Liquidation process under Insolvency and Bankruptcy Code, 2016

Shekhar Agrawal


In all the discussions and coverage of Insolvency and Bankruptcy Code, 2016, the process of Resolution of Corporate persons gets highlighted. No doubt, the first objective of the Code is Resolution, but maximization of value of assets is a close second. If statistics of matters referred under the Code is seen, one finds that far more cases finally go for Liquidation.


Initiation of Liquidation: Liquidation may be initiated when Adjudicating Authority (“AA”) either does not receive the resolution plan within the maximum period prescribed for corporate insolvency resolution process or rejects the resolution plan received. Further, the Committee of Creditors (“CoC”) may also decide with at least 66 % votes, to liquidate the Corporate Debtor (“CD”) any time before the resolution plan is approved and Resolution Professional intimates the AA of such a decision. Another situation is when the CD contravenes any term of an approved resolution plan, any person whose interest is prejudicially affected may apply for Liquidation of CD.


AA while passing the order of Liquidation of Corporate Debtor, shall direct issuance of public announcement that the CD is in liquidation and require that such order is also sent to registering authority of CD, such as Registrar of Companies in case of Companies.


Moratorium: Like Insolvency Resolution, Moratorium kicks in on passing the order of Liquidation. No suit or legal proceedings shall be instituted by or against the corporate debtor. However, Liquidator may file such proceedings on behalf of CD, with prior approval of the AA.


Directors and Employees: All powers of the Board of Directors, Key Managerial Personnel, and the Partners of the CD, as the case may be, shall cease to have effect and will vest in the Liquidator.


Further Order for Liquidation shall be deemed to be notice of discharge to all employees of the Corporate Debtor. However, they may be retained where business is proposed to be continued during the liquidation process.


All the persons like Officers, Directors, Partners, Auditors, Resolution professionals and earlier liquidator as well as those holding properties of CD have a duty to assist and cooperate with the Liquidator in the discharge of his duties. In case of non-cooperation, Liquidator can seek direction from AA against them.


The CD is also required to add the phrase ‘In Liquidation’ after its name in all correspondence.


Liquidator and Fees: While passing the order of Liquidation, Adjudicating Authority is required to name an Insolvency Professional (‘IP’) as Liquidator. In case any IP is already appointed as Resolution Professional for CIRP, he may continue, or another IP can be appointed, subject to his consent for appointment and independence (?) etc. There are provisions for his replacement in certain circumstances.


Fees payable shall be decided by CoC where they do not approve the Resolution plan. Financial Creditors are also required to advance sums required for liquidation cost over liquid assets available, which would be refunded with interest out of the proceeds of liquidation. In all other cases, fees would be on percentage basis on realizations and distribution to stakeholders, as prescribed in the Regulations.


Powers and duties of the Liquidator -

Liquidator is required to oversee the entire process of liquidation, right from Liquidation order till dissolution of the CD. He has to take custody of all the assets, evaluate them properly and dispose them in a transparent manner keeping in mind the objectives of the Act. In the interim, he has to preserve and protect them. He has to invite Claims and verify them for consolidation. Thereafter, he may admit or reject the Claim. He has to defend any suit, prosecution, or other legal proceedings, civil or criminal, in the name and on behalf of the CD.

A creditor may appeal to the AA, Adjudicating Authority, against the decision of the liquidator accepting or rejecting the claims within fourteen days of the receipt of such decision.


Liquidator has the power to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Further, in case any clarification is required, AA’sdirection can be obtained.


In the process of Liquidation, CoC has no role. In Punjab National bank Vs Kiran Shah, Liquidator ORG Information Ltd, NCLAT held that after Liquidation order is passed, CoC has no role to play and they are merely Claimant. They cannot even seek replacement of the Liquidator in the absence of any such provision in law.


A Creditors Consultation Committee is required to be formed, but Liquidator is not bound by their advice. The liquidator shall have the power to consult any of the stakeholders entitled to a distribution of proceeds. Further, record of such consultation would be available to all stakeholders for the sake of transparency.


Liquidator also has the power to access any information systems(?) for the purpose of admission and proof of claims and identification of the assets relating to the CD corporate debtor from any source, such as information utility, credit information systems regulated under any law for the time being in force, any agency of the Central, State or Local Government including any registration authorities or a data bank maintained by the IBBI.

Reports: Liquidator shall prepare and submit

  1. A preliminary report within 75days of liquidation commencement date

  2. An asset memorandum

  3. Progress reports on quarterly basis

  4. Sale report

  5. Minutes of consultation with stakeholders

  6. The final report prior to dissolution to the AA adjudicating authority.

Liquidator is also required to maintain various Books and Registers for the entire process and preserve them for 8 years.


Liquidator should also get accounts completed and brought up to date, wherever they are found incomplete. He is also required to maintain a cash book and ledgers and various registers for assets, security, and investment. Further, the Liquidator is required to preserve physical and electronic copies of Reports and Books for 8 years after dissolution.


Liquidation Estate- All the assets of the CD shall form an estate of the assets, which will be called the Liquidation Estate in relation to the CD. The Liquidator shall hold the Liquidation Estate as a fiduciary for the benefit of all the creditors. The estate includes not only assets owned and in possession of CD, but also those not in possession. Assets listed in account books or with an information utility, should be traced and taken in control. These could be movable or immovable as well as securities and shares held in subsidiaries and joint ventures. Intangible assets like intellectual properties are also included.


However, assets of a third party in possession of theCorporate Debtor like those received in bailment (for example, received for fabrication) and all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund are not included.

Avoidable Transactions: The provisions relating to Preferential, Undervalued, Fraudulent and Extortionate transactions apply to Liquidation proceedings as they apply to Resolution proceedings.

The look back period for this is two years for related party and one year for others, preceding the date of liquidation order.


Based on an application of the Liquidator the Adjudicating Authority, may pass order restoring the property or consideration in lieu thereof given in such transactions back to Corporate Debtor. Undervalued and extortionate transactions could be avoided.

Revival- In Jindal Steel and Powers Ltd Vs Arun Kumar Jagatramka & Ors, and S C Sekaran Vs Amit Gupta & Ors, NCLAT held that even in liquidation proceeding, steps are required to be taken to revive and continue the CDby protecting it from its management. Liquidator should explore Compromise and organize an Arrangement with its Creditors under Sec 230 of Companies Act, 2013 and on failure, try and sell the business as a going concern. The last step is the death of CD by liquidation, which should be avoided. In Maharashtra Seamless Limited Vs. Padmanabhan Venkatesh & Ors, Hon’ble Supreme Court held that Resolution plan even below the Liquidation Value can be accepted by CoC as the Code prefers revival, and the commercial wisdom of CoC is not to be interfered with.


A period of 90 days is allowed for Compromise and Arrangements and the same is not included in the one-year period allowed for liquidation. Further, those not eligible to submit Resolution Plan, cannot be party to such Compromise or Arrangement either.


Distribution of Assets: Distribution of assets of CD in Liquidation is done as per provisions contained in the Code, popularly known as the Waterfall Mechanism. The order of priority in distribution of proceeds from liquidation estate is as follows -

  1. Liquidation costs paid in full; This includes Fee of Liquidator as well as costs incurred in engaging advisers, in protecting the assets, running the business, interest on interim finance etc.,

  2. Debts of the secured creditor where he opts to relinquish security, and dues of the workmen for 24 months immediately preceding commencement of liquidation shall rank equally. It is highlighted that a Secured Creditor has the option of either enforcing his security or leaving it to the Liquidator to realize and receive disbursement as per this mechanism.

  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: -

  6. 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;

  7. debts owed to a secured creditor for any amount unpaid following the enforcement of security interest

We may note that the lower priority of government dues is a big departure from prior legislations

f. Any other debts and dues;

g. Preference shareholders, if any; and

h. 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 amount distributed to the relevant recipient after such deduction.


Dissolution of Corporate Debtor -

Where the assets of the CD have been completely liquidated, the liquidator shall make an Application to the AA for the dissolution of such CD. Early dissolution can be applied any time after preliminary report is prepared, where it appears to the Liquidator that there are insufficient realizable assets to cover the Liquidation cost and no further investigation into affairs of CD is required.


Once order of dissolution is passed, the same is required to be filed with the authority where the CD, Corporate Debtor, is registered.


In case of Voluntary Liquidation, the conditions and procedural requirements are prescribed and somewhat different than general liquidation and would be dealt with in a separate Article.


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