The first order objective of Insolvency and Bankruptcy Code is insolvency resolution of the corporate debtor.[1] However, if the resolution process gets failed than in such circumstances the code also provides for the liquidation of the corporate debtor. Chapter III of Insolvency and Bankruptcy Code of 2016 (hereinafter The Code) provides for the liquidation process of a corporate person.

Chapter III extends from section 33 to section 54 of the Act. IBBI has also provided Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereinafter Liquidation Regulation) which assist the code and provides regulation for the liquidation process of the corporate debtor.

The process of Liquidation

1. Nitiation Of The Process

   The code does not allow any of the stakeholders to institute the liquidation process against the corporate debtor rather regarded it as last resort to be used in cases where the resolution process of the corporate debtor fails. As per Section 33 of the Code, the liquidation process of the corporate debtor initiates when no resolution plan was passed by the committee of creditors even after the expiry of maximum time permitted for resolution process of the corporate debtor or the resolution plan is rejected by the Adjudicating Authority owing to be in violation of the provision of Code as per section 31 of the Code or when the committee of creditors passed with more 66 per cent of the vote to liquidate the corporate debtor. After any of the abovementioned circumstances comes in to play than the Adjudicating Authority passes an order for liquidating the corporate debtor and issues a public announcement.

2. Institution Of Moratorium

   As soon as liquidation process of corporate debtor initiates a moratorium comes into force which bars the institution of proceeding by or against the corporate debtor unless such proceeding is instituted by the liquidator on the behalf of the corporate debtor after obtaining permission of adjudicating Authority. However, this moratorium does not bar the secured creditor's rights to do anything mentioned under section 52 of the code.

3. Appointment Of Liquidator

   After the institution of the liquidation proceeding, previously the resolution professional for corporate debtor shall now start acting as the liquidator for the corporate debtor unless he was replaced by the Adjudicating Authority.[2] The liquidator is the person who supervises the whole liquidation process of the corporate debtor. All the powers of the board of directors and key managerial persons of the corporate debtor will be transferred to the liquidator. The liquidator has to fulfil all the duties as mentioned in section 35 of the code which includes collecting claims of the creditors of the corporate debtor and verifying them, selling assets of the corporate debtor or the corporate debtor as whole all of which is provided under regulation 32 of the Liquidation Regulations etc.

4. Public Announcement Of Liquidation By And Consolidation Of Claims Of Creditors

   After his appointment, the liquidator has to make a public announcement within five days of his appointment for calling of the claims of the creditors of the corporate debtor [3] and consolidate them as provided under section 38 of the Code. The debtor shall submit their claim in the manner provided under regulation(s) 16, 17 18, 19 and 20 of the Liquidation Regulation according to their respective category of creditors. Thereafter, the liquidator verifies the claims within 30 days of receiving the claim[4] and determines whether to admit or reject the claim.[5] The liquidator also has to determine the value of the claims admitted by him.[6] The code also provided a remedy to the creditor whose claims are either rejected or undervalued, as mentioned under section 42 such creditors can approach the Adjudicating Authority within 14 days of receiving such decision of liquidator.

5. Formation Of Liquidation Estate, Asset Memorandum And Submitting Progress Reports To Adjudicating Authority

   After the appointment of the liquidator, he shall form a ‘liquidation estate'[7] which will include all the assets of the corporate debtor mentioned in section 36 (3) of the code. However, such liquidation estate will not include anything mentioned under 36 (4) of the code. The liquidation estate shall be held by the Liquidator in the fiduciary of the creditors of corporate Debtor.
   The liquidator within 75 days of his appointment is also required to submit a preliminary report to the Adjudicating Authority with capital structure, assets and liability of the corporate debtor.[8] If during the preparation of such report appears to the liquidator that the assets of the liquidator are insufficient to bear liquidation cost than he can apply to Adjudicating Authority for early dissolution of the corporate debtor.[9] The preliminary report shall be accompanied by an Asset Memorandum as provided under regulation 34 of the liquidation Regulation which will provide information regarding the value of assets, intended mode and manner of sale, expected amount of realization and any other such important information about the corporate debtor.
   As per regulation 15 of the Liquidation Regulation, the liquidator has to submit progress reports of the liquidation process with information regarding the properties remain to be sold or realized, list of settled stakeholders, distribution of the unsold properties made to stakeholders, fees or remuneration to be paid to the liquidator and expenses occurred by him etc. This report is ought to be submitted by the liquidator within 15 days after every quarter of his appointment as liquidator.

6. Sale Of Assets And Their Distribution

   As per regulation 32 of the Liquidation regulations the liquidator can sell the assets of the corporate debtor in the following manners:
   
   1. an asset on a standalone basis;
   2. the assets in a slump sale;
   3. a set of assets collectively
   4. the assets in parcels;
   5. the corporate debtor as a going concern; or
   6. the business(s) of the corporate debtor as a going concern.
      However, the assets with the security interest cannot be sold by the liquidator unless such security interests have been relinquished by the secured creditors.
      The mode of the selling of the assets as provided under the regulation 33 of the Liquidation regulation is an auction. However, in certain circumstances the liquidator may sell the assets in a private sale, these circumstances include when:
      
      1. the asset is perishable;
      2. the asset is likely to deteriorate in value significantly if not sold immediately;
      3. the asset is sold at a price higher than the reserve price of a failed auction, or
      4. the prior permission of the Adjudicating Authority has been obtained for such sale
         
         The manner of the auction, as well as private sell, is provided under schedule I of the Liquidation regulation.
         The liquidator cannot make any sells to the person who is barred from submitting a resolution plan as per section 29A of the code.[10] Further by an amendment in the regulation came in January 2020 such person is also barred from being a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013.[11] These steps are taken to avoid the backdoor entry of the promoters of the corporate debtor who were responsible for its liquidation to take control of the corporate debtor.
         The amount which is realized from the sale of assets will be deposited in a Bank Account in the name of corporate debtor followed by in liquidation in the name. Thereafter, once the list of all stakeholders and the Asset Memorandum is submitted to the Adjudicating Authority the Liquidator shall proceed with the distribution of the amount realized from the sale of the assets within 90 days of the receipt of the amount.[12] The amount shall be distributed in the mechanism provided under section 53 of the Code. This mechanism is known as the waterfall mechanism where the person at top of the fall receives his amounts and others receives their amount subsequently according to their position in the waterfall.
         When any unsold assets of the corporate debtor are there which cannot be sold due to some reason than with the permission of the Adjudicating Authority the liquidator can distribute such assets to the creditor.[13]
         

7. Completion Of Liquidation

   As per regulation 44 of the liquidation regulation the liquidation shall complete within one year from the liquidation commencement date and can take an additional 90 days if the sale is attempted under section 32A of the Liquidation Regulations. However, if the liquidation process fails to complete within the abovementioned period than the liquidator has to submit an application to the Adjudicating Authority to continue with the liquidation process accompanied by the reasons as to why liquidation cannot be completed within the time limit and what is the additional time is required for the completion of the liquidation.

When all the assets of the corporate debtor have been liquidated than the liquidator has to submit a final report to Adjudicating Authority specifying how the liquidation is conducted and how the assets have been liquidated.[14] Finally, the liquidator shall make an application under 54(1) of the code to Adjudicating Authority for dissolution for the Corporate Debtor after which based on this application the Adjudicating Authority will order for the dissolution of Corporate Debtor. This completes the resolution process of the corporate debtor.

Rights of the secured creditor during liquidation
As per section 52 of the Code, the secured creditor has two option with respect to the assets in which he has some security interest, first is to relinquish such right and receive proceed from the sale of such assets as per section 53 of the Code or realize the security interest by selling the asset manner given in section 52 of the code. However, if secured creditor adopts the latter as an option then he will fell even below to the unsecured creditors in the waterfall mechanism provided under section 53 of the code, i.e. they will receive their unrealized debt quite below in the waterfall.

Conclusion
Liquidation is been incorporated in the code as a last resort. However, it's been a trend since the incorporation of the code that most of the companies failed to get resolved and end at being liquidated. The data released by Insolvency and Bankruptcy Board of India in March 2019 shows that as many as 378 companies have been liquidated under the code till that time.[15] That's a quite huge number at least as compared to companies which are successfully resolved the number of which stands at 88 way lower than 378.[16] This is certainly a problem as the very objective of the code is getting defeated as per this data.

End-Note:

1. Binani Industries Limited Vs. Bank of Baroda & Anr.,Company Appeal(AT) (Insolvency) No. 82 of 2018
2. The Insolvency and Bankruptcy Code 2016, S 34.
3. Regulation 12, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016
4. Regulation 30, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016
5. The Insolvency and Bankruptcy Code 2016, S 39 and 40.
6. The Insolvency and Bankruptcy Code 2016, S 41.
7. The Insolvency and Bankruptcy Code 2016, S 36.
8. Regulation 13, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.
9. Regulation 14, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.
10. The Insolvency and Bankruptcy Code 2016, S 35(1)(f).
11. Pti, Liquidation Process: Secured Creditor Cannot Sell Assets to Entities Ineligible for Insolvency Plan (The Economic Times January 7, 2020) accessed April 29, 2020.
12. Regulation 42, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.
13. Regulation 38, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.
14. Regulation 45, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.
15. Karunjit Singh and Mohit Bhalla, Under IBC, 378 Companies Owing Rs 2.5 Lakh Crore Sent for Liquidation (The Economic TimesMay 29, 2019) accessed April 29, 2020.
16. Ibid.