Voluntary Liquidation Process under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to provide a comprehensive framework for resolving insolvency and bankruptcy matters in India. While the Code is often associated with insolvent companies that are unable to pay their debts, it also provides a mechanism for solvent companies that wish to wind up their affairs voluntarily. This process is known as voluntary liquidation.

Voluntary liquidation enables a corporate person to liquidate its assets in an orderly manner, pay its debts, and distribute any surplus among its stakeholders. It ensures that a company can close its operations legally and transparently, without any disputes or defaults.

Legal Framework on Voluntary Liquidation Process

The process of voluntary liquidation is governed by Section 59 of Chapter V of Part II of the Insolvency and Bankruptcy Code, 2016. It applies to corporate persons such as companies, limited liability partnerships (LLPs), and other incorporated entities that have not committed any default.

The process is further regulated by the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017, which lay down the procedural requirements and timelines to be followed.

Eligibility for Voluntary Liquidation

Under Section 59(1) of the IBC, a corporate person may initiate voluntary liquidation proceedings if:

• It intends to liquidate itself voluntarily, and
• It has not committed any default in repayment of debts.

Both solvent companies and LLPs can choose this route when their stakeholders decide that the business should be closed in a lawful and structured manner.

Who Can Initiate the Process of Voluntary Liquidation 

The initiation of voluntary liquidation depends on the nature of the entity:

1. If the corporate debtor is a company – The majority of directors are eligible to initiate voluntary liquidation proceedings.
2. If it is a limited liability partnership (LLP) – The majority of designated partners can initiate the process.
3. If it is another form of corporate person – The persons responsible for exercising its corporate powers may begin the proceedings.

Step-by-Step Process of Voluntary Liquidation

The voluntary liquidation process under the IBC is systematic and time-bound. The steps are as follows:

Declaration of Solvency

The process begins with a declaration of solvency made by the majority of the directors or designated partners through an affidavit. This declaration must confirm that:

• The company is not being liquidated to defraud any person.
• The company has no debt, or it will be able to repay its debts in full from the proceeds of assets to be sold.

The declaration must be accompanied by the following documents:

• Audited financial statements and records of business operations for the last two years, or since incorporation, whichever is later.
• A valuation report of assets, prepared by a registered valuer, if available.

This step is crucial, as it ensures that the company is financially capable of settling all its obligations before proceeding to liquidation.

Convening a Board Meeting

After making the declaration of solvency, the Board of Directors or designated partners must convene a meeting to:

• Approve the decision for voluntary liquidation.
• Appoint an insolvency professional as the proposed liquidator.
• Issue a notice for calling a General Meeting to obtain the approval of shareholders or partners.

This resolution lays the foundation for the liquidation process to proceed in a formal and legally compliant manner.

Convening a General Meeting

Within four weeks of the Board Meeting, the company must hold a General Meeting of its members to:

• Pass a special resolution to voluntarily liquidate the company; or
• Pass an ordinary resolution if the liquidation is due to expiry of a fixed duration or occurrence of an event specified in the articles of association.

In both cases, the meeting must also pass a resolution for the appointment of a liquidator and approval of his remuneration.

If the company has outstanding debts, the resolution for voluntary liquidation must be approved by creditors representing two-thirds in value of the debt within seven days of the resolution.

Intimation to the Registrar of Companies and IBBI

After the approval of the resolution, the liquidator must intimate the Registrar of Companies (ROC) and the Insolvency and Bankruptcy Board of India (IBBI) within seven days of such approval.

This ensures that both regulatory bodies are formally informed of the commencement of the liquidation proceedings.

Public Announcement

Within five days of appointment, the liquidator must make a public announcement in Form A of Schedule I of the Voluntary Liquidation Regulations, 2017.

The announcement must be published:

• In one English and one regional language newspaper;
• On the website of the corporate person (if any);
• On the IBBI website ([email protected]); and
• In the Official Gazette.

The announcement invites all creditors to submit their claims within 30 days from the liquidation commencement date.

Claims to be Submitted to the Liquidator

All creditors of the corporate person must submit their claims to the liquidator using prescribed forms as per the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2017.

This helps the liquidator assess all liabilities accurately before realization and distribution of assets.

NOC from Tax Authorities

The company must inform the Income Tax Department within one month of passing the resolution for voluntary liquidation.
It must obtain a No Objection Certificate (NOC) confirming that all tax liabilities have been cleared before the final dissolution.

Opening of Bank Account

The liquidator must open a separate bank account in the name of the company, followed by the words “in voluntary liquidation”, in a scheduled bank.

All receipts and payments during the process must be routed through this account to ensure transparency and accountability.

Preparation of Preliminary Report

Within 45 days from the liquidation commencement date, the liquidator must submit a Preliminary Report detailing:

• The capital structure of the company.
• Estimates of assets and liabilities.
• The proposed plan of action for carrying out the liquidation process.

This report provides a clear roadmap for the liquidation proceedings and ensures that all stakeholders are informed about the progress.

Verification of Claims and Preparation of Stakeholders’ List

After receiving claims, the liquidator must verify them and either admit or reject each claim wholly or partly. Within 45 days from the last date of claim submission, the liquidator must prepare a list of stakeholders that includes:

• The amount of claim admitted.
• Whether the debt is secured or unsecured.
• Details of each stakeholder.

This list forms the basis for the distribution of proceeds after asset realization.

Realisation of Assets

The liquidator must recover and realise all assets and dues of the company in a time-bound manner. The objective is to maximise the value of assets for the benefit of all stakeholders.

All monetary proceeds are deposited into the liquidation account opened for this purpose.

If certain assets cannot be sold or distributed, the liquidator may distribute them in kind with the approval of the stakeholders.

Distribution of Proceeds

After the realization of assets, the liquidator must distribute the proceeds to creditors within six months of receipt.

Before distribution, liquidation costs such as the liquidator’s fees and expenses are deducted.

The process ensures that all legitimate claims are settled in accordance with the IBC and the Voluntary Liquidation Regulations.

Completion of Liquidation

The liquidator must endeavour to complete the voluntary liquidation process within 12 months from the liquidation commencement date.

If the process continues beyond 12 months, the liquidator is required to convene a meeting within 15 days after the end of 12 months to present an Annual Status Report explaining the reasons for delay and the progress made.

Handling Unclaimed Proceeds and Undistributed Assets

Any unclaimed proceeds or undistributed assets at the end of the liquidation must be transferred to the Companies Liquidation Account maintained by the Public Account of India.

If the liquidator fails to deposit the amount on time, it must be deposited later along with interest at 12% per annum. The liquidator must also apply to the NCLT for an order confirming the deposit.

Preparation and Submission of Final Report

Once all assets are realised and debts are settled, the liquidator prepares a Final Report, which includes:

• Audited accounts of the liquidation.
• A statement showing how assets have been disposed of, debts discharged, and that no litigation is pending.
• A sale statement showing the realised value, manner and mode of sale, shortfall (if any), and details of buyers.

This report is then submitted to the Registrar of Companies, the IBBI, and the National Company Law Tribunal (NCLT).

Application for Dissolution

The liquidator must make an application to the NCLT for dissolution of the corporate person under Section 59(7) of the IBC. If satisfied that all requirements have been met, the NCLT passes an order declaring the company dissolved from the date of the order.

Within 14 days, a copy of the dissolution order must be filed with the Registrar of Companies, after which the corporate person ceases to exist.

Timelines Summary in Voluntary Liquidation Process under IBC

Conclusion

Voluntary liquidation under the Insolvency and Bankruptcy Code, 2016, provides an efficient and transparent mechanism for solvent companies to close their operations. It ensures that businesses that no longer wish to continue can exit the market lawfully, settle all dues, and protect the interests of their stakeholders.

This process reflects a shift from the earlier Companies Act-based system to a modern, time-bound, and creditor-friendly framework. For companies that are financially sound but wish to exit due to strategic or operational reasons, voluntary liquidation under the IBC offers a legally secure and structured path for closure.