THE PROCESS OF LIQUIDATION UNDER INSOLVENCY AND BAKRUPTCY CODE,2016

The Insolvency and Bankruptcy Code ,2016 (IBC) was hailed as a revolutionary legislation in the sphere of Corporate Insolvency . In a bid to strengthen and  solidifying  the existing   Insolvency Resolution framework ,  the IBC’s main focus is geared towards revitalizing and reinforcing sick business enterprises . Perhaps the most welcoming feature of this legislation can be deemed as the time frame for resolution. Also, synthesizing a more economically reasonable solution to bankruptcy is other one it’s key features. Under The Corporate insolvency resolution process, cautious efforts are made to protect the interests of small investors and creditors, under a ‘resolution plan’. A Resolution Plan is defined Under Section 5(26) of IBC as  a ‘plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II’.The plan needs to approved by the Committee of Creditors (COC). The Resolution Plan generally suggests restructuring of the operations of  the business , by selling off the assets of the company to pay off the debtors and investors.

Any Financial Creditor or and Operational Creditor can file an appeal in the NCLT for an insolvency petition against an operational debtor, when the creditor, having financial control over the debtor, has invested capital worth Rs. 1,00,000 or more in an enterprise. Indian Board of Insolvency and Bankruptcy (IBBI) is a regulatory body established by IBC to oversee and regulate insolvency proceedings.However ,if the Resolution plan under the Insolvency  resolution doesn’t pan out as expected by the COC, then the process of liquidation is opted. The basic principle of the Code, however, is to make an attempt at resolution ,before ultimately going over to liquidation. In events such as failure to adopt a resolution plan within the reasonable time frame of 180 days (with a further extension of 90 days), or rejection to adopt a plan altogether by the COC are the key catalysts that trigger the liquidation process.

Liquidation Under IBC ,2016

Section 12 of IBC prescribes a decisive time-limit for the completion of the Insolvency Process as per CIRP . The resolution process is meant to probe into the possibility and feasibility to revive the strained enterprise and the interest of the creditors to acquiesce to the same. However, despite being a final bid to restore investor confidence, it is observed that a vast majority of companies that have , and still, opt for Insolvency Resolution have gone for liquidation as the final measure. IBBI chairman , Mr. M.S. Sahoo  has recognized Liquidation as the only  ‘natural outcome’ wherein a chronically waned companies files for insolvency resolution.

Liquidation Process

Liquidation is the process of bringing a business to an end, thereby distributing it’assets to claimants, as part of debt settlement. The company is insolvent ,meaning it cannot pay it’s obligation when they are due.As company  operations and the remaining assets are used to pay the creditors and shareholders of the enterprise, based on the priority of their claims and investments. General partners are subject to liquidation process.

Role of Committee of Creditors (COC) and Resolution Professional

The COC is the main body tasked with deciding upon the future state of the company (S. 21).It constitutes of the Financial Creditors of the Corporate Debtors and is formed by the Resolution Professional after the apprehension of the position of the Corporate Debtor. The voting power in the forum is based on the financial credit owed to the debtor.[S.21(2) &(3)] The Corporate Insolvency Resolution Process (CIRP)  shall be completed within a period of 180 days (including extension of 90 days) as per section 12 of the IBC.The COC is generally constituted with a motive to liquidate the company at the first meeting only, since at this point liquidation is seen as the only option left to realize the company’s monetary potential. An Insolvency Professional is appointed to oversee the Insolvency resolution process under CIRP. The professional is appointed by the Committee by a majority vote [S.22{2}] . The Resolution professional acts on his discretion ,as per interimpowers given to him/her by the Adjudicating Authority, to present an application before the Adjudicating Body to grant extension by 90 days before the aforementioned period of Resolution. If the Resolution Professional, before the confirmation of any resolution planned , but during the resolution period, submits the decision of the Committee before the Adjudicating Authority to liquidate the Corporate Debtor, by ¾th majority, then the Authority / Tribunal shall , working upon the recommendations of the Committee , order for a liquidation Under Section 33.Also, an order for liquidation can be passed by theThe National Company Law Tribunal (NCLT) , Under section 31, on grounds of rejection of the Resolution Plan for ‘not confirming to the requirements’ under Sub-section 1. Hence the Adjudicating Authority has a decisive hegemony over the decision of the committee to prematurely liquidate the Corporate debtor ,even before the manifestation of a resolution plan.

Distribution of Assets

It shall be the duties of the Resolution Professional(herein after referred to as the liquidator), to take control of the liquidation estate to realize the monetary potential of the same, collect the claims of all the creditors (Under S.38), Verify such claims of returns made by the creditors and acknowledge or dismiss the same (S.40) and distribute the monetary returns , thereby acting in the best interests of the Creditors.

A  liquidity distribution is a type of non-dividend distribution made by the corporation or partnership to its shareholders and creditors during the period of it’sliquidation. When a company has more liabilities than assets, equity is negative and no liquidated distribution is made at all.”

    Under Section 53 of  the Act, the liquidator shall prepare a list of stakeholders and get it duly notified by the Adjudicating Authority for the liquidation process to commence. The liquidator shall prioritize the distribution of liquid assets to the creditors. For payment of outstanding debts ,IBC has provided a sequence for repayment to creditors in case of liquidation. Among unsecured financial creditors, workmen dues, equity share holders, the CIPR and liquidation costs as well as the fees of the resolution Professional are all listed and prioritized as debts to be cleared.

Winding up

The Term ‘winding up’ was introduced in the IBC,2016 as a connotation to liquidation , upon the reading of  Section 2(94A). Earlier Section 27(1)(a) of the Companies Act,2013 contained provisions for liquidation of the Company by a tribunal on accounts of insolvency. Apart from inability to pay-off debts , other grounds defined Under Section 271 of the Act for dissolution  of an enterprise are –• “Passing of  a liquidation Resolution By NLCT•  Acting in Contravention to the sovereignty and integrity of the country.• Default in filing of financial records”.

Aishwarya Says:

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