Answer By law4u team
When a company under Corporate Insolvency Resolution Process (CIRP) fails to find a resolution plan or the process exceeds the prescribed timelines (330 days), the company enters into liquidation. Liquidation is the process through which the corporate debtor’s assets are sold off to pay its outstanding liabilities. The liquidation process aims to maximize the value of assets and equitably distribute the proceeds to creditors based on their priority.
Steps Involved in the Liquidation Process under IBC
Order of Liquidation by NCLT
Once CIRP fails or exceeds the time limits without an approved resolution plan, the National Company Law Tribunal (NCLT) passes an order for liquidation under Section 33 of the Insolvency and Bankruptcy Code (IBC).
The Insolvency Professional (IP) who was managing the CIRP is appointed as the liquidator. If there was no IP previously, NCLT appoints a new liquidator.
Moratorium Lifts
Once liquidation is ordered, the moratorium (which protected the debtor from legal actions and recovery proceedings) ends. Creditors and other stakeholders are free to initiate their claims, and the company's assets can be sold.
Role of the Liquidator
The liquidator takes charge of the debtor's assets and operations. Their primary responsibility is to:
- Take control of the corporate debtor's property and assets.
- Identify and secure the debtor's assets.
- Conduct the sale of assets to maximize recovery.
- Ensure that the sale process is transparent and orderly.
- Prepare a list of creditors and their claims.
- Distribute the proceeds from the sale to the creditors based on the order of priority.
Liquidation Estate
The corporate debtor’s assets form the liquidation estate. These assets may include:
- Tangible assets (like machinery, buildings, land).
- Intangible assets (such as intellectual property).
- Any other claims or rights the debtor holds.
The liquidator is responsible for valuing and selling these assets.
Claims by Creditors
Creditors who have claims against the corporate debtor must submit their claims to the liquidator. These include both financial creditors (banks, investors) and operational creditors (suppliers, service providers).
The liquidator reviews the claims and determines the validity and amount of each claim.
Asset Sale
The liquidator conducts the sale of the debtor’s assets through a transparent bidding process.
The assets are sold either as a going concern or through an asset-by-asset sale, depending on the nature of the company and its assets.
The proceeds from the sale of the assets are used to repay the creditors.
Priority of Payment to Creditors in Liquidation
Under Section 53 of the IBC, the order of priority for payment to creditors during liquidation is clearly defined:
Costs of Liquidation
The first priority goes to the costs incurred during the liquidation process, including the fees of the liquidator, professional costs, and any other costs directly related to the liquidation.
Secured Creditors
Secured creditors (those who have a claim against specific assets, such as banks with mortgages or charges on assets) are next in line.
They can either:
- Enforce their security to recover their dues from the sale of the secured assets.
- If they choose not to enforce their security, they rank equally with unsecured creditors in terms of payment.
Wages and Other Employee Dues
Any unpaid wages, salaries, and other dues to employees are paid after secured creditors, but before other unsecured creditors.
Unsecured Creditors
Unsecured creditors (such as trade creditors or those without collateral backing) are next in line for payment after secured creditors and employees.
Operational creditors (suppliers, service providers) and financial creditors (banks, non-banking financial companies) both fall into this category.
Preference Shareholders
Any dues owed to preference shareholders are paid after unsecured creditors. However, in most cases, there may be insufficient funds left for this class of shareholders.
Equity Shareholders
Finally, the equity shareholders (owners of the company) receive payment, but this is typically after all creditors have been paid. In most cases, equity shareholders do not receive any payment, as the company's assets may be insufficient to cover its debts.
Example of Liquidation Process
XYZ Ltd.
Debt: XYZ Ltd. has total liabilities of ₹100 crore.
CIRP Failure: Despite multiple attempts, no resolution plan is approved within the 330-day limit.
NCLT Order: The NCLT orders liquidation of XYZ Ltd. under Section 33 of IBC.
Liquidator Appointment: A liquidator is appointed to manage the liquidation process.
Asset Sale: XYZ Ltd.’s assets (factories, machinery, intellectual property) are sold for ₹60 crore.
Payment to Creditors:
- Liquidation Costs: ₹5 crore is paid to cover the liquidation costs.
- Secured Creditors: ₹30 crore is paid to secured creditors.
- Employee Dues: ₹5 crore is paid to employees.
- Unsecured Creditors: ₹10 crore is paid to unsecured creditors.
- No Payment to Equity Shareholders: The remaining ₹10 crore is insufficient to pay the equity shareholders.
Conclusion
The liquidation process under the Insolvency and Bankruptcy Code (IBC), 2016 is a structured, step-by-step process that begins when the CIRP fails or when no resolution plan is approved. It involves the appointment of a liquidator, who oversees the sale of the company's assets to repay creditors in a prioritized order. The IBC ensures that the creditors receive fair treatment, but often, not all creditors are fully satisfied, especially in cases where the debtor's assets are insufficient to cover all liabilities.
