IBC_Module 6

LIQUIDATION PROCESS

The process of liquidation can be understood in a simple way. In this situation the
assets of the debtors are sold off in order to recover the money. This is then
distributed off as workmen’s dues, debts to secured creditors, wages and unpaid dues
to employees other than workmen, debts to unsecured creditors, and any other debts
owed to the Central and State Governments or shareholders and partners, in that
order.

As per Section 33 of the Insolvency and Bankruptcy Code, 2016, the liquidation
process may be initiated in three different scenarios. They are-

➢ When the Adjudicating Authority either does not receive a resolution plan

within the stipulated time period of 180 days (at most 270 days if an extension
is awarded) or if it rejects the received resolution plan citing non-compliance
with specified requirements under Section 31.

➢ If the committee of creditors decide to liquidate the corporate debtor, and such

decision is intimated to the Adjudicating Authority, at any time during the
resolution process before confirmation of resolution plan, by the resolution
professional.

➢ If the corporate debtor acts contrary to the provisions of the resolution plan. In

which case any person, other than the corporate debtor, whose interests are
adversely affected as a result of the act may apply for a liquidation order from
the Adjudicating Authority. In the absence of such application, the
Adjudicating Authority may, by itself, determine the existence of such
contravention by the corporate debtor, and pass a liquidation order.

In the event of either of these scenarios, the Adjudicating Authority first passes an
order requiring the corporate debtor to be liquidated. A public order stating that
the corporate debtor is in liquidation is also passed, and the authority with which
the corporate debtor is registered is notified of such order.
Following, initiation of liquidation, a liquidator is appointed to whom all powers
of the board of directors, key managerial personnel and the partners of the
corporate debtor are transferred.
The liquidator then follows such key steps as follows, towards the completion of
the liquidation process.

• Formation of liquidation estate including, but not limited to, all tangible
and intangible assets owned by the debtor. This estate of assets, as created
for the purpose of liquidation, is held as a fiduciary for the benefit of all
creditors.

• Consolidation of claims of creditors received or collected by the
liquidator within 30 days from the commencement of liquidation process.
Such claims may also be withdrawn or changed by a creditor within 14
days of its submission.

• Verification of claims in the time period stipulated by the Adjudicating
Authority.

• Admission or rejection of claims either wholly or partially by the
liquidator, and the information of such admission or rejection
communicated to both the creditor and corporate debtor within a period of
7 days. In case of a rejection, the reasons for the decision must be recorded
in writing by the liquidator. A creditor may also appeal the liquidator’s
rejection of his claim within 14 days of receiving said decision.

• Determination of valuation of claims by the liquidator.

• Distribution of proceeds from the sale of liquidation assets amongst
creditors after proportionate deduction of resolution process and
liquidation costs.

• Dissolution of corporate debtor following the complete liquidation of his
assets. The Adjudicating Authority passes the order for the corporate
debtor to be dissolved on application by the liquidator and a copy of the
order forwarded to the authority with which the corporate debtor is
registered within seven days of the date of such order.

The corporate debtor is thus dissolved and the liquidation process completed.

Timeline of Rectification of Defects

It has been held in the case of JK Jute Mills v. M/s Surendra Trading that the period
of 14 days prescribed for Adjudicating Authority to pass such an order is directory
while the period of one week given to applicant or operational creditor for rectifying
defects in the application is mandatory. It has been held by the supreme court that in
the event the defects are not removed within seven days, the applicant should file an
application in writing showing sufficient ground as to why the objections could not be
removed in that particular time.

Insolvency Resolution for Individuals and Unlimited Partnerships

In case of individuals and unlimited partnerships, the Code only applies in cases
where the minimum amount of default is INR 1000. It is to be noted that this amount
may be upwardly revised by the Central Government at any later point in time
provided that the revised value does not exceed INR 100000.

Initiation of Insolvency Resolution Process

One of the two processes that Insolvency and Bankruptcy Code, 2016 allows for in
case of insolvencies is insolvency resolution.

In case of individuals and unlimited partnerships, the application to initiate
insolvency resolution process may be filed either by the debtor, or by the creditor.
When the debtor is a partner of a firm, he may not apply for insolvency resolution on
behalf of the firm, unless all or a majority of the partners of the firm file the
application jointly.

Similarly, a creditor may make an application individually or jointly with other
creditors, for initiation of insolvency resolution process against any one or more
partners of a firm, or the firm itself. Either the debtor or the creditor may also file an
application through a resolution professional.

Interim Moratorium

A period of stay on pending legal proceedings as well as prevention of initiation of
fresh legal action by creditors against the debtor, as is relevant to his debts,
commences on the date of filing of application and ceases on the day the application
thus filed is admitted. In case the application made is relevant to a firm,

this period (termed as interim moratorium) operates against all partners of the firm as
on the date of the application.

Appointment of Resolution Professional

Once the application is filed, the Debt Recovery Tribunal directs the Board to
nominate a resolution professional for appointment. If the application is filed through

a resolution professional, the DRT directs the Board to confirm that there are no
disciplinary proceedings against the resolution professional. The Board, in turn,
confirms the appointment of the resolution professional, or rejects the appointment
and appoints another insolvency resolution professional for the process.

Admission/Rejection of Application
Within 10 days of appointment, the resolution professional examines the application
for initiation of insolvency resolution process and submits his report to the DRT
recommending either approval or rejection of the application following which the
DRT may admit or reject the application within 14 days of the date of submission of
report. In case the application is rejected on the grounds of debtor’s intent to defraud
either his creditors or insolvency resolution professional, the creditor is entitled to file
for a bankruptcy order.
Where the application is admitted under Section 100, the DRT may issue instructions
towards constructing a repayment plan which would be binding on both creditors and
debtors. A period of moratorium hence commences from the date of admission of the
application, and ceases to have effect on expiry of a period of 180 days from the date
that the application is admitted, or on the date the DRT passes an order on the
repayment plan (whichever is earlier).
Repayment Plan
After the application is admitted, a public notice inviting claims from creditors within
21 days is issued following which the insolvency resolution professional registers
claims of the creditors and thereafter prepares a list of creditors within thirty days
from issuance of the notice.
In order to suitably clear his debts and dues, the debtor then, in consultation with the
resolution professional, prepares a repayment plan containing a proposal for the
creditors for restructuring of his debts and affairs. The resolution professional further
submits a report on the repayment plan to the Debt Recovery Tribunal.

Meeting of Creditors and Voting Rights
A meeting of creditors is required to be summoned in order to approve the payment
plan. The resolution professional sends the notice summoning such a meeting to the
list of creditors prepared under Section 104. In this meeting, the creditors decide

whether to approve, modify, or reject the repayment plan. Modifications require the
consent of the debtor.
Furthermore, the resolution professional assigns voting shares to each creditor. All
creditors can vote with respect to the repayment plan in accordance with their
assigned shares unless said creditor is not included in the list of creditors prepared, or
is an associate of the debtor, or is voting in respect of a debt of unliquidated amount.

Approval of Repayment Plan
The repayment plan, or any modification to it, is said to be approved only when it is
voted for by a majority of more than 75% in value of the creditors present in person or
by proxy and voting on the resolution in a meeting of the creditors.
A report on the repayment plan thus approved is then filed by the resolution
professional to the DRT, which may ask to reconvene a meeting of creditors so as to
modify the repayment plan. The DRT may also reject the repayment plan following
which the debtor and the creditors would be eligible to file a bankruptcy order.
In case, the DRT approves the repayment plan, it becomes binding on the debtor as
well as the creditors.

Implementation and Completion of Repayment Plan
The implementation of the repayment plan is supervised by the insolvency resolution
professional.
On completion of the repayment plan, the resolution professional applies to the DRT
for a discharge order in relation to the debts mentioned in the payment plan. The DRT
may pass such discharge order allowing either an early discharge or discharge on
complete implementation of the payment plan.
Thus, the repayment plan may also prematurely end with creditors remaining whose
claims have not been fully satisfied and who will, then, be eligible to file for a
bankruptcy order, or it may end after the plan has been completely implemented and
the insolvency resolved.