Answer By law4u team
Liquidation under the Insolvency and Bankruptcy Code (IBC) is the process of winding up the affairs of a corporate debtor when its insolvency resolution fails or is not possible. It involves selling off the debtor’s assets to repay creditors in an orderly manner. Understanding when liquidation commences under the IBC is critical for stakeholders to know their rights and the procedural timeline.
When Does Liquidation Commence Under the IBC?
Failure of Insolvency Resolution Process:
Liquidation commences when the Committee of Creditors (CoC) fails to approve a resolution plan within the stipulated 180 days (extendable by 90 days) from the date of admission of the insolvency petition. If no viable plan is approved by this deadline, the resolution process is deemed to have failed.
Order by the National Company Law Tribunal (NCLT):
Upon failure to approve a resolution plan, the resolution professional files an application with the NCLT for commencement of liquidation. The NCLT then passes an order to initiate liquidation proceedings.
Liquidation Commencement Date (LCD):
The date on which the NCLT orders liquidation is called the Liquidation Commencement Date. From this date, the moratorium imposed during the resolution phase continues to be in effect, prohibiting institution of suits or continuation of pending suits against the corporate debtor.
Trigger by Default and Admission:
Liquidation process is triggered after the initial default is admitted under the IBC (default must be ₹1 lakh or more) and insolvency proceedings begin. If resolution fails, liquidation follows.
Voluntary Liquidation:
Apart from the above, liquidation can also commence voluntarily if the corporate debtor opts for it under specific provisions of the IBC, generally when it is solvent but chooses to wind up.
Key Legal Procedures During Commencement:
- Appointment of a Liquidator: The resolution professional or another registered insolvency professional is appointed as the liquidator to manage asset sale and distribution.
- Public Announcement: The liquidator announces the commencement of liquidation inviting claims from creditors.
- Moratorium Continuation: No legal proceedings against the debtor’s assets can proceed without permission from the NCLT.
Common Misconceptions:
- Liquidation does not start immediately after default; it starts only after failed resolution attempts.
- The moratorium protects the debtor’s assets from being seized outside the liquidation process.
- Liquidation is not the first step; it is the last resort when resolution fails.
Example:
Suppose a manufacturing company defaults on loan repayments of ₹5 crores, and a creditor files an insolvency petition under the IBC. The insolvency resolution process is admitted by the NCLT, and the Committee of Creditors tries to approve a resolution plan. After 180 days, no plan receives the required votes. The resolution professional files an application for liquidation, and the NCLT orders liquidation on May 1st, 2025. This date becomes the Liquidation Commencement Date, and from then, the liquidator manages asset sale to repay creditors.
