Liquidation Process for Corporate Debtor under IBC

Liquidation Process for Corporate Debtor under IBC

• As per Insolvency and Bankruptcy Code read with Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (with amendments)
• Form E of Schedule II, provided by the corporate debtor, must be submitted in person, by mail, or electronically to the liquidator as proof of claim. In accordance with Regulations 17(1), 18(1), or 19(1), the liquidator must receive proof of claim in Form G of Schedule II in person, via mail, or electronically.

Following Liquidation Steps to be followed under the IBC

Step-I – Appointment of liquidator and consequences

Step-II – Announcement of Liquidation and Calling for Submission of Claims and Appointment of Valuers

Step-III

1. Verification and Acceptance of Claims
2. Preparation of Asset Memorandum and Other Reports

Step-IV– Formation of liquidation estate (With Inclusions and Exclusions)

Step-V – Sale of Assets

Step-VI – Distribution of Assets as per Waterfall

Step-VII – Dissolution of Corporate Debtor (to be completed within 1 year)

Step 1 : Appointment of Liquidator ( Section 34 )

• Resolution Professional appointed for the CIRP shall subject to submission of written consent to the NCLT, act as a liquidator for the purposes of liquidation unless replaced by the NCLT under Sec 34(4).
• The NCLT shall by order replace the Resolution Professional, if
  • Resolution Plan submitted by RP under Section 30 was rejected for failure to meet the mandatory requirements of resolution Plan As per Section 30(2)
  • IBBI recommends the replacement of a Resolution Professional to the NCLT for reasons to be recorded in writing and also propose a name of Insolvency Professional.
  • The RP fails to submit the written consent
• For the purposes of Sec 34(4)(a) & (c) the NCLT may direct IBBI to propose the name of another Insolvency Professional to be appointed as a liquidator and IBBI shall propose the name within 10 days along with the written consent of the Insolvency Professional.

Step II  A – Public Announcement of Liquidation

• As soon as the Adjudicating authority passes the liquidation order, liquidator is required to public announcement within 5 days of Liquidation order in Form B of Schedule II
• The public announcement shall-
  • Call upon stakeholders to submit their claims or update their claims submitted during the corporate insolvency resolution process, as on the liquidation commencement date; and
  • Provide the last date for submission or updation of claims, which shall be thirty days from the liquidation commencement date.

The announcement shall be published-

• In one English and one regional language newspaper with wide circulation at the location of the registered office and principal office, if any, of the corporate debtor and any other location where in the opinion of the liquidator, the corporate debtor conducts material business operations;
  • on the website, if any, of the corporate debtor; and
  • on-the website, if any, designated by the Board for this purpose

Step II  B- Claims Process in Liquidation

• 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
• A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility: Provided that where the  information relating to the claim is not recorded in the information utility, the financial creditor may submit the claim in the same manner provided for  the submission of claims for the operational creditor.
• An operational creditor may submit a claim to the liquidator with such supporting documents required to prove the claim as may be specified by  the Board.
• 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 as provided in sub-section (2) and to the extent of his  operational debt under sub-section (3).
• Creditor may withdraw or vary his claim under this section within fourteen days of its submission.
• The liquidator shall verify the claims submitted under section 38 within such time as specified by the Board (within thirty days from the last date for receipt of claims)
• 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
• After verification of claims the liquidator may, either admit or reject the claim, in whole or in part, as the case may be however he shall record in  writing the reasons for such rejection.
• 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.

Step IV : Reports to be prepared by Liquidator

• Asset Memorandum– To evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report.  (Within 75 Days) (SEC 35(1)(c) , Reg 5(1), Reg 34)

• Progress Report– To report the progress of the liquidation process in a manner as may be specified by the board.                                            (15 days from the end of each quarter) (SEC 35(1)(n))

• Preliminary Report- Report prepared in accordance with Regulation 13 (75 days) (Reg 2(1)(f) &13)

• First Progress report- The quarterly report prepared in accordance with Regulation 15     (15 days from the end of quarter of appointment (Reg 2(1)(g) &15)

• Subsequent Progress Report- In case IP ceases to act as a liquidator, then 15 days from the date of cessation.             (15 days from the end of every quarter (Reg 2(1)(g) &15) )

• Sale Reports- To be enclosed with Progress report after sale of each asset (Reg 5(1), Reg 36)
• Minutes of consultation with the stakeholders     (After every meeting (Reg 5(1), Reg 8)

• The Final Report prior to distribution,   (Within 1 Year (Reg 5(1), Reg 45) )

• Provide Copies of the reports and minutes to stakeholders in electronic or physical forms: on application from stakeholder; receipt of cost of making reports or minutes; receipt of confidentiality undertaking. (Reg 5(3))

Step V – Sale of Assets

• If a company goes into liquidation, all of its assets are distributed to its creditors based on a pre-determined priority order. Secured creditors are first in line, as their claims over assets are often secured by collateral and a contract.

Step VI – Distribution of Assets as per Waterfall

Amount available under a Resolution Plan or proceeds of sale of assets  of the liquidation estate  will be distributed in the  manner and in the priority  based on the value of  security Interest of each  creditor:

1. CIRP Cost and liquidation Cost (including any interim finance),
2. Secured debt together with workmen dues for the preceding 24 months rank highest in priority based on value of security interest of each creditor.
3. Employee dues for a period of12 months
4. Other unsecured financial creditors.
5. Central and state Government dues (2years)and remaining part  of secured debt, if any after  sale of mortgaged assets by  financial creditors
6. Any remaining debts and dues, dues of suppliers of goods or services, remaining dues of workmen, employees and Govt. authorities
7. Preferential shareholders
8. Equity shareholders or partners (in the case of LLP)

Step VII – Dissolution of Corporate Debtor (to be completed within 1 year)

• According to IBC provision : The liquidation process of any corporate debtor under IBC Code will have to be completed within 1 year of its commencement liquidation process within 1 year of its commencement, notwithstanding pendency of applications for avoidance transactions,

Distribution of Proceeds – Regulation 42.

• The liquidator shall distribute the proceeds from realization within 90 Days (earlier six months) from the receipt of the  amount to the stakeholders.

Proceed of Liquidation and Distribution of Proceeds Regulation 41 and Regulation 42.

• 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.
• 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.
• 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 (earlier six months) from the receipt of the amount to the stakeholders.
• Insolvency resolution process costs, if any, and the liquidation costs shall be  deducted before such distribution is made.

Distribution of Proceeds – Section 53

• 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 following order of priority and within such period as may be specified, namely: –
  1. the insolvency resolution process costs and the liquidation costs paid in full;
  2. 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;

1. 1. wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
   2. financial debts owed to unsecured creditors;
   3. the following dues shall rank equally between and among the following : –

1. 1. 1. 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;
      2. debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
         • any remaining debts and dues;
         • preference shareholders, if any; and
         • equity shareholders or partners, as the case may be.

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.

Step VIII – Dissolution Of CD under IBC

• When all of the corporate debtor’s assets have been liquidated, the liquidator must apply to the AA for the corporate debtor’s dissolution under Section 54 of the Code.
• If the liquidator believes there are not enough realisable assets to cover the cost of the liquidation and further inquiry into the affairs of the corporate debtor is not necessary, they may apply for an early dissolution under Regulation 14 of the Liquidation Regulations at any time after the preliminary report is prepared.
• Orders for dissolution must be filed with the appropriate authority where the corporate debtor is registered as soon as they are passed.

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