This article is written by Miheer Jain pursuing Certificate Course in Advanced Civil Litigation from LawSikho.

Introduction

Almost all discussions and coverage of the Insolvency and Bankruptcy Code, 2016 (Code) focus on the rehabilitation of corporations through the corporate insolvency resolution process, which is the Code’s primary objective. However, maximisation of asset value is a close second, and if we look at the statistics of things referred under the Code, we can see that considerably more cases end up in liquidation, so it’s necessary to deal with its application and potential implications. It is essential to internalise that while the objective of the Code either through CIRP or liquidation is to ensure the revival of the company, in most cases, liquidation resulting in slicing and dicing of the company or distribution of assets in order to ensure a maximization of asset value becomes inevitable. Therefore, this article is a guide to a step-by-step understanding of the process of liquidation.

The article would cover how assets are distributed once a company undergoes liquidation, the powers and duties of the liquidators, and the role of the Committee of Creditors in the process. 

Why does any company go into liquidation?

When the Adjudicating Authority (AA) either does not receive the Resolution Plan under Section 30(6) of the Code or the maximum period prescribed for the corporate insolvency resolution process expires or when AA rejects the resolution plan under Section 31 of the Code, liquidation may be initiated under Section 33 of the Code. Furthermore, any time before the resolution plan is adopted and the Resolution Professional informs AA of such a decision, the Committee of Creditors (CoC) may resolve to liquidate the corporate debtor (CD) under Section 33(2) with at least 66 percent votes. In addition, if the CD violates any terms of an approved resolution plan, any person whose interest is prejudiced by the violation may ask for the CD to be liquidated. 

While passing the order of liquidation of CD, AA shall direct the issuance of a public announcement under Section 33(1) of the Code that the CD is in liquidation, as well as the requirement that such order is sent to the CD’s registering authority, such as the Registrar of Companies in the case of corporations.

Applicability of moratorium in case of liquidation

The moratorium also applies when a liquidation order is issued, as it does in the Corporate Insolvency Resolution Process. No legal action or litigation shall be brought by or against the CD. However, with AA’s permission, the liquidator may file such procedures on CD’s behalf.

Powers of the management

All powers of the Board of Directors, key management personnel, and partners in the corporate debtor, if applicable, will cease to exist and will be vested in the hands of the official liquidator. 

Furthermore, a liquidation order is understood to be a notice of discharge to all CD workers. They may, however, be kept if CD’s business is to be continued during the liquidation process. 

Officers, directors, partners, auditors, and resolution professionals, as well as those who own CD’s assets, have a responsibility to assist and cooperate with the liquidator in handling the company’s affairs. 

In all correspondence, the CD must include the word “In Liquidation” following its name.

Appointment of liquidator and fees payable to such liquidator

AA must name an Insolvency Professional (IP) as a liquidator while passing the liquidation order. If an IP has already been appointed as a Resolution Professional for the Corporate Insolvency Resolution Process, he may be retained or another IP may be appointed, subject to his approval and independence, among other things. Under Section 34(4) of the Code, there are provisions for his replacement in specific circumstances. 

In the event that the resolution plan is not approved, the fee payable will be determined by the CoC under Regulation 39D of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Financial creditors must additionally advance funds for liquidation costs over liquid assets available, which will be repaid with interest from the liquidation proceeds. Fees would be based on a percentage of realisations and distribution to stakeholders in all other circumstances, as specified by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. (Liquidation Regulations).

Scope of powers of the liquidator

A liquidator is necessary to supervise the entire liquidation process, from the liquidation order through the CD’s dissolution. He must take possession of all assets, accurately analyse them, and dispose of them in a transparent manner while keeping the Code’s objectives in mind. In the meanwhile, he must keep and safeguard them. For consolidation, he must invite claims and verify them. He can then accept or reject the claims. In the name and on behalf of the CD, he must defend any litigation, prosecution, or other legal procedures, civil or criminal. 

Within fourteen days of receiving the liquidator’s decision to accept or reject the claims, a creditor may file an appeal with the AA under the appellate procedure of the Insolvency and Bankruptcy Code, 2016. 

In carrying out his duties, obligations, and responsibilities, the liquidator has the authority to seek expert aid from anybody or designate any professional. Furthermore, AA’s direction can be asked if any clarification is required.

Role of Committee of Creditors in the process of liquidation

The National Company Law Appellate Tribunal (NCLAT) held in Punjab National Bank vs. Kiran Shah, the liquidator of ORG Information Ltd.1 that after a Liquidation Order is issued, the CoC has no role to perform and is only a claimant. They are unable to seek the replacement of the liquidator since there is no such provision in the law. 

The formation of a Creditors Consultation Committee is needed, although the liquidator is not obligated by their recommendations. 

Any of the stakeholders who are entitled to a distribution of proceeds can confer with the liquidator. Furthermore, for the interest of openness, a record of such consultation would be made available to all stakeholders. The liquidator also has the authority to gain access to any information systems for the purpose of admitting and proving claims and identifying CD assets from any source, including any information utility, credit information systems regulated under any law currently in force, any agency of the central, state, or local government, including any registration authorities, data bank maintenance, and any other source.

Documents to be submitted by the liquidator

According to Regulation 5 of the Liquidation Regulations, the liquidator must prepare and submit the following:

1. A preliminary report within 75 days of liquidation commencement date;
2. An asset memorandum;
3. Progress reports on a quarterly basis;
4. Sale report;
5. Minutes of consultation with stakeholders; and
6. The final report prior to dissolution to the AA.

Wherever accounts are found to be incomplete, the liquidator should complete and bring them up to date. He must also keep track of cash, ledgers, and other assets, security, and investment registries. Furthermore, after dissolution, the liquidator is required to keep physical and electronic copies of reports and books for a period of eight years.

Liquidator as fiduciary of all assets

In regards to the CD, all of the CD’s assets form an estate of assets known as the liquidation estate. The liquidator acts as a fiduciary for all creditors, holding the liquidation estate in trust for them. CD’s estate includes not only assets that he owns and controls, but also those that he does not control. Assets listed in accounting books or with information utility should be tracked and managed. Movable and immovable assets, as well as securities and shares held in subsidiaries and joint ventures, fall under this category. Intellectual property and other intangible assets are also covered. 

Assets in the custody of a third party, such as those received in bailment and all monies payable to any workers or employee from the provident fund, pension fund, or gratuity fund, are not included.

Avoidable/preferential transactions u/s 43-51 IBC, 2016

Preferential, undervalued, fraudulent, and extortionate transactions laws apply to liquidation proceedings in the same way they apply to the Corporate Insolvency Resolution Procedure. 

For related parties, the relevant back period is two years prior to the Insolvency Commencement Date, and for others, it is one year prior to the Insolvency Commencement Date. 

AA may issue an order restoring the property or consideration in lieu thereof given in such transaction to CD based on an application from the liquidator. Transactions that are undervalued or exorbitant could be avoided.

Revival of the company through liquidation

Even in liquidation proceedings, NCLAT held in Jindal Steel and Powers Ltd vs. Arun Kumar Jagatramka & Ors. and S C Sekaran vs. Amit Gupta & Ors. that actions must be taken to revive and maintain the operations of the CD by shielding it from its management. If compromise and arrangement with creditors are not possible, the liquidator should endeavour to sell the business as a continuing concern under Section 230 of the Companies Act, 2013. Liquidation, or the death of a CD, is the last stage that should be avoided. 

The Hon’ble Supreme Court held in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors that a resolution plan that is less than the liquidation value can be accepted by CoC since the Code prefers resurrection and the commercial wisdom of CoC is not to be interfered with. 

From the date of the liquidation order, a period of 90 days is provided for compromise and arrangements, which is not included in the liquidation term. Those who are not eligible to propose a resolution plan are likewise ineligible to participate in such a compromise or agreement. 

Waterfall mechanism vis-à-vis distribution of assets

Section 53 of the Code, sometimes known as the ‘waterfall system,’ governs the distribution of CD assets in liquidation. The following is the priority order for the distribution of proceeds from the liquidation estate:

1. Fees of the liquidator, as well as fees expended in engaging advisers, protecting the assets, running the firm, and interest on interim funding, have all been paid in full.
2. Debts of the secured creditor who chooses to relinquish security and dues of the workmen for the 24 months immediately preceding the start of the liquidation will be treated similarly. It should be noted that a secured creditor has the choice of asserting his security or allowing the liquidator to realise and disburse his security via this procedure.
3. Wages and unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date.
4. Financial debts owed to unsecured creditors.
5. Following dues shall rank equally between and among the following: 
   • Any amount due to the Central Government and the State Government and other government dues for the period of two years preceding the liquidation commencement date,
   • Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

Note: It is to be noted that government dues being placed on a lower priority is a big departure from prior legislation.

1. Any other debts and dues;
2. Preference shareholders, if any; and
3. Equity shareholders or partners, as the case may be in the end.

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients and the amount distributed to the relevant recipient after such deduction.

Process of dissolution

When the CD’s assets have been totally liquidated, the liquidator must apply to the AA for the CD to be dissolved under Section 54 of the Code. Early dissolution can be requested under Regulation 14 of the Liquidation Regulations at any time after the preliminary report has been prepared if the liquidator believes there are insufficient realisable assets to cover the liquidation cost and no further investigation into CD’s affairs is required. Once the order of dissolution has been issued, it must be lodged with the authority where the CD is registered.

Conclusion

The Supreme Court, the NCLTs, and the NCLATS have all stated that the first-order goal is resolution. The second-order goal is to maximise the value of the corporate debtor’s assets, while the third-order goal is to promote entrepreneurship, credit availability, and interest balance. This priority list is inviolable.

It’s worth noting that the Preamble makes no mention of liquidation, which is only used as a last resort if there is no resolution plan or if the resolution plans that have been filed are inadequate. Even during liquidation, the liquidator can sell the corporate debtor’s business as a going concern. As can be seen, the fundamental goal of the Act is to ensure the corporate debtor’s resuscitation and continuation by shielding it from its own management and from a corporate death by liquidation. Liquidation should only be used as a last choice, and every effort should be made to resurrect the business.

References 

• https://www.mondaq.com/india/insolvencybankruptcy/987994/liquidation-process-under-the-insolvency-and-bankruptcy-code-2016–an-overview
• https://taxguru.in/corporate-law/liquidation-process-company-model-timeline-liquidation-process-ibc-2016.html
• https://www.wirc-icai.org/images/material/Insolvency-Bankruptcy-Code-II-Liquidation.pdf
• https://www.ibbi.gov.in/uploads/law/IBC%20Part%20II.pdf

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