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Liquidation Process

IBC AND THE LIQUIDATION PROCESS- INDIA

For easing the liquidation process under the Companies Act, 2013, the Government of India enacted the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as “the Code”) and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereinafter referred as “the Regulations”) in which the detailed process of insolvency and liquidation was explained. 

Overview of Liquidation process

Step 1: Appointment of liquidator

Step 2: Public announcement of commencement of liquidation and calling for claims

Step 3: verification and acceptance of claims and preparation of various reports and asset memorandum by liquidator

Step 4: formation of liquidation estate

Step 5: sale of assets as per schedule I of the Regulations

Step 6: distribution of funds as per section 53 of the Code

Step 7: Dissolution of Corporate Debtor

Order for liquidation by National Company Law Tribunal  (NCLT)

The NCLT has the power to refer the Corporate Debtor for liquidation under the following scenarios[1]:

  • On failure to receive the resolution plan before the statutory time period permitted to complete the corporate insolvency resolution process;
  • When the NCLT rejects the proposed resolution plan;
  • The resolution professional informs the Tribunal , the decision of the committee of Creditors to liquidate the Corporate Debtor;
  • If the NCLT determines that the Corporate Debtor had contravened the resolution plan approved by them.

The Tribunal  may order for liquidation of the Corporate Debtor based any of the abovementioned reasons and the appointed liquidator will issue public announcement informing the same. Liquidation process shall be initiated only as the last resort available i.e. when there is no alternate way to revive the Corporate Debtor and no resolution plan has been approved.  The Apex court in Swiss Ribbons Pvt. Ltd. and Ors. vs. Union of India (UOI) and Ors.[2] had observed that the preamble of the Code dose not prescribe for liquidation. Only in a situation where there is no resolution plan or that the resolution plan submitted is not up to the mark, then the liquidation process shall be initiated. In Innoventive Industries v. ICICI Bank Ltd[3],  it was observed that the moratorium, passed at the time of the resolution process, shall cease to exist from the day the liquidation order against the Corporate Debtor was passed.

Appointment of the liquidator

The resolution professional shall take over as the liquidator of a Corporate Debtor only after the order of the Tribunal to initiate the liquidation process and he must fulfill all the pre-requisites as mentioned in rule 3 of the Regulations. Unless the Tribunal  has ordered specifically to replace the resolution professional who was appointed as the liquidator, that the liquidator shall step into the shoes of the board of directors, key managerial personal and partners of the Corporate Debtor[4] and within 5 days of appointment, the liquidator as prescribed in Form B of Schedule II of the Regulation shall publish a public announcement.[5]

Claims against liquidating entity

All claims against the liquidating entity shall be submitted to the liquidator as and when mentioned in the public announcement and any claim made during the time of corporate insolvency resolution process shall also be updated.[6] The claims shall be submitted as per the prescribed format mentioned in the Code and as per the relevant class of the Creditor.

Liquidation process

For the purpose of the liquidation, the liquidator shall have powers and duties as mention under the section 35 of the Code. He shall form an estate of the assets of the Corporate Debtor as the liquidation estate for the benefits of the Creditors.[7] It is the duty of the liquidator to prepare and submit a preliminary report, asset memorandum, progress reports, sales report and the final report of dissolution to the Tribunal.[8] Within 75 days from the date of commencement of liquidation process, the liquidator has to submit a Preliminary Report containing the estimates of its assets and liabilities[9] and an asset memorandum congaing the value of the assets to be realized[10]. The first report shall be filed within 15 days after the end of the first quarter in which he was appointed and then, he shall submit subsequent reports after every quarter.

All claims of various stakeholders i.e. consolidation of claims shall be made to the liquidator within 30 days from the day of commencement of liquidation[11]. The liquidator has to verify all the claims made by various stakeholders and then decide whether to accept or reject them. He shall also determine the value of the claims to be admitted. The Creditor shall have the right to appeal to the Tribunal if aggrieved by any decision of the liquidator within 14 days of the receipt of such decision[12].

Realization of Assets

The next step is of realization of assets i.e. sale of assets of the Corporate Debtor. The liquidator shall sell all the assets of the Corporate Debtor, except the ones which are subject to security interest[13]. If the committee of Creditors have recommended that for maximum realization of assets it will be better to sell as a going concern, then the liquidator shall do so. The mode of sale of assets of the Corporate Debtor shall be as prescribed under Schedule I of the Regulation[14].

Distribution of funds

The secured Creditors have two option to realize their dues[15]. Firstly, they may opt out of the resolution process and enforce their security to secure their dues. Secondly, they may choose to go ahead with the resolution process wherein, give up all rights over the collateral. The latter option shall give the secured Creditors priority over all except the dues owe to the workmen. 

Section 53 of the Code clearly lays down the sequence in which the dues will be repaid thereby categorizes the order of priority among all the Creditors[16], which is as follows:

  1. insolvency resolution process and liquidation costs to be paid in full
  2. dues to workmen (for period of 24 months prior to liquidation) and, secured Creditors only if they have relinquished the security
  3. dues to employees (for period of 12 months prior to liquidation)
  4. financial debt to unsecured Creditors
  5. dues to any Government body and secured Creditors only if the security has been realized
  6. any remaining dues or debts
  7. preference shareholders
  8. partners or equity shareholders

No distribution of money shall be made to anyone without first filing the list of stakeholders and the asset memorandum with the Tribunal [17]. Upon the completion of liquidation of all assets of the Corporate Debtor, the liquidator shall make an application for dissolution. The Tribunal upon receiving such application, shall pass order whereby the Corporate Debtor shall stand dissolved from the date of such order. The copy of the same shall be sent to the authority with which the Corporate Debtor was registered within 7 days of passing such order[18].

Conclusion

Nearly all discussions and coverages on the Insolvency and Bankruptcy Code, 2016, highlight the process of Resolution of Corporate persons, which is the first objective of the Code. However there are numerous cases where the resolution plan fails or revival is not possible and they ultimately go for liquidation. It is the duty of the committee of the Creditors to check for all possible alternative before referring the matter for liquidation and it shall be chosen as the last resort only.


[1] Section 33 of Insolvency and Bankruptcy Code, 2016.

[2] AIR 2019 SC 739

[3] AIR2017SC4048

[4] Section 34 of Insolvency and Bankruptcy Code, 2016.

[5] Rule 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[6] Rule 16 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[7] Section 36 of Insolvency and Bankruptcy Code, 2016.

[8] Rule 5 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[9] Rule 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[10] Rule 34 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[11] Section 38 of Insolvency and Bankruptcy Code, 2016.

[12] Section 41 of Insolvency and Bankruptcy Code, 2016.

[13] Rule 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[14] Rule 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[15] Section 52 of Insolvency and Bankruptcy Code, 2016.

[16] Section 53 of Insolvency and Bankruptcy Code, 2016.

[17] Rule 42 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[18] Section 54 of Insolvency and Bankruptcy Code, 2016

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