Liquidation Proceedings under the Insolvency & Bankruptcy Code, 2016

Step 1:
Initiation of Liquidation: As per Section 33, in case there is no resolution plan submitted even after the expiry of the maximum permitted time for CIRP/Fast Track CIRP or such plan is rejected due to non-adherence of the requisites mentioned under Section 31, the Adjudicating Authority shall pass an order requiring the Corporate Debtor to be liquidated, make a public announcement about the same and inform the authority with whom the Corporate Debtor is registered about their liquidation.

• It must be mentioned that even prior to this stage, the Resolution Professional can intimate the Adjudicating Authority of the decision taken by 66% majority vote of the CoC to liquidate the Corporate Debtor, at any time during the CIRP but before confirmation of a plan,.

Step 2:
Appointment of Liquidator: After an order is passed under Section 33, the Resolution Professional may act as the Liquidator for the liquidation proceedings, after obtaining written consent of the CoC.

• The Adjudicating Authority may replace the Resolution Professional, and direct the Board to propose another name when:
  1. The resolution plan submitted by the Resolution Professional did not meet the requirements under Section 30 and was thus rejected.
  2. The Board recommends replacement of the Resolution Professional.
  3. The Resolution Professional fails to submit the written consent.
• The powers and duties of the Liquidator are largely similar to those of the Resolution Professional, which include verifying claims, evaluating assets of the corporate debtor etc [as set out from clause (a) to (o) of Section 35 (1)].

Step 3:
Preparation of the Liquidation Estate: The Liquidator shall prepare and hold the Liquidation Estate as a fiduciary for the benefit of all the creditors. Such estate comprises the following:

1. any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor, or an information utility or records in the registry or any depository recording securities of the corporate debtor, or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
2. assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;
3. tangible assets, whether movable or immovable;
4. intangible assets including but not limited to intellectual property, securities and financial instruments, insurance policies, contractual rights;
5. assets subject to the determination of ownership by the court or authority;
6. any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;
7. any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;
8. any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and
9. all proceeds of liquidation as and when they are realised.

• However, such estate will not comprise of assets held by a third party, assets in security collateral held by a financial service provider, personal assets of any shareholder/partner/director, assets of an Indian/Foreign subsidiary of the Corporate Debtor as well as any assets as may be specified by the Board.

Step 4:
Consolidation and Verification of Claims: Under Section 38, the Liquidator shall receive all claims of the creditors within 30 days of the commencement of liquidation.

• Such claims are then verified by the Liquidator under Section 39.
• Lastly, the liquidator may accept or reject any claims in whole, or in part, and such decision ought to be communicated to the corporate debtor within 7 days of the admission/rejections.
• A creditor may appeal to the Adjudicating Authority against such decision of the Liquidator.

Note: Avoidance Transactions –

1. Preferential Transaction: Such transactions involve those where the Corporate Debtor has given preference to a certain transaction, indicated by a transfer of property for the benefit of a creditor, putting such person in a beneficial position in the event of distribution of assets under Section 53 with a lookback period of 2 years. On receipt of such an application, the Adjudicating Authority may issue an order to restore such property to the Corporate Debtor.
2. Under-valued Transactions: Instances of under-valued transactions are cases where the Corporate Debtor makes a gift to a person, or the consideration is significantly lesser than the value, not being made in the ordinary course of business. The lookback period for under-valued transactions is 2 years for related parties, and 1 year for other persons. The Liquidator, or in case of his failure, any creditor may make an application to the Adjudicating Authority for under-valued transactions, who may then pass an order restoring the position as it existed- as if such transaction had not taken place.
3. Extortionate Transactions: A transaction may be considered as extortionate credit transaction, if Corporate Debtor is required to make exorbitant payments in respect of the credit provided under the principles of law relating to contracts. Where Liquidator is of the opinion that the Corporate Debtor is a party to extortionate credit (financial/operational debt) during 2 years preceding insolvency commencement date, he may make application to the Adjudicating Authority, which shall order to restore/set-aside/modify the terms or relinquish its Security Interest or restore the position as it existed prior to such transaction.

Step 5:
Distribution of Assets: Section 53 prescribes an order of priority for distribution of assets, commonly known as the waterfall mechanism. It is given as follows:

1. Insolvency Resolution cost and Liquidation cost paid in full;
2. Workmen’s dues of 24 months preceding Liquidation and Debts owed to secured creditors who have relinquished their security (equal ranking).
3. Wages owed to employees, 12 months preceding Liquidation.
4. Financial Debts owed to unsecured creditors.
5. Amount due to the Government 2 years preceding Liquidation and debt owed to any secured creditor for the amount unpaid after realising its security (equal ranking).
6. Any remaining debts.
7. Preference shareholders, if any.
8. Equity shareholders/Partners, etc.

Step 6:
Dissolution of the Corporate Debtor: As per Section 54, once the assets of the Corporate Debtor are completely liquidated, the Liquidator should make an application to the Adjudicating Authority, who may then pass an order that the Corporate Debtor shall be dissolved from the date of such order.