Proposed Tweaks For Voluntary Liquidation To Streamline Process, Says IBBI
Upfront disclosures about pending litigations will positively impact the liquidation process, according to experts.
In an effort to refine the voluntary liquidation process, the Insolvency and Bankruptcy Board of India put forth proposals last week to include additional obligations on the stakeholders to ensure timebound liquidations.
A voluntary liquidation process can be initiated when there is no default on the part of the company being liquidated. The process materialises after taking an approval from the directors and members of the company.
A liquidator must endeavour to complete the liquidation process within 90 to 270 days from the commencement date, according to the rules. In practice, however, this timeline is seldom adhered to.
Causes Of Delay
The regulator has said that as of August 2023, 55% of the cases under voluntary liquidation have been continuing for more than a year.
It has been pointed out that the delays are attributable to pending litigations, unsettled demands and penalties, and delays in making foreign remittances.
"The interplay between the IBC and other legislations continues to remain a concern at the ground level, as the authorities do not necessarily accord supremacy to the processes under the IBC which poses practical challenges," Veena Sivaramakrisnan, partner at Shardul Amarchand Mangaldas, told BQ Prime.
Other factors that cause delays are hold-ups in submission of claims from governmental authorities—an issue that also plagues the corporate insolvency resolution process—and obtaining no-objection or no-dues certificates from authorities, according to Karishma Dodeja, partner at Trilegal.
There should be a mechanism where the regulators—the NCLT and the IBBI—engage with each other and align on processes required for the completion of the voluntary liquidation process, Dodeja said.
Importance Of Timeliness
Highlighting the sanctity of timeliness, the IBBI proposed that companies seeking voluntary liquidation will have to disclose all pending litigations and assessments before the authorities and make sure that sufficient provisions have been made to meet the obligations arising out of such pending matters.
Pending litigations quite often impact the success of processes under the IBC. If these disclosures are made on an upfront basis, it will inform the liquidator of the potential roadblocks in the process, in terms of the impact of such proceedings on the overall process and the costs required to defend such proceedings, according to Dodeja.
It has also been proposed that if the liquidator fails to complete the liquidation process within the stipulated time of 90–270 days, then a status report will have to be submitted to the regulator explaining why the liquidation was not completed on time and specify the additional time that will be required for completing the process.
The voluntary liquidation rules say that unclaimed or undistributed amounts shall be deposited into the corporate voluntary liquidation account along with details of stakeholders entitled to such amounts. After the amount has been deposited, the stakeholders can apply to the board for a withdrawal of the amount. This is done to ensure an efficient closure of the liquidation process.
However, the present mechanism does not provide for a situation wherein distribution of such an amount can be undertaken before the order of dissolution has been passed.
The average time taken for the dissolution of the voluntary liquidation process—from the date of submission of the final report—is 280 days, according to data. This causes delays in distribution and inconvenience to the claimants.
Therefore, the regulator has also proposed to include a provision whereby the liquidator will be charged with the responsibility of verifying the requests for withdrawal and subsequently, submit his opinion to the board so that withdrawals can be permitted even before the dissolution order is passed.