Chapter 24 Liquidation on or after Failing of Resolution Plan – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.
Liquidation on or after Failing of Resolution Plan – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material
Question 1.
The Resolution Professional has reported cases of undervalued transactions during resolution process to the Adjudicating Authority. What orders can be passed by the Adjudicating Authority in this regard? (Dec 2019, 5 marks)
Answer:
Section 48 of the Insolvency and Bankruptcy Code, 2016 lists out the orders that may be passed by the Adjudicating Authority setting aside the transaction at undervalue. According to Section 48, the order of the Adjudicating Authority under sub-section (1) of Section 45 of the Code may provide for the following:
(a) require any property transferred as part of the transaction, to be vested in the corporate debtor;
(b) release or discharge (in whole or in part) any security interest granted by the corporate debtor;
(c) require any person to pay such sums, in respect of benefits received by such person, to the liquidator or the resolution professional as the case may be, as the Adjudicating Authority may direct; or
(d) require the payment of such consideration for the transaction as may be determined by an independent expert.
Question 2.
You are the liquidator of ABC Ltd. which is currently undergoing liquidation process. As a liquidator, indicate how you will handle the priority of claims for distribution of liquidation proceeds of ABC Ltd. as enumerated in the Insolvency and Bankruptcy Code, 2016. (Dec 2019, 5 marks)
Answer:
Section 53 of the Insolvency and Bankruptcy Code, 2016 has significantly altered the priority of claims for distribution of liquidation proceeds of a corporate debtor. The priority of claims as enumerated in the Insolvency and Bankruptcy Code, 2016 provides for payment to unsecured financial creditors before payment towards Government dues.
Section 53(1) of the Code stipulates that the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority:
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and debts owed to a secured creditor;
(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) Government dues and remaining secured creditors (any remaining debt if they enforce their collateral);
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
Question 3.
From the following details, determine the order of priority payment out of the realization of liquidation estate assets :
(i) Financial debts owed to unsecured creditors;
(ii) Wages and any unpaid dues owed to employees other than workmen for 24 months preceding the liquidation commencement date,
(iii) Liquidator’s remuneration,
(iv) Debts owed to a secured creditor who has relinquished the security,
(v) Preference shareholders. (Dec 2021, 5 marks)
Answer:
As per Sections 53 of the Insolvency and Bankruptcy Code, 2016, the proceeds from the sale of the liquidation assets shall be distributed in the order of priority and within such period as specified thereunder. Accordingly, in the present question, the Order of priority payment is given as under:
- Liquidator’s remuneration;
- Debts owed to a secured creditor who has relinquished the security;
- Wages and any unpaid dues owed to employees other than workmen for 24 months preceding the liquidation commencement date;
- Financial debts owed to unsecured creditors;
- Preference shareholders.
Question 4.
As a liquidator of Corporate Debtor, how will you gather information for the purpose of admission & proof of claims and identification of the liquidation estate assets. (Dec 2021, 5 marks)
Answer:
Section 37(1) of the Insolvency and Bankruptcy Code, 2016 provides that notwithstanding anything contained in any other law for the time being in force, the liquidator shall have the power to access any information systems for the purpose of admission and proof of claims and identification of the liquidation estate assets relating to the corporate debtor from the following sources:
- an information utility;
- credit information systems regulated under any law for the time being in force;
- any agency of the Central, State or Local Government including any registration authorities;
- information systems for financial and non-financial liabilities regulated under any law for the time being in force;
- information systems for securities and assets posted as security interest regulated under any law for the time being in force;
- any database maintained by the Board; and
- any other source as may be specified by the Board.
Question 5.
During the course of liquidation the liquidator noticed that some preferential transactions were made with some persons. What do you understand by preferential transactions ? State the orders that may be passed by the Adjudicating Authority in relation to the avoidance of preferential transactions. (June 2022, 5 marks)
Question 6.
What are the Powers and Duties of Liquidator?
Answer:
- to verify claims of all the creditors
- to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor
- to evaluate the assets and property of the corporate debtor
- to take such measures to protect and preserve the assets and properties of the corporate debtor
- to carry on the business of the corporate debtor for its beneficial liquidation
- to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract
- to draw, accept, make and endorse any negotiable instruments on behalf of the corporate debtor
- to obtain any professional assistance from any person or appoint any professional
- to invite and settle claims of creditors
- to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of on behalf of the corporate debtor
- to investigate the financial affairs of the corporate debtor
- to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument and for such purpose to use the common seal, if any, as may be necessary for liquidation, distribution of assets and in discharge of his duties and obligations and functions as liquidator – to apply to the Adjudicating Authority for such orders or directions as may be necessary
Question 7.
What does Liquidation Estate comprise of?
Answer:
The liquidation estate shall comprise all liquidation estate assets which shall include the following:
- any assets over which the corporate debtor has ownership rights
- assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets
- tangible assets, whether movable or immovable
- intangible assets
- assets subject to the determination of ownership by the court or authority
- any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter
- any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest
- any other property belonging to or vested in the corporate debtor at the insolvency commencement date
- all proceeds of liquidation as and when they are realized
Question 8.
What shall not be included in the liquidation estate assets?
Answer:
- Assets owned by a third party which are in possession of the corporate debtor, including:
- assets held in trust for any third party
- bailment contracts
- all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund
- other contractual arrangements which do not stipulate transfer of title but only use of the assets
- assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;
- personal assets of any shareholder or partner of a corporate debtor as the case may be
- assets of any Indian or foreign subsidiary of the corporate debtor; or
Question 9.
Explain the provisions related to “Liquidation Estate”?
Answer:
- The Section 36 provides for the creation of a liquidation estate comprising the assets of the corporate debtor as set out in section 36(3).
- Section 36 also lists out the assets which are to be excluded from the liquidation estate.
- The Central Government has been given the power to notify assets, in consultation with the appropriate financial sector regulators, which will be excluded from the estate in the interest of efficient functioning of the financial markets.
- Section 36(1) provides that for the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.
- Section 36(2) further provides that the liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.
Question 10.
What are the assets covered under “Liquidation Estate” as per Section 36(3)?
Answer:
Section 36(3) provides that subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following:
(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;
(c) tangible assets, whether movable or immovable;
(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;
(e) assets subject to the determination of ownership by the court or authority;
(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;
(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;
(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and
(i) all proceeds of liquidation as and when they are realised.
Question 11.
What shall not be included in the liquidation estate assets as per Section 36(4)?
Answer:
According to section 36(4), the following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:
(a) assets owned by a third party which are in possession of the corporate debtor, including –
- assets held in trust for any third party;
- bailment contracts;
- all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;
- other contractual arrangements which do not stipulate transfer of title but only use of the assets; and
- such other assets as may be notified by the Central Government in consultation with any financial sector regulator;
(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;
(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;
(d) assets of any Indian or foreign subsidiary of the corporate debtor; or
(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.
The liquidator should not declare the dues in respect to Provident Fund/Pension Fund/Gratuity Fund as part of the liquidation estate.
Question 12.
Whether liquidator is required to make announcement of filing of list of stakeholders with the Adjudicating Authority in the newspapers.?
Answer:
- IBBI amended the IBBI (Liquidation Process) Regulations, 2016, vide notification dated March 4, 2021, requiring the Liquidator to file the list of stakeholders, as modified from time to time, on the website of the Board.
- It discontinued the requirement of announcement of filing of list of stakeholders with the Adjudicating Authority in the newspapers.
Liquidation on or after Failing of Resolution Plan Notes
When liquidation can be ordered
Section 33 provides for the liquidation of the corporate debtor in following four scenarios:
- Where the Adjudicating Authority does not receive a resolution plan
- Where the Adjudicating Authority rejects the resolution plan
- Where, at any time before confirmation of resolution plan, the committee of creditors resolve to liquidate corporate debtor
- Where the corporate debtor violates the terms of the resolution plan
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 has amended sub-section (2) of section 33 to provide tor a reduced threshold from seventy-five percent to sixty-six percent of voting share for obtaining the approval of the committee of creditors for making an application to the Adjudicating Authority to pass a liquidation order.
Bar to filing of suits and legal proceedings
Section 33(5) provides that subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:
Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority
Appointment of Liquidator and Fee to be Paid
Section 34(1) provides that where the Adjudicating Authority passes an order for liquidation of the corporate debtor under section 33, the resolution professional appointed for the corporate insolvency resolution process under Chapter II shall, subject to submission of a written consent by the resolution professional to the Adjudicatory Authority in specified form, shall act as the liquidator for the purposes of liquidation
Powers to vest in liquidator – Section 34(2) further provides that on the appointment of a liquidator under section 34, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the liquidator.
Powers and Duties of Liquidator
- to verify claims of all the creditors
- to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor
- to evaluate the assets and property of the corporate debtor
- to take such measures to protect and preserve the assets and properties of the corporate debtor
- to carry on the business of the corporate debtor for its beneficial liquidation
- to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract
- to draw, accept, make and endorse any negotiable instruments on behalf of the corporate debtor
- to obtain any professional assistance from any person or appoint any professional
- to invite and settle claims of creditors
- to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of on behalf of the corporate debtor
- to investigate the financial affairs of the corporate debtor
- to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument and for such purpose to use the common seal, if any, as may be necessary for liquidation, distribution of assets and in discharge of his duties and obligations and functions as liquidator
- to apply to the Adjudicating Authority for such orders or directions as may be necessary
Liquidation Estate
The liquidation estate shall comprise all liquidation estate assets which shall include the following:
- any assets over which the corporate debtor has ownership rights
- assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets
- tangible assets, whether movable or immovable
- intangible assets
- assets subject to the determination of ownership by the court or authority
- any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter
- any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest
- any other property belonging to or vested in the corporate debtor at the insolvency commencement date
- all proceeds of liquidation as and when they are realized
What shall not be included in the liquidation estate assets
- Assets owned by a third party which are in possession of the corporate debtor, including:
- assets held in trust for any third party
- bailment contracts
- all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund
- other contractual arrangements which do not stipulate transfer of title but only use of the assets
- assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;
- personal assets of any shareholder or partner of a corporate debtor as the case may be
- assets of any Indian or foreign subsidiary of the corporate debtor; or
Consolidation of Claims
- 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 process
- a financial creditor may submit a claim to the liquidator by providing a record Of such claim
- an operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim
- the liquidator shall verify the claims submitted
- the liquidator may, after verification of claims under section 39, either admit or reject the claim
- Section 41 provides that the liquidator shall determine the value of claims admitted
Appeal Against the Decision of Liquidator
According to section 42, a creditor may appeal to the Adjudicating Authority against the decision of the liquidator accepting or rejecting the claims within fourteen days of the receipt of such decision.
Preferential Transactions and Relevant Time
Related parties often possess information of the corporate debtor’s financial affairs and may collude with him to siphon off assets with the knowledge that the corporate debtor might become insolvent in the near future.
Section 43 invalidates transfers of property or an interest thereof given during the relevant time to a person for the benefit of a creditor, surety or guarantor on account of antecedent debt or other liabilities which have the effect of putting such creditor, surety or guarantor in a better position than the position which he would have been in if such transfer had not been made.
Section 44 specifies the orders that may be passed by the Adjudicating Authority in relation to the avoidance of a preferential transaction. These orders are passed to reverse the effects of the preferential transaction and require the person to whom the preference is granted to pay back any gains he may have made as a result of such preference.
Avoidance of Undervalued Transactions
According to section 45(1), if the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction
Section 45(2) provides that a transaction shall be considered undervalued where the corporate debtor
makes a gift to a person
enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor
Relevant Period for Avoidable Transactions
- one year preceding the insolvency commencement date
- such transaction was made with a related party within the period of two years preceding the insolvency commencement date
Transactions Defrauding Creditors
Section 49 strikes at transactions entered into with the intention of prejudicing the interests of a person who has made or may make a claim against the corporate debtor. According to section 49, where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45, the Adjudicating Authority shall make an order-
- restoring the position as it existed before such transaction as if the transaction had not been entered into; and
- protecting the interests of persons who are victims of such transactions.
Extortionate Credit Transactions
- Section 50 strikes at extortionate credit transactions entered into by the corporate debtor in the period of two years preceding the insolvency commencement date.
- Adjudicating Authority after examining the application shall, by an order-
- restore the positjon as it existed prior to such transaction; –
- set aside the whole or part of the debt created on account of the extortionate credit transaction;
- modify the terms of the transaction;
- require any person who is, or was, a party to the transaction to repay any amount received by such person
Secured Creditor in Liquidation Proceedings
- In a liquidation proceeding, the secured creditor may realise its security interest outside the liquidation proceedings or choose to relinquish its security interest and participate in the distribution of assets
- Where the secured creditor realises security interest, he shall inform the liquidator of such security interest and identify the asset
- the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest
- the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest if secured creditor faces resistance from the corporate debtor
- In case of any surplus proceeds, the secured creditor shall account to the liquidator for surplus
Distribution of Assets
The assets will be distributed in the following order, in case of liquidation:
- fees of insolvency professional and costs related to the resolution process
- workmen’s dues for the preceding 24 months and secured creditors
- employee wages
- unsecured creditors
- government dues and remaining secured creditors (any remaining debt if they enforce their collateral)
- any remaining debt
- shareholders
Dissolution of Corporate Debtor
Section 54 provides that after the affairs of the corporate debtor have been wound up and its assets are completely liquidated, the liquidator shall make an application to the adjudicating authority for the dissolution of the corporate debtor.