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MODULE 3

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-

Ø 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.

Ø 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.

Ø 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

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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.

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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.

Formation of Consolidation of Verification of
Liquidation Claims Claims

Estate

Admission or Determination of Distribution of
Rejection of Valuation of proceeds from
Claims liquidated assets
Claims

Dissolution of 3
Corporate
Debtor

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. However, the
IBC is not yet notified for Individuals and Partnership Firms under The Partnership
Act.

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.

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Appointment of Resolution Professional

Once the application is filed, the Adjudicating Authority, also known as National
Company Law Tribunal (NCLT) under the Code, directs the Board to nominate a
resolution professional for appointment. If the application is filed through a
resolution professional, the NCLT 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 NCLT recommending either approval or rejection of the application following
which the NCLT 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 NCLT 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 NCLT
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

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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 NCLT.

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 NCLT, which may ask to reconvene a meeting of creditors so as
to modify the repayment plan. The NCLT may also reject the repayment plan
following which the debtor and the creditors would be eligible to file a bankruptcy
order.

In case, the NCLT approves the repayment plan, it becomes binding on the debtor
as well as the creditors.

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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
NCLT, for a discharge order in relation to the debts mentioned in the payment
plan. The NCLT 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.

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