulations, 2017 provide detailed rules that govern the practical aspects of voluntary liquidation. This structured regulatory framework ensures transparency, fair treatment of stakeholders, and an orderly exit for solvent corporate entities.

1. Liquidator’s duties

The appointed liquidator plays a vital role in

• • Public announcement- within five days, a notice must be issued inviting claims from creditors.
  • Verification of claims- Each claim is examined, settled and distributed in accordance with Section 53 of the IBC.
  • Distribution- Once liabilities are cleared, any remaining proceeds are distributed among stakeholders.
  • Final report- After completion the liquidation, the liquidator submits a report to the Adjudication Authority for dissolution.

2. Special Provisions

• • Maintenance of Records- The liquidator must ensure proper record-keeping and preservation of documents after dissolution.
  • Unclaimed Proceeds- Funds not claimed by stakeholders are deposited into the Corporate Voluntary Liquidation Account.

KEY CHALLENGES IN VOLUNTARY LIQUIDATION

1. Time-bound Completion- Adherence to timelines specified in regulations is essential but challenging in practice.
2. Stakeholder Co-operations- Ensuring creditor and shareholder alignment is critical.
3. Regulatory Scrutiny- Proper documentation and compliance are necessary to avoid penalties.

JUDICIAL PRECEDENTS

1. Viyes Consultancy (P.) Ltd. v. Registrar of Companies (2020) 158 SCL 0789: It was held that the liquidator had followed due process of law, and, thus, affairs of company were completely wound up and its assets were completely liquidated. Therefore, application for voluntary liquidation of a company was allowed.

CONCLUSION

Section 59 of IBC, along with the Voluntary liquidation Regulations of 2017, offers a structured and efficient framework for companies in India that wish to dissolve voluntarily. It enables solvent companies to exit the market in an orderly and transparent manner, ensuring that creditor and stakeholder rights are respected throughout the voluntary liquidation process.