Voluntary Liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016

 

Voluntary liquidation under Section 59 of the Insolvency and Bankruptcy Code, 2016 read with Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 allows a solvent company to close its operations on its own. This means the company is not in financial distress and is able to pay off all its dues. It is a formal process that a company chooses to follow when it decides to shut down business activities permanently, usually due to internal business decisions or the end of its purpose.

Requirements

To initiate voluntary liquidation under this section, a company must meet the following key conditions:

1.   The company must not be in financial default. It should be in a position to pay all its debts from its existing assets.

2.  A majority of directors must formally declare that the company is solvent. They must confirm they have reviewed the company's financial position and believe that the company can pay off its debts fully and is not closing to deceive or harm anyone.

3.  The declaration of solvency by the directors must be supported by documents including recent audited financial statements, a report from a registered valuer on the company’s assets (if any), and disclosures of any legal or regulatory matters still pending.

 

4.  A special resolution must be passed by the shareholders in a general meeting approving the voluntary liquidation and appointing a liquidator to carry out the process.

5.  If the company owes any money to any creditor, the approval of creditors representing at least two-thirds of the total debt value is also required.

Procedure

Once the requirements are met, the following steps are followed:

1. The directors make a formal declaration of solvency with supporting documents in a duly held Board Meeting of the Company.

2.  The shareholders approve the decision through a special resolution and appoint a professional liquidator in the General Meeting, within 04 weeks of the Declaration by Directors.

 

3.   If the company has creditors, their approval must also be obtained within 07 days after the shareholders’ resolution.

 

4.  The decision to liquidate is then reported to the Registrar of Companies and the Insolvency and Bankruptcy Board of India, within 05 and 07 days respectively.

 

5.    A public advertisement is issued within 05 days inviting any claims from the stakeholders of the company within 30 days. The liquidator receives and verifies these claims and prepares a preliminary report within 45 days followed by a list of stakeholders of the company within 75 days from the liquidation commencement date.

 

6.   The liquidator then proceeds to sell the company’s assets (if any), settle debts, and distribute any remaining funds to the shareholders.

 

7.   Once everything is completed, the liquidator prepares a final report and submits it to the relevant authorities including the National Company Law Tribunal, along with the dissolution application.

 

8.  After reviewing the submitted dissolution application, the tribunal passes an order formally dissolving the company.

 

9.  A copy of the dissolution order is sent to the Registrar of Companies, and the liquidator is responsible for maintaining the records for a fixed period after closure.

Time Limit

The voluntary liquidation process as per the regulations is stipulated to be completed within a defined period. If the company has creditors involved, the process should ideally be completed within 270 days from the date of approval. If there are no creditors, it must be completed in about 90 days.

Strike-Off under Section 248 of the Companies Act, 2013

Strike-off is a simplified process under the Companies Act, 2013, through which a company that is no longer active can apply to have its name removed from the official register of companies. This method is typically used when a company has stopped operating and wishes to close without undergoing a full liquidation process.

A company may be struck off in the following cases:

a) a company has failed to commence its business within one year of its incorporation 

b) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company

c) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company 

d) the company is not carrying on any business or operations, as revealed after the physical verification carried out.

Modes of Strike Off-

A.  Voluntary Strike Off (by Company) – Section 248(2)

Applicable when the company:   

• has not commenced its business within one year of incorporation; or
• is not carrying on any business or operation for the last two financial years and has not applied for the status of a dormant company.

The company files Form STK-2 with the RoC along with:

• Indemnity bond (STK-3)
• Statement of accounts (not older than 30 days)
• Special resolution/consent of 75% members in terms of paid-up share capital
• Affidavit from directors (STK-4)

B.    Compulsory Strike Off (by RoC) – Section 248(1)

The RoC may remove a company’s name if it has reasonable cause to believe that:

• The company has failed to commence its business within one year of incorporation; or
• The company is not carrying on any business or operation for the preceding two financial years and has not applied for the status of a dormant company; or
• The subscribers to the memorandum have not paid the subscription money and a declaration has not been filed within 180 days; or
• The company is not carrying on any business as per the information received.

RoC sends notice to the company and its directors in Form STK-1.

Once the company is struck off, it is no longer considered a legal entity.

 

Procedure

The general steps for strike-off are as follows:

1. Board Meeting: The board of directors approves the proposal by passing of a resolution in the Board Meeting for strike off.

2. Settlement of Liabilities: All the liabilities are cleared off and settled including any loans or statutory dues. All the bank accounts of the company are closed, and NOC is obtained from Creditors for their approval.

3. Shareholder Consent: A resolution is passed by shareholders with atleast 75% members approving the resolution (in terms of their share capital) confirming their agreement to apply for strike-off.

4. Filing the Application: The company submits an application to the Registrar of Companies in Form STK-2 (Govt Fees for STK-2 is ₹ 10,000), along with supporting documents such as:

·    A copy of the board and shareholder resolutions 

·   A statement of accounts (not older than 30 days and certified by a Chartered Accountant)

·   Affidavits (in STK-4) and indemnity bonds from all directors (in STK-3)

·    Confirmation of no legal disputes or pending obligations

5. Public Notice by RoC: RoC issues a public notice in Form STK-6, allowing objections from the public, creditors, or stakeholders (timeframe: 30 days).
   
   
6. Final Notice & Strike Off: After 30 days, if no objection is received, the RoC strikes off the name and publishes the notice in the Official Gazette in Form STK-7.
    

Revival of the company after Strike Off: Once the name of the company is struck off under Section 248, and the notice is published in the Official Gazette, the company stands dissolved and ceases to exist as a legal entity. However, under Section 252 of the Companies Act, 2013, if the Registrar is satisfied that the name of the company has been struck off based on incorrect information, he may file an application before the tribunal within a period of three years from the date of passing of order dissolving the company, seeking restoration.  

Further if the company, any member, creditor, or aggrieved person may apply to the National Company Law Tribunal (NCLT) for restoration of the company’s name within twenty years from the date of publication in the Official Gazette of the Notice. If the Tribunal is satisfied that the removal was unjustified, it may order the restoration of the company’s name to the register, and the company shall be deemed to have continued as if its name had never been struck off.

"EXIT STRATEGIES FOR MULTINATIONAL COMPANIES IN INDIA: A COMPARATIVE LEGAL ANALYSIS OF CLOSURE MECHANISMS UNDER THE IBC AND COMPANIES ACT"

India’s corporate landscape includes a significant number of Multinational Companies (MNCs) operating through wholly owned subsidiaries, joint ventures, or branch/liaison offices. These entities may at some stage consider closure or exit from the Indian market due to strategic realignment, financial distress, regulatory challenges, or other commercial considerations.

Exit strategies for MNCs in India involve a range of legal, financial, and operational considerations to ensure a smooth and compliant withdrawal from the market. The primary objective is to present a comprehensive and comparative analysis of the legal framework governing the closure of Multinational Companies (MNCs) operating in India, based on their solvency status. In the dynamic and evolving landscape of global business, MNCs often reassess their market presence and may choose to exit jurisdictions for strategic, financial, or operational reasons. In such instances, understanding the legal options and procedural requirements for closure becomes critical.

There are two principal legislative frameworks governing corporate exit in India- Insolvency and Bankruptcy Code, 2016 (IBC), and the Companies Act, 2013. Their primary focus is to delineate the exit mechanisms available to multinational corporations, both in situations of solvency and insolvency, through a critical analysis of the key legal processes prescribed under these statutes.

Through a detailed examination of these legal pathways, it is aimed to provide clarity on the conditions, procedural timelines, regulatory authorities involved (such as the National Company Law Tribunal (NCLT), Registrar of Companies (ROC), and Insolvency and Bankruptcy Board of India (IBBI)), and compliance requirements relevant to each mode of closure.

By bridging the legal and procedural understanding of company closure mechanisms, this study aims to contribute to better strategic decision-making for MNCs contemplating an exit from the Indian market, while also offering policy insights that may inform future legislative reforms.

Classification of Companies Based on Solvency

Legal procedures vary based on the financial position of the company:

a) Solvent Companies

Entities that can pay off their debts as they fall due. Closure mechanisms include:

●     Strike-off under Section 248 of the Companies Act, 2013

●     Voluntary Liquidation under Section 59 of the IBC, 2016

●     Winding Up of Companies under Section 271 of the Companies Act

b) Insolvent Companies

Entities unable to pay debts. Closure is initiated through:

● Corporate Insolvency Resolution Process (CIRP), followed by liquidation under IBC followed by liquidation

●     Winding Up of Companies- Section 271 of the Companies Act

Unlocking a New Era: EFTA Nations’ commitment of $100 Billion FDI for India

In a historic move towards bolstering international trade and economic integration, India has inked a groundbreaking Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA) on March 10th, 2024. Spearheaded by Shri Piyush Goyal, Minister of Commerce and Industry, Food and Consumer Affairs, and Textiles, this modern and ambitious agreement marks India's first Free Trade Agreement (FTA) with four developed nations, comprising Switzerland, Iceland, Norway, and Liechtenstein.

At the core of this agreement lies a remarkable commitment: EFTA has pledged to promote investments aiming to surge India's foreign direct investments by a staggering USD 100 billion over the next 15 years. This visionary pact doesn't stop there; it also aims to pave the way for the creation of 1 million direct jobs within India through these investments, setting a new benchmark in FTA history.

The significance of this agreement extends far beyond mere numbers. EFTA's generous offer encompasses 92.2% of its tariff lines, covering an impressive 99.6% of India's exports. In return, India has reciprocated by offering 82.7% of its tariff lines, encompassing 95.3% of EFTA exports. Notably, India has ensured that sensitive sectors such as pharmaceuticals, medical devices, processed food, dairy, soya, and coal remain safeguarded.

In a groundbreaking move, TEPA delves into uncharted territories by making a legal commitment to promote target-oriented investments and the creation of jobs, a first in FTA history. This agreement not only unlocks doors to large European and global markets for Indian exporters but also provides a window for EFTA nations to access India's vast market.

The scope of TEPA is broad and comprehensive, covering 14 chapters with a primary focus on crucial aspects such as market access for goods, rules of origin, trade facilitation, intellectual property rights, and sustainable development. It also includes provisions for Mutual Recognition Agreements in Professional Services, underscoring the commitment to fostering a conducive environment for trade and investment.

One of the standout features of TEPA is its emphasis on services exports, particularly in sectors where India holds key strengths, such as IT services, business services, education services, and more. EFTA's offers in services include improved access through digital delivery, commercial presence, and enhanced commitments for entry and temporary stay of key personnel.

TEPA isn't just about trade; it's a catalyst for 'Make in India' and 'Atmanirbhar Bharat' initiatives, bolstering domestic manufacturing across sectors like infrastructure, manufacturing, pharmaceuticals, chemicals, and more. This agreement is a gateway to integrating into EU markets, with Switzerland serving as a potential base for Indian companies to expand their reach.

In addition to its economic implications, TEPA signals India's commitment to sustainable development, inclusive growth, social development, and environmental protection. It fosters transparency, efficiency, simplification, and harmonization of trade procedures, setting a high standard for international agreements.

As we embark on this new era of economic collaboration, TEPA stands as a testament to India's progressive vision and its dedication to fostering a vibrant, globally connected economy. With a promise of $100 billion in investments and 1 million jobs, this agreement not only unlocks economic opportunities but also signifies a landmark moment in the history of India's trade relations with EFTA nations.

 

This Article has been Compiled by Divyansh Jaiswal (Senior Associate)

You can direct your queries or comments to the author at divyansh@factumlegal.com

Analysing the Mediation Act, 2023

The Mediation Act, 2023 (“the Act”) was passed by the Rajya Sabha on 01.08 2023, the Lok Sabha on 07.08.2023 and given assent by the President on 14.09.2023. The Bill was introduced with the intention to provide quick and affordable justice to the population of the country. The objective of the Act is to promote, encourage and facilitate mediation especially institutional mediation for resolution of civil and commercial disputes, enforce mediated settlement agreements, provide for a body for registration of mediators, to encourage community mediation and to make online mediation as an acceptable and cost-effective process and for matters connected therewith or incidental thereto.

Applicability - The Mediation Act, 2023 will apply where mediation is conducted in India and under this law, provision for international Mediation has been provided for in cases where one party is other than that of Indian nationality. Moreover, disputes other than commercial disputes, in which Central Government and State Government or its agency, entity etc. are a party, cannot be mediated unless the nature of disputes which can be referred to mediation are notified.

The Mediation Act only applies to international mediation where the mediation is conducted in India but not applicable to mediation which are conducted outside India.

Definition of Mediation – Section 4 of the Act has defined mediation as a process, whether referred to by the expression mediation, pre-litigation mediation, online mediation, community mediation, conciliation whereby party or parties, request a third person referred to as mediator or mediation service provider to assist them in their attempt to reach an amicable settlement of a dispute.

Hence, the Mediation Act recognises online mediation and community mediation which have been a part of our ancient culture by way of Panchayats which was later replaced by British rule which introduced system of jurisprudence and adversarial litigation conducted in the Courts.

Mediation Agreement - A mediation agreement as defined in Section 5 of the Act shall be in writing, in the form of a mediation clause in a contract or in the form of a separate agreement.

Disputes or matters not fit for mediation – Such disputes have been mentioned in an indicative list provided in First Schedule of the Act. Few of such disputes are disputes which by virtue of any law for the time being in force may not be submitted for mediation, disputes involving allegations of serious and specific fraud/fabrication of documents/forgery/impersonation/coercion, disputes involving prosecution for criminal offences, disputes which have the effect on rights of a third party who are not a party to the mediation proceedings, etc.

Interim relief by court or tribunal – Parties to mediation can under Section 8 of the Act before the commencement of, or during the continuation of, mediation proceedings under this Act, file suit or appropriate proceedings before a court or tribunal having competent jurisdiction for seeking urgent interim relief.

Mediators – As specified in Section 10, person of any nationality can be a mediator provided they possess the requisite qualifications. In case parties fail to reach an agreement on the name of a mediator, the party initiating the mediation can make an application to the Mediation Service Provider for appointment of a mediator from the panel of mediators maintained by it, which must take into consideration the preference of the parties and suitability of the mediator in resolving the dispute.

Territorial jurisdiction to undertake mediation – As mentioned in Section 15 of the Act, mediation shall take place within the territorial jurisdiction of the court or tribunal of competent jurisdiction to decide the subject matter of dispute or online or any other place with the mutual consent of the parties.

Withdrawal from mediation - As mentioned in Section 20 of the Act, a party may withdraw from mediation at any time after the first two mediation sessions. Cost may be imposed for absence in first two sessions.

Enforceability - Mediated Settlement Agreement in Section 22 of the Act, shall be final and binding on the parties and persons claiming under them respectively and enforceable in accordance with the provisions of the Code of Civil Procedure, 1908, in the same manner as if it were a judgment or decree passed by a court, and may, accordingly, be relied on by any of the parties or persons claiming through them, by way of defence, set off or otherwise in any legal proceeding.

Time - Period – As per Section 21 of the Act, Mediation shall be completed within a period of one hundred and eighty days from the date fixed for the first appearance before the mediator which may be extended for a further period as agreed by the parties, but not exceeding one hundred and eighty days.

Challenging mediated settlement agreement – As per Section 22 of the Act, a mediated settlement agreement may be challenged may file an application before the court or tribunal of competent jurisdiction, only on all or any of the grounds of fraud, corruption, impersonation and where the mediation was conducted in disputes or matters not fit for mediation under section 7. An application for challenging the mediated settlement agreement shall be made after ninety days have elapsed from the date on which the party making that application has received the copy of mediated settlement agreement.

Community Mediation – Chapter X of the Act recognises Community Mediation and states that any dispute likely to affect peace, harmony and tranquillity amongst the residents or families of any area or locality may be settled through community mediation with prior mutual consent of the parties to the dispute.

Mediation Council of India: Chapter VIII of the Act specifies establishment of the Mediation Council of India (MCI) to be headed by a chairperson to be appointed by the Central Government. Duties and functions of the Mediation Council of India have been laid down, inter alia, for promoting institutional mediation, registration of mediators, grading of mediation service providers etc.

Hence, the Mediation Act institutionalizes the mediation which aims to provide an effective alternative dispute resolution mechanism which reduces the dependency on the Court. It has been stated in the Act that pre-litigation mediation in matters of commercial disputes will continue to be governed according to Section 12(A) of the Commercial Courts Act, 2015. One of the drawbacks of the Act is that the Act does not provide for enforcement of settlement agreements resulting from international mediation conducted outside India. The Act also uses the word conciliation interchangeably with mediation. With this Act coming into effect and the Rules that will be formulated later, the role mediation in amicable dispute resolution can grow and settlement can be reached efficiently and effectively.

This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Managing Partner). 

You can direct your queries or comments to the author at info@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is  intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other  responsibility arising due to any action taken by any person on the basis of this article.