Note: To view Amended, Updated & Annotated Insolvency and Bankruptcy Code 2016 [as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021], refer to [14th Edition] of Taxmann's Insolvency & Bankruptcy Law Manual

1. Initiation of Liquidation

The first step is to make efforts to revive and restart the corporate person by preparing ‘resolution plan’. If that does not work, next process is liquidation i.e. extinction of corporate person.

1.1 When liquidation to be ordered by Adjudicating Authority

Revival or liquidation is required to be made in time bound manner. Hence, rigid time frame has been specified.

The Adjudicating Authority (NCLT) shall order liquidation of corporate person in following cases—

(a) Resolution plan required under section 30(6) of Insolvency Code, 2016 is not received before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 of Insolvency Code, 2016 or the fast track corporate insolvency resolution process under section 56 of Insolvency Code, 2016, as the case may be [section 33(1)(a) of Insolvency Code, 2016]

(b) Adjudicating Authority (NCLT) rejects the resolution plan under section 31 for the non-compliance of the requirements specified [section 33(1)(b) of Insolvency Code, 2016]

(c) Before approval of resolution plan, if resolution professional intimates to NCLT the decision of Committee of Creditors (CoC) approved by not less than sixty-six per cent of the voting share to liquidate the corporate debtor [section 33(2) of Insolvency Code, 2016].

(d) If resolution plan approved by Adjudicating Authority under section 31 or section 54L(1) of Insolvency Code, is contravened by corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order [section 33(3) of Insolvency Code, 2016]. [words in italics inserted by Ordinance w.e.f. 4-4-2021].

If adjudicating Authority determines that the corporate debtor has contravened the resolution plan, it shall pass liquidation order [section 33(4) of Insolvency Code, 2016].

1.2 Contents of liquidation order

The liquidation order shall contain the following—

(i) an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter III Part II of Insolvency Code, 2016

(ii) issue a public announcement stating that the corporate debtor is in liquidation; and

(iii) require such order to be sent to the authority with which the corporate debtor is registered. [Section 33(1) of Insolvency Code, 2016].

1.3 Effect of liquidation order

The liquidation order passed by Adjudicating Authority has effects as specified in section 33 of Insolvency Code.

1.4 Model time frame for completion of liquidation process

The liquidation process is expected to be completed within one year from commencement of liquidation process and appointment of liquidator. The model timeline for each activity has been specified in Regulation 47 of IBBI (Liquidation Process) Regulations, 2016 as inserted w.e.f. 25-7-2019.

Exclusion of period of lockdown due to Corona virus for counting period – Subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of computation of the timeline for any task that could not be completed due to such lockdown, in relation to any liquidation process Regulation 47A of IBBI (Liquidation Process) Regulations, 2016 as inserted w.e.f. 17-4-2020.

2. Appointment of Liquidator and his fees

After passing of an order for liquidation of the corporate debtor under section 33 of Insolvency Code, 2016 by Adjudicating Authority, the resolution professional appointed for the corporate insolvency resolution process under chapter II shall, subject to submission of a written consent by the resolution professional to the Adjudicatory Authority in specified form, act as the liquidator for the purposes of liquidation, unless replaced by the Adjudicating Authority under section 34(4) (discussed below) – section 34(1) of Insolvency Code, 2016.

Insolvency Professional shall be eligible to be appointed as a liquidator, if he and every partner or director of the insolvency professional entity is independent of corporate debtor. He should be eligible to be appointed as independent director of corporate debtor under section 149 of Companies Act, 2013. He should not have been employee or proprietor or partner of auditors, secretarial auditors or cost auditors of corporate debtor in last three financial years or legal or consulting firm of corporate debtor contributing to more than 10% of gross turnover of such firm in last three financial years – Regulation 3(1) of IBBI (Liquidation Process) Regulations, 2016.

The liquidator shall disclose any pecuniary or personal relationship with corporate debtor. He should not represent any other stakeholder in the same liquidation process.

All powers of company management vest with liquidator – On the appointment of a liquidator under this section, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the liquidator – section 34(2) of Insolvency Code, 2016.

The personnel of the corporate debtor shall extend all assistance and co-operation to the liquidator as may be required by him in managing the affairs of the corporate debtor. If they do not
co-operate, liquidator can apply to Adjudicating Authority for appropriate orders, like section 19 of Insolvency Code, 2016 – section 34(3) of Insolvency Code, 2016.

Fees of liquidation professional as liquidator – The liquidator shall charge fee for the conduct of the liquidation proceedings in proportion to the value of the liquidation estate assets. This will be specified by the Board (IBBI) – section 34(8) of Insolvency Code, 2016.

Fees of liquidator shall be fixed by Committee of Creditors (CoC) before a liquidation order is passed under section 33(1)(a) or 33(2) of Insolvency Code, 2016.

2.1 Public announcement of appointment of liquidator

Once Liquidator is appointed, he shall make public announcement in form B of Schedule II of IBBI (Liquidation Process) Regulations, 2016, within seven days. The public announcement shall be in newspaper, website of corporate debtor and website of IBBI. The public announcement shall call upon stakeholders to submit their claims within 30 days from liquidation commencement date – Regulation 12 of IBBI (Liquidation Process) Regulations, 2016.

“Liquidation commencement date” means the date on which proceedings for liquidation commence in accordance with section 33 or section 59 of Insolvency Code, 2016, as the case may be – Section 5(17) of Insolvency Code, 2016.

2.2 Reporting by Liquidator

The Liquidator shall prepare and submit preliminary report, asset memorandum, progress report/s, sale reports, minutes of consultation with stakeholders and final report to adjudicating authority.

3. Powers and duties of Liquidator

The liquidator will work under overall directions of the Adjudicating Authority. He will have the powers and duties as specified in section 35(1) of Insolvency Code, 2016.

Liquidator cannot sale property to ineligible resolution applicant – The liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant – proviso to section 35(1)(f) of Insolvency Code.

Who is ‘ineligible resolution applicant’ has been specified in section 29A of Insolvency Code.

3.1 Consultation with stakeholders

The liquidator shall have the power to consult any of the stakeholders entitled to a distribution of proceeds under section 53 of Insolvency Code, 2016. However, such consultation shall not be binding on the liquidator. The records of any such consultation shall be made available to all other stakeholders not so consulted, in a manner specified by the Board (IBBI) – section 35(2) of Insolvency Code, 2016.

3.2 Disclaimer of onerous property or contract

Onerous property can be any of following – (a) land of any tenure, burdened with onerous covenants (b) shares or stocks in companies (partly paid – though these words are not used) (c) any other property which is not saleable or is not readily saleable by reason of the possess or thereof being bound either to the performance of any onerous act or to the payment of any sum of money; or (d) unprofitable contracts – Regulation 10(1) of IBBI (Liquidation Process) Regulations, 2016.

In such case, the Liquidator shall apply to the Adjudicating Authority within six months from the liquidation commencement date, or such extended period as may be allowed by the Adjudicating Authority, to disclaim the property or contract.

3.3 Recovery of monies due by Liquidator

The liquidator shall endeavour to recover and realize all assets of and dues to the corporate debtor in a time-bound manner for maximization of value for the stakeholders – Regulation 39 of IBBI (Liquidation Process) Regulations, 2016.

4. Liquidation Estate

The liquidation estate shall comprise all liquidation estate assets as specified in section 36(3) of Insolvency Code, except those specified in section 36(4) of Insolvency Code, 2016.

4.1 Liquidator to form a liquidation estate

The liquidator shall form an estate of the assets mentioned in section 36(3) of Insolvency Code, 2016. These will be for the purposes of liquidation. These which will be called the ‘liquidation estate’ in relation to the corporate debtor – section 36(1) of Insolvency Code, 2016.

The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors – section 36(2) of Insolvency Code, 2016.

4.2 Valuation of assets intended to be sold

Where the valuation has been conducted under regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 or regulation 34 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017, as the case may be, the liquidator shall consider the average of the estimates of the values arrived under those provisions for the purposes of valuations under these regulations – Regulation 35(1) of IBBI (Liquidation Process) Regulations, 2016.

4.3 Asset Sale Report

Asset Sale Report shall be prepared as specified in Regulation 36 of IBBI (Liquidation Process) Regulations, 2016.

5. Realization of security interest by secured creditor

Provisions are contained in Regulation 37 of IBBI (Liquidation Process) Regulations, 2016.

Provision not applicable if sale under SARFAESI Act or RDB Act – The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993. Thus, in that case, Liquidator does not come into picture at all – Regulation 37(7) of IBBI (Liquidation Process) Regulations, 2016.

Secured creditor not to sale asset to person who is not eligible to submit a resolution plan – The secured creditor shall not sale or transfer asset, which is subject to security interest, to person who is not eligible to submit a resolution plan – Regulation 37(8) of IBBI (Liquidation Process) Regulations, 2016, inserted w.e.f. 6-1-2020.

6. Distribution of unsold assets

The liquidator may, with the permission of the Adjudicating Authority, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances.

The application seeking permission of the Adjudicating Authority shall be with specified details – Regulation 38 of IBBI (Liquidation Process) Regulations, 2016.

7. Liabilities of contributory in liquidation

“Contributory” means a member of a company, partner of a limited liability partnership, and any other person liable to contribute towards the assets of the corporate person in the event of its liquidation – Regulation 2(1)(b) of IBBI (Voluntary Liquidation Process) Regulations, 2017.

“Contributory” means a person liable to contribute towards
the assets of the company in the event of its being wound up.

Explanation. – For the purposes of this clause, it is hereby clarified that a person holding fully paid-up shares in a company shall be considered as a contributory but shall have no liabilities of a contributory under the Act whilst retaining rights of such a contributory [section 2(26) of Companies Act, 2013]

NCLT has powers to settle list of such contributories as are liable to contribute to assets of the company. While making the list, NCLT has powers to rectify the register of members, if required – section 285(1) of Companies Act, 2013.

7.1 Liability of Present Members

Present members are called ‘List A’ Contributories. A present member has liability to contribute to assets of the company in case of winding up, in following cases and to following extent :

(a) The contribution is limited maximum upto amount unpaid on his shares – section 285(3)(d) of Companies Act, 2013.

(b) In case of company limited by guarantee, contribution required will be maximum upto amount guaranteed. However, if the company limited by guarantee has share capital, the liability of member will be to the extent of any sum unpaid on any shares held by him, as if the company were a company limited by shares – Section 285(3)(e) of Companies Act, 2013.

7.2 Liability of Past Members

These are called ‘List B’ Contributories. A past member has liability to contribute to assets of the company in case of winding up, as provided in section 285(3) of Companies Act, 2013.

7.3 Rights of contributories can be adjusted by NCLT

NCLT can adjust rights of contributories among themselves and distribute surplus (if any) among persons entitled thereto.

NCLT can adjust rights of contributories among themselves and distribute any surplus among them – section 297 of Companies Act, 2013.

The distribution of surplus, if any, will be on pro rata basis, as per provisions of memorandum and articles of the company.

8. Liquidator has powers to access information

The liquidator shall have the power to access any information systems for the purpose of admission and proof of claims and identification of the liquidation estate assets relating to the corporate debtor from the specified sources. These powers are overriding powers, irrespective of provisions in any other law [section 37(1) of Insolvency Code, 2016]

9. Creditors can ask for information from liquidator

The creditors may require the liquidator to provide them any financial information relating to the corporate debtor in specified manner – section 37(2) of Insolvency Code, 2016.

The liquidator shall provide information to such creditors within a period of seven days or provide reasons for not providing such information.

10. Ascertaining claims against corporate debtor

The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process – section 38(1) of Insolvency Code, 2016.

A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility. However, where the information relating to the claim is not recorded in the information utility, the financial creditor may submit claim with supporting documents to prove the claim – section 38(2) of Insolvency Code, 2016.

An operational creditor may submit a claim to the liquidator in manner, along with supporting documents required to prove the claim as may be specified by the Board (IBBI) – section 38(3) of Insolvency Code, 2016.

A creditor who is partly a financial creditor and partly an operational creditor shall submit claims to the liquidator to the extent of his financial debt in the manner provided in section 38(2) and to the extent of his operational debt under section 38(3) of Insolvency Code.

10.1 Submission of proof of claims to Liquidator

Proof of claims shall be submitted to Liquidator as follows—

(a) Operational Creditor – Operational Creditor shall submit proof of claims electronically in Form C of Schedule II as contained in IBBI (Liquidation Process) Regulations, 2016, with details specified in Regulation 17.

(b) Financial Creditor – Financial Creditor shall submit proof of claims electronically in Form D of Schedule II as contained in IBBI (Liquidation Process) Regulations, 2016, with details specified in Regulation 18.

(c) Workmen and employees – Workmen and employees shall submit proof of claims by post or electronically in Form E of Schedule II as contained in IBBI (Liquidation Process) Regulations, 2016, with details specified in Regulation 19.

An authorized representative may submit a consolidated proof of claim for all such dues in Form F of Schedule II of IBBI (Liquidation Process) Regulations, 2016.

Liquidator can himself submit the claim on basis of books of account, even if workman or employee has not made a claim.

(d) Other stakeholders – Other stakeholders shall submit claims in person, by post or electronically in Form G of Schedule II of IBBI (Liquidation Process) Regulations, 2016.

10.2 Verification of claims by liquidator

The liquidator shall verify the claims submitted under section 38 within the time as specified by the Board (IBBI). The liquidator may require any creditor or the corporate debtor or any other person to produce any other document or evidence which he thinks necessary for the purpose of verifying the whole or any part of the claim – section 39 of Insolvency Code, 2016.

10.3 Admission or rejection of claims by liquidator

The liquidator may, after verification of claims, either admit or reject the claim, in whole or in part. If the liquidator rejects a claim, he shall record in writing the reasons for such rejection – section 40(1) of Insolvency Code, 2016.

The liquidator shall communicate his decision of admission or rejection of claims to the creditor and corporate debtor within seven days of such admission or rejection of claims – section 40(2) of Insolvency Code, 2016.

11. Avoidance of preferential transactions by liquidator

The corporate debtor is of course aware that order of liquidation is possible. Hence, he may give preference to some transactions where he may be interested.

12. Avoidance of undervalued transactions

The liquidator or the resolution professional may find that certain preferential transactions as specified in section 45(2) were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction – section 45(1) of Insolvency Code, 2016.

The undervalued transaction can be avoided only if (i) such transaction was made with any person within the period of one year preceding the insolvency commencement date or (ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date – section 46(2) of Insolvency Code, 2016.

The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions.

13. Action if corporate debtor had defrauded creditors

If Adjudicating Authority is satisfied that undervalued transaction was deliberately entered into by corporate debtor – (a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor, or (b) in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority can pass any of following orders – (i) restoring the position as it existed before such transaction as if the transaction had not been entered into and (ii) protecting the interests of persons who are victims of such transactions – section 49(1) of Insolvency Code, 2016.

14. Protection to corporate debtor against extortionate credit transactions

When a corporate debtor is in difficulties, he is forced to obtain credit at abnormally high rates and on unfair terms. This is extortion of corporate debtor.

If the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor – section 50(1) of Insolvency Code, 2016.

15. Position of secured creditor in liquidation proceedings

A secured creditor in the liquidation proceedings may—(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53or (b) realise its security interest in the manner specified in this section – section 52(1) of Insolvency Code, 2016.

If the secured creditor intends to realise security interest under section 52(1)(b) of Insolvency Code, 2016, he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

15.1 Distribution of amount realised by secured creditor

If the secured creditor realises an amount by way of proceeds which is in excess of the debts due to him, the secured creditor shall—(a) account to the liquidator for such surplus and (b) tender to the liquidator any surplus funds received from the enforcement of such secured assets.

The amount of insolvency resolution process costs, due from secured creditors who realise their security interests shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate – section 52(8) of Insolvency Code, 2016.

If the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in section 53(1)(e) of Insolvency Code, 2016.

16. Voluntary liquidation by corporates with no default

A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under Chapter V Part II of Insolvency Code, 2016 – section 59(1) of Insolvency Code, 2016.

Though the word used is ‘corporate person’, in many subsequent sections, the provisions refer only to ‘company’.

Company can also liquidate voluntarily if fixed period or event was specified in Articles of company for its dissolution.

16.1 Procedure for Voluntary Liquidation

Company should first prepare declaration from majority of the directors of the company verified by an affidavit stating that— (i) they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and (ii) the company is not being liquidated to defraud any person – section 59(3)(a) of Insolvency Code, 2016.

Special resolution after declaration – Within four weeks of a declaration, there shall be— (i) a special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or (ii) a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:

Approval of creditors if company owes debt – If the company owes any debt to any person, creditors representing two-thirds in value of the debt of the company shall approve the resolution passed under sub-clause (c) within seven days of such resolution – proviso to section 53(3) of Insolvency Code, 2016.

16.2 Application to NCLT after assets wound up

After the affairs of the corporate person have been completely wound up, and its assets completely liquidated, the liquidator shall make an application to the Adjudicating Authority (NCLT) for the dissolution of company.

The Adjudicating Authority shall then pass an order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly – section 59(8) of Insolvency Code, 2016.

A copy of an order of Adjudicating Authority shall be filed with ROC within fourteen days from the date of such order – section 59(9) of Insolvency Code, 2016.

16.3 Procedure for voluntary liquidation

The procedure has been prescribed in Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017.

16.4 Completion of liquidation

The liquidator shall endeavour to complete the liquidation process of the corporate person within twelve months from the liquidation commencement date Regulation 37(1) of IBBI (Voluntary Liqui-dation Process) Regulations, 2017.

If he is unable to do it, he is required to hold meeting of contributors. he is also required to file Annual Status Report.

Final Report – On completion of the liquidation process, the liquidator shall prepare the Final Report giving details as specified in regulation 38.

The liquidator shall send the Final Report forthwith, to the Registrar and the Board.

The liquidator shall submit the Final Report to the Adjudicating Authority along with the application under section 59(7) Regulation 38(3) of IBBI (Voluntary Liquidation Process) Regulations, 2017.

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The statutory material is obtained only from the authorized and reliable sources
All the latest developments in the judicial and legislative fields are covered
Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
Every content published by Taxmann is complete, accurate and lucid
All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
The golden rules of grammar, style and consistency are thoroughly followed
Font and size that's easy to read and remain consistent across all imprint and digital publications are applied

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