What aspects are to be kept in mind while preparing the statement of assets and liabilities to be submitted along with Declaration of Solvency?
A Declaration of Solvency is required from majority if the directors of the Company verifying that if there exists any debt in the Company then it will be able to pay its debts in full from the proceeds of the assets to be sold in liquidation. Apart from the available audited accounts with the directors, it is pertinent to note the following pointers, while making a declaration of solvency:
There is usually a substantial gap between the available financials of a company and the preparation of declaration of solvency in case the voluntary liquidation is commenced later in a financial year. Clearly, the directors would rely on such latest available accounts for determining the solvency status of the company. However, to enhance the credibility of such accounts, it is always prudent to consider foreseen and unforeseen liabilities that may be incurred by the company which may have a substantial bearing on the solvency status. Upon assessment for solvency, if there is any shortfall for solvency, the bank account needs to be adequately funded and necessary compliances done before initiating on Board Meeting for consideration of Voluntary Liquidation.
What documents are covered under ‘Record of business operations’ to be annexed to the Declaration of Solvency?
The record of the business operations is not defined anywhere in the IBBI (Voluntary Liquidation Process) Regulations, however, considering the intent of the law, it should refer to documents (including most recent ones) such as Financial Statements and notes thereto, Books of Accounts, Auditors Report, Directors Report and its annexures, statutory books and records, minutes books, trademarks, all original licenses, permissions and registrations, any contracts with Vendors/Creditors/ Suppliers, employees, or any other stakeholders which are still effective, any notices, demands, orders whether appealed, protested or not which may have contingent or statutory liability that may arise after the commencement of liquidation or any other business information or secret which could help in better realization of assets under the liquidation or is otherwise needed for beneficial liquidation. You shall be required to attach these records along with financial statement for the immediately preceding two financial years.
Can we approve the voluntary liquidation of a Company via Directors’ Circular Resolution?
Yes, it is possible to approve the resolution for Members Voluntary Liquidation by Circular Resolution as it is not prohibited specifically anywhere under the Companies Act, 2013. However, considering the gravity of the business to be transacted, it is advisable to convene a Board Meeting and pass the resolution.
What are the various intimations to be made upon the Company moving into liquidation?
To the Existing Bank: For not to accept any debit instruction signed by any previous signatory and to give effect to the change in signatories of the Bank from the previous signatory to the Liquidator or a person so authorized by him/ her. Once a new account for Liquidation is opened, a request be sent for closure of existing bank account
Note: It is recommended to have clear instructions in the closure letter regarding change of existing signatories to the Liquidation and thereafter transfer of funds from existing bank account to the new bank account. The closure process can be a little time-consuming depending on the policies of the Bank. Some banks do offer the facility to open up a bank account within 1 day of receipt of the requisite documents.
To the IBBI: Publication on the IBBI website in Form A of IBBI (Voluntary Liquidation Process) Regulations, 2017) i.e Public Announcement for disclosure of commencement of liquidation and appointment of liquidator.
To the Income Tax Department: Pursuant to Section 178 of the IT Act, the Liquidator has to intimate the IT Department about his appointment. Thereafter, the Department will raise demands, if any and issue a No Objection Certificate within a time window of 3 months.
Note: The Company cannot part away with its assets until this NOC is received from the IT Department.
To the ROC: Intimation of appointment of Liquidator in Form MGT 14; Intimation of commencement of Liquidation along with executed Declaration of Solvency in Form GNL-2.
To GST Department/Ward: Pursuant to Section 88 of the CGST Act, and Intimation is to be submitted with the jurisdictional GST Department with respect to appointment of Liquidator within 30 days of his appointment. The Departments can require provision of debt certificate from the Company and status of GST Returns, in order to ascertain the GST Liability and calculation of GST Refund, if any.
What effects do liquidation procedures have on existing contracts?
For the purposes of liquidation, the liquidator forms an estate of the assets and holds the liquidation estate as a fiduciary for the benefit of all the creditors. The liquidation estate assets include the contractual rights of the Company as well.
If any contractual liability is there, it needs to be exited either before commencement of liquidation by the then management of the company and such liability shall be made as part of Declaration of Solvency. If there is a requirement of goods or services under such contract during the liquidation for the beneficial liquidation, the liability for such future payments should also be covered under DOS. All other contracts come to end on commencement of liquidation.
Can the creditor’s claims ranking under Section 53 of the Code, be amended in any way?
The ranking or waterfall mechanism is prescribed by the Insolvency and Bankruptcy Code and cannot be amended. The liquidator who is responsible for distribution of liquidation proceeds is bound by the waterfall. However, any party may contractually agree to relinquish its claims or offer the proceeds payable to it to some other creditor. Nonetheless, the liquidator is not a party to or bound by any such arrangement.
Is the Company required to continue with ROC Filings post commencement of liquidation?
The e-filling status of the Company, on successful filing of Form GNL-2 and Form MGT-14, is changed to ‘Under Liquidation’. It should be pursued with office of concerned Registrar for change in status. However, we have seen in practice that hard copies are insisted by Registrar’s office for the attachments to the said Forms i.e hard copy of Declaration of Solvency executed by all the Directors, the Board and Special Resolution passed for approval of VL and appointment of Liquidator, Creditors Approval, if any, Public Announcement in Form A and any other document as may be deemed necessary.
Once the hard copies are taken on record by the ROC, the status of the Company is changed to ‘Under Liquidation’ and thereafter the Company is not required/ cannot file any e-forms except GNL Forms, if required.
Is the Company required to hold Annual General Meeting if VL has commenced but Dissolution order not obtained?
Pursuant to Regulation 4 of the IBBI( Voluntary Liquidation Process) Regulations, 2017, the effect of the commencement of liquidation of the Company is as follows:
Pursuant to Regulation 37 of the IBBI (Voluntary Liquidation Process) Regulations, 2017, the Liquidator shall endeavor completion of process in 12 months and if continuing for more than 12 months, hold a meeting of the contributories (shareholders) within 15 days from end of 12 months to update progress of liquidation.
Thus, in view of the above provisions, the requirement of meeting with shareholders comes only upon completion of twelve months from liquidation commencement date, and the fact that now the management of the Company rests in the hands of the liquidator and no decisions are to be taken by the shareholders with respect to the company or for approval of accounts, it is understood that the requirement to hold an Annual General Meeting of the Company is no longer applicable to the Company.
Can there be a change in Directorship post commencement of Liquidation?
It is not advisable for a Director who has provided his Declaration of Solvency to resign from his post when the Company is undergoing liquidation. However, in un-avoidable situations, if a Director resigns, Form DIR-12 cannot/ is not required to be filed as the status for e-filing is ‘Under Liquidation’. The Company may submit a hard copy of hand-filed form DIR-12 with the concerned Registrar along with necessary attachments.
Note: This will not bring an effect on the Master Data of the Company.
Do the statutory auditors continue to hold position post commencement of liquidation?
The tenure of the statutory auditors shall continue to remain same as it was prior to commencement of liquidation of the Company. The requirement of audit of the accounts of the Company until commencement of the liquidation is advisable to be served by the present statutory auditors of the Company, nonetheless, the Liquidator hold the power to appoint any other professional to audit the accounts of the Company until commencement of liquidation and for the liquidation period.
Does the Company need to make financials and do filings for the March 31 ending even if VL has commenced before 31st March?
It is advisable to have audited accounts for the period upto Liquidation commencement date and these can be used for the filings of the respective Financial Year even if these are for a period ending before 31st March.
Further, from the Liquidation commencement date, a separate accounting is to be done for the Liquidation period (period from Liquidation commencement date till dissolution) as prescribed in the Voluntary Liquidation process Regulations.
What will happen to the tax registrations such as GSTIN, PAN, TAN, etc after the Company is dissolved?
Once, the dissolution order is passed by the NCLT, the Company ceases to exist hence, it has to surrender its PAN and TAN registrations with the concerned departments.
Surrender of PAN can be done online through NSDL TIN website as well as through off-line mode.
Surrender of TAN can be done by making an application to the jurisdiction Assessing Officer (TDS) requesting the reasons for surrender.
Similarly, the GST refund to be claimed and GSTIN of the Company to be surrendered post passing of dissolution order of NCLT.
As per the amendment to IBBI (Voluntary Liquidation) Process Regulations, dated 05.08.2020, the corporate person may replace the liquidator by appointing another insolvency professional as liquidator by a resolution of members or partners, or contributories, as the case may be. Earlier, the Regulations did not provide such tool to the corporate to get itself released from an inefficient liquidator or to get itself out of a situation where it was unfortunately left without a liquidator. This omission to replace the liquidator during voluntary liquidation, has now been addressed in the updated regulations.
This flexibility can come to use in times like, death of present liquidator or to replace a liquidator which was not working in the best interest of the corporate or under any other circumstance where the stakeholders of the corporate desire to change the liquidator, for smooth liquidation process. This should also result in a rather more diligent liquidation process with the risk of being replaced, hanging on the Liquidator.
The IBBI has also clarified that in event of replacement of liquidator, where a Liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Likewise, in case the replaced Liquidator distributes any amount which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.