Liquidation Procedure, Regulation and Liability of a Purchaser of an Asset in a Liquidation Process
Jose S Jose
Seventh Semester, B.A. LL.B.(Hons.), National University of Advanced Legal Studies (NUALS), Kochi
The Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the ‘Code‘) provides two methods of liquidation: voluntary liquidation under section 59 and liquidation initiated when a resolution plan for reviving the corporate debtor fails. As per section 59, a corporate person can voluntarily initiate liquidation if he has not made any default under the code. A default is the non-payment of whole or part of a debt which has become due for payment by a corporate debtor.
On the other hand, if a default occurs on the part of a corporate person, an application can be made to the Adjudicating Authority to initiate a corporate insolvency resolution process (CIRP). This application can be initiated by a financial creditor, an operational creditor or by the corporate debtor itself. During the CIRP, a resolution plan is created to revive the corporate debtor. If the resolution plan is not approved by the Committee of Creditors (CoC) or if any of the conditions under section 33 of the Code are met, liquidation proceedings will be instituted.
Liquidation in case of the Default
Section 33 of the code deals with the conditions under which liquidation can be initiated once the resolution plan doesn’t work out. The conditions include the following-
- When the Adjudicating Authority (AA) does not receive a resolution plan within the maximum time limit allowed for the completion of the corporate insolvency resolution process (CIRP) under section 12 or fast-track CIRP under section 56 of the code.
- When the Adjudicating Authority rejects the resolution plan under section 31(2) due to non-compliance of requirements under section 30(2).
- When the resolution professional (RP) lets the Adjudicating Authority know about the decision of the Committee of Creditors (Coc) to liquidate the corporate debtor.
- When the corporate debtor contravenes the approved resolution plan, and any other person prejudicially affected by such contravention applies to the Adjudicating Authority for liquidation.
Once the Adjudicating Authority decides to liquidate the corporate debtor, a public announcement should be made about such a decision as per section 33(1)(b)(ii) of the code.
Time Period for CIRP
The time limit prescribed for completing CIRP is 180 days, as per section 12(1) of the code. The resolution professional can apply for an extension of this period if instructed by the Coc through a resolution passed by 66% of voting members. The AA, if convinced, can extend the time period for as many days as it thinks fit but not beyond 90 days.
The legislature, by the 2019 amendment, had inserted 330 days as the maximum period under which the CIRP should be completed, terming it as mandatory. This was struck down by the Supreme Court of India in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Vs. Satish Kumar Gupta & Ors. [1] observing that the term ‘mandatorily’ is arbitrary under Article 14 and an unreasonable restriction on the right to conduct business under Article 19(1)(g) of the Constitution of India. The court remarked that the CIRP must be completed within the outer limit of 330 days; however, the Adjudicating Authority can extend such period if it can be shown that it is in the interest of all the stakeholders to continue the process of CIRP rather than moving into liquidation and the delay was due to the tardy process of the Adjudicating Authority or appellate authority.
The decision of the CoC to liquidate the Corporate Debtor
The decision of the Committee of Creditors (Coc) to liquidate the corporate debtor should be passed by not less than 66% of the voting members. This decision should be intimated to the resolution professional, who must present it to the Adjudicating Authority. Such a decision should be made during the CIRP process before any resolution plan is approved. Upon receiving this decision, the Adjudicating Authority is expected to pass a liquidation order.
Liquidation Process and Regulations
The Insolvency and Bankruptcy Code 2016, along with the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 (hereinafter referred to as ‘IBBI regulations’), deal with the process and regulations of liquidation proceedings in India.
Once an order for liquidation is passed under section 33 of the code, the first step is to appoint a liquidator under section 34. Once the liquidator is appointed, he calls various stakeholders eligible for the distribution of proceeds under section 53 of the code to submit their claims. These stakeholders include operational creditors, financial creditors, workmen, employees and so on. Such stakeholders are to submit their claims as per Chapter V of the IBBI regulations. The claim should be submitted within 30 days of the commencement of liquidation as per section 38(1) of the code read with rule 12 (2)(b) of IBBI regulations.
Sale and Distribution of Assets
The liquidator, under section 35(f) of the code, has the power to sell any asset of the corporate debtor, including movable property, immovable property and any actionable claims. Ordinarily, a liquidator sells the assets of the corporate debtor through auction as per rule 33 of IBBI regulations. The asset will be sold to the highest bidder. The liquidator may also sell the assets of the corporate debtor through a private sale if the conditions under rule 33(2) of IBBI regulations are met. The assets can be sold through a private sale if it is found to be perishable, likely that its value will deteriorate if not sold immediately, it is sold at a higher price than the reserve price of a failed auction, or if the prior permission of AA has already been obtained.
Unsold assets can be distributed among the stakeholders with the prior permission of AA as per rule 38 of the IBBI regulations.
Distribution of Proceeds
Section 53 of the code provides an order of priority for the distribution of proceeds from the sale of assets of the corporate debtor under liquidation. This order of priority is known as the ‘waterfall mechanism’. As per this provision, the costs of the insolvency resolution process and liquidation are to be considered top priority while distributing the proceeds from the sale of assets. Workmen’s dues for twenty-four months preceding the liquidation commencement date and debts owed to a secured creditor in the event such secured creditor has relinquished security are given the next priority. Thirdly, wages and any unpaid dues owed to employees other than workmen for twelve months preceding the liquidation commencement date will be given priority. Then comes the debts owed to unsecured creditors, followed by dues owed to the central or state government and debts owed to a secured creditor for any amount unpaid following the enforcement of security interest. Least priority is given to preference shareholders and, lastly, equity shareholders.
The Supreme Court in the case of Paschimanchal Vidyut Vitran Nigam Ltd. v Raman Ispat Pvt. Ltd.[2] clarified that taxes and tariffs required to be credited to the treasury, which falls within the ambit of article 265 of the Constitution, come under government dues covered by section 53(1)(f) of the Code.
The liquidation process is to be completed within one year from the commencement of the process. The AA can order an extension if needed under rule 44 of IBBI regulation.
Liability to pay government dues charged on sold assets
Government dues are to be paid by the liquidator as per the waterfall mechanism under section 53 of the code. The priority of distribution of proceeds from the sale of assets of a corporate debtor for government dues is very low and comes after both secured and unsecured creditors. However, issues can arise when government authorities charge dues on auctioned properties from purchasers. The Gujarat High Court, in the case of KRBL Limited v. State of Gujarat,[3] clarified that the purchaser of an asset under IBC is not liable to pay any dues to the government. The liquidator is to pay for it as per the waterfall mechanism under section 53 of the code.
Conclusion
The liquidation process under the Insolvency and Bankruptcy Code 2016 is a structured procedure designed to balance the interests of creditors, employees, and other stakeholders while ensuring the orderly wind-up of the corporate debtor. The code provides a clear framework for both voluntary and compulsory liquidation. The process prioritises efficient resolution of debts and maximisation of asset value through methods such as public auctions and private sales. The waterfall mechanism ensures a fair allocation of proceeds from asset sales. Importantly, legal precedents clarify the non-liability of purchasers for government dues on auctioned properties, ensuring that assets can be transferred free from any hindrances. Overall, the liquidation provisions under the code provide for an equitable distribution of the corporate debtor’s assets and ensure a robust insolvency framework in India.
References:
[1] Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2019) ibclaw.in 07 SC.
[2] Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd., (2023) ibclaw.in 81 SC.
[3] KRBL Ltd. v. State of Gujarat, (2023) ibclaw.in 770 HC.
