Liquidation Process
Proceeds of Liquidation and Distribution of Proceeds
Proceeds of Liquidation, Distribution of Proceeds and Dissolution of corporate debtor under Sec. 41, 53 & 54 of IBC
I. All money to be paid in to bank account [LP Reg. 41]
- The liquidator shall open a bank account in the name of the corporate debtor followed by the words ‘in liquidation’, in a scheduled bank, for the receipt of all moneys due to the corporate debtor.
- The liquidator shall deposit in the bank account opened under sub-regulation (1) all moneys, including cheques and demand drafts received by him as the liquidator of the corporate debtor, and the realizations of each day shall be deposited into the bank account without any deduction not later than the next working day.
- The liquidator may maintain a cash of one lakh rupees or such higher amount as may be permitted by the Adjudicating Authority to meet liquidation costs.
- All payments out of the account by the liquidator above five thousand rupees shall be made by cheques drawn or online banking transactions against the bank account.
II. Distribution of assets [Sec. 53]
1. Non–obstante Clause [Sec. 53(1)]
Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the order of priority under section 53 and within such period and in such manner as may be specified.
2. Order of priority [Sec. 53(1)]
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following :—
(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
Whether the provident fund, pension fund and gratuity fund come within the meaning of assets of the ‘Corporate Debtor’ for distribution under Section 53 of the Code-NCLAT
NCLAT in the matter of State Bank of India Vs. Moser Baer Karamchari Union & Anr. 113(IBC)19/2019 held that n terms of sub-section (4) (a) (iii) of Section 36, as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/ liquidation assets of the ‘Corporate Debtor’, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1), does not arise. The ‘workmen’s dues’ is mentioned in clause (b)(i) of Section 53(1), which are the dues for the period of twenty-four months preceding the liquidation commencement date. In view of the aforesaid specific provisions, the Explanation (iii) below Section 53, for the purpose of meaning of ‘workmen’s dues’, the Appellant cannot derive the meaning as assigned to it in Section 326 of the Companies Act, 2013, including the Explanation below it. There is a difference between the distribution of assets and preference/ priority of workmen’s dues as mentioned under Section 53(1)(b) of the ‘I&B Code’ and Section 326(1)(a) of the Companies Act, 2013. It has also been noticed that Section 53(1)(b)(i) which relates to distribution of assets, workmen’s dues is confined to a period of twenty-four months preceding the liquidation commencement date.
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following:—
(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
NCLAT in the matter of Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar 98(IBC)67/2020 held that in a case, where no fund is created by a company, in violation of the Statutory provision of the Payment of Gratuity Act, 1972, then the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate.
3. contractual arrangements [Sec. 53(1)]
Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.
4. liquidator’s fee [Sec. 53(3)]
The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
Explanation.—For the purpose of this section—
(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and
(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.
5. Time limit of distribution [LP Reg.-42]
- Subject to the provisions of section 53, the liquidator shall not commence distribution before the list of stakeholders and the asset memorandum has been filed with the Adjudicating Authority.
- The liquidator shall distribute the proceeds from realization within 90 days from the receipt of the amount to the stakeholders.
- The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made.
6. Return of money [LP Reg.-43]
A stakeholder shall forthwith return any monies received by him in distribution, which he was not entitled to at the time of distribution, or subsequently became not entitled to.
7. Completion of liquidation [LP Reg.-44]
i. Time limit of liquidation process
The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the Adjudicating Authority or any action thereof. Where the sale is attempted under sub-regulation (1) of regulation 32A, the liquidation process may take an additional period up to 90 days.
ii. Extension of the time limit of liquidation process
If the liquidator fails to liquidate the corporate debtor within one year, he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been completed and specifying the additional time that shall be required for liquidation.
8. Final report prior to dissolution [LP Reg.-45]
- When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.
- If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.
- The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for –
(a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or
(b) for the dissolution of the corporate debtor, in cases not covered under clause (a).
9. Corporate Liquidation Account [LP Reg.-46]
(1) The Board shall operate and maintain an Account to be called the Corporate Liquidation Account in the Public Accounts of India:
Provided that until the Corporate Liquidation Account is operated as part of the Public Accounts of India, the Board shall open a separate bank account with a scheduled bank for the purposes of this regulation.
(2) A liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon till the date of deposit into the Corporate Liquidation Account before he submits an application under sub-regulation (3) of regulation 45.
(3) A liquidator, who holds any amount of unclaimed dividends or undistributed proceeds in a liquidation process on the date of commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020, shall deposit the same within fifteen days of the date of such commencement, along with any income earned thereon till the date of deposit.
(4) A liquidator, who fails to deposit any amount into the Corporate Liquidation Account under this regulation, shall deposit the same along with interest thereon at the rate of twelve percent per annum from the due date of deposit till the date of deposit.
(5) A liquidator shall submit to the authority with which the corporate debtor is registered and the Board, the evidence of deposit of the amount into the Corporate Liquidation Account under this regulation, and a statement in Form-I setting forth the nature of the amount deposited into the Corporate Liquidation Account, and the names and last known addresses of the stakeholders entitled to receive the unclaimed dividends or undistributed proceeds.
(6) The liquidator shall be entitled to a receipt from the Board for any amount deposited into the Corporate Liquidation Account under this regulation.
(7) A stakeholder, who claims to be entitled to any amount deposited into the Corporate Liquidation Account, may apply to the Board in Form J for an order for withdrawal of the amount:
Provided that if any other person other than the stakeholder claims to be entitled to any amount deposited into the Corporate Liquidation Account, he shall submit evidence to satisfy the Board that he is so entitled.
(8) The Board may, if satisfied that the stakeholder or any other person referred to under sub-regulation (7) is entitled to withdrawal of any amount from the Corporate Liquidation Account, make an order for the same in favour of that stakeholder or that other person.
(9) The Board shall maintain a corporate debtor-wise ledger of the amount deposited into and the amount withdrawn from the Corporate Liquidation Account under this regulation.
(10) The Board shall nominate an officer of the level of Executive Director of the Board as the custodian of the Corporate Liquidation Account and no proceeds shall be withdrawn without his approval.
(11) The Board shall maintain proper accounts of the Corporate Liquidation Account and get the same audited annually.
(12) The audit report along with the statement of accounts of the Corporate Liquidation Account referred to in subregulation (11) shall be placed before the Governing Board and shall be forwarded to the Central Government.
(13) Any amount deposited into the Corporate Liquidation Account in pursuance of this regulation, which remains unclaimed or undistributed for a period of fifteen years from the date of order of dissolution of the corporate debtor and any amount of income or interest received or earned in the Corporate Liquidation Account shall be transferred to the Consolidated Fund of India.]
III. Dissolution of corporate debtor [Sec. 54]
- Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.
- The Adjudicating Authority shall on application filed by the liquidator order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
- A copy of the dissolution order shall within 7 days from the date of such order, be forwarded to the authority with which the corporate debtor is registered.
Principal debtor has gone into liquidation would not have any effect on the liability of the guarantor
The Supreme Court in Maharashtra State Electricity Board Bombay v. Official Liquidator High Court, Ernakulum and Anr. 1982 Volume 3 Supreme Court Cases page 358 has held that, a discharge which the principal debtor may secure by operation of law in bankruptcy or in liquidation proceedings in the case of a company does not absolve the surety of his liability. In such case, the Supreme Court has considered the interplay of sections 128 and 134 of the Act of 1872. In the facts of that case, a company in respect of which a bank issued a guarantee in favour of the Electricity Board, went into liquidation. The Supreme Court has held that, the fact that the company which is the principal debtor has gone into liquidation would not have any effect on the liability of the guarantor.
Section 54 of IBC and Section 302 of the Companies Act, 2013
Section 54 of the Code says that once the affairs of Corporate Debtor were wound up and its assets were wholly Liquidated, the Liquidator shall make an application before an Adjudicating Authority for ‘Dissolution of the Corporate Debtor’. In fact Section 54 of the Code is similar to Section 302 of the Companies Act, which deals with ‘Dissolution of a Company’. Section 290 of the Companies Act, 2013 has a provision like that of Section 35 of the I&B Code, which specifies the power of Liquidator in an exclusive manner i.e. the Liquidator shall exercise his power subject to the Directions of the Tribunal. As per Section 36 (3) of the Code, Liquidator estate include both tangible and intangible assets. A Liquidator has only sale power of a Liquidation estate as seen from the I&B Code, 2016.
