Exit Option for a Solvent Company – Voluntary Liquidation

The provisions relating to voluntary liquidation of a company were earlier covered under the Companies Act, 2013. After the notification of Insolvency and Bankruptcy Code, 2016 (“IBC”) the voluntary liquidation of a company is now governed by the provisions of section 59 of IBC and relevant regulations issued under IBC. The corresponding provisions under the Companies Act, 2013 in this regard have been repealed.

A corporate person will be eligible to opt for voluntary liquidation under IBC provided it fulfils the following two mandatory conditions:

  • 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 broad steps involved in the voluntary liquidation are summarised below:

  1. Board of Directors will hold a board meeting and approve the voluntary liquidation and also issue a declaration of solvency.
  2. A meeting of the shareholders shall be convened to approve the voluntary liquidation of the company and appointment of an Insolvency Professional as a liquidator of the company.
  3. If 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 by the shareholders within seven days of such resolution.
  4. Necessary filings will be done with the Registrar of Companies, Insolvency and Bankruptcy Board of India and Income Tax authorities.
  5. The liquidator will take over the charge of the company will proceed with further steps including realisation of assets of the company, settlement of outstanding dues and distribution of proceeds to the stakeholders.
  6. The liquidator shall give a public notice and invite claims from stakeholders.
  7. The liquidator shall endeavor to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date.
  8. Where the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate person.
  9. The Adjudicating Authority shall on an application filed by the liquidator, pass an order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
  10. A copy of the order shall be forwarded to the authority with which the corporate person is registered.

In view of above provisions, voluntary liquidation is an expeditious process for winding up the affairs of a company without much complications or compliances.

Status of Statutory dues under IBC – Operational or Financial creditors – Who decides?

In the Insolvency Resolution Process for Corporate Persons, an issue is generally discussed as to the status of statutory dues payable by the Corporate Person – whether the same will qualify as a financial debt or operational debt. To understand the issue, it would be useful to first know the definitions of certain terms defined under The Insolvency and Bankruptcy Code, 2016 (“IBC).

Some of the relevant definitions are discussed below:

  • “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.
  • “Debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.
  • “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
  • “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes –
  • money borrowed against the payment of interest;
  • any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent ……………………………….
  • “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
  • “operational debt” means a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

If we analyse the above definitions closely, statutory dues shall not fall either under the definition of “financial creditor” or “operational creditor” since the same cannot be said to have become due on account of disbursement of debt or supply of goods or services, etc..

The treatment of statutory dues shall be as per resolution plan approved by the Committee of Creditors. Once, the resolution plan, as approved by the Committee of Creditors, is approved by the Adjudicating Authority the same shall be binding on all stakeholders involved in the resolution plan including government authorities to whom statutory dues are payable. Therefore, the fate of statutory dues payable to government authorities will be initially decided by the Committee of Creditors and thereafter by the Adjudicating Authority when it considers the resolution plan.

Foreign Direct Investment in Limited Liability Partnership

Limited Liability Partnership (“LLP”) is a hybrid entity with advantage of a company and operational flexibility of a partnership. The concept was introduced by the Ministry of Corporate Affairs through Limited Liability Partnership Act, 2008 on 9th January, 2009.

Setting up of LLP in India has various advantages. Some of the significant advantages are as follows:

  • contribution by the partners may consist of tangible, movable or immovable or intangible property or other benefit including money, promissory notes, and other agreements to contribute cash or property and contracts for services performed or to be performed.
  • No requirement of holding quarterly board meetings.
  • Distribution of profits to partners of the LLP is exempt from tax.
  • No withholding tax on distribution made to partners by LLP.
  • Non-applicability of Corporate Social Responsibility (CSR) provisions.

FOREIGN DIRECT INVESTMENT IN LLP

Foreign investment is permitted under the automatic route in LLP operating in sectors/activities where 100% Foreign Direct Investment (FDI) is allowed through the automatic route and there are no FDI-linked performance conditions. As of now, payment by an eligible foreign investor towards capital contribution/profit share of LLPs is allowed only by way of cash consideration in terms of the Foreign Exchange Management Act, 1999.

In addition to the above, LLPs receiving FDI are also allowed to make downstream investment in other limited liability company or LLP in those sectors where 100% FDI is permitted through automatic route.

REPORTING REQUIREMENTS

  • An LLP receiving FDI in the form of capital contribution shall submit a report within a period of 30 days from the date of receipt of funds in form FDI-LLP (I) through its Authorised Dealer Bank to the regional office of the Reserve Bank of India (RBI) under whose jurisdiction the registered office of the LLP is situated.
  • Any disinvestment or transfer of capital contribution or profit share between a resident and non-resident or vice versa shall be reported to RBI through Authorised Dealer Bank within a period of 60 days from the date of transfer in form FDI-LLP (II).

Though, External Commercial Borrowings are not allowed in LLP in India, however, FDI norms relating to LLP are considerably liberalised as compared to investment in Indian companies.

Condonation of Delay Scheme, 2018

A large number of companies had been non-compliant with regard to filing of financial statements and annual return under the Companies Act 1956 and/or Companies Act, 2013. The said default would result in disqualification for the appointment of new directors as well a ground for vacation of office of existing directors. Condonation of Delay Scheme, 2018 (“CODS” or “Scheme”) was introduced by the Ministry of Corporate Affairs (“MCA”) on 29th December, 2017 as a relief to those companies who had not filed its financial statements or annual returns for the last three financial years or more as required under the Companies Act 2013 and/or the Companies Act, 1956. This scheme was valid from 1st January 2018 to 1st May 2018.

The salient features of the Scheme are summarised below:

Documents which can be filed under CODS with the Registrar of Companies-

  • Forms AOC-4, AOC-4 XBRL, 23AC, 23AC XBRL, 23ACA and 23ACA XBRL – for filing financial statements;
  • Form 21A/ MGT-7/ 20B – for filing annual returns;
  • Form 23B/ADT-1 regarding appointment of auditors; and
  • Form 66 regarding filing of compliance certificate.

Cut-off date of the overdue documents which is covered under the Scheme-

A defaulting company is permitted to file its overdue documents under the Scheme which were due for filing till 30th June, 2017.

Procedure to file overdue documents under the Scheme-

 The Director Identification Number (DIN) of directors of the defaulting companies were temporarily activated so as to enable the defaulting companies to make filings of overdue documents. Post filing of overdue documents, the companies were required to file form e-CODS to condone the delay in filings.

 Benefits of the CODS-

  •  Once Form e-CODS is approved by the MCA, the defaulting companies will not be penalised under the provisions of the Companies Act, 1956 and/or Companies Act, 1956 for delay in filing the financial statements, annual returns and other forms as covered under the Scheme.
  • The Registrar concerned shall withdraw the prosecution(s), if any, before the concerned Court(s) for all documents filed under the Scheme.

DCGI Cracks The Whip To Prohibit 344 Drugs Constituting Fixed Dose Combinations, Delhi High Court Stays Notifications Vis-À-Vis Pfizer’S Corex

In an unprecedented move, the Ministry of Health and Family Welfare proceeded to prohibit “the manufacture for sale, sale and distribution for human use” of 344 (three hundred and forty four) drugs constituting fixed dose combinations, vide notifications bearing S.O. 705(E) through S.O. 1048(E) dated March 10, 2016 (“Notifications”). These Notifications were swiftly followed by a circular dated March 12, 2016, whereby Drugs Controller General of India (“DCGI”), reiterating the prohibition and instructing the Drug Controllers of all states and union territories to take necessary action in this regard.

The scale and magnitude of the ban has surely left pharmaceutical sector shell-shocked. The genesis of the move can be traced to the amendment made to the Drugs and Cosmetics Rules, 1945, in December 2001, whereby fixed dose combinations of two or more approved drugs required permissions from the Licensing Authority before its import or manufacture. The Notifications have relied on the recommendations of an Expert Committee which has found that these drugs have “no therapeutic justification”. The details of the Expert Committee are not mentioned in the Notifications, however, it is likely, that the Expert Committee refers to committee under the Chairmanship of Prof. C. K. Kokate which had given its recommendations in July 2013. It is pertinent to mention here that the committee report available on the website of the CDSCO does not contain the specific recommendations of irrationality of any of the drugs prohibited under the foregoing Notifications.

Subsequently, the Delhi High Court has granted an interim injunction suspending the operation of notification bearing no. S.O. 909(E) vis-à-vis the fixed dose combination of Chlopheniramine Maleate + Codeine Syrup marketed by Pfizer under the brand name “Corex” on March 14, 2016. On behalf of Pfizer, it had been argued that the decision of Government prohibiting Corex has been undertaken arbitrarily without due process on its part. It is further being contended that the drug has been marketed in India for over 25 (twenty five) years as well as globally without any restrictions. The matter would come up before the court again next week.

Prima facie there seem to be multiple irregularities in the notification, especially, in light of the allegations made by Pfizer that such steps have been taken without due process, including an opportunity to show cause. However, its remains to be seen whether that is actually the case, with the DCGI likely to contend that ample opportunity has been afforded to the stakeholders to represent against these coercive measures.

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