Have you ever wondered what happens when a company can no longer meet its financial obligations? How does the legal system handle such a situation, ensuring fair treatment for creditors while aiming for a quick resolution? The liquidation process under the Insolvency and Bankruptcy Code (IBC) is initiated when a corporate debtor fails to resolve its insolvency during the resolution process or if the committee of creditors deems liquidation to be in their best interest.
The liquidation process is a mechanism where the assets of the insolvent company are sold to repay creditors according to the priority established by the IBC. This is overseen by a liquidator, who takes control of the company’s assets and manages the entire process from valuation to sale.
Liquidation Process under IBC
The liquidation process under IBC is the last and final recourse in resolving the financial distress of companies. Liquidation is a procedure aimed at winidng up an insolvent company when resolution attempts fail. It is all about maximising the value of assets and distributing it among creditors in a fair and orderly manner.
1. Initiation of Liquidation
The initiation of liquidation marks the beginning of the end for a corporate debtor that has been unable to resolve its insolvency issues.
Circumstances leading to liqudation:
- Completion of Corporate Insolvency Resolution Process (CIRP): The CIRP is designed to resolve insolvency through a resolution plan. If the CIRP concludes without the approval of a resolution plan within the stipulated period (180 days, extendable by another 90 days), liquidation is initiated.
- Decision by Committee of Creditors (CoC): The CoC may decide to liquidate the corporate debtor at any point before the approval of the resolution plan if they believe that liquidation would be more beneficial. This decision requires a 66% majority vote of the financial creditors.
- Rejection of Resolution Plan: If the National Company Law Tribunal (NCLT) rejects the resolution plan submitted at the end of the CIRP for not meeting the required standards or legal requirements, it can order the liquidation of the corporate debtor.
- Violation of Resolution Plan: Post-approval, if the corporate debtor fails to comply with the terms of the resolution plan, the NCLT may order liquidation.
2. Appointment of the Liquidator
Usually, a Resolution Professional (RP) who was handling the company’s Corporate Insolvency Resolution Process (CIRP) is appointed as the liquidator. In cases where the RP cannot continue or if there’s a conflict of interest, the NCLT selects a new liquidator from a panel maintained by the Insolvency and Bankruptcy Board of India (IBBI).
The liquidator’s main duties include:
- Taking control of the company’s assets and taking over the assets of the corporate debtor to secure them during the liquidation process.
- Evaluating the assets to repay creditors, fairly and transparently and then selling these assets to the highest bidder to maximize returns for the creditors.
- Responsibility for distributing the proceeds among the creditors according to the priority established under the IBC.
- Investigate the financial affairs of the bankrupt company to identify any fraudulent transactions or unfair practices that occurred prior to liquidation.
- Preparing a final report detailing the liquidation process and submitting it to the NCLT. Following approval, they oversee the formal dissolution of the company, concluding the liquidation process.
Appointment
The appointment is done according to section 34 of the IBC. When the Adjudicating Authority passes an order for the liquidation of the corporate debtor under Section 33 of the IBC, the resolution professional who was appointed for the CIRP shall act as the liquidator.
Replacement
The Adjudicating Authority may replace the resolution professional acting as the liquidator under certain circumstances. These circumstances include:
- Rejection of the resolution plan submitted by the resolution professional
- Recommendation for replacement by the Board with reasons recorded in writing
- Failure of the resolution professional to submit written consent for the appointment
Upon direction from the Adjudicating Authority, the Board must propose the name of another insolvency professional within ten (10) days. The Adjudicating Authority, upon receipt of the proposal from the Board, appoints the proposed insolvency professional as the new liquidator.
In Sahara Fincon v. Tirupati Ceramics, it was held that the replacement of a Resolution Professional as a liquidator can only be done as per provisions of section 34(4) of the IBC. In this case, the Committee of Creditors had resolved to replace RP even before the rejection of the resolution plan to be submitted by the RP.
3. Public Announcement and Claims Collection
Public Announcement:
Once appointed, the liquidator is required to make a public announcement regarding the initiation of the liquidation process.
This announcement informs all stakeholders, including creditors, employees, shareholders and the general public, that the company is under liquidation. The announcement also invites creditors to submit their claims within a stipulated time frame, typically 30 days from the date of the announcement.
The announcement is made in one English and one regional language newspaper with wide circulation where the registered office of the company is located and is also published on the official website of the Insolvency and Bankruptcy Board of India (IBBI).
Claims Collection:
Following the public announcement, the liquidator undertakes the process of claims collection:
- Creditors submit their claims to the liquidator using specified forms, providing details such as the amount of the claim, the details substantiating the claim, and any security held against the claim.
- The liquidator further reviews and verifies the claims submitted by the creditors. This involves checking the legitimacy and accuracy of the claims against the company’s books and records.
- After thorough verification, the liquidator decides on the admission or rejection of the claims. If a claim is admitted, it is included in the list of creditors and considered for the distribution of proceeds. If rejected, the creditor is informed, and they have the right to appeal the decision to the National Company Law Tribunal (NCLT).
- Once all claims are processed, the liquidator prepares a list of stakeholders based on the admitted claims, which is then used for the distribution of liquidation proceeds.
4. Asset Disposal and Distribution
The custody and valuation of assets are foundational to the liquidation process, ensuring that all assets are securely held, accurately valued, and ready for sale. This phase directly impacts the returns to creditors and the efficiency of the liquidation process, as it provides the basis for asset liquidation and distribution of proceeds.
Asset Disposal
Section 53 of the IBC outlines the priority order for the distribution of proceeds from the sale of liquidation assets.
- The first priority is given to the payment of insolvency resolution process costs and liquidation costs. These include expenses incurred during the insolvency resolution process and liquidation proceedings, such as fees for professionals, legal expenses and administrative costs.
- Workmen’s dues for the period of twenty-four (24) months preceding the liquidation commencement date are paid next, followed by debts owed to secured creditors who have relinquished security as per Section 52 of the IBC.
- Wages and any unpaid dues owed to employees other than workmen for the period of twelve (12) months preceding the liquidation commencement date are prioritized next.
- Financial debts owed to unsecured creditors are paid after
- Any remaining debts and dues, which may include contractual obligations, outstanding payments or other liabilities, are prioritized next in the distribution of proceeds.
- Preference shareholders, if any, are paid before equity shareholders or partners. Equity shareholders or partners receive proceeds from asset sales only after all other claims and dues have been settled.
How creditors are paid from the liquidated assets.
Under Section 52 of the IBC, the effect of secured creditor’s rights depends on whether they relinquish their security interest or decide to realize it. If secured creditors relinquish their security interest, they are placed second under the priority order given in section 53 after insolvency resolution process costs and liquidation costs. Their claims are then treated equally with “workmen’s dues for 24 months preceding the liquidation commencement date. The assets secured by these creditors become part of the liquidation estate, and the liquidator can sell them.
However, if secured creditors decide to realize their interest in the secured assets, these assets do not become part of the liquidation estate. Instead, the creditors enforce their secured interest to recover their debt. They cannot sell or transfer the secured asset to any ineligible resolution applicant. If the proceeds from realizing the secured interest are insufficient to repay the debt, the unpaid portion becomes part of the liquidation estate. Conversely, if the proceeds exceed the debt owed, the surplus must be accounted for by the liquidator.
Regulation 21A (2) of the Liquidation Process Regulations, 2016, outlines the payment obligations of secured creditors. If they proceed to realize their security interest, they must pay certain amounts within specified timeframes to ensure the proper functioning of the liquidation process.
5. Completion of Liquidation
The completion of liquidation marks the conclusion of the winding up of a corporate debtor.
Final Report:
- The liquidator compiles a final report detailing the entire liquidation process, including the asset sale, distribution of proceeds and the outcome for all stakeholders.
- This final report is submitted to the National Company Law Tribunal (NCLT) for review. The report provides transparency and accountability for the liquidation process, offering a clear record of all actions and decisions taken by the liquidator.
Dissolution of the Company:
- Once all the assets of the corporate debtor have been fully liquidated, the liquidator is required to make an application to the NCLT for the dissolution of the company.
- Upon receiving the application from the liquidator, the NCLT reviews the request. If satisfied with the completion of the liquidation process and the fulfillment of all legal obligations, the Authority issues an order for the dissolution of the corporate debtor.
- The NCLT order specifies the effective date of dissolution, marking the official end of the corporate debtor’s existence. From this date forward, the company ceases to exist legally.
- A copy of the dissolution order is sent to the authority with which the corporate debtor is registered within seven days from the date of the order. This step ensures that the dissolution is recorded in the official records and that the appropriate regulatory bodies are informed of the company’s termination.
Frequently Asked Questions
1. What is the liquidation process under IBC?
The liquidation process under the IBC is a legally structured process for the dissolution of insolvent companies in India.
2. What triggers the liquidation process under IBC?
The following are the reasons that triggers the liquidation process under IBC:
- Rejection of resolution plan by the Adjudicating Authority for non-compliance.
- When the resolution plan has not been received within the prescribed time.
- When the resolution professional intimates the adjudicating authority for liquidation of the corporate debtor if approved by the committee of creditors with at least sixty-six percent of the voting share.
3. Who can initiate liquidation proceedings under IBC?
The liquidation process is initiated by Appropriate Authority by appointing a liquidator who plays a pivotal role throughout the process with various powers and duties prescribed under section 35 of the IBC.
4. How are assets distributed during liquidation under IBC?
During liquidation under the IBC, assets are distributed among creditors according to a specific priority order in Section 53.
5. What happens to the employees during a company’s liquidation?
During a company’s liquidation process, employees are typically impacted in several ways.
- Firstly, their job security becomes uncertain as the company’s operations wind down and ultimately cease.
- Secondly, any outstanding wages, salaries or benefits owed to employees for their services rendered before the liquidation commencement date become part of the liquidation process.
- Furthermore, employees may also face challenges in finding new employment, especially if the closure affects a significant portion of the workforce or if there are limited job opportunities in the region or industry.
- Overall, the impact of a company’s liquidation on employees can be significant, both financially and professionally.
6. Can a company be revived after entering liquidation under IBC?
Yes, a company can potentially be revived even after entering liquidation under the IBC. While the primary objective of the IBC’s liquidation process is to orderly wind up the affairs of insolvent companies and distribute their assets among creditors, there are provisions within the legislation that allow for revival under certain circumstances.
Final Thoughts
Navigating the intricate landscape of corporate insolvency demands a deep understanding of the legal frameworks, particularly the Liquidation Process. In our blog, we’ve delved into the complexities of the liquidation process under the IBC, shedding light on its significance and procedural aspects.
Navigate Liquidation with Expertise and Confidence
Understanding the Liquidation Process is essential for businesses facing financial distress. Seeking professional advice is important for navigating issues effectively. At A Agarwalla & Co. we offer expertise and guidance to ensure a smooth transition through the liquidation process. Our team is dedicated to helping you with understanding the complexities of the liquidation process.