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The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) was introduced to speed up the process of dissolution. The Resolution process took about 4.3 years on average for completing the process of dissolution when compared to 1 year and 1.5 year for United Kingdom and United States respectively, it took much time. After the introduction of the act, this duration has come down to 1.6 years in India as of 2019.
Before the introduction of the Code, the act called Sick Industrial Companies (Special Provisions) Act, 1985 governed the provisions and procedure of Insolvency and Bankruptcy. Board of Industrial and Financial Resolution aimed at the revival of the companies declared “sick”. The time for revival took much of the court’s time and resources and thus the Code was introduced. Under the Code, new tribunals named National Company Law Tribunal and National Appellate Country Law Tribunal were incorporated.
The code aims for a time bound Resolution for the insolvency process and it would not be wrong to conclude that the government is able to achieve the set target. The Chapter two of the code contains the provisions for the process of Corporate Insolvency Resolution Process.
The liquidation process can begin in various ways as stated u/s 33 of the code.
- When the adjudicating authority does not receive a Resolution plan under the said time period as permitted u/s 12 or in case of fast track CIRP u/s 56 of the code or rejects the plan u/s 31 of the code for non-compliance of the specified requirements, then in that case the adjudicating authority can:
- Pass an order for liquidation of the corporate debtor and laid in Chapter 3 of the Code;
- Issue a public announcement stating the liquidation phase of the corporate debtor;
- Sending the order to corporate authority with which the corporate debtor is registered.
- When the decision by committee of creditors is informed to the Adjudicating authority by the Resolution professional during the corporate insolvency Resolution process and before the confirmation of the Resolution plan, then the Adjudicatory Authority can pass a liquidation order.
- In case, the Resolution plan contravened by the corporate debtor, then, in that case, any person other than the corporate debtor whose interest has been prejudicially affected by the contravention, may make an application for the Adjudicating authority to obtain a liquidation order. And if found that the corporate debtor contravened provisions of the Resolution plan, then the Adjudicating authority can pass an order under sub-clauses (i), (ii) and (iii) if Section 33(1)(b).
- Once the order for liquidation is passed, no suit can be initiated against the corporate debtor as stated u/s 52. Itprovided 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 the Liquidator
When the Adjudicating authority passes an order of liquidation of the corporate debtor u/s 33 of the code, the Resolution professional appointed under chapter two shall act as the liquidator for the purpose of liquidation unless substituted by the Adjudicating authority u/s 34(4). The adjudicating authority can replace the Resolution professional if the Resolution plan submitted was rejected to meet the requirement as stated in section 30(20) or the board recommends the replacement of the Resolution professional due some reason which needs to be specified to the Adjudicating authority.
Once, the application is furnished the board shall propose the name of another insolvency professional which would be appointed as the official liquidator and shall be submitted within 10 days of direction issued by the Adjudicating Authority. The fees to be charged by Resolution professional shall be in proportion to the value of the liquidation estate, as may be specified by the board. Such fees shall be paid by the proceeds from the liquidator estate.
Powers and Duties of the Liquidator
On the direction of the adjudicating authority, the liquidator shall verify the claims of the creditors and collect all the information of the corporate debtor’s asset, finance and operations which include financial and operational payments and business operations. The liquidator takes over the custody of any asset over which the corporate debtor has ownership rights as documented in the balance sheet. The Resolution professional shall evaluate the assets and property in a manner specified by the Board and prepare a report. Also, to protect and preserve the assets and property and to carry out business activities of the corporate debtor which he may consider necessary.
The liquidator is allowed to draw, accept, make and endorse negotiable instruments including bill of exchange, hundi or promissory note on behalf of the corporate debtor, having the same effect had these been drawn by the corporate debtor itself. The liquidator can appoint or take assistance from any person, and take all such steps or sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument under a common seal, while performing of his duties, obligations and responsibilities. He can, on behalf of the corporate debtor, institute or defend any legal proceedings, civil or criminal in nature as required.
The liquidator can consult any stakeholder entitled for the distribution though such consultation shall not be binding u/s 53 of the code.
Apart from the above, the liquidator has the authority to access the information u/s 37 of the act. The act states that liquidator has the power to access any piece of information of the admission of claims and for identifying the liquidation estate like
- an information utility
- credit information systems
- a Central, State or Local Government agency inclusive of registration authorities
- The database being maintained by the board and other information as may be specified by the board
Such information should be provided by the liquidator to the creditor requested for the information within seven days of receipt of such request or provide the reason or delay or inability to submit the information.
Consolidation of Claims
Section 38 of the act specifies the duty that the liquidator should receive and collect all the claim from the creditor has a time of 30 days to submit the claim from the date of commencement of the Corporate Insolvency Resolution Process.
The financial creditor can submit a claim to the liquidator by providing the information utility of such claim. In case when the information utility is not available, then in that case, the financial creditor can submit the claim in the same way the operational creditor does.
The operational creditor has to provide the documents in such form and manner which indicated the claim along with the supporting documents. In case a creditor is partially a financial creditor and partially an operational creditor then, in that case, it should submit the claims in such a manner which indicates both its claim.
Verification of Claim
All the claims received by the liquidator of those filed u/s 38 of the code shall be verified by the liquidator and the liquidator may require any creditor whether financial of operational to produce such documents requiring to verifying such claims. The process of verification is mentioned u/s 39 of the code.
Admission or Rejection of Claim by the Liquidator and Appeal Against it
Upon the verification the claims submitted by the creditor, either admits or reject the claims, which can be a part or whole. The liquidator in case of rejection must state the reason in writing for rejection of claim. This admission or rejection is communicated to the creditor and the corporate debtor within seven days of admission or rejection of claim.
It may require creditor if not satisfied can appeal to the Adjudicating authority against the decision of the liquidator within seven days of receipt of the decision u/s 42 of the code.
Preferential Transactions and Relevant Time
Where the liquidator or the Resolution professional, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions to any persons, he shall apply to the Adjudicating Authority for the avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
The preference could bereferred to the of a transfer of property or an interest thereof which belongs to the corporate debtor or surety or guarantor for a past financial or operational debt or other liabilities of the corporate debtor to the financial or operational creditor who is beneficial to his interest that would not have been in case the distribution had been done in accordance with the section 53 of the code.
The following fall out of the ambit of preferential transaction:
- A transfer made in the ordinary course of business or financial affairs;
- any transfer creating a security interest in property acquired by the corporate debtor to the extent that such security interest secured new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property.Such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property.
All such transfers should be maid in avail of the code and non-compliance of the court shall presume that the transfer is a preferential one.
A preference shall be deemed to be given at a relevant time, if it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date. A preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
Avoidance of undervalued transactions
On examination, if it comes to the knowledge of the liquidator that certain undervalued transactions have been performed when the corporate debtor executes transactions like gifts or transfer assets for a consideration significantly lower than the estimated value, then in that case an application should be made to the adjudicating authority to declare such transaction void and reverse such transactions.
Distribution of Assets
The distribution of the assets shall be done as per the as specified u/s 53 of the code. Anything contrary in the law enacted by the Parliament or the State Legislature shall withstand the code. The proceeds of the sales the liquidation assets should be distributed in the following manner:
- The cost of insolvency Resolution process and liquidation costs should be paid in ful
- The following to be ranked equally:
- The due of the workmen from the 24 months preceding the commencement of liquidation
- The debt owed to the secured creditor
- The wages of the employees other than the workmen from the 12 months preceding the commencement of liquidation
- The debts owed to unsecured creditors
- The following to be ranked equally:
- The debt due to the Central Government and the State Government including the amount to be acknowledged to the Consolidated Fund of India and of State (if any), from the 12 months preceding the commencement of liquidation.
- The debt owed to secured creditor following any amount of security interest
- Other miscellaneous debts and dues
- Preferred shared holder (if any)
- Partners or equity shareholders
In case the there exists any contractual agreement then in that case, where the preference is disrupting the above order, then such agreement shall be disregarded by the liquidator. The fees of the liquidator shall be deducted proportionately from the proceeds being paid to each recipient.
Dissolution of Corporate Debtor
When all the assets of the corporate debtor have been completely liquidated, the liquidator moves in an application to the adjudicating authority for dissolution of such corporate debtor. The adjudicating authority shall on application as filed by the official liquidator will dissolve the corporate debtor u/s 54 of the code and a copy of that order shall be forwarded to the authority with which the corporate debtor is registered.