Voluntary Liquidation: A comprehensive analysis of wilful business closure
The culmination of business of a Body Corporate is by way of Liquidation or winding up its business operations, where eventually the company stands dissolved. At this point the Certificate of Incorporation of the company would be cancelled. Liquidation is either compulsory or voluntary. The Insolvency and Bankruptcy Code, 2016 (IBC), provides an option of voluntary liquidation to close the unwanted companies / dormant companies and those companies who have outlived their objective.
This comes as a best tool to reduce the baggage and avoid unnecessary compliances and cost on a regular basis. On top of it, the fear of getting disqualified being a part of a non-compliant set up has given jitters to management in the recent past. Voluntary liquidation refers to a process where the management of the company initiates the liquidation process on their own, rather than being forced by its creditors. The cases eligible are the ones where there are no defaults and the closure is not to defraud anyone.
The key benefits of voluntary liquidation under IBC, 2016 are highlighted below:
Closure of business: Voluntary liquidation provides a way for the body corporate to close its business in an orderly manner, which can help to protect the interests of the company’s management, especially when the management continues to be active through the process under the supervision of the professional engaged.
Reduce the Baggage / dead weight: Closing inactive or unnecessary body corporates that were created over time but are no longer required due to changing circumstances or completion of the said objectives can be the need of the hour for many corporate groups. The VL process helps reduce the burden of compliance and financial costs on the company’s management.
These costs can be a drain on the company’s resources, distracting management from other more pressing priorities, and potentially exposing them to legal liabilities and reputational damage. Voluntarily liquidating these entities can help reduce these burdens, freeing up resources and simplifying the company’s structure. It can also help avoid potential legal liabilities or non-compliances that can result in disqualifications of directors also.
Speed and control: Voluntary liquidation allows the company to initiate the liquidation process quickly and to have control over the process, as the same is being initiated by the management and completed under the supervision of an Insolvency Professional. Since the premise of the process is not to default on payments to the creditors, there is no intervention or delays due to prolonged litigations. The operations can be culminated within set timelines and the intervention of NCLT /Adjudicating Authority happens at the last stage to take the process on record and pass the dissolution order.
Reputation protection: Voluntary liquidation can help to protect the reputation of the company and its directors. By voluntarily initiating the liquidation process, the company can show that it is taking proactive steps and is committed to fulfil their obligations towards its creditors. Further, the management/ directors of the companies avoid the risk of disqualification occur due to any non-compliances of the company.
Strike off vs Voluntary Liquidations
According to the Companies Act, 2013, the Strike off process is for removal of name of the company from register of companies and doesn’t immediately provides for dissolution. This results in restoration of the companies by authorities or creditors. Further companies needs to fulfill pre-conditions of this process, which are considered as limitations to the closure and exit for the management.
Under the Companies Act, 2013, the strike off process is a procedure for removing the name of a company from the register of companies maintained by the Registrar of Companies (ROC). However, the strike off process does not lead to the dissolution of the company. Instead, the company’s name is struck off from the register, and the company becomes a dormant company. The struck off companies can be restored by the authorities or creditors. If the company is restored, it will need to comply with all legal requirements and fulfil any outstanding obligations. Therefore, the strike off process should be approached with caution.
The article has been contributed by Insolvency Clinic, a platform that extends assistance to various stakeholders across the IBC spectrum
Also See: IBC Act
