Section 33 IBC: Corporate Debtor Liquidation Initiation Rules

Section 33 of the Insolvency and Bankruptcy Code (IBC), 2016, details the initiation of a corporate debtor’s liquidation. The Adjudicating Authority (NCLT) orders liquidation under specific conditions: if no resolution plan is received within the stipulated period, if all submitted plans are rejected, or if the Committee of Creditors (CoC) resolves to liquidate with a 66% voting share before plan approval. Additionally, liquidation can be ordered if the corporate debtor violates the terms of an approved resolution plan, upon application by an affected party. The NCLT’s liquidation order involves public announcement and notification to the debtor’s registered authority. Once liquidation commences, legal proceedings against the corporate debtor are generally barred, though the liquidator may initiate actions with NCLT approval. This bar does not apply to secured creditors realizing their interests under Section 52. Furthermore, a liquidation order serves as a deemed notice of discharge for employees, unless the liquidator continues the business. Amendments to Section 33 have reinforced the CoC’s authority in liquidation decisions and clarified the timing for such decisions.

When Liquidation is initiated.

Section-33(1)- Grounds for initiating liquidation by the Adjudicating Authority.

Section 33(1) serves a crucial purpose within the insolvency resolution framework of the IBC.

Bare Text of Section 33(1) – IBC.

“33. (1) Where the Adjudicating Authority, —

(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan under sub-section (6) of section 30; or

(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein, it shall—

(i) pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter;

(ii) issue a public announcement stating that the corporate debtor is in liquidation; and

(iii) require such order to be sent to the authority with which the corporate debtor is registered.

Section 33(1) empowers the Adjudicating Authority to initiate liquidation in the following cases:

1. No Resolution Plan is received within the maximum period allowed for Corporate Insolvency Resolution Process (CIRP) (as per Section 12). It ensures there is no indefinite continuation of insolvency proceedings.

2. All Resolution Plans are rejected for not meeting the requirements under Section 30(2). It guarantees that only legally compliant plans are accepted; if not, liquidation must follow.

It is important to clarify that the provisions of Section 33(1), are applicable to both types of insolvency resolution processes under the Code—namely:

• the regular CIRP governed by Chapter II (Sections 6 to 32), and
• the Fast Track CIRP, which is governed by Chapter IV (Sections 55 to 58).

The expression ‘corporate insolvency resolution process‘ used in Section 33(1) is broad and encompasses both standard and fast track proceedings. Accordingly, if no resolution plan is received within the prescribed time limit, or if the plan is rejected by the Adjudicating Authority, liquidation shall be initiated irrespective of whether the CIRP was conducted under Chapter II or Chapter IV.”

Section-33(2)- Initiation of Liquidation by CoC under CIRP.

If, at any time during the CIRP, but before the confirmation of the resolution plan, the Resolution Professional (RP) informs the Adjudicating Authority that the CoC has resolved — with at least 66% of the voting share — to liquidate the corporate debtor, the NCLT shall pass a liquidation order.

This liquidation order will be in accordance with sub-clauses (i), (ii), and (iii) of Section 33(1)(b) of the IBC, which includes:

• A declaration that the corporate debtor shall be liquidated;
• A public announcement of the liquidation order; and
• A direction to send a copy of the liquidation order to the authority with which the corporate debtor is registered.

Prior to the 2018 amendment, Section 33(2) allowed the RP to recommend liquidation to the Adjudicating Authority, and the tribunal would then assess whether the corporate debtor was viable. However, there was no clear mechanism involving the CoC in this specific step, even though CoC is the main decision-making body in the CIRP.

Prior to substitution, sub-section (2) read as under-

“(2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of the resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub clauses (i), (ii) and (iii) of clause (b) of sub-section (1).”

After said amendment, sub-section (2) read as under-

“(2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of the resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six per cent. of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

The amendment transferred the primary authority to recommend liquidation from the RP to the CoC, reinforcing the principle that commercial decisions lie with the financial creditors.

Explanation to Section 33(2).

It is pertinent to mention that Explanation to sub-section (2) of Section 33 was inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Act No. 26 of 2019), dated 05.08.2019, and brought into effect from 16.08.2019 vide Notification S.O. 2953(E).

Pursuant to the said amendment, the Explanation to Section 33(2) reads as under:

“Explanation. – For the purpose of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.”

The purpose of inserting the Explanation to Section 33(2) was to clarify and remove any ambiguity regarding the timing of the decision by the CoC to liquidate the Corporate Debtor. The law clarifies that the CoC can decide to liquidate the corporate debtor any time after its constitution under Section 21(1),

• Even before preparation of the Information Memorandum,
• And before submission or confirmation of any resolution plan.

Prior to the amendment, there was uncertainty as to whether the CoC could recommend liquidation before certain formal steps (like preparation of the Information Memorandum) were completed. This includes the period even before the preparation of the Information Memorandum, which is generally considered a critical stage in CIRP. It enables the CoC to terminate the CIRP early where revival is clearly not viable, thereby saving time and resources. Especially relevant in cases where the CoC determines at an early stage that no resolution plan would be feasible.

Section-33(3)- Liquidation on Contravention of Approved Resolution Plan.

Prior to the Insolvency and Bankruptcy Code (Amendment) Act, 2021, Section 33(3) provided that if a corporate debtor contravened the terms of an approved resolution plan, the Adjudicating Authority may pass a liquidation order on application by any person whose interests are prejudicially affected.

It is pertinent to mention that sub-section (3) of Section (33) was substituted by the Insolvency and Bankruptcy Code (Amendment) Act, 2021 (Act No. 26 of 2021), which was enacted on 11th August 2021 and deemed to have come into force retrospectively from 4th April 2021.

Prior to the said amendment, Section 33(3) reads as under:

“(3) Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub clauses (i), (ii) and (iii) of clause (b) of sub-section (1).”

Pursuant to the said amendment, Section 33(3) reads as under:

“(3) Where the resolution plan approved by the Adjudicating Authority under section 31 or under sub-section (1) of section 54L, is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub clauses (i), (ii) and (iii) of clause (b) of sub-section (1).”

Section 33(3) of the IBC by the 2021 Amendment was done to provide clarity and consistency in relation to approved resolution plans — whether they originate from the regular CIRP or the Pre-Packaged Insolvency Resolution Process (PPIRP).

Section-(4)- NCLT order on contravention of Approved Resolution Plan.

Upon receiving an application under Section 33(3), if the Adjudicating Authority finds that the corporate debtor has violated the terms of the approved resolution plan, it shall pass a liquidation order.

Bare Text of Section 33(4) – IBC.

“(4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).”

This liquidation order will be in accordance with sub-clauses (i), (ii), and (iii) of Section 33(1)(b) of the IBC, which includes:

• A declaration that the corporate debtor shall be liquidated;
• A public announcement of the liquidation order; and
• A direction to send a copy of the liquidation order to the authority with which the corporate debtor is registered.

Example: Contravention of Resolution Plan- The Company X undergoes the CIRP. During the process, a resolution plan is submitted by Resolution Applicant Y, which is duly approved by the CoC. The plan is subsequently approved by the Adjudicating Authority under Section 31 of the Insolvency and Bankruptcy Code, 2016. Key Terms of the Approved Plan:

• Payment of ₹50 crores to financial creditors in 6 equal monthly instalments.
• Payment of ₹5 crores to operational creditors within 30 days from the date of approval.
• Continuation of all existing employee contracts without termination.

After the resolution plan is approved and becomes binding:

• Resolution Applicant Y fails to pay the first two instalments to financial creditors.
• No payments are made to operational creditors within the 30-day period.
• The new management terminates existing employee contracts, in violation of the plan terms.

In this case, the creditors, being prejudicially affected, file an application under Section 33(3). The Adjudicating Authority, upon verifying the contravention, orders liquidation of Company X.

Section-33(5) & (6)- Bar on Legal Proceedings During Liquidation.

Section 33(5) of IBC deals with restrictions on the institution or continuation of legal proceedings against the corporate debtor once a liquidation order has been passed.

Bare Text of Section 33(5) & (6) – IBC.

“(5) 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.

(6) The provisions of sub-section (5) shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

Once the liquidation process is initiated through the passing of a liquidation order under Section 33 of the IBC, a statutory bar is imposed on the institution or continuation of any suit or legal proceeding against the corporate debtor. However, the liquidator is permitted to initiate legal proceedings on behalf of the corporate debtor, but only with the prior approval of the Adjudicating Authority.

It is important to note that this restriction is expressly made subject to Section 52 of the Code. Section 52 allows secured creditors to opt out of the liquidation estate and realize their security interest outside the liquidation process. Accordingly, the bar under Section 33(5) does not apply to such secured creditors, to the extent they are enforcing their rights under Section 52.

Section-33(7)- Deemed discharge of employees upon Liquidation.

Bare Text of Section 33(7) – IBC.

“(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.”

When the Adjudicating Authority passes a liquidation order under Section 33 of the IBC, it is deemed to be an official notice of discharge to all officers, employees, and workmen of the corporate debtor. However, if the liquidator chooses to continue the business of the corporate debtor during the liquidation process—such as for the purpose of maximizing asset value—their employment may continue for the duration of such operations.

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