LIQUIDATION PROCESS UNDER INSOLVENCY AND BANKRUPTCY CODE - Author Advocate Raghu Vasishth

INTRODUCTION:

The term liquidation refers to closing the business operations of a company and selling off all the assets to its creditors and stakeholders. The process of liquidation ceases the company to exist in the eyes of law. The Insolvency and bankruptcy Code, 2016 (in short “IBC” hereinafter) has precisely laid down the liquidation process for a company, otherwise stated to be corporate debtor under the said Code, who have failed to revive or pay debts to its creditors under the Corporate Insolvency Resolution Process (CIRP). The liquidation process is consequential when the CIRP is unsuccessful to meet the requisite statutory provisions of the Code.

The core objective of IBC is to revive and sustain the business model of the corporate debtor by repaying its debts and liabilities to the creditors under the approved resolution plan by the Adjudicating Authority (i.e. the NCLT Bench). This objective if secured and achieved, prevents the company from undergoing liquidation process. On the other hand, if CIRP does not survive or resolution plan is rejected by the NCLT, the liquidation process is initiated under section 33 of IBC, 2016. For the said purpose, to carry out the liquidation process smoothly, both IBC and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereinafter referred to as “Liquidation Regulations”) resorts for payment of debts and liabilities by the corporate debtor under the supervision of appointed liquidator under section 34 of the IBC.

This article intends to explain the liquidation process under IBC for its simple understanding.

DEFINING LIQUIDATION:

In general terms ‘liquidation’ means winding up of the corporate structure in case the corporate debtor is unable to repay its debt to the creditors. The settlement of debts in such a case is done via disposing off the assets of the corporate debtor through sale and distributing the proceeds of the sale to the creditors, stakeholders, workmen/employees, government institutions.

On reading the entire Insolvency and Bankruptcy Code, 2016, it is observed that the term “Liquidation” has not been defined anywhere. Interestingly, this is when liquidation process is the last and only available resort to satisfy the debts of corporate debtors due and payable to the creditors followed either by no resolution plan or the resolution plan submitted but rejected does not work for the corporate debtor as observed by Supreme Court in the case of Swiss Ribbons Pvt.Ltd. v. Union of India & Ors. 2019 SCC Online SC 73.

CONDITIONS PRECEDENT TO LIQUIDATION PROCESS

The initiation of liquidation process commences consequent to the events prescribed under section 33 of the Insolvency and Bankruptcy Code, 2016. The section 33 states as under:

1.     The Adjudicating Authority does not receive the resolution plan before the expiry of the CIRP period or maximum period permitted for CIRP as provided under section 12 or fast track CIRP under section 56 of the Code;

2.     The Adjudicating Authority if unsatisfied due to non-compliance of requirements specified under section 31(1) of the Code which provides for approval of resolution plan, may by order reject the resolution plan under sub-section 2 therein;

3.     Under section 33(2) the Adjudicating Authority shall pass liquidation order as referred to in clause (b) of sub-section (1) to liquidate the corporate debtor, if the resolution professional informs the Adjudicating Authority about the decision of the committee of creditors to liquidate the corporate debtor, who has decided to liquidate the corporate debtor with the voting share of sixty-six percent, before the confirmation of the resolution plan. Sub-section (2) of section 33 further explains that the decision of liquidation of corporate debtor can be taken anytime after it is constituted under sub-section (1) of section 21 but before the confirmation of the resolution plan;

4.     Any approved resolution plan by the Adjudicating Authority under section 31 or section 54L of the IBC, is noticed to be contravened by the corporate debtor, any person other than corporate debtor whose interests are prejudicially affected by any such contravention may by an application seek liquidation order from the Adjudicating Authority. The Adjudicating Authority on its satisfaction towards contravention of resolution plan by the corporate debtor, shall pass a liquidation order under section 33(4);

As corporate insolvency resolution process is initiated, moratorium under section 14 of the Code comes into effect. Likewise, on passing of liquidation order, no suit or proceedings shall be instituted by or against the corporate debtor. However, the only exception lies with the liquidator who has the power to institute a suit or legal proceedings on behalf of the corporate debtor with permission of the Adjudicating Authority. Section 33 sub-section (6) precludes the liquidator from initiating legal proceedings against transactions notified by the central government as prescribed therein.

PROCESS OF LIQUIDATION:

1.    Appointment of Liquidator: After the Adjudicating Authority has initiated the process under Section 33 and order of liquidation will be considered to be a notice of discharge to officers, employees and workmen of the corporate debtor under sub-section (7) of the said section. This is followed by submission of written consent by the resolution professional (RP) of the corporate debtor to the Adjudicating Authority to be appointed as liquidator. The appointment of liquidator, shall cease to have effect all the powers of the board of directors, key managerial personnel and partners of the corporate debtor. The management of the corporate debtor shall provide all assistance and cooperation to the liquidator. The appointment of RP as liquidator is subject to replacement by the Adjudicating Authority under sub-section (4) of section 34 of IBC. The Adjudicating Authority may direct the Insolvency and Bankruptcy Board of India to propose the name of another insolvency professional to be appointed as Liquidator.

2.    Powers and duties of Liquidator: The Insolvency and Bankruptcy Code, 2016 has given powers to liquidator from taking control of the assets of the corporate debtor, managing and representing them wherever necessary to verifying and inviting claims from the creditors under section 35 therein. Under section 36(3), it is the duty of liquidator to form an estate of the assets to be called as liquidator estate of the corporate debtor as prescribed under the said section. The liquidator has been widely empowered under section 37 to access information for admission and proof of claims and identification of liquidation estate assets of the corporate debtor from various sources including information utility, agencies governed by Central, local or State government, credit information systems, database maintained by IBBI etc.

3.    Consolidation and Verification of the Claims of the Creditors: After the announcement of the liquidator, section 38(1) prescribes thirty days to receive and collect the claims of creditors, both financial or operational creditors, subject to withdrawal and vary their claim within fourteen days of submission under sub-section (5) of the said section. The verification of submitted claims by the creditors to be made by the liquidator on the basis of the evidence required from creditor, corporate debtor or any other person to justify the claim.

4.    Admission, Rejection and Determination of the value of the Claim: The liquidator may either accept or reject the claim of the creditor, provided reasons are given for rejection and the same shall be communicated by him to the creditor and corporate debtor within seven days of his decision under section 40(2) of the Code. Thereafter, value of the claims admitted by the liquidator is to be determined as specified by the IBBI.

5.    Appeal Against the Liquidator: Section 42 entitles the creditor to appeal against the decision of the liquidator (for rejecting or accepting the claim) before the Adjudicating Authority within 14 days of the communication of the decision.

6.    Completion of Liquidation: The chapter VII of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 under Regulation 44 provides for completion of liquidation of corporate debtor within one year from the liquidation commencement date. The liquidation process may take additional ninety days for reasons as provided under sub-regulation 32A therein. In case the liquidator fails to liquidate the corporate debtor within one year, he shall make an application to the Adjudicating Authority along with a report explaining the reason for non-completion of liquidation within one year and specify the time required for the same.

7.    Circumstantial remedy before Adjudicating Authority: The liquidator shall make an application before the Adjudicating Authority for avoidance of preferential transactions made by the corporate debtor. During the relevant time, if it is found that the transactions of the corporate debtor were undervalued, the liquidator shall apply to the Adjudicating Authority to declare such transactions as void. Any transaction made within one year preceding the insolvency commencement date and transaction with related party within two years of the insolvency commencement date shall be the relevant period for avoidable transactions. The creditors, shareholders, partners of the corporate debtor are also entitled under section 47 of the Code to approach and make an application before the Adjudicating Authority for undervalued transaction when the liquidator or resolution professional has not reported the Adjudicating Authority under section 45 of the Code.

8.    Priority of Distribution assets:

    According to Section 53 of the IBC Code, 2016, the sequence of distribution of assets amongst the creditor has been made as IRP and Liquidation Cost, Workmen Dues for twenty four months preceding commencement of liquidation, debts secured to secured creditor as provided under section 52 of the Code, unpaid dues to employees other than workmen for 12 months preceding the liquidation date followed by unsecured financial creditors, whereafter amount due to Central and Sate Government for last two years of liquidation commencement date then to preference shareholders or partners and equity shareholders.

9. Dissolution of the Corporate Debtor: On complete liquidation of the corporate debtor, the liquidator shall make an application to the Adjudicating Authority for its dissolution. The Adjudicating Authority’s order of dissolution under sub-section (2) of section 54 shall be forwarded to the authority concerned where the corporate debtor is registered.

VOLUNTARY LIQUIDATION OF CORPORATE PERSONS

According to Chapter-V of Part-II under Insolvency and Bankruptcy Code, 2016 provides for voluntary liquidation by corporate person itself who have not committed any default and shall meet such conditions and procedural requirements as specified by the Insolvency and Bankruptcy Board of India (IBBI). Section 59 under sub-section (3) of the Code, 2016 has elaborated the conditions for voluntary liquidation proceedings of the corporate person. The corporate person if a company through its directors have to submit declarations for solvency and declaration that the company is not being liquidated to defraud any person. The condition precedent further requires declarations accompanied by audited balance sheets of the company, complete record of business operations from previous two years or date of incorporation. Also, valuation report of assets of the company prepared by a registered valuer. Intimation to concerned Registrar of Companies (ROC) and IBBI with two-third creditors. Appointment of Insolvency Professional as Liquidator to present the application before the Adjudicating Authority for dissolution of the corporate person.

Conclusion:

The object of the Insolvency and Bankruptcy Code, 2016 is to make every possible endeavor to revive, reorganize and rehabilitate the corporate debtor by way of corporate insolvency resolution process in a way that it becomes capable of running and carrying on its own operations. Any failure to the CIRP process, the liquidation process has been introduced to satisfy the debts due and payable to all the creditors of the corporate debtor in the prescribed form and nature provided under the Code. The insolvency proceedings under the Code intends to resolve or liquidate the corporate person in a stringent time bound manner for the purpose of improving corporate structure in India.

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