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Clearing the air around voluntary liquidation process
The Ministry of Corporate Affairs on June 29, 2017 came out with an important clarification bringing an end to the uncertainty over proceedings for voluntary winding up initiated under the Companies Act, 1956
Clearing the air around voluntary liquidation process

The Ministry of Corporate Affairs on June 29, 2017 came out with an important clarification bringing an end to the uncertainty over proceedings for voluntary winding up initiated under the Companies Act, 1956 (1956 Act), once the provisions under the Insolvency and Bankruptcy Code 2016 relating to voluntary winding up were made effective.

Background

The 'winding up' or 'liquidation' of a company denotes one of the processes by which a company ceases to exist.  Presently, the winding up proceedings of a company can be initiated in several ways including at the instance of the directors and members of the company to voluntarily liquidate the company (Voluntary Liquidation).

The provisions of the 1956 Act originally governed the process of the Voluntary Liquidation. Subsequently, the Companies Act 2013 (2013 Act) was enacted which replaced the 1956 Act in a phased manner. However, the provisions of the 2013 Act dealing with the process of the Voluntary Liquidation never came into force.

Eventually, on April 01, 2017, the provisions of the Bankruptcy Code governing the process of Voluntary Liquidation came into force, overriding the provisions of the 1956 Act and omitting the provisions of the 2013 Act. It is notable that the process of voluntary liquidation under the Bankruptcy Code is different in many ways from the 1956 Act. The matter had gone awry for the companies which were at a stage of Voluntary Liquidation under the 1956 Act, where all the major steps for the Voluntary Liquidation prescribed under the 1956 Act had been completed but the filing before the High Court had not been made. Such companies were unable to decide if they shall continue with the process under the 1956 Act or initiate the process afresh under the Bankruptcy Code. The confusion would have persisted if no clarification had been issued by the MCA in this respect.

It is pertinent to note that the Voluntary Liquidation proceedings which are dealt with by the High Court have to be in accordance with the provisions of the 1956 Act, on the other hand all the Voluntary Liquidation proceedings which are dealt with by the National Company Law Tribunal (Tribunal) have to be in accordance with the Bankruptcy Code. The provisions of Section 434 (1) (c) of the 2013 Act stated that only such Voluntary Liquidation proceedings under the 1956 Act will be transferred to the Tribunal that are at a stage as may be prescribed by the Central Government. However, there was no prescription made by the Central Government in this regard.

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Rule 4 of the Companies (Transfer of Pending Proceedings) Rules, 2016 (Transfer of Proceedings Rules) prescribed that all applications and petitions relating to voluntary winding up of companies pending before a High Court on April 01, 2017 will continue to be dealt with by the High Court in accordance with provisions of the 1956 Act.

However, the said rule failed to provide clarification with respect to the transition of the matters of Voluntary Liquidation where no application or petition has been made and hence such proceedings are not pending before the High Court. Thereafter, the MCA notified the Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017 on June 29, 2017, which amended the Rule 4 of the Transfer of Proceeding Rules to state that in all proceedings relating to the processes of Voluntary Liquidation which are at a stage where notice of the resolution of the shareholders to liquidate the company has been published in accordance with the 1956 Act and the company has not been dissolved before April 01, 2017, such Voluntary Liquidation proceedings should continue to be governed by the 1956 Act.

The uncertainty on the process of the transition of the Voluntary Liquidation proceedings from the 1956 Act to the Bankruptcy Code was resolved by the MCA in this manner.

How do companies stand to benefit?

Companies which were at advanced stages in the process of Voluntary Liquidation, and were left wondering how the process would be concluded, can now be assured that the process will not be made unnecessarily cumbersome due to the provisions of the Bankruptcy Code relating to Voluntary Liquidation being made effective.

Archana Tewary, is Partner and Aastha Srivastava is Associate at law firm J Sagar Associates

 

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