A Comprehensive Analysis under the Companies Act, 2013 & IBC, 2016

Voluntary liquidation is a procedure by which a company begins the dissolution of its affairs by choice. It is a vital way of corporate restructuring and insolvency proceedings. The voluntary liquidation structures along with their process and implications mentioned under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. It is significant for shareholders to know the difference between these two legislative frameworks, it is easier to navigate the corporate dissolution in the Indian aspect. The current article’s purpose is to aware you about the voluntary liquidation under the Companies Act, 2013 and the IBC, 2016.

Voluntary Liquidation pursuant to Section 59(7) of IBC, 2016

The Company that wishes to liquidate itself voluntarily and not commit to any default may start with a voluntary liquidation process subject to the accomplishment of certain situations. It is defined under section 59(7) of the IBC, 2016. 

Reasons for voluntary liquidation

There are certain reasons for the voluntary liquidation, which are as follows:

• Measure tax planning: Companies may plan for voluntary liquidation to avail of certain benefits of taxes. In addition, companies may plan for voluntary liquidation to offset their capital losses.

• Special purpose vehicle (SPV): In case the object for which the company has been incorporated is fulfilled, then the company can be liquidated voluntarily. For instance, toll projects, and SPV in real estate projects.

• No potential opportunities: In case a company cannot feasibly operate financially because of unfavorable environmental situations, technical obsolescence, or due to amendments in legal structure, it may decide to wind up its operations voluntarily or the company does not have potential business opportunities.

Voluntary liquidation conditions

1. Company shall have resolved to wind up voluntarily by a special resolution passed by creditors and shareholders;
2. Company shall be solvent.

Implication of income tax for voluntary liquidation

There are certain compliances under the Income Tax Act, 1961:

• Dividend: It is define under section 2(22)(c) of the Income Tax Act, 1961. Any distribution made to the company’s shareholders on its liquidation to the extent which the distribution is attributed to accumulated the company’s profit is treated as a deemed dividend and as per TDS @ 10% is needed to be deducted (according to provisions of section 194 of the Income Tax Act, 1961).
• Capital Gain: The company’s assets distribution to its shareholders on its liquidation must not be transferred by the company, as per section 46 of the Income Tax Act, 1961.
• Company in Liquidation: The Company’s liquidator shall provide intimation to the income tax officer within 30 days from the appointment date. In case the liquidator fails to offer such intimation, he must be personally liable for payment of dues of income tax and other compliances.

However, it is not compulsory to have NOC according to the circular passed by the IBBI Circular No. IBBI/LIQ/45/2021 Dated 15-11-2021. 

According to provisions of Section 2(35) of the Income Tax Act, 1961, the principal officer’s position is occupied by the liquidator to ensure the compliances need to be fulfilled. 

Impact of Stamp Duty: In case the company distributes immovable property among their shareholders, then a liquidator is needed to implement the sale deed and transactions need to have stamp duty according to the state Stamp Duty Act.

Step-by-step timeline process for Voluntary Liquidation

There is a step-by-step timeline process for voluntary liquidation:

1. Solvency Declaration: An affidavit has been filed for the Declaration of Solvency (DoS) by the directors, in which certain things must be written:

• Made a full inquiry about the company’s affairs and must have created their opinion, which is either the company has no debt or if any then it will be able to pay in full from the process of selling assets in the liquid;

• Company must have sufficient provisions to meet the duties, which arise on account of pending cases; and

• The company is not being liquidated to defraud any individual.

1. Must pass SR within four weeks of attaining DoS(T)DoS;
2. Creditors approval within seven days of SR (T+7);
3. To fill Form A (T+5) for public announcement;
4. IBBI intimation by IP (T+7);
5. Send notice to RoC & IBBI re. SR/ permission of creditors (T+7/14);
6. Submission of Stakeholder’s claims (T+30);
7. Alteration/ withdrawal of shareholder’s claims (T+44);
8. Preliminary report submission by the liquidator to CD (T+45);
9. Need to verify the liquidator’s claims (T+60);
10. Claim’s rejection/ intimation of a decision of acceptance (T+67);
11. Make lists of Shareholder (T+45*/75);
12. Any appeal by creditors against the Liquidator’s decision;
13. Process distribution within 30 days of realization;
14. Before applying for dissolution, need to deposit the unclaimed amount in a corporate voluntary liquidation account;
15. Final report submission to ROC, IBBI, and AA (T+90*/270);
16. Voluntary liquidation process is completed (T+90*/270)

Modes of Voluntary Winding up Companies Act, 2013

Conclusion

Under the Companies Act, 2013, and the Insolvency and Bankruptcy Code, 2016, voluntary liquidation is provided to the companies in India to distinguish the winding affairs. The Companies Act provides a process more straightforward and company-driven for dissolution, and the IBC provides a comprehensive structure, which includes oversight by insolvency professionals and the NCLT. Both legal frameworks’ motive is to maintain the orderly winding up of the company’s affairs, make sure the fair treatment of shareholders and creditors. Meanwhile, the choice between the Companies Act, 2013 and IBC depends on several factors such as the financial position of the company, the desired level of regulatory framework, and extension of creditor involvement. If you have any doubts regarding Voluntary liquidation and to know about the procedure for the voluntary winding up of a Company, thus, here is our Legal Window Team of professions, and experts to help you!