Modes of closing a business - Series I: Summary procedure of liquidation

The COVID-19 pandemic situation is challenging the economies of the world, including an impact on large and small businesses. Despite the many relaxations granted by the Government of India and various State Governments, the impact on businesses is high. While some large businesses have cash reserves and resources to bide them by, the impact on startups which may not have those resources is many a time, fatal.

Through this blog series, we are covering various modes of closure of a company.  In this Series-I, we are providing insights on summary procedure of liquidation of a Company which is mostly applicable for the start-ups which intend to shut down their entity with certain assets and liabilities.

Series-II covers aspects associated with closure of a company under striking off by the RoC.

Series-III will cover matters in relation to obtaining status of dormant for specified period, which is relevant for start-ups planning on pivoting and not shutting down the company.

Series-IV will cover the voluntary liquidation under the Insolvency and Bankruptcy Code.

About Winding Up

Winding up means a proceeding by which a Company is dissolved. The assets are disposed-off, the liabilities are paid-off and the surplus, if any, is then distributed among the shareholders/members in proportion to their share-holding in the company.

Winding Up proceedings are governed by the provisions of the Companies Act 2013 (the Act) as well as Insolvency and Bankruptcy Code 2016 (the Code). Sections 271 to 275 of the Act govern the mode and process of winding up of companies. The modes of closure of a company are: (a) Summary Procedure of liquidation of eligible companies; (b) Strike off of company by the RoC under section 248 of the Act. (c) Winding Up by the National Company Law Tribunal (the Tribunal) (d) Voluntary Liquidation under the Code.

The companies can also make an application for remaining in “Dormant status” while shutting down the operations, whilst not shutting down the company.

Modes of Winding Up

Winding Up by Tribunal

The process requires very technical, requiring several forms, consents, documents and is very procedural. Further, the statutory authorities’ intension is to ensure there no short-changing of the many stakeholders.

The company may pass a Special Resolution (75% of the shareholders approve) for its winding up by Tribunal. The Tribunal takes up the activities such as appointment of liquidator, ensuring that there has been no fraud, misconduct, misfeasance etc, then the liquidator shall take over the control of the company and carry out the winding up and the long dissolution processes.

Corporate Insolvency Resolution Process under the Code

In case of inability of a company to pay its debts and on an application by a creditor (where the minimum amount of the default is Rs. 1 lakh, which limit is now revised to Rs. 1 crore), the company may be subject re-organisation or resolution process under the IBC. In case the resolution process is not successful, then the company liquidation process shall be initiated to pay of the creditors from realisation of sale of assets.

Voluntary Liquidation

Unlike Winding up by Tribunal as explained above, in case if the company is able to pay all its dues to its stakeholders can opt for voluntary liquidation process under the Code. In this case, the company will appoint Liquidator and thereafter Liquidator will carry-out further steps of winding up and dissolution.

Summary Procedure of Liquidation

With an objective of reducing the burden of the Tribunal and to simplify and expedite the winding up process, the concept of summary winding up was introduced. This is a process of winding up with the Central Government (delegated to the Regional Directors of ROC) replacing the Tribunal as jurisdictional authority over specific winding up cases.

Section 361 of the Act empowers the Central Government to approve the liquidation of While the Act has defined book value of assets as criteria for a company to be eligible for summary winding up, the Companies (Winding Up) Rules 2020 (the Rules), which are effective from 1 April 2020[1], has widened the scope of applicability of the summary winding up procedure by providing additional criteria.

Eligibility Criteria

  1. The book value of assets of the company does not exceed Rs 1 crore; and
  2. Any one of the below conditions based on the latest audited balance sheet:
    1. In the case of a company which has taken deposits, the total outstanding deposits does not exceed Rs 25,00,000/-; or
    2. Loans including secured loans in a company does not exceed Rs 50,00,000/-; or
    3. The turnover of the company is up to Rs 50,00,00,000/-; or
    4. The paid-up share capital of the company does not exceed Rs 1,00,00,000/-.

Process of summary procedure of liquidation

The procedure for summary procedure of liquidation includes –

Declaration of Solvency

The Board of Directors of a company shall have to submit a declaration of solvency stating that: (i) the company have no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the liquidations; (ii) the entity is not being liquidated to defraud any person;

Corporate Resolutions

Upon submission of declaration of solvency, the Company, within four weeks from the date of declaration of solvency shall have to pass a special resolution passed by shareholders of the company requiring that the company be liquidated under section 361 of the Act and authorisation to the Board of Directors to make an application to the Regional Director.

Filing of application with the Regional Director

Upon passing of a special resolution, the Company shall make an application to the Regional Director in Form RD-1. The Company shall attach the detailed application together with the necessary documents and the latest audited financial statements of the Company.

Appointment, rights and duties of Liquidator

On the basis of application made to the Regional Director, it shall appoint the Official Liquidator[2] to act as the liquidator of the company to carry-out the liquidation proceedings of the Company.

The official liquidator shall take into his custody or control all assets, effects and actionable claims to which the company is or appears to be entitled, and shall submit a report to the Regional Director within 30 (thirty) days of his appointment.

Upon receipt of the report, the Regional Director may order the winding up of the company.

Claims of the Creditors

The Creditors would have to submit their claims with Liquidator for pending dues. The Liquidator shall take this into consideration at the time of repayment.

Realisation of Assets and Payments to the stakeholders

The Liquidator shall sell off all the assets of the Company and consider making payment to the claims received and prepare the final accounts of the company.

Dissolution Order by Regional Director

Upon the official liquidator filing the final accounts after realising all assets of the company and payment to the creditor and the shareholders under the Rules, the Regional Director shall pass an order dissolving the company.

Dissolution Order to be filed with the RoC

Upon receipt of the dissolution order, the company shall file the copy of order, received from the Regional Director, with the RoC.

Conclusion

In India, it takes time to shut down the business and the processes involved is lengthy.

The key advantage of the summary procedure of liquidation is that winding up of eligible companies would be adjudicated by the Regional Director and not by the overburdened Tribunal. Comparatively, this process is less time consuming. The companies affected due to COVID-19 and intending to shut-down the company, can follow the procedure set out above. However, this is beneficial only in case if the company has assets including cash & bank balance and wish to wind up in an efficient manner.

In case, where the company has no assets and liabilities and has not carried out business for last 2 years, it can follow the striking off of the company procedure which will be captured in our next blog or if the intent is to shut down the operations for temporary period, it may obtain the status of dormant as provided in our Series-III of the blog.

Disclaimer: In the process of simplifying the reading of this blog, we have excluded many technical aspects/document descriptions, filings, timelines etc. to be followed. Please obtain legal advice, since your specific company’s requirements have to be considered. This blog was originally published on YourStory

 

[1] Rule 190 of the Companies (Winding Up) Rules 2020
[2] Official Liquidator shall mean an Official Liquidator appointed under sub-section (1) of section 359.

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