Category: Uncategorized

Liquidation is the Last stage of any company’s Life, once the Liquidation Process of a Company is Completed, then such company ceased to exist. In India the Liquidation Process is governed by the “Insolvency and Bankruptcy Code, 2016, and Regulation made thereunder, i.e. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The Prime duty of the Liquidator is to maximise the value of the stakeholder(s). The liquidation Process, shall be completed within one year form its commencement date.

Following is table explaining the brief flow of liquidation Process:

Initiation of Liquidation Process:	Where the Adjudicating Authority, -before the expiry of the insolvency resolution process period, does not receive a resolution plan or(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein,Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors to liquidate the corporate debtor, Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub-clauses (i), (ii), (iii) of clause (b) sub-section (1).In occurrence of any of the above circumstance, the Adjudicating Authority passes liquidation order.
Appointment of liquidator	Eligibility for appointment as liquidator:An insolvency professional shall be eligible to be appointed as a liquidator if he, and every partner or director of the insolvency professional entity of which he is a partner or director, is independent of the corporate debtor.Where the Adjudicating Authority passes an order for liquidation of the corporate debtor, the resolution professional appointed for the corporate insolvency resolution process shall, subject to submission of his written consent to the Adjudicatory Authority shall act as the liquidator for the purposes of liquidation unless replaced by the Adjudicating Authority.Replacement of the Resolution ProfessionalThe Adjudicating Authority shall by order replace the resolution professional, ifthe resolution plan submitted by the resolution professional was rejected for failure to meet the requirements mentioned in sub-section (2) of section 30; or the Board recommends the replacement of a resolution professional to the Adjudicating Authority for reasons to be recorded, orThe resolution professional fails to submit written consent, In any of the abovementioned events the Adjudicating Authority may direct the Board to propose name of another insolvency professional, to be appointed as a liquidator.
Public Announcement by Liquidator	The liquidator shall make a public announcement in Form B of Schedule II within five days from his appointment, to call upon stakeholders to submit their claims or update their claims submitted during the corporate insolvency resolution process, as on the liquidation commencement date and provide the last date for submission or updation of claims, which shall be thirty days from the liquidation commencement date.]The announcement shall be published-(a) in one English and one regional language newspaper at the location of the registered office and principal office, if any, of the corporate debtor and any other location where in the opinion of the liquidator, the corporate debtor conducts material business operations;(b) on the website, if any, of the corporate debtor; and(c) on the website, if any, designated by the Board for this purpose.
Submission of claim.	A person, who claims to be a stakeholder, shall submit its claim, or update its claim submitted during the corporate insolvency resolution process, including interest, if any, on or before the last date mentioned in the public announcement, in the following forms.01.Claims by operational creditors.Form C02.Claims by financial creditors.Form D03.Claims by workmen and employeesForm E04.Claims by other stakeholdersForm G
Verification of claims	The liquidator shall verify the claims submitted within thirty days from the last date for receipt of claims and may either admit or reject the claim, in whole or in part, as the case may be.  The liquidator may call for such other evidence or clarification as he deems fit from a claimant for substantiating the whole or part of its claim.
List of stakeholders	The liquidator shall prepare a list of stakeholders, category-wise, on the basis of proofs of claims submitted and accepted under these Regulations, with-(a) the amounts of claim admitted, if applicable,(b) the extent to which the debts or dues are secured or unsecured, if applicable,(c) the details of the stakeholders, and(d) the proofs admitted or rejected in part, and the proofs wholly rejected.The liquidator shall file the list of stakeholders with the Adjudicating Authority within forty-five days from the last date for receipt of claims, and the filing of the list shall be announced to the public in the manner specified in Regulation 12(3).
Stakeholders’ consultation committee and its meeting.	The liquidator shall constitute a consultation committee within sixty days from the liquidation commencement date, based on the list of stakeholders to advise him on the matters relating to sale of Assets the Corporate Debtor. The liquidator shall convene a meeting of the consultation committee when he considers it necessary and shall convene a meeting of the consultation committee when a request is received from at least fifty-one percent of representatives in the consultation committee
REALISATION OF ASSETS[Sale of Assets].	The liquidator may sell- (a) an asset on a standalone basis; (b) the assets in a slump sale;               (c) a set of assets collectively; (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern:Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate.]
Mode of sale.	The liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified in Schedule I. The liquidator may sell the assets of the corporate debtor by means of private sale in the manner specified in Schedule I when-(a) the asset is perishable;(b) the asset is likely to deteriorate in value significantly if not sold immediately;(c) the asset is sold at a price higher than the reserve price of a failed auction; or(d) the prior permission of the Adjudicating Authority has been obtained for such sale:
Distribution of unsold assets.	The liquidator may, with the permission of the Adjudicating Authority, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances. The application seeking permission of the Adjudicating Authority shall-identify the asset;provide a value of the asset;detail the efforts made to sell the asset, if any; andprovide reasons for such distribution
Liquidator to realize uncalled capital or unpaid capital contribution.	The liquidator shall realize any amount due from any contributory to the corporate debtor.No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporatedebtor.
Proceeds of Liquidation and Distribution of Proceeds	All money to be paid in to bank account. The liquidator shall open a bank account in the name of the corporate debtor followed by the words ‘in liquidation’, in a scheduled bank, for the receipt of all moneys due to the corporate debtor.
Distribution	Subject to the provisions of section 53, the liquidator shall not commence distribution before the list of stakeholders and the asset memorandum has been filed with the Adjudicating Authority.(2) The liquidator shall distribute the proceeds from realization within 22[ninety days] from the receipt of the amount to the stakeholders.(3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made.
Completion of liquidation.	The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date. Provided that where the sale is attempted under sub- Regulation (1) of regulation 32A, the liquidation process may take an additional period up to ninety days.]If the liquidator fails to liquidate the corporate debtor within one year, he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been completed and specifying the additional time that shall be required for liquidation.
Final report prior to dissolution	When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for –(a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or(b) for the dissolution of the corporate debtor, in cases not covered under clause (a).]
Post Dissolution	After filing the Dissolution Application, Once the hon’ble tribunal passed the Dissolution order of the CD, a copy of the order shall be forwarded to authority with which the Corporate Debtor is registered within 7 days, from the receipt of the order.

Apart of the aforesaid Liquidation Process, the Liquidator is also required prepare and file several Reports, Applications and Documents, from time to time, into the spam of Liquidation.

Following the table explaining the brief Reporting requirement of the Liquidator and their respective Timeline:

Name of the Report	Content	Timeline
Preliminary report	The liquidator shall submit a Preliminary Report to the Adjudicating Authority date, having the following details-(a) the capital structure of the corporate debtor;(b) the estimates of its assets and liabilities as on the liquidation commencement datebased on the books of the corporate debtor:	within seventy five days from the liquidation commencement
Asset memorandum;	The asset memorandum shall provide the following details in respect of the assets which are intended to be realized by way of sale-(a)value of the asset, (b) intended manner of sale (c) expected amount of realization from sale; and(d) any other information that may be relevant for the sale of the asset	within seventy five days from the liquidation commencement
Progress report(s);	A Progress Report shall provide all information relevant to liquidation for the quarter,including-(a) appointment, tenure of appointment and cessation of appointment of professionals;(b) a statement indicating progress in liquidation, including (i) settlement of list of stakeholders,(ii) details of any property that remain to be sold and realized,(iii) distribution made to the stakeholders, and(iv) distribution of unsold property made to the stakeholders;	(a) first Progress Report within fifteen days after the end of the quarter in whichhe is appointed;(b) subsequent Progress Report(s) within fifteen days after the end of every quarterduring which he acts as liquidator; and
Sale report(s);	Assets Sale report consist the following:the realized value;cost of realization, if any;the manner and mode of sale;if the value realized is less than the value in the asset memorandum, the reasons for the same;the person to whom the sale is made; andany other details of the sale.	On sale of an asset
Final report prior to dissolution	account of the liquidation, showing how it has been conducted and how the corporate debtor’s assetshave been liquidated	Along with the Dissolution Application on the Completion of the Liquidation.

The liquidator shall preserve a physical as well as an electronic copy of the reports and minutes referred for eight years after the dissolution of the corporate debtor.

APPLICABLE PROVISIONS:

Section 68, 69 & 70 of the Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014 are the provision concerned towards the Buy Back of Securities by the unlisted company; however, in addition to the companies act, 2013 the listed Company shall also comply with the SEBI (Buy Back of Securities) Regulations, 2018 as issued by Security Exchange Board of India (SEBI) in pursuance to Sec 68(2) (f) of the Companies Act, 2013.

MEANING:

Buy Back of Shares refers to the process by which a company re-purchase its shares and other specified securities from its existing shareholders at a price higher than the market price. It is a way of returning money to its investors. Buy-Back of its own shares by a company is nothing but reduction of share capital. Generally, the need for buyback arises when the management considers that the shares are undervalued or if the outstanding shares are falling.

SOURCES OF BUYBACK:

Pursuant to section 68 (1) of Companies Act, 2013, a company whether public or private, may purchase its own shares or other *specified securities* out of following sources:-

• Its free reserves; or
• The securities premium account; or
• The proceeds of the issue of any shares or other specified securities.

However, buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or other specified securities.

** Specified Securities includes employees stock option or other securities as may be notified by the Central Government from time to time.

Author’s Comment:

• A company cannot do buyback of debentures as debenture denotes a debt to the company and it is not included in specified securities.
• There is no such restriction for buyback of securities out of proceeds of an earlier issue of different kind of securities.

MODES OF BUY BACK:

A company may buy-back its shares by any of the following modes:

CONDITIONS FOR BUY-BACK:

Pursuant to section 68 (2) and 68 (7) of Companies Act, 2013, no company shall purchase its own shares or other specified securities unless the following conditions are fulfilled:

• Buy-back is authorized by the Articles of Association of the Company;
• Board Resolution is passed where the buy-back is upto 10% or less of the total paid-up equity capital and free reserves of the company; whereas, a Special Resolution would be required at a General Meeting of the company where the buy-back is more than 10% of the total paid-up equity capital and free reserves of the company but upto 25% or less of the aggregate of paid-up capital (equity and preference) and free reserves of the company.
• Maximum number of shares that can be bought back in any financial year shall not exceed 25% of paid up equity capital ;
• The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back cannot be more than 2:1 ratio i.e. twice the paid-up capital and its free reserves.
• All the shares or other specified securities for buy-back should be fully paid-up;
• the buy-back of the shares or other specified securities listed on any recognized stock exchange are in accordance with the regulations made by SEBI.
• The buyback in respect of shares or other specified securities not listed on any recognized stock exchange are in accordance with Companies (Share Capital and Debentures) Rules, 2014.
• No offer of Buyback under this sub section shall be made within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any.
• A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back

Additionally, pursuant to SEBI (Buy Back of Securities) Regulations, 2018, a listed company shall also comply with the following:

• No offer of Buyback for 15% or more of paid up capital and free reserves of the company shall be made from open market.
• In case of Buyback from open market, company shall ensure that atleast 50 % of amount earmarked for buyback as specified in Board Resolution/ Special Resolution is utilized for buying back shares or other specified securities.
• A company shall not buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.
• No insider shall deal in shares or other specified securities of the company on the basis of unpublished price sensitive information relating to buy-back of shares or other specified securities of the company.

Author’s Comment: There is no such limit of maximum 25% of paid up capital on buyback of preference shares in any financial year.

TIME LIMIT FOR COMPLETION OF BUYBACK:

Pursuant to section 68 (4) of Companies Act, 2013, every buy-back shall be completed within one Year from the date of passing of the Special Resolution or the Board Resolution, as the case may be.

ADVANTAGES OF BUYBACK:

There are several advantages of buyback such as:

• Increase in Earnings per share: With the reduction in the number of shares in the market due to Buy Back, the earnings per share (EPS) increases Since EPS is calculated by dividing earnings by total number of outstanding shares, when the total number of shares decreases, earnings per share will increase.

• Maintaining shareholders value in a situation of poor state of secondary market by a return of surplus cash to the shareholders.
• Countering a Hostile Takeover: Buyback can be used as an effective defence strategy to prevent hostile takeover.
• Approval of NLCT not required: Company can reduce the capital of company without the approval of NCLT.
• Increase in Promoter Holding: Buyback increases the holding of promoters by purchasing back shares from their shareholders.
• Reduction in Unutilized Cash in Hand: Since the company spends cash to buys its stock, the cash assets on its balance sheets reduce. This increases the RoE (return on equity).
• Provides Exit opportunity:It enables the company to buy the shares of dissatisfied or dissenting shareholders of the company

PROHIBITION OF FURTHER ISSUE OF SHARES OR SECURITIES:

Pursuant to section 68 (8) of Companies Act, 2013, When a company completes a buy-back of its shares it shall not make a further issue of the same kind of shares within a period of six months except by way of:

• Bonus issue or
• In the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or
• Conversion of preference shares or debentures into equity shares.

Author’s Comment: There is no restriction on issue of different kind of securities after completion of buyback.

FILING OF LETTER OF OFFER AND DECLARATION OF SOLVENCY WITH THE REGISTRAR:

Pursuant to Rule 17(2) of The Companies (Share Capital & Debentures) Rules, 2014, the unlisted company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a Letter of Offer in Form No SH 8. It shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director (if any).

Pursuant to Regulation 8 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall:

• within five working days of the public announcement file a draft letter of offer, along with a soft copy, containing disclosures as specified in Schedule III through a merchant banker who is not associated with the company with the Board.
• The Board may provide its comments on the draft letter of offer not later than seven working days of the receipt of the draft letter of offer.

Pursuant to section 68 (6) of Companies Act, 2013 read with Rule 17(3) of The Companies (Share Capital & Debentures) Rules, 2014 , a declaration of solvency has to be filed by the company to the Registrar and SEBI (if listed) along with the aforesaid letter of offer. As per aforesaid rule, declaration of solvency shall be filed in the Form No. SH.9 along with the fee and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit to the effect that the Board of Directors of the company has made an opinion that company is capable of meeting its total liabilities and that the company will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board as specified in the said Form.

Author’s Comment:

• No declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.
• the listed company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the Board or public announcement of the offer to buy-back is made

DISPATCH OF LETTER OF OFFER TO SHAREHOLDERS:

Pursuant to Rule 17(4) of The Companies (Share Capital & Debentures) Rules, 2014, the letter of offer shall be dispatched to the shareholders of unlisted company immediately after filing the same with the Registrar of Companies but not later than 20 days from its filing with the Registrar of Companies.

Pursuant to Regulation 9 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall dispatch the letter of offer along with the tender form to the securities holders who are eligible to participate in the buy-back offer not later than five working days from the receipt of communication of comments from the Board.

OFFER PERIOD:

Pursuant to Rule 17(5) of The Companies (Share Capital & Debentures) Rules, 2014, the offer for buy-back for an unlisted company shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer. Provided that where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days.

Pursuant to Regulation 8 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make sure that:

• The date of the opening of the offer shall be not later than five working days from the date of dispatch of the letter of offer.
• The offer for buy-back shall remain open for a period of ten working days.

VERIFICATIONS OF THE OFFERS RECEIVED:

Pursuant to Rule 17(7) of the Companies (Share Capital & Debentures) Rules, 2014, an unlisted company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall complete the verification of offers received within seven working days of the closure of the offer.

PAYMENT TO SHAREHOLDERS/RETURN SHARE CERTIFICATE:

Within 7 days of time specified in aforesaid Rule 17(7), an unlisted company shall:

• make payment in cash to those shareholders or security holders whose securities have been accepted; or
• return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the securities holders within seven working days of the closure of the offer.

REGISTER OF BUY BACK OF SHARES:

Pursuant to section 68 (9) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, Where a company buys back its shares or other specified securities under this section, the company shall maintain a register of shares or other securities so bought-back the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed in FORM NO. SH.10.

RETURN AND CERTIFICATION OF COMPLIANCE:

Pursuant to section 68 (10) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, the company shall file with the ROC & SEBI (in case of Listed Company) a return in form SH 11 and a compliance certificate in SH 15 shall be annexed along with it signed by two directors out of which one shall be Managing director (if any) along with the attestation of Practicing Professional within 30 days of the completion of Buy Back.

POST BUYBACK COMPLIANCES FOR LISTED COMPANIES:

Along with the aforesaid compliances (if applicable) and pursuant to SEBI (Buy Back of Securities) Regulations, 2018:

• The company shall issue a public advertisement in a national daily within two days of expiry of buy-back period, inter-alia, disclosing:

• number of securities bought;
• price at which the securities were bought;
• total amount invested in the buy-back; and
• the consequent changes in the capital structure and the shareholding pattern after and before the buy-back.

• The merchant banker shall ensure that a final report is submitted to the Board in the form specified within fifteen days from the date of expiry of buyback period.

TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT:

Pursuant to section 69 of Companies Act, 2013, the company shall transfer the sum equal to the nominal value of shares bought back to the Capital Redemption Reserve Account when the said shares are bought back out of Free Reserve or Security Premium Account. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

Author’s Comment: We transfer the amount to CRR account because we don’t want the company to pay dividend out of it. This is because they have already broken the creditor’s trust by paying the shareholders before the creditors. In return, these funds are now blocked.

CIRCUMSTANCES IN WHICH BUYBACK IS PROHIBITED:

Pursuant to section 70(1) of Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other specified securities:-

• Through any subsidiary company including its own subsidiary companies;
• Through any investment company or group of investment companies
• If a default, is made by the company, in the repayment of deposits or interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

However, buyback is not prohibited in aforesaid case if default is remedied and a period of three years has lapsed after such default ceased to subsist.

Pursuant to section 70(2) of Companies Act, 2013, no company shall, directly or indirectly, purchase its own shares or other specified securities if company has not complied with the provisions of Section 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for failure to distribute dividend) AND 129 (Financial Statements).

Author’s Comment: By interpreting the word “AND”, it can be said that if a company is in default of sec 123 only or of sec 92,123 and 127 but has complied sec 129, then sec 70(2) shall NOT be attracted.

SECURITIES WHICH CAN’T BE BOUGHT BACK:

The Company shall not buyback the following securities:

• Lock-in securities: Any securities issued by a listed company to its promoters or group of employees, which subject to lock-in period are not available for buyback before expiry of lock-in period.
• Partly paid-up shares: A company can’t buy-back its partly-paid up shares, on which call money is in arrear.
• Non-transferrable securities: Those securities which are subject to lien or are pledged or restricted by a court can’t be bought-back by the company.

PENALTY:

Pursuant to section 68(11) of Companies Act, 2013, if a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.

CONCLUSION:

It can be concluded that Indian companies announce buyback in response to an over-capitalized company and their undervaluation position of their stocks in capital markets. Buyback can be termed as mixed bag. Buyback provides investors with exit opportunity when stocks are undervalued or sparsely traded. It can be used as an effective defence strategy to prevent hostile takeover. It offers an opportunity for the company to use its liquidity position to extinguish its shares today and issue them again in future. On the other hand, sometimes it may be used by the promoters to give a false signal about the company so as to increase the price of stocks so that promoters can sell their stocks, thus misleading shareholders. Therefore, every shareholder must reconsider all his views before purchasing the shares of companies involved in the process of buyback.