Special purpose vehicles, and voluntary winding up in a COVID-19 era


Business closures. Mass layoffs. Financial fragility. These are some of the words you would often hear being associated with the COVID-19 pandemic. This is because the impact of the pandemic caught many unawares. And sheer endurance of the virus and its constant mutations further raises the anxiety and the stake for many businessmen and women.

Difficult times leaves businesses, especially those set up for very narrow and specific purposes little or no option. This article concentrates on what these very specific vehicles whose reason for being has been taken away by the pandemic.

These specific-focused, time bound companies are called Special Purpose Vehicles (SPVs). SPV are mostly seen in financial market structuring. But they can be used in virtually any sector or industry.

The Companies’ Act, 2019 permits promoters of company to agree to bind themselves in the company constitution to just a single purpose. Section 19 of the Companies’ Act, 2019 therefore provides that “where the registered constitution of a company sets out the nature of the business or object, there is deemed to be a restriction in the registered constitution on the business or activities which the company may engage, unless the registered constitution states otherwise”. Suffice to say that a company that finds itself in such a situation is at liberty to undo the restrictions.

But let’s assume it does not want to change its objects and purpose. And COVID-19 has dried up its production line. One option available to it is to pull the plug on its business and wind up. This is known as voluntary winding up. Voluntary winding up can be compared to liquidation. The difference between a voluntary winding up and a liquidation is that whiles a voluntary winding up is a pre-insolvency measure, compulsory liquidation is an insolvency measure.

Liquidation is basically the process of winding up a company’s affairs in an organized manner with the aim of ensuring that all creditor payments and outstanding liabilities settled. Companies that choose to enter into voluntary liquidation basically fall under two categories. First are those that may be able to pay off their debts whenever they fall due, settle employee liabilities and still be able to cover all operational costs without a problem. And then there are those that may be in the situation where they have started to experience difficulties but have not yet reached the point of crisis. Both companies may choose to voluntarily fold up.

Voluntary winding up begins with a special resolution to wind up the company. No particular reason needs to be stated in the resolution. The mere fact that the company is able to pay its liabilities when they fall due is adequate to enable the company to enter into voluntary liquidation. The directors would be required to file an affidavit stating that after a full enquiry into the matters of the company, they have formed the opinion that the company is able to pay its debts and liabilities when they fall due.

The voluntary liquidation begins at the point of passage of the resolution. Under the Corporate Insolvency and Restructuring Act, 2020 (Act 1015), once a company enters into voluntary or solvent liquidation, the company must appoint an insolvency practitioner (IP) to oversee the winding up process.  Once the private liquidation begins, things tend to change very quickly.

The most immediate effect of the liquidation is that the power of the Board of Directors is vested in the insolvency practitioner. The directors may only act with the consent of the insolvency practitioner. As a matter of policy, responsibility for actions of the company switches from the directors to the insolvency practitioner; so does the liability for all the actions of the company. The rationale for freezing the powers of directors is to ensure that there are no turf wars and power plays between the insolvency practitioner and the directors. In any event, there is no gap because the Insolvency Practitioner often has the power of a director.

It is important to note that companies in the middle of a solvent liquidation must place at the end of the company name the phrase, (“in Liquidation”). This is to appear on all letter heads or publications where the name of the company is printed.  This serves as notice to members of the general public that the company is undergoing the process of shutting down operations and is therefore winding up all its affairs.

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