Under the Insolvency and Bankruptcy Code, the process of liquidation cannot be started by the creditors at the first instance due to the default of payment. The code says that an operational or financial creditor can start the corporate insolvency procedure when the corporate debtor fails to pay the minimum amount. Furthermore, the corporate debtor can also start the procedure. However, the corporate debtor must liquidate the debts mandatorily in case of failure to reach a proper plan of resolution under the process of corporate insolvency resolution.
Furthermore, the corporate debtor can begin the proceeding of liquidation after obtaining approval from the shareholders, director, and the creditors. The following points highlight a few of the circumstances that may result in voluntary liquidation procedure.
- The corporate debtors must not have committed any default.
- The directors or the designated partners of the corporate entity need to make a declaration via an affidavit to prove that the corporate person has no debts whatsoever and can pay the debts in full from the proceeds of the sale of assets under the liquidation initiated. The liquidation procedure must not be started to cheat anyone. Apart from this, the declaration must follow the valuation report of the corporate entity along with the audited financial statements.
- Within four weeks of declaration, the contributors pass a special resolution requiring the corporate entity to liquidate and appoint a professional liquidator for carrying out the procedures effortlessly, and creditors representing about two-thirds of the total debt that is owed for approval of the resolution within a period of seven days.
Voluntary liquidation is an out-of-the-court process and once the affairs of the corporate entity is rounded up and the assets liquidated fully, the liquidator needs to apply to NCLT or National Company Law Tribunal for dissolution along with the final report. Following the application, NCLT also needs to pass the order of declaration and the entity is going to be dissolved from the date of the order. The procedure of liquidation of the limited liability partnerships on account of the application made for voluntary liquidation and insolvency is to get an appropriate position under the Bankruptcy and Insolvency Act in India.
Liquidation procedure after corporate insolvency resolution
A corporate debtor and operational or financial creditor can apply to the NCLT for starting the procedure of insolvency resolution after the default of the corporate debtor or the inability to pay the dues. According to the Code, there is a timeframe of 180 days for initiating the process of insolvency resolution that starts from the admission of the application by the tribunal, and it can be extended further for a period of ninety days. During this time, no proceedings, suits, action of enforcement or recovery can be started against the corporate debtor. The committee comprising the creditors is going to approve the resolution plan that is placed before viability determination and evaluation. The following occurrences can be noticed in the event of the liquidation initiation.
- The committee of creditors can decide to liquidate the company
- The committee comprising the creditors may not be able to reach a plan of resolution within the time frame of 180 days, which can only be extended once within a period of ninety days.
- The NCLT may reject the plan of resolution.
- The corporate debtor may offend against the provisions of the resolution plan.
- The tribunal or NCLT may pass the order for the compulsory liquidation of the company.
A company may start the procedure of voluntary liquidation only after obtaining approval from a majority of the board of directors along with the majority of creditors and shareholders. While the NCLT needs to approve the mandatory liquidation procedures in the event of liquidation initiation, the consent of the company and the shareholders may not matter in the case of compulsory liquidation. When it comes to voluntary liquidation, the corporate debtor needs to start the procedure through the partners and the directors along with the approval of the creditors and the shareholders.
Completion of the bankruptcy procedure
While the procedure of compulsory liquidation is completed within a period of two years from the date of the beginning, the period of voluntary liquidation is shorter. According to the code of bankruptcy and insolvency, if the liquidation procedure cannot be rounded up within a period of one year, the liquidator needs to arrange a meeting of the contributors within fifteen days of expiry of the twelve-month period and towards the end of this period until the dissolution of the debts of the corporate debtor.