Dissolution without Liquidation

 Dissolution without Liquidation – Is it even possible?

In India, there are a lot of companies with liabilities and no assets and idea of closure of the company is to be contemplated as there does not exist future prospects in the company. One of the options for those companies is to undergo Corporate Insolvency Resolution Process and then liquidation process if resolution plan is not approved by the Committee of Creditors or no viable resolution plan is received. For those companies with no assets, liquidation process can seem like a cumbersome and time taking process when the companies have no assets to liquidate. In this article, we explore the possibility and viability of any option which paves the way for early dissolution of such companies without undergoing the normal liquidation process as envisaged under the Insolvency and Bankruptcy Code, 2016 ('IBC’).

Every distressed company has to go through a hierarchy of processes which include a compulsory insolvency resolution process prior to liquidation and the final dissolution only after the competition of such liquidation process. Thus, every company dissolved pursuant to the IBC has to mandatorily undergo the preceding Corporate Insolvency Regulation Process (“CIRP”) and liquidation process.

Now the question for consideration is whether a company has to compulsorily undergo a liquidation process under IBC?

In order to answer the question, we can refer to the following provisions:

Section 54 of IBC- Application for Dissolution- where the assets of the Corporate Debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such Corporate Debtor.

Regulation 14 of the IBBI (Liquidation Process) Regulations, 2016- Early Dissolution- if it appears to the Liquidator that:

1. the realizable properties of the Corporate Debtor are insufficient to cover the cost of the liquidation process; and
2. the affairs of the corporate debtor do not require any further investigation;

He may apply to the Adjudicating Authority for early dissolution.

Rule 11- NCLT Rules, 2016- Inherent Powers of NCLT- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the tribunal.

Analysis

A conjoint reading of the aforementioned provisions suggests that an application of dissolution shall be made where the assets of the corporate debtor are completely sold. Hence, it may be naturally implied that where the Corporate Debtor has no assets at the very commencement of the liquidation, the liquidation period may not be required.

The following question has been answered in a number of judgements passed by the National Company Law Tribunal (“NCLT”):

In Synew Steel Pvt Ltd CP (IB)N.96/BB/2020, initially the application was filed under Section 10 of the IBC read with Rule 7 of I & B (AAA) Rules, 2016, inter alia seeking to initiate CIRP in respect of the M/S Synew Steel Pvt Ltd on the ground that it has committed default of an amount of Rs. 1, 18,56,964/- which includes claims from both Financial Creditors and Operational Creditors. The Adjudicating Authority admitted the case and CIRP was initiated in respect of the Corporate Applicant.

It was pointed out by the Insolvency Resolution Professional (IRP) that he is unable to constitute the Committee of Creditors (COC) because there were no assets (movable or immovable) with the Corporate Debtor except a cash balance of Rs. 729/-. The entire share capital of the Corporate Debtor was eroded. Because of no business being conducted by the Corporate Debtor in the last 3 years, there has been no revenue.

The NCLT referred to the following provisions before going into the merits of the case

1. Section 54 of IBC
2. Rule 14 of IBBI (Liquidation Process) Regulations, 2016
3. Rule 11 of NCLT Rules, 2016

The Tribunal held that “there would be no useful purpose served, by placing the Corporate Debtor under a Liquidation Process, under the extant or provisions of Code. Since the Assets of Company were realized, the liquidation process under the provisions or Code is deemed to have been completed under Chapter III of Part II of Code and thus it would be just and proper for the Adjudicating Authority to dissolve the company as proposed by the Resolution professional and the Applicant Company i.e. Synew Steel Private Limited is ordered to be dissolved with immediate effect”.

After considering the aforementioned cases and provisions, it is safe to say that early dissolution of a company is a viable option for a Corporate Debtor seeking to dissolve the company in a timeframe shorter than that in normal liquidation process. However, the process for ‘dissolution without liquidation’ (early dissolution) is not as straight forward as it seems and requires careful consideration on various issues before approaching the Hon’ble NCLT as the NCLT has complete discretion to reject the application for early dissolution if it is not satisfied with the reasons and has done so on previous occasions. 

This Article has been Compiled by Aditya Raj (Associate) and Arun Gupta (Partner). 

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