An Overview of Liquidator under Companies Act, 2013
The author, Prachi Malpani, is a 4th-year law student at Symbiosis Law School, Hyderabad.
A liquidator in the general sense is a person who is appointed when a company is about to wind up either by compulsion or voluntarily in order to carry out the liquidation process of the company. Before a company finally ceases to exist, it is required to realise the assets of the company which are to be adjusted against the creditors, debenture holders, and other liabilities of the company, and this is the duty of the liquidator. A liquidator comes into the picture only at the time of winding up of a company. An Official liquidator is appointed by the court at the time of compulsory winding up whereas a company liquidator is appointed by the members of the company at the time of voluntary winding up. The main aim of this article is to understand the need of a liquidator. This article at length discusses the need and role of a liquidator at the time of liquidation of a company and also explains who are eligible to be appointed as liquidators. The author has analysed various provisions of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 which deal with liquidators, their powers and duties, etc. This article also enumerates and explains the procedure for appointment of a liquidator as prescribed under section 275 of the Company Act. Also, the article talks about the result of removal or resignation of a liquidator and the procedure to be followed thereafter which is prescribed under section 276 of the Companies Act. The author through this article has tried to make the reader understand the key role that a liquidator performs throughout the process of liquidation.
Introduction
A company‘s winding up is the process whereby its life comes to an end and its assets are administered for the advantage of its members & creditors. Winding up or liquidation is the process by which the management of a company‘s affairs is taken out of its director‘s hands, its assets are realised by the liquidator, and its debts and liabilities are discharged out of the proceeds of realisation and any surplus of assets remaining is returned to its members and shareholders.1 A company may wind-up due to various reasons. But generally it is either voluntary liquidation, this includes both the creditors‘ voluntary liquidation (CVL) and members‘ voluntary liquidation (MVL) or compulsory liquidation i.e., when the court orders for the winding up of the company. An Administrator, called the liquidator is appointed who takes upon the complete control of the company.
A liquidator is an officer who is particularly appointed to wind up the affairs of a company when it decides to end its operations, typically when it goes bankrupt. He manages the entire liquidation process. Generally a liquidator is appointed by the court or by the shareholders of a company or by unsecured creditors. The core variances between a liquidator and an official receiver are not their roles but the insolvency process which they oversee and manage. A liquidator is appointed in a MVL and CVL by the directors, which enables the directors to hold a degree of control over the process. An official receiver is appointed by the court as a liquidator when a winding-up order has been passed as a consequence of a creditor(s) forcing the company into compulsory liquidation.
Company liquidator as defined by the Companies Act, 2013 means a person appointed by the Tribunal as the Company Liquidator in accordance with the provisions of section 275 for the winding up of a company under this Act.2 A liquidator is a person with the legal authority to act on behalf of a company in various capacities; however, he is only an additional person helping the company in the winding up process.3 As the liquidator is appointed, he/she takes over the control of the company‘s assets. He sells the assets of the company to fetch maximum price4 and uses fund realised from such sale is used to pay the company‘s debts and lastly if anything remains he distributes it among the members in agreement with their rights and share. In certain jurisdictions, a liquidator is also referred as a trustee, like, a bankruptcy trustee.
Appointment of Liquidator
With the passing of the Insolvency and Bankruptcy Code, 2016, a company can now be wound up under the Companies Act, 2013 only by the tribunal. The concept of voluntary winding up which was earlier available has now been removed. However, the IBC, 2016 provides for voluntary liquidation of companies. Under the Insolvency and Bankruptcy Code, 2016 a company is eligible to file for voluntary liquidation only when it has no debts or future promises to pay the full debt from the proceeds of the assets sold under the liquidation process. This is to ensure, that the liquidation process is not to defraud any of the creditors. But, when a special resolution is passed for winding up of the company by the tribunal then an application may be made by the company to the tribunal under the Companies Act, 2013.5 The IBC, 2016 has offered an easier exit route to companies opting for voluntary liquidation as compared to the one laid down by the Companies Act, 2013. The previous process of voluntary liquidation given by the Companies, Act 20013 was very complex and lengthy and it would the process would go on up to ten years but the procedure laid down by the IBC, 2016 is very simple and short. It typically comprises with the board of directors gaining approval of the shareholders and appointing a liquidator. If the books of the company show debts, then two-thirds creditors by value of the debt need to approve the resolution passed by the shareholders. After all approvals necessary are received, it must be filed with the registrar of companies and the Insolvency and Bankruptcy Board of India. Ideally the process finishes within a year.
It is now clear that companies can now be wound up only by way of tribunal under the Companies Act, 2013. A tribunal may order for winding up of a company in the cases mentioned in Section 271 of the Act. And such order is made by the tribunal on an application made by any of the individuals mentioned in the Section 272 of the Act.
Section 275 of the Companies Act, 20136 is concerned with the appointment of liquidators to manage the affairs of the company on winding up or to manage its affairs in the course of hearing the petition for winding up. This Section adopts the shift in policy in the amended Sections 448 and 450 of the 1956 Act in providing for the appointment of independent professionals as liquidators of the company. This follows the recommendations of the J J Irani Committee and the Erabi Committee for constitution of a panel comprising of professionals who could function as liquidators of the company in winding up.
The 2013 Act adopts in substance the amended Section 448 of the 1956 Act. The office of the Official Liquidator is retained under Section 359 of the 2013 Act. Under Section 275, the Tribunal will appoint the Official Liquidator or liquidator from a panel maintained by the Central Government for this purpose. The designation accorded to the liquidator appointed is "Company Liquidator".
A liquidator appointed pending winding up orders passed is a "Provisional Liquidator". A provisional liquidator will be appointed only from the panel of liquidators which contains names of professionals–chartered accountants, lawyers, cost accountants, company secretaries or other professionals which is constituted by the Central Government.
Powers and Duties of Liquidator
Section 290 of the 2013 Act provides for the powers and duties of company liquidator in winding up by the tribunal. The company liquidator can exercise certain powers subject to the overall control of the tribunal. The tribunal may require the company liquidator to perform any other duty. The powers of the company liquidator as specified in Section 290(1) of the Act. Following are some of the powers of a liquidator -
1. "to carry on the business of the company so far as may be necessary for the beneficial winding up of the company";7
2. "to sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels";8
3. "to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in accordance with priorities established under this Act";9
4. "to inspect the records and returns of the company on the files of the Registrar or any other authority";10
5. "to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange, hundi or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if such instruments had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business";11
6. "to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases, the money due shall, for the purpose of enabling the Company Liquidator to take out the letters of administration or recover the money, be deemed to be due to the Company Liquidator himself";12
7. "to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be necessary,— (i) for winding up of the company;
a. for distribution of assets;
b. in discharge of his duties and obligations and functions as Company Liquidator";13
When an individual is appointed as the liquidator of a company, he is expected to perform certain duties which are laid down in various provisions of law. Following are the duties of a liquidator:
1. The first duty which a liquidator has to fulfil is that of providing notice of his appointment. It is clearly stated under Section 178 (b) of the Income tax act that an
individual who is appointed as a liquidator must within thirty days of him becoming such liquidator, give notice to the Assessing Officer sanctioned to evaluate the
revenue of the company of his appointment.14
2. It is the duty of the liquidator to act equitably and impartially the whole winding-up
procedure in accordance with the provisions of law and the directions of the tribunal.15 It is also his duty to make himself thoroughly acquainted with the state of affairs of the company, and also about the technical hurdles that the company is facing. The liquidator has to act fairly and honourably in considering the claims of persons against the company.16
3. The liquidator must bring into his custody and control the property of the company.17 The Supreme Court in Indian Official Liquidator, U.P. & Uttarakhand v. Allahabad
Bank18 held that company judge under Companies Act has no jurisdiction at instance of official liquidator to set aside auction or sale held by recovery officer under RDB Act.
4. He must submit a preliminary report to the tribunal within sixty days from the winding up order.
5. He must within 30 days from date of direction from the tribunal shall call a meeting of the creditor and other contributories in order to determine the persons who are to be made the members of the advisory committee, if such committee is to be appointed. And, he must chair this committee.19
6. He must keep all sums received by him on behalf of the company into some scheduled bank, or in accordance to the directions of the tribunal.20
7. He must maintain proper books in the prescribed manner in which he must make entries or minutes to be made of the proceedings of meetings and of other such matters as may be prescribed. The books may be inspected by any creditor or contributory or their agents subject to control of the tribunal.21
8. A liquidator owes a duty to act with care and efficiency. He has a duty to exercise his particular professional skills to complete the winding up process and he shall incur liability if he fails to show the required degree of care and skill which, by accepting the office, he holds himself out as possessing. Therefore, a high standard of care and
diligence is required of a liquidator.22
9. As the liquidator is acquainted with all the state of affairs of the company and has all
the records and accounts of the company, it is his duty to maintain all these records and accounts safely and not disclose these information to any person not authorized to access them or has legitimate reason to gain access to them.23
Removal and Resignation of Liquidator
Section 276 of the Companies Act, 2013 provides for the removal and replacement of liquidators.24 Section 276 corresponds with Sections 448(6), 463 and 515 of the 1956 Act insofar as those sections deal with the removal of the liquidator.
Section 276 of the 2013 Act lists the grounds on which the liquidator maybe removed. Since there is a panel of liquidators constituted under Section 275 of the 2013 Act, there is no provision for appointment of the official liquidator in a voluntary winding up. There is no specific provision for the appointment and removal of a liquidator in a voluntary winding up by the tribunal.
Under Section 275 of the 2013 Act, the power to maintain and accordingly remove professionals from the panel vests with the central government. Under Section 276, the tribunal has the power to remove a provisional liquidator or company liquidator. The grounds on which the tribunal may remove the company liquidator are set out in this section. Additionally, the company liquidator can be removed on the grounds of (i) failure to exercise due care and diligence in the performance of his powers and functions, (ii) inability to act as the provisional or company liquidator and (iii) conflict of interest or lack of independence during the term of the appointment that would justify removal. Transfer of company or provisional liquidator in section 276 would arise only in the case of death, resignation or removal of a company or provisional liquidator.
The court may remove a liquidator if his duty conflicts with his interests. If there is a conflict of interest in respect of creditors, it is for the creditors alone to decide what is to be done.25―For breach of any of his duties a Voluntary Liquidator may render himself liable for the consequences arising out of such breach. Thus if he acts partially or commits breach of trust or betrays that fiduciary relationship in which he stands towards his Company, he shall be liable for the consequences of the wrongful acts, omission or breach of trust. He must be honest and impartial, and should never act in his own interest, or else he shall be liable.‖ If he makes any secret profits he shall be liable to make good to his Company all that he has received secretly. If he is unfair towards the general body of Creditors or Contributories, an application may be made to the Court for his removal, and the Court may remove him if it thinks fit to do so.26
He also has the option to resign from the office but to do so, he is required to call a members or creditors meeting and submit his resignation and he is also obligated to submit record of all his dealings and actions as the liquidator of the company and he is also required to submit a statement with respect to his tenure and all other related documents which were in his possession.27
Any vacancy occurring in the office of the company liquidator by reason of removal or resignation or death shall be filled in the manner provided in Section 310.
Conclusion
Winding of a company means the end of the life of the company and for this purpose a liquidator is appointed who takes over the entire winding up procedure. Currently, under Companies Act, 2013 a company can be wound up only by way of tribunal. This means, an application is to the tribunal by the company or creditors or other individuals mentioned under Section 272 of the 2013 Act. The tribunal then appoints a liquidator who is made in charge of the liquidation proceedings. This liquidator performs various duties and has a number of powers which are laid down under Section 290 of the 2013 Act. However, the actions of the liquidator must be in accordance with the law failing which the tribunal may remove the liquidator. He may also be removed when "any creditor or contributory may apply to court requesting the liquidator‘s removal". And if the court sees sufficient grounds for the removal of the liquidator, it may issue an order for his removal. The liquidator also has an option of resigning for his duties but for this he is bound to give notice. And vacancy that arises in the office of liquidator due to any reason like removal, resignation or death is filled by appointing a new liquidator in the manner prescribed in the Act.
Footnotes:
1 Pennington‘s Company Law, 5th Edition, Page 839 2 Section 2(23) Companies Act, 2013
3 National Steel & General Mills v. Official Liquidator Vasant Investment Corporation v. Official Liquidator [1981] 51 Comp Cas 20 (Bom) "Company Liquidator", in so far as it relates to the winding up of a company, means a person appointed by—
(a) the Tribunal in case of winding up by the Tribunal; or
(b) the company or creditors in case of voluntary winding up, as a Company Liquidator from a panel of
professionals maintained by the Central Government under sub-section (2) of section 275
1989 SCC Online Del 118;
4 Edelweiss Asset Reconstruction Company Ltd. Vs. Bharati Defence and Infrastructure Ltd CP 292(IB)/MB/2017
5 B. Vishwanathan v. Seshasayee Paper and Boards Ltd. (1992) 73 Comp. Cas. 136 (Mad.)
6 Section 275, Companies Act, 2013.
(1) For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall appoint an Official Liquidator or a liquidator from the panel maintained under sub-
section (2) as the Company Liquidator.
1["(2) The provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code 2016;"]
7 Section 290(1)(a) Companies Act, 2013
8 Section 290(1)(c) Companies Act, 2013
9 Section 290(1)(g) Companies Act, 2013
10 Section 290(1)(h) Companies Act, 2013
11 Section 290(1)(j) Companies Act, 2013
12 Section 290(1)(k) Companies Act, 2013
13 Section 290(1)(m) Companies Act, 2013
14 Official Liquidator v. Commissioner of Income Tax, AIR 1970 Cal 349 15 S. C. Sekaran Vs. Amit Gupta & Ors.
16 BabulalRukmanand v. Official Liquidator, Bharatpur, AIR 1968 Raj 214 17 Section 283, Companies Act, 2013
18 (2013) 31 taxmann.com 150
19 Section 287(3) Companies Ac, 2013
20 Section 350 Companies Act, 2013
21 Section 293; Parkwell Investments Ltd v. Wilson &Anor, [2014] EWHC 3381(Ch)
22 Standard Bank of South Africa v. The Master of the High Court (Eastern Cape Division), [2010] 3 All SA 2010 (SCA)
23 Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors
24 276. Removal and replacement of liquidator
(1) The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing, remove the provisional liquidator or the Company Liquidator, as the case may be, as liquidator of the company on any of
the following grounds, namely:—
(a) misconduct;
(b) fraud or misfeasance;
(c) professional incompetence or failure to exercise due care and diligence in performance of the powers and
functions;
(d) inability to act as provisional liquidator or as the case may be, Company Liquidator;
(e) conflict of interest or lack of independence during the term of his appointment that would justify removal.
(2) In the event of death, resignation or removal of the provisional liquidator or as the case may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another Company Liquidator for reasons
to be recorded in writing.
(3) Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or damage from the
liquidator and pass such other orders as it may think fit.
(4) The Tribunal shall, before passing any order under this section, provide a reasonable opportunity of being
heard to the provisional liquidator or, as the case may be, Company Liquidator.
25 Section 311 Companies Act, 2013
26 Home & Colonial Insurance Co. 1930, I Ch. 102; Stead Hazel & Co. 1933, 1 K..B. 840 27 321. Resignation of liquidator Companies (Court) Rules, 1959
References Articles Referred
1. Annapurna Chakraborty, The Role of Official Liquidator. NUJS
2. Chakrapani Misra, Company Law, SCC Online
3. LIQUIDATION AND WINDING OF COMPANY UNDER INSOLVENCY AND
BANKRUPTCY CODE 2016, International Journal of Pure and Applied
Mathematics, Volume 120 No. 5 2018, 1-15.
4. Role of liquidator in winding up process, International Journal of Academic Research
and Development ISSN: 2455-4197
5. A Study on Compulsory Liquidation of a Company and its Liability, International
Journal of Pure and Applied Mathematics, Volume 119 No. 17 2018, 647-658
Books Referred
1. CORPORATE RESTRUCTURING, INSOLVENCY, LIQUIDATION & WINDING- UP, The Indian Institute of Company Secretary
2. Company Law, Avatar Singh, Seventeenth Edition.
3. Company Law and Practice, G.K. Kapoor, 23rd Edition
4. Law Relating to Insolvency & Bankruptcy Code 2016, Vinod Kothari Sikha Bansal ,
2016 Edition.