Initiation of Liquidation under Sec. 33 of Insolvency and Bankruptcy Code 2016 (IBC)

Liquidation Process
Initiation of Liquidation

Initiation of Liquidation under Section 33 of IBC

I. Initiation of Liquidation [Sec. 33]

1. Liquidation Order [Sec. 33(1), (2), (3) & (4)]

The Adjudicating Authority shall pass a liquidation order requiring the corporate debtor to be liquidated in the manner as laid down in Chapter-III:

1. If the Resolution plan is not submitted to Adjudicating Authority under section 30(6) before the expiry of the CIRP period or the maximum period permitted for completion of the CIRP under section 12 or the fast track CIRP under section 56, as the case may be or

2. Resolution is rejected by Adjudicating Authority under section 31 for the non-compliance of the requirements specified therein or

3. Where the resolution professional, at any time during the CIRP but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than 66% of the voting share to liquidate the corporate debtor.

Note: The committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under section 21(1) and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

4. Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned 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. On receipt of an application, if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order.

The Adjudicating Authority shall issue a public announcement stating that the corporate debtor is in liquidation. It shall require the liquidation order to be sent to the authority with which the corporate debtor is registered.

NCLAT in the matter of Punjab National Bank Vs. Mr. Kiran Shah Liquidator of ORG Informatics Ltd. 16(IBC)16/2020 held that after the liquidation the Committee of Creditors has no role to play and they are simply a claimant whose matters are to be determined by the Liquidator and cannot move an application for removal of Liquidator in absence of any provisions under the law.

2. No suit or other legal proceeding shall be instituted by or against the corporate debtor [Sec. 33(5) & (6)]

When a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor. However, a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority. It shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

3. Deemed Notice of discharge to the employees [Sec. 33(7)]

The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

 

II. Contributions to liquidation costs[Reg.-2A]

What is liquidation cost:

As per Section 5(16) liquidation cost means any cost incurred by the liquidator during the period of liquidation subject to such regulations, as may be specified by the Board. The Board defined the liquidation cost under Liquidation Process Regulation 2(ea), liquidation cost means-

(i) fee payable to the liquidator under regulation 4;

(ii) remuneration payable by the liquidator under sub-regulation (1) of regulation 7;

(iii) costs incurred by the liquidator under sub-regulation (2) of regulation 24;

(iv) costs incurred by the liquidator for preserving and protecting the assets, properties, effects and actionable claims, including secured assets, of the corporate debtor;

(v) costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern;

(vi) interest on interim finance for a period of twelve months or for the period from the liquidation commencement date till repayment of interim finance, whichever is lower;

(vii) the amount repayable to contributories under sub-regulation (3) of regulation 2A;

(viii) any other cost incurred by the liquidator which is essential for completing the liquidation process:

Provided that the cost, if any, incurred by the liquidator in relation to compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013), if any, shall not form part of liquidation cost.

2. Where the committee of creditors did not approve a plan under sub-regulations (3) of regulation 39B of the CIRP Regulations, 2016, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, as estimated by him, in proportion to the financial debts owed to them by the corporate debtor.

Illustration

Assume that the excess of liquidation costs over liquid assets is Rs.10, as estimated by the liquidator. Financial creditors will be called upon to contribute, as under:

Sl. No. Financial creditors Amount of debt due to financial creditors (Rs.) Amount to be contributed towards liquidation cost (Rs.)
(1) (2) (3) (4)
1 Financial institution A 40 04
2 Financial institution B 60 06
3 Non-financial institution A 50 00
4 Non-financial institution B 50 00
TOTAL 200 10

 

3. The contributions made under the plan approved under sub-regulation (3) of regulation 39B of the CIRP Regulations, 2016 or contributions made under regulation 2A, as the case may be, shall be deposited in a designated escrow account to be opened and maintained in a scheduled bank, within 7 days of the passing of the liquidation order. The amount contributed shall be repayable with interest at bank rate referred to in section 49 of the Reserve Bank of India Act, 1934 as part of liquidation cost.

 

III. Compromise or arrangement

NCLAT in S.C. Sekaran Vs. Amit Gupta & Ors. [2019] ibclaw.in 02 NCLAT held that in view of the provision of Section 230 and the decision of the Hon’ble Supreme Court in ‘Meghal Homes Pvt. Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. – (2007) 7 SCC 753’ and ‘Swiss Ribbons Pvt. Ltd.’, we direct the ‘Liquidator’ to proceed in accordance with law. He will verify claims of all the creditors; take into custody and control of all the assets, property, effects and actionable claims of the ‘corporate debtor’, carry on the business of the ‘corporate debtor’ for its beneficial liquidation etc. as prescribed under Section 35 of the I&B Code. The Liquidator will access information under Section 33 and will consolidate the claim under Section 38 and after verification of claim in terms of Section 39 will either admit or reject the claim, as required under Section 40. Before taking steps to sell the assets of the ‘corporate debtor(s)’ (companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets wholly and thereafter, if not possible to sell the company in part and in accordance with law. The ‘Liquidator’ if initiates, will complete the process under Section 230 of the Companies Act within 90 days. For the purpose of counting the period of liquidation, the pendency of the appeal(s) preferred by the ‘Eight Finance Pvt. Ltd.’ that is from 12th July, 2018 and till date should be excluded.

NCLAT in the matter of Y. Shivram Prasad Vs. S. Dhanapal & Ors. defined that during the liquidation process, following steps required to be taken for its revival and continuance of the Corporate Debtor by protecting the Corporate Debtor from its management and from a death by liquidation:

i. By compromise or arrangement with the creditors, or class of creditors or members or class of members in terms of Section 230 of the Companies Act, 2013.

ii. On failure, the liquidator is required to take step to sell the business of the ‘Corporate Debtor’ as going concern in its totality along with the employees.

The last stage will be death of the ‘Corporate Debtor’ by liquidation, which should be avoided.

Further NCLAT answered the question whether Adjudicating Authority (NCLT) have power to play duel role, one as the Adjudicating Authority in the matter of liquidation and other as a Tribunal for passing order under Section 230 of the Companies Act, 2013 that during proceeding under Section 230, if any, objection is raised, it is open to the Adjudicating Authority (NCLT) which has power to pass order under Section 230 to overrule the objections, if the arrangement and scheme is beneficial for revival of the Corporate Debtor (Company). While passing such order, the Adjudicating Authority is to play dual role, one as the Adjudicating Authority in the matter of liquidation and other as a Tribunal for passing order under Section 230 of the Companies Act, 2013. As the liquidation so taken up under the Code, the arrangement of scheme should be in consonance with the statement and object of the Code. Meaning thereby, the scheme must ensure maximisation of the assets of the Corporate Debtor and balance the stakeholders such as, the Financial Creditors, Operational Creditors, Secured Creditors and Unsecured Creditors without any discrimination. Before approval of an arrangement or Scheme, the Adjudicating Authority (NCLT) should follow the same principle and should allow the Liquidator to constitute a Committee of Creditors for its opinion to find out whether the arrangement of Scheme is viable, feasible and having appropriate financial matrix. It will be open for the Adjudicating Authority as a Tribunal to approve the arrangement or Scheme in spite of some irrelevant objections as may be raised by one or other creditor or member keeping in mind the object of the Insolvency and Bankruptcy Code, 2016.

 

1. Completion Time Limit [LP Reg. 2B]

Where a compromise or arrangement is proposed under section 230 of the Companies Act, 2013, it shall be completed within 90 days of the order of liquidation under sub-sections (1) and (4) of section 33. The time taken on compromise or arrangement, not exceeding 90 days, shall not be included in the liquidation period.

2. Ineligibility [LP Reg. 2B]

A person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.

The Promoter, if ineligible u/s 29A cannot make an application for Compromise & Arrangement u/s 230 of the Companies Act, 2013 for taking back the immovable and movable property or actionable claims of the Corporate Debtor:

NCLAT in Jindal Steel and Power Limited Vs. Arun Kumar Jagatramka [2019] ibclaw.in 04 NCLAT held that as noticed, the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. – Writ Petition (Civil) No.99 of 2019 held that the ‘primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation’. The aforesaid judgment makes it clear that even during the period of Liquidation, for the purpose of Section 230 to 232 of the Companies Act, the Corporate Debto’ is to be saved from its own management, meaning thereby the Promoters, who are ineligible under Section 29A, are not entitled to file application for Compromise and Arrangement in their favour under Section 230 to 232 of the Companies Act. Proviso to Section 35(f) prohibits the Liquidator to 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. From the provision of section 35, it is clear that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the ‘Corporate Debtor’.

3. Compromise or Arrangement Cost [LP Reg. 2B]

Any cost incurred by the liquidator in relation to compromise or arrangement shall be borne by the corporate debtor, where such compromise or arrangement is sanctioned by the Tribunal under sub-section (6) of section 230 of the Companies Act, 2013. However, such cost shall be borne by the parties who proposed compromise or arrangement, where such compromise or arrangement is not sanctioned by the Tribunal under sub-section (6) of section 230 of the Companies Act, 2013.

 

 

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