INITIATION OF VOLUNTARY LIQUIDATION PENDING LITIGATIONS

[Mr. M. GOVINDARAJAN]

Voluntary liquidation

Section 59 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for voluntary liquidation by corporate persons.  A corporate person who intends to liquidate it voluntarily and has not committed any default may initiate voluntary liquidation proceedings.  The voluntary liquidation of a corporate person shall meet such conditions and procedural requirements as may be specified by the Board.  In addition the following conditions are complied with-

• a declaration from majority of the directors of the company verified by an affidavit stating that-
  • they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
  • the company is not being liquidated to defraud any person;
• the declaration shall be accompanied with the following documents-
  • audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
  • a report of the valuation of the assets of the company, if any prepared by a registered valuer;
• within four weeks of a declaration there shall be-
  • a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
  • a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator.
• the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the resolution passed within seven days of such resolution..

Issue

The issue to be discussed in this article whether voluntary liquidation can be initiated when there are litigations pending against the corporate person, with reference to decided case law.

Case law

In ‘Central Inland Water Transport Corporation Limited v. Vinod Kumar Kothari’ – 2018 (10) TMI 1522 - NATIONAL COMPANY LAW TRIBUNAL, KOLKATA, the corporate debtor, Central Inland Water Transport Corporation Limited was engaged in river services between Kolkata and Assam and Kolkata and Bangla Desh and used to undertake movement of oil from Haldia to Budge/Paharpur for the Indian Oil Corporation.  The Corporate debtor attained loss from the date of inception.  The Cabinet approved the proposal of dissolution of corporate debtor.  The Ministry of Shipping specified the manner of disposal of assets of the corporate debtor.

The Board of Directors of the corporate debtor passed a resolution on 25.11.2017 approving voluntary liquidation of corporate debtor in compliance with the provisions of the Code and the Regulations made there under subject to the approval of shareholders of the corporate debtor within 21 days from the said Board resolution.

The consent of the shareholders could not be obtained within the time stipulated.  Therefore the Board   convened the Board meeting to ratify the resolution already passed in the previous Board meeting.  An extraordinary meeting was    also called for the shareholders of the corporate debtor passed a special resolution, approving the voluntary liquidation.  A declaration of solvency has been given by the Directors. 

The Corporate debtor, thereafter,  has initiated voluntary liquidation by appointing the  respondent as liquidator.  A public announcement was issued.  As regards assets and liabilities of the corporate debtor substantial portion of the assets/properties of the corporate debtor, including movable assets such as vessels, pontoons, barges, etc., were already disposed of pursuant to the directions of the Ministry of Shipping.  Certain land parcels are to be disposed of according to the directions of the Ministry by the liquidator and the receivables in the books of the corporate debtor amounting to ₹ 12.14 crore out of which ₹ 11.46 crore is pending for last three years and the same is not considered recoverable.

A consent letter was obtained from Kolkata Port Trust and Garden Reach Shipbuilders & Engineers Limited with the conditions that their claims to the tune of ₹ 99.16 crore and ₹ 24.29 crore are to payable to them.  The voluntary liquidation regulations require a resolution for voluntary liquidation to have a consent of at least 66% in the value of the creditors, while the creditors of the company include several employees who have filed claims against the company in addition to various other creditors, the company went ahead to take the consent of Kolkata Port Trust and Garden Reach Shipbuilders & Engineers Limited to satisfy the requirement of 66% of the creditors.

The liquidator filed an application before the Adjudicating Authority for suspending voluntary liquidation  since the corporate debtor has several pending litigation, and that claims against the corporate debtor exceed the value of its assets and the very requisite for the voluntary liquidation that the company is to be solvent is absent in this case.  The liquidator also prayed for an order of winding up proceeding under section 271 of the Companies Act, 2013.

The Adjudicating Authority observed that the liquidator failed to prepare a final report because he could not dispose of the assets of the corporate debtor to the satisfaction of the creditors and because of the pending litigation against the corporate debtor.  The Adjudicating Authority further observed that the main ingredients under Regulation 38 of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 are not satisfied in the present case.  The main ingredients under the said Regulation are-

• The corporate person is to discharge its debts to the satisfaction of the creditors; and
• No litigation is pending against the corporate debtor.

The Adjudicating Authority suspended the voluntary liquidation process but at the same time rejected the prayer for conversion of the application for winding up and for compulsory liquidation under section 271 of the Act.

The Adjudicating Authority held that the proceedings of voluntary liquidation and winding up are different and the requirements to be meted out are also different.  The resolution passed by the members in the extra ordinary general meeting is passing voluntary liquidation.  As the Adjudicating Authority suspended the voluntary liquidation the company can take steps for compulsory liquidation by filing an application under section 10 of the Code.  The application cannot be converted as prayed for.