According to the Insolvency and Bankruptcy Code (IBC), 2016, a Corporation or Limited Liability Partnership (LLP) that is unable to continue operating because of financial difficulties may be wound up through a structured process known as liquidation. This procedure is started when the corporate debtor cannot pay back its debts and the Corporate Insolvency Resolution Process (CIRP) does not have a workable resolution plan.

The National firm Law Tribunal (NCLT) receives an application to start the liquidation process under IBC, which can be started by the firm or its creditors. After accepting the application, the NCLT designates a liquidator who will oversee the company’s assets and operations while safeguarding the interests of all parties involved, including shareholders, workers, and creditors.

Controlling the company’s assets, selling them, and allocating the money in priority order—paying secured creditors first, then unsecured creditors, employees, and shareholders—is the liquidator’s job. Though extensions are conceivable, the procedure is intended to be time-bound and usually finished in a year. If a resolution plan is approved, the IBC also permits the corporation to be revived. In an effort to stop additional financial harm, this liquidation process under IBC guarantees openness, safeguards stakeholders and offers a legal framework for resolving troubled businesses.

What Is the Liquidation Process Under IBC

The term “liquidation” is not defined under the IBC. Liquidation, however, generally refers to the process of dissolving or winding up the corporate debtor. When a corporate debtor is dissolved or wound up, it indicates it will either stop existing or shut down entirely. According to the IBC, when a corporate debtor is unable to pay its debts and continue operating its business as usual, the liquidation process under the IBC begins. Under the IBC, liquidation falls into two primary categories: 

Compulsory Liquidation under IBC: Following a failed settlement process, a corporation is declared insolvent by the National Corporation Law Tribunal (NCLT). If it determines that the corporate debtor has committed a default, the tribunal has the authority to order liquidation.

Voluntary Liquidation process under IBC: A solvent business that chooses to shut down and is able to settle all of its debts may choose to go through voluntary liquidation. For this to happen, the shareholders must pass a resolution.

The liquidation Process under IBC is given under Section 33 of IBC which is as follows:

  • Assigning a liquidator- A liquidator will be chosen to oversee the corporate debtor’s activities and carry out the liquidation process under IBC after it has begun. The Resolution Professional (RP) assigned to oversee the bankruptcy resolution procedure is typically also hired to carry out the liquidation process under IBC. The eligibility requirements for an insolvency practitioner to be appointed as a liquidator are listed in Regulation 3 of the Liquidation Regulations.

Section 35 of the IBC specifies the liquidator’s responsibilities and authority. Verification of the claims made by the creditors, assessment of the corporate debtor’s assets, doing business on behalf of the corporate debtor, taking possession of the corporate debtor’s assets, etc. are all included.

  • The liquidator’s public declaration- Within five days after the appointment, the liquidator must publish a public statement in Form B of Schedule II of the Liquidation Regulations. The format for a public notification is specified in Schedule II, Form B. The public announcement’s objective is to request that creditors and other relevant parties submit their claims about the corporate debtor.
  • Verification and consolidation of claims- Within 30 days of the liquidation process under IBC starting, the corporate debtor’s creditors must submit their claims. The liquidator will review the claims that the creditors have filed after receiving them. For the purpose of verification, the liquidators may also request that the creditors provide any supporting documentation for their claims.
  • Acceptance, rejection, and evaluation of the valuation of claims- A liquidator has the authority to accept or deny the claims based on their verification. The liquidator must notify both the corporate debtor and the creditor within seven days after making a decision about the acceptance or rejection of a creditor’s claim.

Following the liquidation’s admission of all necessary claims, the liquidator must assess the claims’ worth in order to allocate the corporate debtor’s assets.

  • The time limit for the liquidation process under IBC- Regulation 47 of the Liquidation Regulations specifies the model timeline for the liquidation process under IBC, which states that the liquidation proceedings must be finished within a year of the date of liquidation. This is in contrast to the resolution process’s extendable time limit of 330 days.
  • Corporate debtor dissolution- The Adjudicating Authority will dissolve the corporate debtor upon the liquidator’s application, following the distribution of the liquidator’s assets according to the priority of claims.
  • Appeal against the liquidator- In accordance with Section 42 of the IBC, a creditor who feels wronged by the liquidator’s decision may appeal to the Adjudicating Authority within fourteen days of the creditor being informed of the decision.

 

Cases Concerning Liquidation Process Under IBC

  1. Section 14 of the Insolvency and Bankruptcy Code (IBC) was used by the National Company Law Tribunal (NCLT) Kolkata Bench to order the company’s liquidation in the Gujarat NRE Coke Limited case. 

The company, a significant producer of metallurgical coke, declared a loss of ₹676 crore in the 2016–17 and owing lenders over ₹4,600 crore. The Resolution Professional (RP), Sumit Binani, was named the liquidator by the NCLT. With a reserve price equal to the entire debt amount, including interest, the tribunal ordered the liquidator to try to liquidate the corporate debtor as a going concern. Within three months after the order date, this sale was to be finalized. This case demonstrates the NCLT’s dedication to maintaining sustainable business operations and protecting jobs even in the midst of liquidation process under IBC. The tribunal sought to minimize the negative impacts on workers and other stakeholders while optimizing value for creditors by directing the sale of the business as a continuing concern.

  1. According to the Delhi High Court’s ruling in re IndorRama Textile Limited ((2013) 4 CompLJ 141 (Del)), a firm is considered to be transferred as a going concern provided the assets and liabilities involved in the transfer represent a commercial activity that may be operated independently for a reasonable amount of time. 
  2. In Allahabad Bank v. ARC Holding (AIR 2000 SC 3098) (“Allahabad Bank Case”), the Supreme Court ruled that if the business is sold off as a continuing concern, all liabilities related to the enterprise or business are also transferred together with the company’s assets. 
  3. According to the ruling in Jayaprakash Shyamsundar Mandare v. Laxminarayan Murlidhar (AIR 1983 Bom 364), a business can only be auctioned off as a going concern if it is still operating.
  4. In IAE International Aero Engines AG and Ors. vs. United Breweries (Holdings) Limited and Ors (ILR 2017 KARNATAKA 2225), the Karnataka High Court noted that a business cannot be auctioned off as a going concern if it has already ceased operations.

 

Conclusion

The concept of liquidation process under IBC, as a going concern aims to strike a balance between insolvency and bankruptcy law processes that aren’t practical due to a number of factors, including the company’s business (if it’s in the public sector), the number of employees or workers employed by the corporate debtor, and the company’s current going concern nature, either fully or partially. Creditors, employees, and the community at large are all affected by these elements, which have a cascading influence on the business operation. As a third arm of possibilities in the event of a default, it is evident that this method is rarely employed and only in extreme cases.

 

Why Choose MAHESHWARI & CO. for This Service?

At MAHESHWARI & CO., we specialize in providing legal and advisory services for the liquidation process under IBC. With an experienced team of insolvency professionals and legal experts, we ensure a seamless and efficient process from start to finish. Our client-focused approach, coupled with a deep understanding of IBC’s intricacies, allows us to safeguard the interests of all stakeholders—creditors, employees, and shareholders. Choose us for personalized solutions, strategic insights, and a commitment to achieving optimal outcomes for your business needs.

 

FAQs Related to the Liquidation Process Under IBC

  1. What triggers the liquidation process under IBC?

The process begins when a corporate debtor fails to repay its debts and no viable resolution plan is approved during the Corporate Insolvency Resolution Process (CIRP).

  1. How long does the liquidation process under IBC take?

Regulation 47 mandates that the process should be completed within one year, although extensions may be granted under specific circumstances.

  1. Who can initiate the liquidation process under IBC?

The process can be initiated by the corporate debtor, creditors, or the National Company Law Tribunal (NCLT).

  1. What happens to the assets of a company during liquidation?

A liquidator is appointed to manage and sell the assets, distributing proceeds in a priority order to creditors, employees, and shareholders.

  1. Can a company be revived after entering the liquidation process under IBC?

Yes, if a resolution plan is approved by the NCLT, the corporate debtor can be revived and continue operations.