Voluntary Liquidation of a Company in India

A company is formed through the legal process of incorporation, but its existence is terminated through liquidation. Voluntary liquidation is the process of a corporation being wound up at the request of its members. The primary goal of voluntary liquidation is to avoid the need for court intervention and allow members and creditors to resolve their debts among themselves. Only a solvent corporation can enforce voluntary liquidation. A corporation can choose the FTE (Fast Track Exit) route, which involves striking off the name/deregistration of a company from the Register of Companies u/s 248 of the Companies Act, 2013, as an alternative to voluntary liquidation.

Process of Voluntary Liquidation

Step 1: Board/Designated Partners' Solvency Declaration

The company's directors must file a Declaration of Solvency in the form of an affidavit stating that the company has not defaulted on debt repayment, that the company is solvent, and that it can pay its debts in full from the proceeds of assets sold in the voluntary liquidation; and that the company is not being liquidated to defraud anyone.

The declaration must include a list of the corporate person's debts as of that date, as well as audited financial statements and a record of the company's business operations for the previous two years or since its incorporation, and, if applicable, a valuation report of the company's assets by a Registered Valuer.
The declaration of solvency should be filed with the Registrar of Companies in Form GNL-2.

Step 2: Identify a Liquidator who is an insolvency professional

To execute the voluntary liquidation procedure, the board must designate an insolvency professional registered with the Insolvency and Bankruptcy Board of India (IBBI).

Step 3: Organise a board meeting

Organise a meeting of the Board of Directors to address the following issues:

• Approving the company's voluntary liquidation
• Appointing an insolvency professional as the company's liquidator

Choosing a day, date, and hour for the company's general meeting and Sending out an EGM notification that includes the proposed resolution and an explanation.

Step 4: Organise a Shareholders' General Meeting

Within four weeks of the Declaration of Solvency, call a General Meeting of Shareholders and pass the following resolutions:

• A special decision in general meeting for the voluntary liquidation of the company or an ordinary resolution for the liquidation of the company as a result of the expiration of any defined period of its existence in the articles of incorporation
• Resolution appointing the company's liquidator
• If the corporation has creditors, the creditors holding 2/3rd of the debt should pass a resolution within seven days following the members' resolution.

Step 5: IBBI and Registrar of Companies filings

The resolutions must be filed with the Registrar of Companies and the IBBI. The voluntary liquidation proceedings are regarded to have begun when the members passed the resolution subject to creditor approval. All powers of the board of directors, senior management employees, and partners of the corporate debtor cease to exist and are vested in the liquidator following the adoption of a Special Resolution at a general meeting and the appointment of a Liquidator.

Step 6: Liquidator takes control of the company

The liquidator will now assume control of the company and proceed with the next procedures, including the realisation of the company's assets, the settlement of outstanding debts, and the distribution of proceeds to stakeholders. The liquidator has the authority to confer with any stakeholders who are entitled to a share of the proceeds.

Step 7: Public Announcement

Within five days of his appointment, the liquidator must issue a public statement in Form A of Schedule I requesting that stakeholders submit claims within 30 days of the liquidation's start date. It should be published in an English and regional language newspaper with a wide circulation in the area where the company's registered office is located and on its website. Within 30 days of the final receipt of claims, the liquidator must verify the claims and either accept or reject them.

The liquidator shall create a list of stakeholders within 45 days of the final day for receipt of claims based on proof of claims received with:

• The claim amounts admitted, if applicable.
• If applicable, the extent to which the debts or dues are secured or unsecured.
• The details of the stakeholders and the proofs accepted or rejected in part.
• The proofs were fully rejected.

Step 8: Preliminary Report

By 45 days of the commencement of the liquidation, the liquidator shall submit a preliminary report. Based on the corporate person's books, the capital structure estimates its assets and liabilities as of the liquidation commencement date based on the corporate person's books. This includes whether he intends to make any further inquiry into any matter relating to the promotion, formation, or failure of the corporate person or the conduct of its business; and whether he intends to make any further inquiry into any matter relating to the promotion.

Step 9: Creating a Bank Account

The liquidator must open a bank account in the company's name, with the words 'in voluntary liquidation' written on it, to receive all money owed and realised to cover liquidation costs. All payments over Rs 5000 must be made by drafting a cheque or using an internet banking transaction.

Step 10: NOC from Tax Authorities

The liquidator must get a No-Objection Letter from the tax authorities in the jurisdiction where the company's registered office is located. If no NOC given by any tax authorities, it shall be deemed as they didn’t have any objection in this regard.

Step 11: Assets Realisation

The liquidator's job is to reclaim and realise the company's assets on time, maximising the stakeholders' value. The money earned will be put in a bank account specifically for this purpose.

Step 12: Distribution

After subtracting the liquidation cost, the money released from the proceeds must be transferred to the stakeholders within six months of receipt. If a particular asset cannot be realised due to its nature or other conditions, the liquidator may distribute it with the company's approval.

Step 13: Liquidation is now complete

The liquidator must finish the liquidation process within 12 months of the start date.

If the liquidation extending beyond 12 months, the liquidator must call a meeting of contributors within 15 days of the end of the first 12 months and every 12 months after that until the company is completely liquidated. He must also present an annual report on the progress of the liquidation, which must include:

• Settlement of the list of stakeholders
• Details of any assets that remain unsold
• Distribution to the stakeholders
• Distribution of unsold assets to the stakeholders
• Developments in any material litigation, by or against the corporate person; filing of, and developments in applications for the avoidance of transactions following Chapter III of Part II of the Code; and filing of, and developments in applications for the avoidance of transactions following Chapter III of Part II of the Code.

Final Report

After the liquidation process is concluded, the liquidator must write a Final Report that includes the following information:

• Liquidation accounts that have been audited
• A declaration stating that all assets have been sold, all debts have been paid off, and no legal action is underway
• A statement of an asset sale that shows the assets realised value, cost, manner and mode of sale, any shortfall, and to whom it is sold.

Filing: After that, the liquidator must file the final report with the registrar and the IBBI.

Application to NCLT: When the company's affairs are completely wound up, the liquidator must file an application with NCLT for the company's dissolution.

Order by NCLT: The NCLT will then issue an order declaring the company dissolved as of the date of the order.

Filing of Order: A copy of the order will subsequently be sent to the registrar of the company's registration.

Preservation of records

After the firm is dissolved, the liquidator must keep the reports, registers, and books of accounts for at least eight years.

What are the top reasons why Companies wind up?

The Companies Act establishes a legal entity known as a private limited company. This results in a business complying with regulations regularly throughout its life cycle. The winding-up procedure is for a company that is no longer in operation and wants to avoid compliance obligations.

In case a company fails to file its compliances on time, it is fined. In doing so, the directors will also be barred from founding another company. Because of this, it is preferable to wind up an inactive corporation to avoid future fines or liability.

If there are any outstanding complaints, it is required to regularise and regulate them. A corporation that complies with all regulations can easily be liquidated. However, it should be remembered that all registrations must also be surrendered.

FAQs on Voluntary Liquidation

1. Which notification is required for the voluntarily winding down to be effective?

Section 59, Insolvency and Bankruptcy Code, 2016, explains Voluntary Liquidation of Corporate Persons, notified the Ministry of Corporate Affairs on March 30, 2017. The Insolvency and Bankruptcy Board of India (IBBI) issued the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 on March 31, 2017, which took effect on April 1, 2017.

2. Who has the authority to start the Voluntary winding up?

The voluntary winding-up can be initiated by a corporation that wishes to liquidate itself freely and has not committed any defaults.

3. To submit the dissolution order, which form must be completed?

The ROC requires the corporation to file the order in Form INC-28.

4. What is the start date for the liquidation process?

The resolution date will mark the start of the liquidation procedure, subject to creditor permission.

5. What has secured creditors' rights in liquidation proceedings?

In a liquidation action, a secured creditor may — surrender its security interest to the liquidation estate and collect revenues from the liquidator's asset sale. Release the interest of its security.

6. Will IT returns be filed for a company under liquidation ?

The liquidator must ensure regular compliance with the filing of IT returns and all other statutory obligations during the voluntary liquidation process.

7. Is a no-dues certificate from the IT Department is required to be submitted along with the dissolution application?

According to a circular issued by IBBI on November 15, 2021, it has been clarified that obtaining a No Objection Certificate (NoC) from the IT Department is unnecessary.

8. Role of directors and promoters vis-à-vis the Voluntary Liquidator

If directors, promoters, or officials of the company demonstrate non-cooperation, the Liquidator is entitled to report such behavior to the NCLT.


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