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When and How to Withdraw from Voluntary Liquidation?

Introduction

The implementation of the Voluntary Liquidation (VL) process in India aimed to simplify the closure of businesses. This was aligned with the Government of India’s goal of enhancing the ‘ease of doing business.’ Nevertheless, instances may arise after the initiation of VL where factors like regulatory changes, new government policies, or shifts in market dynamics prompt a business to reassess its decision to undergo liquidation. The absence of explicit provisions in the Insolvency and Bankruptcy Code and Companies Act brings forth a crucial inquiry: Is it possible for a company to retract from VL once initiated, and if yes, what are the acceptable stages for such withdrawal?

This article delves into these queries, aiming to unravel potential interpretations and offer insightful responses.

IBBI Discussion Paper: Providing Clarity

Acknowledging the necessity for a withdrawal option, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper for public input on November 24, 2020. This document suggested the introduction of a new regulation (4A) within the Voluntary Liquidation Regulations, 2017. This regulation delineates the circumstances under which withdrawing from the liquidation process becomes permissible, contingent upon approval from the Adjudicating Authority.

“4A. Withdrawal from Liquidation Process

(1) In cases where the sale of assets of the corporate entity has not commenced, the members, partners, or contributories, as applicable, may opt to withdraw from the process by passing a resolution with a special majority. It is important to note that if the corporate entity owes any debt, creditors representing two-thirds in value of the debt must approve the resolution within seven days.

(2) For processes not covered in sub-regulation (1), the members, partners, or contributories, as applicable, may decide to withdraw from the process by passing a resolution with a special majority, provided the resolution is either approved by all unpaid creditors or the dues of all unpaid creditors have been settled.

(3) The liquidator is required to submit an application to the Adjudicating Authority for withdrawal from the process, accompanied by a statement ensuring that:

(a) Proper procedures for withdrawing from voluntary liquidation have been followed.

(b) The withdrawal process is not initiated to defraud any individual, and the corporate entity remains solvent.

(4) Following approval from the Adjudicating Authority, the liquidator is obligated to forward a copy of the order to the corporate entity and the Board.”

Minimal Participation of Adjudicating Authority (AA) in Voluntary Liquidation Procedure

In the context of voluntary liquidation in India, the Adjudicating Authority (AA) plays a small function separate from the liquidation process. Notably, the AA generally stays uninvolved from the start of voluntary liquidation until the liquidation is completed and a dissolution petition is filed with the AA, which differs from the post-CIRP Liquidation procedure. Only in certain cases does membership in AA become necessary.

To begin, the AA becomes involved after the Corporate Person’s (CP) affairs are completed. When the CP’s assets have been fully liquidated and its affairs have been properly wound up, the liquidator files a formal application to the AA, therefore commencing the CP’s dissolution procedure.

Furthermore, the AA comes into play when there are concerns regarding the legitimacy of the liquidation procedure. If the liquidator detects a fraudulent purpose or concerns the CP’s viability, particularly if it is unable to fully satisfy its obligations with the sales of its assets, the liquidator may contact the AA. This technique seeks to halt the continuing liquidation process, prevent potential fraud, and ensure equitable treatment of creditors.

Current Situation and Recent Legal Cases

The planned addition of new Regulation 4A to the Voluntary Liquidation Regulations, as detailed in the IBBI Discussion Paper, has not yet been enacted. As a result, there are no mechanisms in place to manage withdrawal.

As of October 2020, eight voluntary liquidation proceedings had been withdrawn, stopped, or canceled. The discussion paper goes into further depth about each of these examples.

In 2023, important legal cases such M/s Biocad India Pvt Ltd vs. ROC Karnataka and Shawn Johny Mathew & Anr vs. Omprakash Joshi exhibited successful withdrawal petitions under section 60(5) of the IBC 2016. In these cases, the National Company Law Tribunal (NCLT) granted the withdrawal requests.

ANALYSIS IN THE CONTEXT OF LEGAL DEVELOPMENT

Given the legislative developments under the Insolvency and Bankruptcy Code (IBC) of 2016, the Adjudicating Authority (AA) permits the withdrawal of the Voluntary Liquidation (VL) process for corporate debtors, subject to certain criteria. These requirements need agreement and consent among stakeholders, including the Voluntary Liquidator, any member, and creditors, indicating a joint desire to withdraw. Furthermore, passing a specific resolution for withdrawal emphasizes the majority’s formal consent. Notably, if assets remain unsold, permission from all creditors is required, or from the

unpaid creditor. Additionally, all consents and permissions must include the Liquidator’s professional costs.

It is critical to emphasize that the National Company Law Tribunal (NCLT) should not oppose these withdrawal petitions, which align with the IBC’s primary goals in 2016. The major goal of the IBC is to emphasize the revival or rehabilitation of corporate debtors. As a result, withdrawal decisions that coincide with these goals should be positively examined by the NCLT, emphasizing the necessity of a pragmatic approach in circumstances when the corporate debtor’s revival prospects are viable.

This comprehensive analysis of withdrawal criteria, which explains how the withdrawal would benefit stakeholders in accordance with the IBC’s objectives, ensures that the process is fair, transparent, and aligned with the core principles of corporate rehabilitation. It emphasizes the importance of stakeholder consensus and the NCLT’s decision, reaffirming the IBC’s aim to promote a healthy business ecosystem. To summarize, based on this account, filing the withdrawal application prior to the distribution of proceeds and closure of the liquidation bank account, as part of the liquidation complete process, adds substance to the criterion.

THE LIQUIDATOR’S ROLE IN WITHDRAWAL

When considering withdrawal, it is vital for the corporate debtor and the liquidator to reach a mutual agreement before initiating the withdrawal process. The liquidator takes the lead by starting the withdrawal petition, making sure there are no objections, and ensuring that the liquidator’s professional fees are settled as agreed upon.

Following this, the liquidator presents the petition to the National Company Law Tribunal (NCLT) and advocates for the withdrawal of the Voluntary Liquidation (VL) process. To support this request, the liquidator illustrates the company’s potential for revival while confirming that all necessary conditions are met and complied with.

Conclusion

Recent cases show that pulling out of VL is possible, but it depends on certain conditions. Everyone needs to agree – members, creditors should not object, and a special decision for withdrawal is crucial. It’s important to have a clear understanding with the Liquidator. The AA looks at withdrawal requests under section 60(5) of the IBC 2016, as long as there are good chances for the company to recover and no one disagrees – creditors, members, or the liquidator.

In summary, being able to step back from voluntary liquidation gives the process some flexibility, recognizing how businesses can change, and the law needs to be adaptable.

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