To provide an orderly framework for withdrawal from the voluntary liquidation process, the Insolvency and Bankruptcy Board of India (IBBI) has proposed amendments to existing regulations. A Corporate Person (CP), which is undergoing a voluntary liquidation process, should be allowed to seek approval from the Adjudicating Authority (AA) for withdrawal from the process, subject to various conditions, according to a discussion paper.
IBBI, a key institution in implementing the Insolvency and Bankruptcy Code (IBC), has sought public comments on the discussion paper on proposed changes to regulations governing the voluntary liquidation process. Currently, IBC provisions and voluntary liquidation regulations are silent on the withdrawal or closure of the process after its initiation.
Apart from proposing that a CP be allowed to seek approval of the AA for withdrawal from the voluntary liquidation process, IBBI said that such a withdrawal should be permitted only if it is backed by a special resolution of the members, partners or contributories, as the case may be. In instances where there has been no sale of assets, the withdrawal should have approval of creditors representing two-thirds in value of the outstanding debt.
As per the discussion paper, where the sale has commenced, the withdrawal should have the nod of all unpaid creditors unless the dues of all unpaid creditors are settled before passing of the resolution. Further, the liquidator concerned should approach the AA with an application for withdrawal along with an affirmation by the liquidator that due process for withdrawal has been followed and that it is not being initiated to defraud any person as well as that the CP concerned is solvent, according to IBBI.
The proposed amendment to regulations provides for "an orderly framework for withdrawal from the process, by way of insertion of new regulation, which also ensures adequate checks and balances so that the process is not misused," it said. IBBI also noted that the proposed amendment might help to save a potential viable company from dissolution, by providing an opportunity to the CP to withdraw from the voluntary liquidation process.
"Saving the CP would avoid destruction of value of resources of the CP and adverse effect on other stakeholders such as workmen, employees, raw material suppliers," it added. As on October 31, voluntary liquidation processes of eight CPs have been withdrawn/ suspended/ cancelled, as per the discussion paper.
"The economic environment is dynamic. There could be instances where the CP initiated the voluntary liquidation process when the financial prospects were on the downside, however, a business opportunity may arise subsequently during the currency of the process," IBBI said. Veena Sivaramakrishnan, Partner at law firm Shardul Amarchand Mangaldas & Co, said the proposed amendment is to allow for a fresh start if tides were to turn during the voluntary liquidation process.
"… the amendment to ensure that a decision to liquidate can be suspended and a corporate debtor is allowed to restart its operations is a welcome change. "While the law was silent, this was the practice followed by the tribunals and codifying the same would provide the required certainty. In addition, limiting the role of the Adjudicating Authority in such process is also a welcome step," she added.
Public comments on the discussion paper have been sought till December 15.