Rise in Voluntary Liquidation Cases: Promoters Seek Clean Slate

Introduction

Over the last few years, the National Company Law Tribunal (NCLT) has seen a notable increase in matters related to voluntary liquidation, most notably with promoters looking for a way out in tough economic times when regulations are changing.

Voluntary winding up, according to the provisions of the Insolvency and Bankruptcy Code in India, is aimed at ensuring that businesses voluntarily cease their activities with a view to a proper winding up of assets and liabilities. In contrast to the usual insolvency arrangements, which often involve lengthy litigations in courts or, in certain cases, are dominated by demands from creditors to get their money back by rescheduling their debts, this mechanism enables faster exit from markets by firms during economic downturns.

Rise in Voluntary Liquidation

The country has experienced a rise in voluntary liquidation cases due to various problems. One of these is the inclination to close companies earlier following increased control by regulators and stringent penalties on people funding certain business ideas. This would enable them to manage the streams of money coming into the company so that they do not end up bankrupt in court (a situation that might ruin their lives). In liquidation, awareness of voluntary liquidation empowers liquidators and mitigates impacts on stakeholders.

With the numerous transformations that have been introduced into our economy, mainly focus is now being centred on matters regarding market risks and sectoral turmoil which have taken place in the recent past while trying to grapple with the future of an increasing number of enterprises that consider renewing their viability and perseverance over the long haul. This is where voluntary liquidation comes in as an available choice for companies looking to change direction entirely and realign their resources to work more effectively while paying dividends to owners simultaneouly.

Besides, the legal regime has also been liberalized through the introduction of the Fast Track Voluntary Liquidation (FTVL) mechanism under Companies Act 2013 by the Company Act 2013 which has greatly expedited the winding up of solvent companies enabling promoters to choose voluntary liquidation as an exit option from the market.

The rapid increase in the number of voluntary windings up cases underscores the necessity for robust regulatory mechanisms that protect all the users of the process while also ensuring it runs expeditiously. Voluntary liquidation is increasingly being used as a preferred method of restructuring; therefore, regulatory authorities must establish adequate and efficient controls that will prevent malpractices and enhance transparency.

Furthermore, the liquidation process must be a part of keeping their interests intact and maintaining a fair distribution of assets. This involves the stakeholders, creditors, employees, and shareholders. In developing trust and faith in the process of voluntary liquidation, it is essential to carry out timely disclosures, effective stakeholder engagement, and communicate clearly.

Conclusion

To sum up, the increase in voluntary liquidation proceedings before NCLT reflects a significant transition in conducting insolvency and reorganization of firms in India. Voluntary liquidation has become an option for starting afresh in a relatively flexible economy where business can be sustained in the long run as company executives increasingly grapple with financial hurdles and seek strategic repositioning. Nevertheless, guaranteeing openness, responsibility and involving the stakeholders are significant for maintaining the honourability as well as expeditiousness of the non-forced elimination operation.

~ Sanjay Sethiya is the Managing Partner at Law Square, Advocates & Solicitors.

~ Akshatha Prasad M D is an Associate at Law Square, Advocates & Solicitors.