All posts by Akshay Kapoor

VOLUNTARY LIQUIDATION IN INDIA

Voluntary liquidation is the most compliant and convenient way of closing down the business both for operational or non-operational companies particularly in the following cases where:

  • the business could not be commenced because of various reasons associated though investments were made in business
  • the business had commenced but has served its purpose
  • the legal entity is no more needed but has cash and bank balances
  • there are considerable investments in assets but assets are no more required
  • the value of the assets is significantly higher than existing liabilities of the company and surplus is to be distributed amongst all remaining stakeholders

The provisions of voluntary liquidation of corporate persons (company/ LLP) in India are covered under the Insolvency and Bankruptcy Code (“Code“) and Voluntary Liquidation Process Regulations. Liquidation (or “winding up”) is a process by which a company’s existence is brought to an end. The new Code is a single window legislative code under which closure of a company has become easier with a well-defined process.

Though there is also a process of closing down a company after a waiting period of two years of no business operations and after extinguishing all its liabilities by applying to Registrar for strike off/ deregister from Register of Companies but during this waiting period and during the restoration period thereafter, the Directors and Company remain exposed to liabilities/ demands.

 

STEPS FOR  VOLUNTARY LIQUIDATION IN INDIA

 

  1. ARE YOU ELIGIBLE FOR VOLUNTARY LIQUIDATION:

    • The Company should be solvent and should remain so during the entire liquidation process
    • The Company should not have committed any default (default means non-payment of debt that has become due and payable).

 

  1. HOW TO START LIQUIDATION:

    • BOARD MEETING FOR DECISION: The Company is required to hold Board Meeting for obtaining consent from the Board for the Voluntary Liquidation of the Company,
    • DECLARATION OF SOLVENCY: Declaration of Solvency duly supported by audited financials, valuation report and list of debts, is required to be given by majority of Directors verified through an affidavit stating that they have made a full inquiry into the affairs of the company and it shall be able in meeting liabilities and not being liquidated to defraud people.

 

  1. LIQUIDATION COMMENCEMENT:

    • Special Resolution passed in the General Meeting of members for voluntary liquidation and appointment of liquidator becomes Liquidation commencement date. The liquidator can only be an Insolvency Professional, registered with Insolvency & Bankruptcy Board of India (IBBI).

In case of a subsidiary of a foreign company is to be liquidated voluntarily both Board Meeting and General Meeting can be held outside India saving travelling costs but in such cases, it is required to get such declaration and affidavit apostil.
The resolution shall further be approved by 2/3rd of creditors and persons to whom any debts are due within 7 days. In our practical experience, it is better to speak to major Creditors well in advance and if possible to settle dissenting Creditors, where cash/ bank balance is available, before holding Board Meeting for voluntary liquidation.

    • From Liquidation commencement, the company shall cease to carry on its business, except as required for the beneficial winding up of its business. Like, Company should not place orders for starting new production cycle but it may place orders for such raw materials as are required to utilize other raw materials in stock for better realization of values. The company continues to exist until it is dissolved by Order of National Company Law Tribunal (“NCLT”).
    • Terms and conditions for appointment of the liquidator should also be approved by shareholders and the remuneration payable shall form part of the liquidation cost.
    • The Liquidator selected should be such having a full support team and fully equipped office to ensure that timelines under the Code are adhered to and the process is completed in a time bound manner.
    • Resolutions are to be filed with the Registrar of companies (ROC) and IBBI.

 

  1. PROCEDURE FOLLOWED BY LIQUIDATOR FOR LIQUIDATION:

    • Public Announcement for Claims: The liquidator shall be required to make Public Announcement within 5 days of his appointment for inviting claims from all stakeholders with the last date for submission of claim shall be thirty days from the liquidation commencement date.
    • Preliminary Report: Preparation of preliminary report by the liquidator within 45 days of commencement of liquidation detailing capital structure, an estimate of assets and liabilities and proposed plan of action for liquidation.
    • Liquidator shall get claims verified and then may admit/ reject claims in full or part
    • Liquidator shall get Valuation and do the sale of the assets in a manner making recoveries of monies due to the Company in a time bound manner.
    • Realised amount to be deposited in a separate bank account: The liquidator shall open a bank account in the name of the company followed by the words ‘in voluntary liquidation’, in a scheduled bank in India for the receipt of all moneys during liquidation. The money in the bank account shall be used in accordance with waterfall mechanism under the Code. All payments in excess of Rs. 5,000/- shall be made through banking channels.
    • Distribution of funds to be done within 6 months from receipt of the amount in a preferential & sequential manner as per Code

 

  1. COMPLETION OF LIQUIDATION:

    • Final Report: On completion of the liquidation process, a Final Report will be prepared by liquidator which shall consist of audited accounts showing receipts & payments pertaining to liquidation since liquidation commencement date and a Statement from Liquidator on completion of Liquidation process covering exceptions like, in case of Pending litigations, a sufficient provision is made to meet future obligations.
    • Submission of Final Report: The Final Report shall be sent to the ROC & IBBI. Thereafter, an Application along with Final Report to be made with NCLT for passing dissolution order.
    • Filing of Dissolution Order: The order of Hon’ble NCLT shall be filed in Form INC-28 with the ROC within 14 days.
    • Preservation of Records: The liquidator shall preserve a physical or an electronic copy of the reports, registers and books of account for at least eight years after the dissolution of the corporate person, either with himself or with an information utility.

 

The objective of amended law for Voluntary Liquidation is to close the process in a time bound manner and accordingly liquidator shall try his best to complete the liquidation process within 12 months and if all activities are planned, it can be completed in much smaller time frame with the distribution of proceeds to all entitled stakeholders. The new law is a major step in Government’s efforts in improving ‘Ease of Doing Business’ rankings of India by making both entry and exit smooth for business in India, a major concern for Investors committing Foreign Direct Investment (FDI) in India.

Except in cases of fraud or misrepresentation, with Liquidation, all liabilities, demands and claims would close forever against the Directors’ and business of the company.

 

 

Significant Beneficial Owner “SBO”: Brief Synopsis

To curb the menace of black money and round tripping of funds, the Ministry has introduced many measures to send a strong message to the existing companies. One of the initial steps by the MCA was to strike off Companies which have not been filing their financial statements for a period of 2 or more years. In this measure more than 200,000 companies were struck off and a proposed 31250 (approx) companies are also liable to be struck off.

A recent measure taken by the MCA in this regard is to get information about the ultimate individual beneficial shareholder of a company. The Ministry in this regard had redrafted the provisions of Section 90 of the Companies Act 2013 and notified it on 13th June, 2018. Through this notification a step has been taken by the Ministry to reveal legitimate individual owner hiding behind anonymity and layers of shell Companies.

Legal Provisions

The amended provision governing “Significant Beneficial Owner” (section 90) herein after referred to as “SBO” under the Companies Act, 2013 (hereinafter referred to as “ACT”) has been made effective from 13.06.2018 and major highlights of these provisions have been enumerated below.

Who is Significant Beneficial Owner (SBO) ?

Any person (singly or along with other person including trust and person’s resident outside India) shall become SBO with respect to shares in a company if:

Condition 1 AND Condition 2
Any 1 condition of the following:

  1. holds 10% or more shares in the company; OR
  2. the right to exercise, or the actual exercising of significant influence; OR
  3. Control as defined in clause (27) of section 2.
I.            Whose name is not entered in the register of members as a shareholder of the company.

 

 

Individuals (natural person) fulfilling the conditions specified above are termed as “SBO” of the Company. In cases where member of the company is not a natural person, the significant beneficial holder shall be:

  1. In case such member is a Company, natural person who either at his own or along with other natural person holds not less than 10% of the share capital of the company.
  2. In case such member is a partnership firm, natural person who at his own or along with other natural person holds not less than 10% of capital or has entitlement of profits of the partnership.

If there is no natural person meeting above conditions, the SBO is the relevant natural person who holds the position of senior managing official.

Compliance required on part of “SBO”

The Compliances required on part SBO have been enumerated below:

  1. SBO is required to give declaration to the Company in form BEN-1.
  2. SBO is required to give declaration within 90 days from the Commencement date (13.06.2018). Therefore, last date for declaration of such significant shareholding is 10.09.2018.
  3. In case an individual becomes SBO after the Commencement of these rules or any changes occur in such ownership then declaration will be required within 30 days from the acquisition or such change.
  4. Any failure to comply with the disclosure requirement in the form of declaration will attract minimum fine of INR 100,000/- which may extent to INR 1million. In addition to this, per day penalty of INR 1000 will also be applicable for each day of continuing default.

Compliance required on part of “Company”:

The Compliances required on part of Company have been enumerated below:

  1. The Company is required to file such declaration as received from a SBO within 30 days from the receipt, in form No.BEN-2 to the Registrar of Companies along with the fees as prescribed in Companies (Registration offices and fees) Rules, 2014.
  2. The Company is also required to maintain register for such declarations received from SBO in the format prescribed in form BEN-3.
  3. The company is made liable to send notice (BEN-4) for obtaining declaration from the SBO in case where suo motto declaration has not been received.
  4. In case even after sending of notice, declaration from the SBO has not been received, then the company is mandatorily required to move an application to the Tribunal (NCLT).
  5. Any failure shall attract penalty of INR1million which may extent to INR 5million on the Company and every officer who is default. In addition to this, per day penalty of INR 1000 will also be applicable for each day of continuing default.

Conclusion:    

From the above, it can be concluded that these stringent additions in the provisions of the Law are to find out about the actual owners having significant influence in Companies or having Control under the entities registered under the law by lifting of veil on such shareholding”.

Disqualification of Director Remedy

The Companies Act, 2013 has been enacted for the purpose of promoting the good corporate practices, greater transparency and effective stakeholder management. In order to achieve the core objectives of the Act, it provides regulators with enormous powers. Recently two major steps have been taken by the Registrar of Companies in this respect. More than 200,000 companies have been struck off to remove the inoperative companies from the Records of the Register of Companies and more than 3,00,000 Directors have been disqualified by deactivation of their DIN (Director Identification Number). In order to understand the Concept of strike-off of Companies and disqualification of Directors, firstly one needs to understand the Connectivity between the two that is the term “Defaulting Companies”.

“Defaulting Company” is nowhere defined under the Act, but in general terms mean a company who has made a default with respect to filling of financial statement or Annual return with the Registrar of Companies under the provisions of the Companies Act 2013 and 1956.

Strike off the Name of the Company

“Strike-off” is an action initiated by the Registrar of Companies by which name of the Company has been struck-off from the Register of Companies and the company shall stand dissolved. Such measure of strike off is taken in cases where Registrar is satisfied that company is not carrying on any business or operation for a period of two immediately preceding financial years. The recent actions with respect to striking-off of the name by the ROC were based on the defaulting status of Companies, prima facie presuming that these Companies are not carrying on any business operations.

Disqualification of Director and Vacation of Office

When a Company defaults in filing its Financial Statements or Annual Return for a continuous period of three years, the Director of such defaulting Companies will not be eligible to be re-appointed in that Company or appointed as Director in other Companies for a term of five years and his office shall be liable to be vacated in all the Companies where he is Director immediately on the occurrence of disqualification (Section 164 read with Section 167 of the Companies Act, 2013).

Following the disqualification by Ministry of Corporate Affairs, disqualified directors have been barred from using their Director Identification Number (DIN) to file any document with ROC. The MCA issued two lists in this regard:

Linkage b/w the strike off of Companies and disqualification of Directors

As explained above, the term defaulting companies is common linkage in both the situations where the name of the companies had been struck-off and de-activation of DIN of Disqualified Director by the Registrar of Companies. Government, through its sources, had reasons to believe that many of these defaulting companies (shell or inoperative companies) were used for money laundering during demonetisation. The Registrar of Companies, to curb the operations of Shell Companies and Money Laundering, struck off 209,032 companies and 309,614 Directors. There has been chaos in the Industry and as a result there have been a spate of representations from industry, defaulting companies and their directors seeking an opportunity for the defaulting companies to become compliant and normalize operations.

Small window to remedy disqualification of Directors

With a view of giving an opportunity to the non-compliant, defaulting Companies to rectify the default, the Ministry had come up with Condonation of Delay Scheme 2018″ [CODS-2018] on 29th December, 2017 which is to be effective from 01st January, 2018.

Condonation of Delay Scheme 2018 [CODS-2018]

The scheme will be effective from 1st January, 2018 and shall remain in force till 31st March, 2018. This scheme is applicable only to the defaulting Companies which fall under one of the following two categories:

  • Companies whose status is still active but DIN of the Directors have been deactivated by the ROC.
  • Companies which have been struck off by the ROC but Restoration applications under Section 252 of the Act were pending before the National Company Law Tribunal (NCLT) up to the date of this scheme. This is however, subject to order of revival by the NCLT.

Procedure for availing the benefits granted under COD scheme

  • DIN of the Disqualified Directors of such Defaulting Companies will temporarily be activated during the validity of the scheme to enable them to file the overdue documents.
  • Companies shall be required to file the overdue documents (financial statements or the annual returns or other associated documents).
  • The defaulting Companies needs to pay statutory filing fee and additional fee payable as payable under the provisions of the Act.
  • Companies after filing overdue Documents needs to file eform CODS and the fees for this form will be INR 30,000/- (Thirty thousand only).
  • Once the COD scheme is over, the companies who have not availed themselves of this Scheme and continue to be in default in filing the overdue documents, the Registrar shall take all necessary actions under the Companies Act, 2013 against them.

We suggest that Directors of the defaulting Companies need to opt for this opportunity and must avail the benefits of CODS-2018.

For Companies not eligible to go for COD Scheme:

The companies which remain untouched or on whom the “Condonation of Delay Scheme 2018″ is not applicable, may get relief from NCLT or High Courts. These Companies will be classified as follows:

  • Companies which have been struck off but were carrying on any business or operation on the date of becoming struck off may approach NCLT for restoration of their name under the provisions of section 252 of the Act. For more information on Restoration of Company, please visit our blog on Restoration Of Name Of A Struck Off Company Under Companies Act, 2013.
  • For Companies which have been stuck off and the Directors have been disqualified but the Promoters of such Companies have no intention of restoring the name of the company. The Directors of such Companies, for removal of Disqualification, may file writ petition in the High Court.

 

Conclusion

The powers exercised by the ROC by striking off the defaulting Companies and deactivating the DIN of the Disqualified Directors is to alarm the Promoters and Directors who are lax in compliances. This step will definitely help in breaking the robust network of shell Companies and fighting against Black Money.

Recent changes made in the Companies Act 2013 by way of Companies Amendment Act 2017 and other notifications issued by the Ministry, it can be concluded that there will be no scope for the defaulting Companies to remain registered under the provisions of the ACT.

 

 

GNL forms under Companies Act, 2013

The Companies Act, 2013 has prescribed various E-form(s) for intimating major events of the Company such as director changes, annual filing of financial statements, increasing the capital, allotment of securities etc, under the respective Rules made therein. However, no separate form has been prescribed for matters like Compounding of offences, extension of AGM, shifting of registered office from one state to another, Private placement offer letter, etc. In such circumstances (described in detail below), the Central Government/MCA has not prescribed any E-form. In such situations, we need to file General Intimation E-forms or GNL forms.

 

General Intimation E-forms or GNL forms

There is much ambiguity as to the appropriate time and event of filing of GNL forms.Through this article we have tried to provide a clarification regarding purpose of filing these GNL forms. These E-forms are governed through the provisions of Chapter 24 and its respective rules and can be categorized in the following manner.

E-Forms Purpose
GNL-1 Application to the Registrar of Companies like compounding applications, extension of AGM.
GNL-2 Filling of any documents like submission of  Private placement offer letter (PAS-4), copy of prospectus, information memorandum etc.
GNL-3 Intimation under section 2(60) when a person is charged with the responsibility to comply with the provisions of the Act
GNL-4 Any further information or documents called for, in respect of application or e-form filed with the RoC

 

 GNL-1: For filling of application with Registrar 

  • Purpose:
    • E-formGNL-1 is required to be filed pursuant to rule 12(2) of Registrar of Companies (Registration Offices and Fees) Rules, 2014 the Companies Act, 2013.
    • This form is used where no E-form is prescribed to file the application under the various rules prescribed under the Act.
    • This single form is prescribed for seeking approval of Registrar of the Company in cases such as-:
    • Compounding of offences
    • Extension of AGM up to 3 months
    • Scheme of arrangement, amalgamation
    • Others, for example
      • Shifting of registered office from one state to another.
      • Application for removal of disqualification of directors

 

GNL-2 : For submission of documents with the company 

  • Purpose:
    • This form is used where no E-form is prescribed to file various documents with the Registrar of the company.
    • The documents can be filed through Form GNL-2. This single form is prescribed for multiple document filing such as:
    • Copy of prospectus
    • Information memorandum
    • Private placement offer letter (PAS-4)
    • Record of private placement to be kept by the company (PAS-5)
    • A report by a company to ROC for intimating the Disqualification of the Director.

 

GNL-3 : Intimation about assignment and relinquishment of charge assigned to person for complying with the provisions of the Act

GNL-3–Section 2(60) defines “Officer who is in default” and it mentions officers such as whole-time director, KMP, directors, etc. who shall be liable to any penalty or punishment in case of default committed by the company (under the Companies Act, 2013). However, there is a mechanism to entrust a specific officer to comply with any provisions of the Act and thereafter, such person shall be the “officer who is in default” in exclusion of all other persons named in Section 2(60). He may be termed as Charged person in accordance with Section 2 sub section 60 clause IV of the Act, the charged person needs to give his/their consent  to act as in this behalf to the Board. The consent of the charged person taken needs to be filed through this form. The withdrawal of the consent for the charged person is also filed through the same form. 

  • Purpose:
    • This form is used where no E-form is prescribed to Identify the person, who is specifically authorized by the company to comply with the provision of the Companies Act, 2013.
    • In order to understand the concept of filing Form GNL-3 and “Charged Person”, we have given an illustration for better understanding. A private company do not need to appoint Chief Financial Officer as per the provisions of Section 203 of the Act. But the Company voluntarily delegates, the responsibilities for the affairs related to the financial matters of the company, to a person. In such situations, the private company need to file Form GNL-3 for intimating the Registrar of Companies, about the person who is specifically authorized (along with the Consent of the person in charged) to comply with the provisions of the Act. The person who will be authorized through form GNL-3 will be deemed to be known as “charged person” and shall be liable as the officer in default for any non-compliance w.r.t financial matters under the Act. This form is required to be digitally signed, both by the charged person (consent) and the Company.

 

GNL-4: Any further information or documents called for, in respect of application or e-form or document, filed electronically with the Ministry of Corporate Affairs shall be furnished through GNL-4.

The Registrar shall examine or cause to be examined every application or e-Form or document filed or delivered under the Act. The Registrar, if finds it necessary, may call for further information if the e-form or document is defective or incomplete in any respect, within thirty days from the date of its filing.

However, this 30 day time period is not applicable in the following cases:

  • Cases where approval of the Central Government or the Regional Director or any other competent authority is required.
  • Straight Through Process (STP) forms which may be examined by the Registrar at any time on suo-motu or on receipt of any information or complaint from any source at any time after its filing.
  • Any Information or explanation called by the registrar in pursuance of Section 206 (Power to call for information, inspect books and conduct inquiries).

The Registrar shall direct him to furnish such information or to rectify such defects or incompleteness, within the 15 days, by filing Form GNL-4.

 

Enumerated below are major points of difference between the 3 GNL forms. 

S.no GNL-1 GNL-2 GNL-3
Purpose Application to ROC where No E-form is prescribed. Submission of document to ROC where No E-form is prescribed. Identification of the person charged comply with the provision of the companies Act, 2013.
Category of applicant Company

  • Foreign Company (for compounding of offences & others purposes )
  • Others (for compounding of offences only)
N/A Company
Signing authority
  • Company (director or manager or secretary or CEO or CFO of the Indian company duly authorized by the board of directors
  • Foreign Company (for compounding of offences &others) can file the e-Form through its authorized representative.
  • others (for compounding of offences only)(in case the applicant does not have DSC then it is to be signed by chartered accountant or cost accountant or company secretary inwhole time practice)
Director, Manager or Company Secretary or CEO or CFO of the company authorized by the board of directors.

 

 

 

E-Form is digitally signed by the

Key managerial personnel(s) charged and by Director,

Manager, CEO, CFO or Company

Secretary of the company duly authorized by the board of directors.