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How liquidation process is initiated as per Insolvency and Bankruptcy Code, 2016?

How liquidation process is initiated as per Insolvency and Bankruptcy Code, 2016?

When a company goes into liquidation its assets are sold to repay the creditors and business closes down. The liquidation process in India is governed by Insolvency and Bankruptcy Code, 2016. The liquidation process in India is initiated by filing an application as per the terms and requirement by IBC, 2016. Once the order is approved and given by the Adjudicating Authority, the company will start with the liquidation process. Section 33 deals with initiation of liquidation, where the Adjucating Authority passes an order requiring the corporate debtor to be liquidated, issue a public announcement by stating that the corporate debtor is under liquidation & such an order is to be sent to the Adjudicating Authority with which the corporate debtor is registered.  The order for liquidation under Section 33 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.  What are the steps in the liquidation process?  STEP 1 - Appointment of Liquidator. Section 34 of IBC,2016 deals with the appointment of liquidator. The Resolution Professional who was appointed for the resolution process shall act as liquidator in insolvency process until and unless certain order is passed regarding the same. All the powers of the board, directors, creditors, and partners of corporate debtors shall be vested in liquidator on the appointment by adjudicating authority All the debtors shall give assistance and cooperation to the liquidator to manage the affairs of the corporate debtor. Liquidator fees are governed as per the Regulation 4 of the IBBI Regulation, 2016 and Section 35 of IBC,2016 deals with the powers and duties of liquidators, such as:

  1. Verify, evaluate, protect and have custody of the estate and properties that belong to corporate debtors.
  2. Sell any moveable and immovable properties and claims as he thinks fit and can draw, accept, endorse any negotiable instruments.
  3. Institute or defend any legal proceedings initiated by or against the corporate debtor.
  4. Investigate the financial matters and can take actions, steps, sign, execute and verify any paper, documents involved in the matter.
  5. Perform all the functions as specified and governed by the board. 

Step 2- Public announcement of liquidation and calling for claims and appointment of valuer. After the order is given, public announcement is to be made within 5 days after commencement date and calling for submission of claims as per Schedule II of IBBI. The liquidator shall receive or collect the claims of creditors within a period of 30 days from the date of the commencement of the liquidation process as per Section 38 (1) of IBC,2016. Appointment of registered valuers to value the assets to be appointed within 7 days from the liquidation commencement date. Step 3- (a)      verification and acceptance of claims- Section 39, 40 of IBC,2016 deals with the verification and acceptance of the claims, the liquidator shall verify the claims as per Section 38 and can claim any document or paper from the debtors and creditors.  As per Section 38, the liquidator shall receive or collect the claims within 30 days from the date of commencement of the liquidation process. As per Section 39, the liquidator shall verify the claims submitted within a period of 30 days from the date of commencement of liquidation process. The liquidator may, after verification of claims, either admit or reject the claim, in whole or in part, as per Section 40. The liquidator has to communicate about the acceptance of the claims within 7 days from the last day of admission/rejection of claims. Further, beyond 30 days the liquidator has no power to admit the same. Appeal is to be filed within 14 days of such decision by liquidator as per Section 42 of IBC,2016. Section 42 deals with Appeal against the decision of liquidator. A creditor may appeal to the Adjudicating Authority against the decision of the liquidator, by accepting or rejecting the claims. As per Section 41, the liquidator shall determine the value of claims admitted under section 40 in such manner as may be specified by the Board. (b)      Preparation of assets memorandum and other reports. The liquidator shall prepare and submit Preliminary Report, Annual Status Report, Minutes of consultations with stakeholder, Final Report. The as sets memorandum shall be made and submitted within 75 days from liquidation order and shall contain the valuations of assets as per the valuation reports and sale reports if made. Similarly, preliminary reports are to be submitted within 75 days from liquidation commencement date containing capital structure and estimates assets and liabilities as per the books of accounts. First progress reports and subsequent progress reports gives the settled list of stakeholders, details of properties that are to be sold, distribution made to the stakeholders, details of fees and remuneration, details of litigation, expenses of litigation. On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of audited accounts of the liquidation, showing receipts and payments pertaining to liquidation since the liquidation commencement date, a sale statement in respect of value of asset, mode and manner sale of asset, the liquidator shall send the report to the Registrar, Board and Adjudicating Authority. Step 4- formation of liquidation asset. The next stage is formation of liquidation assets owned by corporate debtor. This includes all the properties on which corporate debtor has ownership rights, moveable and immovable, tangible goods, intangible goods, assets in respect of which security interest has been relinquished by secured creditor, assets on which ownership is determined by the court or authority. Basically, the liquidator forms and accounts the liquidation assets which are taken into consideration. Step 5- secured creditor in liquidation proceedings. The secured creditor in liquidation proceedings may relinquish its security interest to the liquidation asset and receive proceeds from the sale of assets, realize its security interest as per Section 52 of IBC,2016, inform the liquidator of its security interest and identify assets subject to such interest. Secured creditors can enforce, settle, compromise or deal with secured assets in accordance with law. Amount of insolvency resolution cost due from the secured creditors shall be deducted from sale proceeds generated from sale of secured assets. Where the money secured is accessed it should be informed to the liquidator, if money received is less than the debts due than the creditor is to approach the liquidator for the remaining due amount.  Step 6 - sale of liquidation assets Sale of Assets is to be done as per Schedule I of the IBBI (Liquidation Process) Regulations, 2016. The sale can also be held in the form of an auction. The liquidator may value and sell the assets of the corporate person in the manner and mode approved by the corporate person in compliance with provisions, if any, in the applicable statute. Step 7 - distribution of assets as per waterfall under Section 53 of IBC,2016. The proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, by Section 53:

  • Insolvency resolution process and liquidation cost paid in full
  • Secured creditors which are relinquished and workmen dues (upto 24 months)
  • Other employees dues (upto 12 months)
  • Financial debts of unsecured creditors
  • Government dues (2 years) and remaining debts and dues
  • Preference shareholders, if any
  • Equity shareholders or partners

It is stated that the distribution of the assets shall not commence until and unless a list of stakeholders and asset memorandum has been filed before the Authority. It shall be distributed within 6 months when the receipt is received from the stakeholders. The liquidator may, with the approval of the corporate person, distribute amongst the stakeholders, an asset that cannot be readily or advantageously sold due to its peculiar nature or other special circumstances. Step 8 - dissolution of corporate debtor. (to be completed within 1 year from the liquidation commencement date) Section 54 of IBC,2016 deals with the dissolution of corporate debtors. It states that when the liquidation is completed, and assets are distributed then liquidator has to file an application for dissolution of corporate debtor before the adjudicating authority. The adjudicating authority is to issue an order regarding the same for the dissolution of corporate debtors from the date when order was given and will be dissolved accordingly. Within 7 days the copy of the order is to be given to the authority with which the corporate debtor is registered. This is the liquidation process initiated as per Insolvency & Bankruptcy Code, 2016. The liquidation process is also regulated in accordance with Insolvency and Bankruptcy Board of India Regulations, 2016.

 

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