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Voluntary liquidation of companies under IBC on the rise

Dipak Mondal     August 8, 2019

Voluntary liquidations under the Insolvency and Bankruptcy Code (IBC) are becoming popular for promoters to close down 'unviable' companies. The Quarterly Newsletter (April-June 2019) issued by Insolvency and Bankruptcy Board of India (IBBI), the insolvency regulator, shows as many as 452 companies have filed for voluntary liquidation till 30 June 2018. Of that, 56 firms have so far been dissolved, final reports have been submitted in 114 cases and 338 are at different stages of the process.

A company can file for voluntary resolution only if it has no debts or promises to pay the debt in full from the proceeds of assets to be sold under voluntary liquidation process. The application of voluntary liquidation should not also be to defraud any person.

According to the IBBI newsletter, of the 452 cases reasons for liquidation in 415 cases were available. Of all the reason for companies applying for voluntary liquidation, the most common reason (254 out of 415) was that of the company is no longer carrying any businesses, followed by commercial unviability of the business (59) and no revenue (19).

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Experts believe that more companies are going for voluntary liquidation route for close of businesses as it offers a much simpler exit route for them instead of the ones prescribed under the Companies Act 2013.

"Under Companies Act, a company without any assets and liability get struck off if it has not started any business activity one year after its incorporation or has not done any business in the past two years. But a company with any kind of asset or liability, the option is to let the company die. And the only way you can let the company die is voluntary liquidation," says Pavan Kumar Vijay, founder, Corporate Professional, a legal and financial advisory firm.

He says that earlier the process of voluntary liquidation would go on for 10 years but now with the option of voluntary liquidation under IBC they have shortened the process.

Typically, the process under voluntary liquidation involves board of directors seeking approval from shareholders and the appointing a liquidator. If the company has debt in its books, two-third of the creditors by value should approve the resolution passed by shareholders. After the necessary approvals, filings should be made with the registrar of companies and IBBI. The process should ideally be over within a year.

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Voluntary liquidation is a faster process with companies being dissolved within 2 years. Of the 338 ongoing cases, 100 of them have been under process for more than 30 days but less than two years, 167 of them are under process for more than 90 days but less than 360 days.

According to IBBI, most of the companies which opted for voluntary are smaller entities, with 275 of them having less than Rs 1 crore paid-up capital and only 42 of them having a paid-up capital of Rs 5 crore or more. The total outstanding debt of the 415 (out of the 452) firms under voluntary liquidation was Rs 857 crore.

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