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PROCESS OF LIQUIDATION UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

By Pratha Khanna

Abstract

This article aims to explore the liquidation process under the Insolvency and Bankruptcy Code, 2016. Further, the article lays down the procedural requirements under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 that need to be complied with by every company going into liquidation. The article also explores the importance of these insolvency guidelines and their need in the current financial system.

The process of liquidation is encapsulated under the Insolvency and Bankruptcy Code, 2016 which primarily provides a timely solution to tackle the insolvency of a corporate debtor. It does so by giving them a period of 180 days and a grace period of 90 days from the date of the order as passed by the Honourable National Company Law Tribunal (NCLT). The first procedural step of liquidation is to hold a meeting with the committee of creditors which also includes an interim insolvency professional as appointed by the NCLT. This professional can be regularized or can be changed once the meeting has been held for the benefit of the board or the company at large. 

Post this meeting, if the insolvency of the said debtor cannot be resolved then Section 33 of the IBC (2016) comes into play and regulates the procedure and mechanism of resolving such an issue. There are three situations wherein a need for liquidation may be initiated,

  1. When the time period set by the NCLT does not solve the issue or when the Adjudicating Authority outrightly rejects the resolution plan,
  2. When the Adjudicating Authority approves the above-said resolution plan; however some terms and conditions of the same are contravened by the corporate debtor,  then the same may pass as an order for liquidation, or
  3. When at any time of the Corporate Insolvency Resolution Process, the Insolvency professional sends an intimation to the Adjudicating Authority informing them of the need for liquidation after receiving more than 65% of the votes amongst the Committee of Creditors. 

Once an order for liquidation is passed by the Honourable NCLT, a liquidator is appointed by the tribunal who initiates the process of liquidation as per the provisions of the IBC and Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (IBBI)   All actions and compliances take place after an order for liquidation is passed by the NCLT and the date of the passing of the order stands as the commencement date for the process of liquidation.

The first step involved in a liquidation process is to appoint a liquidator as was mentioned above, by the NCLT.  The second step is to publicly announce the commencement of liquidation and invite any fresh claims if the amount of liquidation is not satisfactory as set by the IBC and IBBI Regulations. Thirdly, the claims received are verified and accepted, a committee of stakeholders is constituted which thus gives way to the preparation of reports such as the Asset Memorandum, Valuation Reports etc. Next, a liquidation estate is formulated and the plans for the sale of assets are laid down. The sale is then proceeded according to the procedures set by Schedule I of the IBBI.  The asset distribution is done in a waterfall manner and the same can be found in Section 53 of the IBC, 2016. This section talks about the distribution in an order of priority which includes paying workmen, creditors with securities, wages and unpaid dues and many more such costs. The last step is to dissolute the debtors and the same has to be done within a year of the commencement of the process of liquidation. At this stage, the process of liquidation comes to an end after taking due consideration of the sections of the IBC and IBBI along with the various forms that are required to be filled as per the mandate of the NCLT. 

However, along with the various steps and the commencement of this process of liquidation, one must also be aware of the duties and responsibilities that come along with the procedure. The most crucial individual in this process is the liquidator and their basic duties are to overlook the entire mechanism of liquidation and take in the assets and evaluate them in a transparent manner keeping in mind the objectives of the code. Moreover, they must also dispose off these assets in a clear system so that the committee of creditors are satisfied with the disposal. The duty of the liquidator is to protect the company in case of civil or criminal charges and in any court proceedings that may take place. In the same manner, there are various other important players in the process of liquidation which includes the entire committee of creditors, the debtors and the insolvency professional. 

The codification of the process of liquidation was very important as the need for it grew over the years contributed by factors such as an increase in the entrepreneurial sector and the number of scams and frauds that occurred over the century. IBC as a whole was drafted with the aim of revamping the resolution of insolvency in India along with trying to promote business in a fair and transparent manner all over the country. Under this, liquidation was an important segment as many times, businesses fail to grow and undertake various steps which further lead to a decline in their revenue and the inflow of their cash reduces by a significant margin.

Furthermore, it is necessary to understand the distinction between liquidation and bankruptcy as we sometimes tend to intermingle the two terms. Liquidation is an orderly system undertaken to shut down a business whereas bankruptcy is a legal phenomenon where an individual is deemed insolvent. Therefore, with the increase in start-ups, the need for an insolvency code grew over the period  and the necessity of creating a liquidation process also increased rapidly. The creation of such a system has helped the country in understanding the process of insolvency and has also bridged the gap between corporates and individuals in a massive manner. As John Mark Green always quotes, “When awareness blossoms, petals of change unfold.” The codification of the process of liquidation may just be a mere necessity however, the change and revolution it has brought about in India is what makes it a phenomenal regulation. 

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