[Analysis] IBBI Proposes Reforms to Streamline Voluntary Liquidation Process | Key Highlights and Proposals

Table of Contents 

1. Disclosure of pendency proceedings or litigation by director of corporate person to ensure transparency
2. Establishing a mechanism for timely reporting of reasons for delay in Liquidation Process
3. Mandatory declaration by corporate person falling under the category of Financial Service Provider
4. Directing liquidator to verify claims prior to dissolution order to ensure timely processing
5. Submitting Final Liquidation Report and Compliance Certificate on the electronic platform
6. Submission of dissolution order to the Board along with final data on electronic platform
7. Conclusion

On October 5, 2023, the Insolvency and Bankruptcy Board of India (IBBI) unveiled a discussion paper for streamlining the voluntary liquidation process.  The Code and the IBBI (Voluntary Liquidation Process) Regulations, 2017 have been designed to facilitate a market-driven approach in the voluntary liquidation process, with the primary goal of achieving faster outcomes at minimal cost.

The key proposals include (a) Disclosure of any pending proceedings or litigation before statutory authorities by director of the corporate person, (b) Establishing a mechanism for timely reporting reasons for delay in the liquidation process, (c) mandatory declaration by a corporate person falling under the category of Financial Service Provider (FSP) etc. The comments may be submitted electronically by 26.10.2023.

The key highlights of the discussion paper are discussed in detail below –

1. Disclosure of pendency proceedings or litigation by director of corporate person to ensure transparency

As per Regulation 37 of the IBBI (Voluntary Liquidation Process) Regulations, 2017, the liquidator must endeavour to complete the liquidation process of the corporate person within 90 or 270 days from the liquidation commencement date, as the case may be.

1.1 Present issues

The Board noticed that as on August 31, 2023, around 55% of the ongoing cases have been continuing for more than one year. Further, it has been observed that the delay is generally on account of delay in making foreign remittances, pending appeal regarding demand/ penalty imposed and refund from statutory departments and other litigations.

1.2. IBBI’s proposal

The IBBI has proposed that the directors of the corporate person must disclose pending proceedings, litigation or assessments before statutory authorities while making a declaration for initiation of the process. Further, sufficient provision has been made to meet the obligations arising, if any, on account of these pending matters.

Impact

The proposed change to disclose pendency proceedings will reduce prolonged liquidation process, ensuring timely compliance, improving efficiency and enhancing transparency in the liquidation process.

2. Establishing a mechanism for timely reporting of reasons for delay in Liquidation Process

As per Regulation 37(2) of the IBBI (Voluntary Liquidation Process) Regulations, 2017, if the liquidation process continues for more than twelve months, the liquidator is required to hold a meeting of the contributories of the corporate person within 15 days from the end of the twelve months from the liquidation commencement date and at the end of every succeeding twelve months till the dissolution of the corporate person. Further, he is also required to present an Annual Status Report(s) indicating progress in liquidation.

2.1. Present issues

The Board noticed that as on 31^st August, 2023, out of 408 cases in which the voluntary liquidation process has commenced, final report has been filed in 175 cases. These 175 cases took an average of 155 days for the submission of the final report. Further, out of these 175 cases, the final report has been submitted within 90 days in 64 cases. Therefore, there is a need to amend this regulation to bring it in line with the timelines specified in Regulation 37(1).

Further, there is no mechanism in place for reporting the reason for the delay by the Liquidator to the Board, where the liquidator fails to liquidate the corporate person within the prescribed time.

2.2. IBBI’s proposal

Now, the IBBI has proposed that in case the liquidator fails to liquidate the corporate person within the prescribed period, he must hold a meeting of the contributories of the corporate person and submit a Status Report to the Board within 15 days after the end of the quarter specifying the reasons behind such delay. Also, the additional time needed to complete the process must be specified.

Impact

The proposed change aims to establish a mechanism for specifying reasons for the delay and additional time needed to complete the liquidation process, fostering transparency and accountability in voluntary liquidations. This streamlines the process, reduces delays and promotes efficiency in corporate liquidations.

3. Mandatory declaration by corporate person falling under the category of Financial Service Provider

Section 3(7) of the IBC defines a “corporate person” as a company, as defined in section 2(20) of the Companies Act, 2013, a limited liability partnership, as defined in section 2(1)(n) of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

Further, Section 227 provides that the Central Government may, in consultation with the appropriate financial sector regulators, notify financial service providers (FSPs) or categories of FSPs for insolvency and liquidation proceedings.

3.1. Present issues

It was observed that there have been instances of initiating the voluntary liquidation process of corporate persons falling under the category of FSP that have not been duly notified. In this regard, it is proposed that in case the corporate person falls under the category of FSP notified by the Central Government, the corporate person must provide a declaration stating that it has obtained prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.

3.2. IBBI’s proposal

The IBBI has proposed that if the corporate person falls under the category of financial service provider, it must declare that the category of financial service provider has been duly notified by the Central Government under section 227 of the Code.

Further, the declaration by the corporate person must also provide that the corporate person has obtained prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.

Impact

The proposed change seeks to improve regulatory oversight and compliance within the financial service provider (FSP) sector under the IBC. This proactive approach aims to enhance governance and transparency in cases involving corporate persons in the FSP category, strengthening the overall IBC framework.

4. Directing liquidator to verify claims prior to dissolution order to ensure timely processing

Regulation 39 of the IBBI (Voluntary Liquidation Process) Regulations, 2017 provides a framework for managing unclaimed deposits and undistributed proceeds during the liquidation process. As per the regulation, liquidators are mandated to deposit unclaimed or undistributed amounts into the Corporate Voluntary Liquidation Account along with details of stakeholders entitled to such deposited amount with the Board

4.1. Present issues

The Board has observed a substantial increase in withdrawal requests in cases where a final report has been submitted but the dissolution order has not been passed. The time gap between the issuance of the dissolution order and the submission of the application for dissolution is growing wider.

Further, based on data available with the Board the average time taken for the dissolution of the voluntary liquidation process from the date of submission of the final report is 280 days. This leads to delays in distribution and inconvenience to claimants. Also, the current mechanism does not provide for distribution after the final report but before the issuance of the dissolution order.

Therefore, there is a need to provide for distribution to these claimants as it will help them get their dues and will reduce the correspondence being made to the Board.

Also, Section 35(1)(j) of the IBC mandates the liquidator to invite and settle the claims of creditors and claimants and distribute proceeds in accordance with the provisions of the code.

4.2. IBBI’s proposal

The IBBI has proposed that upon receiving a request for withdrawal from the claimant, the Board must direct the liquidator to verify the claim in cases where the dissolution order has not been passed. This verification process includes checking the legitimacy of the claim, the amount involved, and any other relevant details.

Further, after verification, the liquidator must submit their findings and opinion to the IBBI, enabling the withdrawal even before the dissolution order.

Impact

The proposed changes aim to streamline and expedite the voluntary liquidation process by allowing claimants to withdraw their dues before the dissolution order is passed, reducing delays and ensuring a more efficient distribution of proceeds. This proactive approach not only enhances efficiency but also the integrity of the process as it involves verifying claims before dissolution orders, ensuring that only valid claims are processed.

5. Submitting Final Liquidation Report and Compliance Certificate on the electronic platform

As per Regulation 38 of the IBC, the liquidator is mandated to submit the final report and compliance certificate in Form H to the Adjudicating Authority (AA). The same is also required to be submitted to the Board as outlined in section 208(2)(d) of the IBC.

5.1. Present issues

It was observed that the final reports and compliance certificates are being submitted to the Board in various forms such as physical, soft copies in pen drive, CD and by email. This results in difficulty in compiling all such filings at one place. To ensure that the reports and compliance certificates are available at one place, the IPs may be required to submit the same on the electronic platform.

5.2. IBBI’s proposal

The IBBI has proposed that Form H and the final report may be submitted on the electronic platform to be notified by a Circular issued by the Board.

Impact:

The proposal initiative to submit the final report and compliance certificate on an electronic platform aims to streamline the filing process. This change will ensure that these documents are readily accessible and organized, reducing administrative complexities and enhancing overall efficiency in regulatory compliance.

6. Submission of dissolution order to the Board along with final data on electronic platform

Under Section 59(9) of the IBC, a copy of the dissolution order must be forwarded to the authority with which the corporate person is registered within 14 days from the date of the order. The provisions of the Code/regulations do not provide for submission of the dissolution order for the voluntary liquidation process to the Board.

6.1. Present issues

The Board has observed that, in several cases, these orders are received after a substantial period of time. Further, the details pertaining to realisations and distribution often change between the submission of the application for dissolution and the issuance of the order. As a result, updated data is not readily available to the Board.

6.2. IBBI’s proposal

The IBBI has proposed that regulations be amended to provide for submission of the dissolution order to the Board, along with the final data on the electronic platform to be notified by Circular issued by the Board.

Impact

The proposed change aims to improve the efficiency and transparency of the voluntary liquidation process under IBC by ensuring the timely submission of dissolution orders to the Board and providing accurate, up-to-date data on realizations and distribution. This enhances oversight and compliance.

7. Conclusion

In conclusion, the discussion paper released by the IBBI outlined a series of comprehensive proposals intended to enhance the voluntary liquidation process. These proposals touch upon vital aspects, including transparency, accountability, streamlined claim processing, strengthened regulatory oversight and efficient data management. Collectively, these initiatives aim to harmonize the voluntary liquidation framework, fostering efficiency and transparency.