Liquidation of a company means the end of the existence of a company. In easy words “Liquidation” means the end of a company mentioned under the Insolvency and Bankruptcy Code, 2016. This usually occurs when a company fails to repay its loan to its entities. The main motive of the Insolvency and Bankruptcy Code 2016 is to help companies and prevent them from going through the process of liquidation. Then the process of Liquidation is carried out by an Adjourning Authority. The main purpose of “Liquidation” is the distribution of assets of the company according to priority to the stakeholders under the process known as “Water Mechanism”.
What is Liquidation?
Liquidation is not primarily mentioned under the Insolvency and Bankruptcy Code, 2016, But it is the process of wind up of a company and ends its existence when it is not able to repay its loan to its entities. Then the process of Liquidation is initiated under the superior vision of the Adjourning Authority and further distribution of assets of the company to its stakeholders according to priority>
Under what Circumstances does Liquidation take place:
The start of the liquidation process is governed by Section 33 of the Code. The following events may lead to the liquidation of a corporate debtor:
If the Adjudicating Authority does not receive a resolution plan for the corporate debtor before the IBC’s maximum time limit for completing the resolution process expires.
If the Adjudicating Authority does not receive a resolution plan for the corporate debtor before the IBC’s maximum time restriction for completing the resolution process expires, the resolution procedure will be terminated.
If the resolution professional advises the Adjudicating Authority, before the approval of the resolution plan, that the committee of creditors has agreed to liquidate the corporate debtor by at least 66% of the voting share.
If the corporate debtor or any other individual whose interests are adversely affected violates the Adjudicating Authority’s approved resolution plan.
Appointment and duties of Adjourning Authority;
After a liquidation decision is made under Article 33 of the Bankruptcy Law, a bankruptcy specialist appointed for corporate bankruptcy proceedings will be liquidated subject to the written consent of the bankruptcy specialist in a certain form to the legal authorities. The purpose of is replaced unless done by the judiciary following Section 34 (4) of the Code.
Some of the liquidators’ main missions are:
Check all creditors’ claims.
Manage or manage all assets, assets, effects, and enforceable claims of corporate debtors. -Evaluate the assets and assets of the corporate debtor and prepare a report by the method decided by the board of directors.
For liquidation, the liquidator forms a pool of assets. This is called the clearing pool concerning the debtor of the company . The liquidator holds the liquidated assets in trust for the benefit of all creditors. Article 38 of the Act stipulates that the liquidator may receive or collect the creditor’s claim within 30 days from the start date of the liquidation procedure, and the creditor may make the claim within 14 days under this section. .. Withdraw or modify the template.
Priority during Distribution of Assets;
Section 53 of the Code establishes a ranking of creditors that determines the order in which outstanding debt is repaid. That is:
IRP and clearing costs. 2.
Worker taxation (24 months) and secured taxation if security is waived.
Contribution of 4,444 employees (12 months).
Unsecured financial creditors;
5. Government dues, and unpaid dues to a secured creditor, if the security has been realized
Remaining debts and dues (which include, unsecured operational debts);
Preference shareholders; 8. Equity shareholders.
If the creditor’s committee decides to liquidate the company’s assets, there are two ways for secured creditors. You can complete the resolution process and force collateral to recover the debt. Alternatively, you can participate in the payment process and waive all rights to the collateral. In the latter option, the secured creditor takes precedence over all but the obligations owed to the worker. Another unique feature of this Code is that government taxation is a low priority, whereas the 2013 Companies Act pays with employees and unsecured financial creditors.
Currently, they are paid according to secured creditors, unsecured creditors, employees, and workers. This undoubtedly sets out the business-first principle that guides the norm of not actively participating in the business of commercial enterprises, considering the government only as an intermediary and regulator. This is a positive move, as authorities have unparalleled resources to collect membership fees and do not need to consider the bankruptcy process, especially in the early stages.
Conclusion and Suggestion:
The legislative intent behind the enactment of the IBC was to rehabilitate and rejuvenate corporate debtors so that they could do their own thing. The clearing process is not a replacement for the windup process, it is only a last resort if the windup process fails for some reason. In addition, Hon’ble NCLAT and the Apex Court have repeatedly confirmed that even if the liquidator goes through a liquidation process, the liquidator must attempt to revive and continue the business of the debtor.
In the case of the Swiss Ribbon, the Supreme Court ruled that:
Interestingly, the preamble does not mention clearing. The submitted up plan does not correspond to the grade. Even in the case of liquidation, the bankruptcy trustee can sell the business of the corporate debtor as a continuing company. For this reason, the main focus of the law is to ensure the resurrection and continuity of corporate debtors by protecting them from their operations and protecting them from the death of the company due to clearing. I understand this. Liquidation should only be used as a last resort and every effort should be made to revitalize the company.
Ayachit, M. (2021, April 12). Liquidation under the Insolvency and Bankruptcy Code, 2016 with a special focus upon the priority of claims. Retrieved from leaders: https://blog.ipleaders.in/liquidation-insolvency-bankruptcy-code-2016-special-focus-upon-priority-claims/
(2016). Insolvency and Bankruptcy Code, 2016a. New Delhi: Indian goverment.
Shekhar, R. (2020, September 29). Liquidation Process Under The Insolvency And Bankruptcy Code, 2016 – An Overview. Retrieved from MONDAQ: https://www.mondaq.com/india/insolvencybankruptcy/987994/liquidation-process-under-the-insolvency-and-bankruptcy-code-2016–an-overview
Singh, A. (n.d.). Liquidation Process And Asset Distribution Under IBC. Retrieved from legalservicesindia: Liquidation Process Under The Insolvency And Bankruptcy Code, 2016 – An Overview