Liquidation process under Insolvency and Bankruptcy Code refers to the winding up of a corporate debtor, marking the end of its operations or existence. It is governed by Chapter III of Part II of the IBC (Sections 33 to 54), effective from December 15, 2016 and supplemented by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The primary objective is to convert the corporate debtor’s assets into cash, distribute proceeds to creditors, and dissolve the entity, ensuring a time-bound and transparent process. This article provides a comprehensive analysis of the liquidation process and ensuring a thorough understanding.
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What is Liquidation Under Insolvency and Bankruptcy Code, 2016?
The liquidation process under Insolvency and Bankruptcy Code, is a structured legal mechanism for closing down a financially distressed corporate debtor. It ensures fair distribution of assets to creditors and eventual dissolution. Below, we break it down into key stages for clarity.
Initiation
Liquidation begins under specific conditions, such as no resolution plan being filed within the stipulated time (usually 180-270 days, extendable to 330 days), rejection of the plan by the National Company Law Tribunal (NCLT), a decision by creditors with at least 66% voting share, or violation of an approved plan.
Process
A liquidator, often the Resolution Professional from the earlier Corporate Insolvency Resolution Process (CIRP), is appointed. They make a public announcement, verify creditor claims, sell assets, and distribute proceeds within a one-year timeframe, aiming for completion within 90 days of receiving proceeds.
Priority of Claims
Assets are distributed based on a strict order, prioritizing costs of the process, workmen’s dues, secured creditors and others with financial creditors generally prioritized over operational creditors, a point upheld in court despite challenges.
Legal Oversight
The process is overseen by the NCLT, with options for creditors to appeal decisions, ensuring transparency and fairness.
Conditions for Liquidation under IBC, 2016
Section 33 of IBC, 2016 initiates liquidation under the conditions given below. These conditions ensures that liquidation is a last resort when revival is not viable:
No resolution plan is received before the expiry of the maximum CIRP period, typically 180 days, extendable to 270 days, or up to 330 days in exceptional cases.
The resolution plan is rejected by the Adjudicating Authority (National Company Law Tribunal, NCLT) for non-compliance with Section 31, which requires approval by at least 66% of the Committee of Creditors (CoC).
The CoC, with at least 66% voting share, decides to liquidate the corporate debtor before confirmation of a resolution plan.
The corporate debtor or an affected person contravenes the terms of an approved resolution plan, as per Section 33(3).
Role and Appointment of the Liquidator
The liquidator, typically the Resolution Professional (RP) from the CIRP, is appointed under Section 34, with consent documented in Form AA of Schedule II of the Liquidation Regulations. Eligibility is governed by Regulation 3, ensuring the liquidator’s competence. The liquidator’s powers and duties is given under Section 35 and that include:
Verifying and admitting/rejecting creditor claims.
Evaluating and selling the corporate debtor’s assets.
Distributing proceeds as per the priority of claims.
Filing reports and applications with the NCLT.
The liquidator’s role is critical in ensuring an orderly and efficient process, with responsibilities extending to stakeholder consultations and reporting.
Find out What Insolvency is
Liquidation Process under Insolvency and Bankruptcy Code
The liquidation process under Insolvency and Bankruptcy Code is structured into several stages, each with specific timelines and requirements:
A. Public Announcement
Within 5 days of appointment, the liquidator issues a public announcement in Form B, Schedule II of the Liquidation Regulations, inviting claims from creditors. This ensures all potential claimants are notified along with claims due within 30 days.
B. Claim Submission, Verification and Reporting
Creditors submit claims within the stipulated period, and the liquidator verifies these, requesting additional evidence if necessary. The liquidator admits or rejects claims, communicating decisions within 7 days. Creditors can appeal rejections to the NCLT within 14 days (Section 42). The liquidator also prepares various reports, including:
Asset Memorandum: Within 75 days of liquidation commencement (Section 35(1)(c), Regulation 5(1), 34).
Progress Reports: Quarterly, submitted within 15 days of each quarter (Section 35(1)(n)).
Preliminary Report: Within 75 days (Regulation 2(1)(f), 13).
Sale Reports: As per Regulation 5(1), 36.
Minutes of Stakeholder Consultations: As per Regulation 5(1), 8.
Final Report: Before distribution, within the one-year timeframe (Regulation 5(1), 45).
These reports, available to stakeholders upon request with cost and confidentiality undertakings (Regulation 5(3)), ensure transparency and accountability.
C. Formation of Liquidation Estate and Asset Sale
The liquidator forms the Liquidation Estate, comprising all assets of the corporate debtor, and opens a bank account in the name “in liquidation” with a scheduled bank. Assets are sold, with restrictions on sales to ineligible persons under Section 29A, ensuring compliance with IBC provisions. The liquidator can explore options like:
Compromise or arrangements (Regulation 2B).
Sale of the corporate debtor as a going concern (Regulation 32(e)).
Sale of the business as a going concern (Regulation 32(f)).
These options aim to maximize value, especially for stakeholders.
D. Distribution of Proceeds
Proceeds from asset sales are distributed based on the waterfall mechanism under Section 53, detailed below. Distribution must occur within 90 days of receipt (previously 6 months), with the liquidator filing details with the NCLT (Regulation 42). Liquidator’s fees are deducted proportionately from sale proceeds for each class of recipients, ensuring fairness.
E. Time Limit and Dissolution
The entire process must be completed within one year from commencement (Regulation 47), though pending avoidance transactions do not delay completion. After distribution, the liquidator applies for dissolution under Section 54. Early dissolution is possible if assets are insufficient to cover costs, post-initial report (Regulation 14). The dissolution order is filed with the corporate debtor’s registration authority and marking the end of its legal existence.
Moratorium During Liquidation
Upon initiation, a moratorium is declared, restricting legal actions against the corporate debtor. It cannot sue or be sued, except for proceedings notified by the Central Government. The liquidator can institute proceedings with NCLT permission, which ensures continuity in necessary legal actions.
Priority of Claims: Waterfall Mechanism
The distribution of assets follows a strict priority order under Section 53 of IBC, as summarized in the table below:
Priority Order | Claim Type | Notes |
(i) | Costs of CIRP and liquidation process | Paid in full. |
(ii) & (iii) | Workmen dues (24 months prior to liquidation), Secured creditor debts | Equal priority. |
(iv) | Employee wages/unpaid dues (excluding workmen covered above, 12 months prior) | |
(v) | Financial debts to unsecured creditors | |
(vi) & (vii) | Central/State Government dues (2 years prior, including Consolidated Funds), Secured creditor debts | Equal priority. |
(viii) | Remaining debts and dues | |
(ix) | Preference shareholders | |
(x) | Equity shareholders/partners |
Summary
The liquidation process under Insolvency and Bankruptcy Code is a structured, time-bound mechanism ensuring the orderly winding up of a corporate debtor. It involves appointing a liquidator, verifying claims, selling assets, and distributing proceeds based on a strict priority, with judicial oversight ensuring transparency. The process, while effective, continues to evolve through case law, addressing stakeholder concerns and maximizing value.
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Liquidation Process under Insolvency and Bankruptcy Code: FAQs
Q1. What is the liquidation process under IBC?
The liquidation process under the Insolvency and Bankruptcy Code, 2016 (IBC) involves winding up a corporate debtor’s operations, selling assets, and distributing proceeds to creditors when revival fails.
Q2. What are the steps in the liquidation process?
1) Initiation by NCLT order. 2) Appointment of liquidator. 3) Public announcement for claims. 4) Claim verification. 5) Asset sale. 6) Proceeds distribution per priority. 7) Dissolution.
Q3. What is the process of liquidation of NCLT?
NCLT orders liquidation post-CIRP failure, appoints a liquidator, oversees claim verification, asset sales, and distribution, ensuring compliance with IBC regulations.
Q4. What is the order of liquidation for bankruptcy?
CIRP and liquidation costs> Workmen dues (24 months) and secured creditors> Employee dues (12 months)> Unsecured creditors> Government dues> Others.
Q5. What is the process of court liquidation?
Court liquidation (via NCLT) involves ordering liquidation, appointing a liquidator, verifying claims, selling assets, distributing proceeds, and dissolving the corporate debtor under IBC oversight.
