CHAPTER 1 – INTRODUCTION
The enactment of Insolvency and Bankruptcy Code, 2016 (IBC) is for giving effect towards a highly time bound process for resolution of insolvency of partnership firms, corporate persons and individuals. Speedy resolution and to maximise recovery for lenders is its objective. The code provides a framework in which an Interim Resolution Professional (IRP) must carry on the operations of business of the corporate as a going concern until the Committee of Creditors (COC) proposes a resolution plan that can keep the corporate business post insolvency resolution. For fostering rescue culture in India and facilitating the restoration, reorganisation and resolution of the Corporate Debtor (CD) rather than its liquidation.
Besides prescribing a judicial framework for insolvency and bankruptcy, the code also introduced as a regulator the Insolvency and Bankruptcy Board of India (IBBI), which can, through its regulatory powers respond to changing realities. Insolvency and Bankruptcy Code, 2016 (IBC) succeeded in bringing separate jurisprudence for insolvency and bankruptcy. IBBI and the government have been always working on resolving issues when they appear through implementing of legislation and thus, amendments are done for resolving and having clarity about it. The National Company Law Tribunal (NCLT) works as an Adjudicating Authority for liquidation as well as insolvency resolution.
The main objective of IBC is to enforce judicial discipline in insolvency resolution. With this respect, the Code has worked out far better than its antecedent, Sick Industrial Companies Act, 1985 (SICA). Imposition of strict timeline of 180 days for Corporate Insolvency Resolution Process (CIRP) which can be extended for another 90 days but, at the discretion of Adjudicating Authority (AA). As per the amendment of 2019, the time limit was revised to 330 days. The CIRP plays a significant role during the period of insolvency resolution. Various steps are included to raise funds or to look for a new buyer for selling the company which is included in the resolution plan and if accepted can revive the company, but if rejected by the committee, then the company will go into liquidation. The recovery of debt process is made in a comprehensive manner in detail but easier to understand to avoid any loopholes in procedures.
The Parliament passed the Insolvency and Bankruptcy Code, 2016 focusing on laws that deals with corporate insolvency, to protect the rights of creditors as well as by appointing resolution professional if a company can be bought and revived. It covers in the seventh schedule under concurrent list in the Indian Constitution, Insolvency and Bankruptcy can be developed by both State and Central Government for legislative framework.
On failure of the resolution plan, the process of liquidation of the corporate person takes place. It has become the most prevailing outcome for the CD’s who entered in the insolvency resolution process. The code requires orderly distribution of sale of the liquidation estate or the assets unsold of the CD where a proportionate amount is received by the creditor of their claims that is based on their place in the distribution of the liquidation process. The ability of the creditor for setting off a debt by passing this orderly scheme of distribution and permitting the creditor to exercise the set off for preferring over others to the extent of value of the set off. This project will help us to understand the important provisions of insolvency and bankruptcy code with respect to the liquidation process where how this process is done in detail and also some of the important judgments to interpret the liquidation process in more precise manner. Further, suggestion with respect to such process will also be noted and concluded as required.
Under the code the proceedings of corporate insolvency are adjudicated by the National Company Law Tribunal (NCLT), which is made as a special forum in handling all the matters with respect to insolvency. The provisions of Insolvency and bankruptcy Code, 2016 are referred to Adjudicating Authority i.e. the NCLT for all the matters which fall under this statute and such orders of NCLT can be appealed to National Company Law Appellate Tribunal (NCLAT) and from the orders of NCLAT the appeal will lie directly to the Supreme Court of India. The study for analysing the provisions of liquidation process of the Code will give more clear knowledge about the functioning of liquidator appointed under the code for effective liquidation regime in India.
The aim is to study the provisions of the code which state about the time bound process and also in searching for a resolution to revive the companies, due to which entrepreneurship would be promoted and there would be credit availability with proper interests of all shareholders. Further, the aim is to also understand the detailed provisions of liquidation process of the code so that how the process works when the resolution plan is not accepted and the order for liquidation takes place. t to creditors as well as the debtors and since it is a time bound resolution process it would be quick and more in an easier manner. The IBBI established for giving statutory powers is to be the regulator for insolvency proceedings. The idea is to understand the code by analysing it in wide manner and to get knowledge about the insolvency and bankruptcy laws in India. The analysis will bring better understanding about the process with judgments and also about the need for improvements as required.
1.4 STATEMENT OF PROBLEM
Once a process is started under the Insolvency and Bankruptcy Code, 2016 by the creditors i.e. financial creditors and operational creditors or by corporate debtors they have different rights as per the code. During the time of such process, it is to be verified whether the Adjudicating Authority or the code has kept a proper balancing between the rights of corporate debtors and financial creditors or/and operational creditors. Through this analysis, there would be more clear idea about the liquidation process and also about various provisions in which if there would be any sort of issue which needs to be actually looked upon. Further, another important factor of this code is to maximise the value of assets of the CD. Such value depends upon the time taken in resolving the insolvency.
There is also another issue relating to delay in the adjudicating mechanisms and when there is delay in passing orders for insolvency, it can lead to siphoning off funds by promoters of companies. As per the code the moratorium is imposed once the process commences, then there is effect on the rights of the stakeholders and powers of creditors in exercising control through the insolvency professional. When a company is put through insolvency process it needs to be looked upon that there is a genuine distress which needs resolution and whether such resolution is possible. If the distress is not looked upon before resolution, then there can even be chance of reducing the value of the company.
1.6 RESEARCH METHODOLOGY
The research is a doctrinal study of the Insolvency and Bankruptcy Code, 2016 and to analyse the important provisions of liquidation process of the code. The project is based from various readings, observation from different authors, journal as well as research articles and analysing statutory provisions. The Library-based research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of primary sources such as statutes and secondary sources such as books, online articles available freely as well as on legal databases. The project is based on pure theoretical research.
1.7 REVIEW OF LITERATURE
The Author explains in brief about the Insolvency and Bankruptcy Code, 2016 as well as the concept in relation to financial creditor and operational creditor. Information utilities have to work upon the collation, collection, provision, maintenance as well as supplying the financial data to the adjudicating authority, financial institutions, businesses, stakeholders and insolvency professionals. Further, the corporate insolvency resolution process has been explained which is initiated by financial creditor or by operational creditor or by CD itself. With the admission of the application by the creditors the concept of moratorium which is declared during the continuation of legal proceedings against debtor and Interim Resolution Professional (IRP) which is appointed by the National Company Law Tribunal in the admission stage itself. Further, the role of COC, during the time of extending the time limit the voting share of 66% is needed. The concept of Resolution Applicant (RA) is explained and also the eligibility criteria for qualifying as a Resolution Applicant has also been stated under the Insolvency and Bankruptcy Code (Amendment) Act, 2017. Further the role of liquidator during the process and also for collecting all the claims from the creditors within a period of thirty days from the commencement of such process. The steps which need to be followed during the time of such process and who needs to be repaid first is also dealt in detailed.
The Author explains about the liquidation process under the code. How it is initiated is stated i.e. either the AA did not receive the resolution plan or the Corporate Insolvency Resolution Process (CIRP) expires or if AA rejects the resolution plan. Also, if COC decides to liquidate the CD before the approved resolution plan within a voting share of 66% and the Resolution Professional (RP) intimates such decision before the AA. The liquidator’s powers and duties during the process is also stated. The role of the COC during the liquidation process. The holding of liquidation estate for the creditors benefits. The Author also sheds the light on the concept of waterfall mechanism where how the assets of the CD is distribution during the time of liquidation and finally the dissolution of the CD.
CHAPTER 2 – LIQUIDATION
It is necessary for business to be efficient and swift procedures for dissolution or closure when they are declared insolvent. Thus, the law should provide for proper exit from the market of businesses. Procedure of insolvency must help entrepreneurs in closing down business. In relation to the corporate persons, liquidation process is of two types under IBC. Firstly, when a CD has committed default, then an OC, FC or Corporate Applicant itself will be able to commence CIRP of the CD. The CD enters into the liquidation phase, if the CIRP fails. Secondly, corporate person can choose on its own for voluntary initiating the liquidation proceedings when no default is there and is a solvent liquidation.
Prior to the code, winding up and liquidation of companies was dealt in the Companies Act, 1956. When a company is inability to pay debts and the order is passed, appointment of liquidator is done for taking over the company for winding its affairs. Pertinently, no provision was there for reorganising or resolution and the only consequence was liquidation for the companies to undergo the procedure for winding up as per the Act. The liquidation and winding up under the Companies Act, 1956 gave rise to delays which led to often complete erosion of the value of assets of the debtor’s company. Whereas under IBC, when default is committed, a company shall first enter into the phase of CIRP before it can be liquidated. The code provides market mechanism for reviving the failed CD’s and closure of failed CD’s. Striking a proper balance between closure and revival of companies and providing two stages of process for dealing with the corporate person insolvency. As per the Stage 1, CIRP is undergone by the CD, where the CD’s creditors shall try to resolve the insolvency in time bound manner. Further in Stage 2, CD will enter into liquidation, if the CIRP fails.
It is at the end left upon the COC to take proper decisions to liquidate the CD after its constitution and resolution plan which is the best and covers all the requirements to chosen or else at the end liquidation will be the only option left. The whole process to bring lawful end of the life of a company is by liquidation process and then finally the dissolution. For stopping a corporate entity to exist as separate legal entity it is required to be dissolved and from that time it will be struck from register and also will become incapable for owning property in its name, being sued and litigating under contracts. The legal status will exist till the period of liquidation, until it is dissolved in the prescribed manner.
2.2 GROUNDS FOR INITIATING LIQUIDATION
The liquidation of the CD who have defaulted and undergone a CIRP the grounds are–
a. Before the expiry of the CIRP, the AA did not receive resolution plan under Section 30 (6) of the code;
b. If the resolution plan is not complying the requirements prescribed and thus the AA rejects it;
c. During the time of CIRP, the RP before the resolution plan gets approved by the COC, states before AA about the decision of COC with the voting share of not less than 66% for liquidating the CD;
d. When at the time of implementation of the resolution plan which was approved by the AA, it is contravened then any person except CD who interests were affected can file an application for liquidating the CD.
The second ground is with the approval of shareholders, board of directors as well as creditors a corporate person may commence voluntary liquidation proceedings provided default has not been committed. Except this, the code also deals primarily in insolvent liquidation as well i.e. liquidation following CIRP.
2.3 LIQUIDATION ORDER
When the AA sets out the ground on which the liquidation can be ordered then –
1. Order will be passed that will require the CD to be liquidated as per the provisions of Chapter III of the code;
2. Public Announcement will be issued stating about the liquidation of the CD;
3. Order will be required to be sent to the authority in which the CD is registered;
No suit or legal proceeding can be instituted by or against the CD when the liquidation order is passed. Thus, limited moratorium is available during the process of liquidation. However, if there would be a prior approval of the AA than the liquidator can institute a suit or legal proceeding. The order of liquidation acts as a notice towards the discharge of officers of CD’s, its employees, workers, except when the business of the CD is continued during the process of liquidation by the liquidator.
CHAPTER 3 – LIQUIDATOR
3.1 APPOINTMENT OF LIQUIDATOR
When the AA is satisfied and does not approve the resolution plan than, it directly rejects the said resolution plan and will pass an order stating that the CD needs to be liquidated, public announcement shall be required to be issued which will state about the liquidation of the CD and order is required to authorise where CD is registered. When the order for liquidation is passed the appointed RP for CIRP shall be acting thereafter as a liquidator which will be subject to written consent of RP to the AA as per specified form and if required new liquidator can also be appointed. The AA needs to replace the RP if the RP’s resolution plan got rejected which he submitted to the AA for not satisfying the mandatory requirements, IBBI suggests to the AA the RP is required to be replaced with reasons in writing or failing to submit his written consent for acting as a liquidator. If the RP is replaced than, the IBBI will be directed by the AA to propose another IP to be appointed as a liquidator which the board must propose it along with the written consent from the IP proposed within a period of 10 days who will be acting as a liquidator.
Liquidation Process Regulations state about the eligible criteria for a liquidator and will be independent of the CD if they will be eligible for appointing as an independent director under the Companies Act, 2013, not a related party, not been a proprietor, employee, partner or cost auditors of the CD in the last three financial years. Further, the liquidator shall disclose about the existence of any personal or pecuniary relationship with the CD, or any of its shareholders to the AA and the IBBI.
3.2 LIQUIDATOR’s FEES
The liquidator must charge a fee for the conduct of the liquidation proceedings in proportion to the liquidation value estate assets, as may be prescribed by the IBBI. The liquidator will be paid fees from the liquidation estate proceeds under Section 53 of the code. As per the Liquidation Process Regulations the liquidator shall be paid fees according to the decision of the COC under Regulation 39D of the CIRP Regulations. The fees of the liquidator will be fixed by the COC during the CIRP period itself and if not fixed at that time than liquidator will be entitled for receiving fees at the same rate as the RP was entitled during the CIRP process, fee which will be equal to amount realized percentage, other liquidation net costs. Liquidator will be entitled for receiving half the fees which is payable on realisation.
3.3 PUBLIC ANNOUNCEMENT
For calling claims against the CD the liquidator has to make a public announcement. Within five days of his appointment, the announcement is required to be made in Form B of Schedule II. The liquidator will call upon shareholders for either updating or submitting their claims during the CIRP. Thus, any shareholders who had submitted their claims during the time of CIRP is required for updating the claims. Further, last date for submission or updating of claims is also required to be provided in the public announcement. It needs to be published via all three ways i.e. in English and one regional language newspaper with wide circulation at the CD’s registered office and in the opinion of the liquidator to any other location where CD is conducting material business. on the website of the CD and on the website of IBBI.
3.4 POWERS & DUTIES OF A LIQUIDATOR
The liquidator shall have the powers and duty which is subject to the directions of the AA in verifying claims of the creditors, taking into control and custody all the property, assets as well as claims of the CD, evaluating the property and assets of the CD in the manner prescribed by the Board, protecting and preserving the properties and assets of CD by taking measures, carrying on the CD’s business for beneficial liquidation as may be considered necessary, conducting the sale of the movable and immovable property and the CD’s actionable claims as well through public auction or contract in private manner. Further, the liquidator can also transfer such property to any body corporate or any person or the same can be even sold in parcels in the manner prescribed, accepting, drawing, or making any negotiable instruments which include hundi, bill of exchanges on the behalf of the CD.
The code further permits the liquidator for obtaining assistance of the professional to appoint any professional who is needed to discharge his obligations, duties or responsibilities. Such appointment is required to be made with a reasonable remuneration that will form part of the liquidation cost. Additionally, the liquidator can take consultation from any of the shareholder who is entitled to distribute the proceeds as per Section 53 and it won’t be binding on the liquidator. Liquidator is required to mandatorily form a stakeholder consultation committee within a period of 60 days of the commencement date of the liquidation which will be based upon the list of stakeholders which is prepared for advising on the sale related matters.
Further, the liquidator has to also invite and settle the creditor’s claims and distributing proceeds according to the provisions of the code, defending or instituting any prosecution, suit or other civil or criminal legal proceedings on behalf of the CD, investigating the financial affairs of the CD for determining preferential or undervalued transactions, applying to the AA for orders which will be necessary for the CD’s liquidation.
Liquidator has also the power for accessing any type of information for the purpose of admission or submission of proof of claims and identifying the liquidation estate assets with respect to the CD from several sources, information utility, credit information systems, state, central or local government agency, regulated system information for assets and securities which is posted as a security interest or any source which may be prescribed by the IBBI.
3.5 RAJIVE KAUL VS. VINOD KUMAR KOTHARI & ORS.
In this case, The NCLAT held that the power to remove the nominee directors of the CD on the board of the another company is with the liquidator. On the board of the NICCO Parks and Resort Limited, the liquidator wanted to remove appellants as the nominee of the CD, due to non-cooperation and attitude and many other factors. It was refused by the Appellants, stating that they were no longer nominee directors and are re-appointed in their individual capacity as directors by the shareholders. The Authority of the liquidator was also questioned for asserting any right to interfere or manage the business of the company other than the CD. The AA was approached by the liquidator which directed that the appellants have to vacate the offices as nominee directors. Further, NCLAT upheld the order of the AA observing that a company in liquidation acts through the liquidator who steps into the shoes of the Board of Directors of such company, for discharging statutory duties. Because of the ineligibility under Section 29A of the code, the appellants were not allowed in deriving any gain or benefit at the liquidation stage of the CD or its assets. Further held that, the liquidator being armed with the requisite powers for removing the appellants as nominee directors and entitled for nominating new directors.
CHAPTER 4 – ADMISSION OF CLAIMS & REALISATION OF ASSETS
4.1 ADMISSION OR REJECTION OF CLAIMS
4.1.1 SUBMISSION OF CLAIMS –
Once the liquidator is appointed, one of the first duties of his is collecting, consolidating and verifying the claims of stakeholders of the CD. Within a period of 30 days from the liquidation commencement date, the liquidator must collect or receive the claims of creditors. Using Form C of Schedule II an OC must submit claims either in person, by post or through electronic means. Further, through Form D and E of Schedule II, FC and workman and employee respectively, can submit their claims in person, by post or electronic means. Whereas, using Form G of Schedule II any other stakeholder can submit their claims in person, by post or electronic means. A creditor who is partly a FC and partly an OC must submit their claims to the liquidator to show the extent of his financial and operational debt in the manner specified for submitting claims by the FCs and OCs, respectively.
Additionally, a secured creditor has to prove his claim from the records available in an IU, or certificate of registration issued by the Registrar of Companies, or proof of registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.
4.1.2 VERIFICATION OF CLAIMS
Once all the claims are submitted, the next step that the liquidator is required to do is verifying the claims. Within 30 days of the last receipt date of claims the liquidation must verify the claims and can either admit or reject the claims wholly or partly. Further, the cost incurred for proving the claim shall be bear by the claimant itself. The costs that is incurred by the liquidator for verifying and determining a claim will form a part of the liquidation costs. But if such claim or part of a claim is found false, then the liquidator must endeavour in recovering the costs from the claimant and must provide details to the IBBI.
The claims that is denominated in foreign currency must be valued in Indian currency at the official exchange rate on the date of liquidation commencement. The amounts unpaid until the liquidation commencement date can be claimed by a person in the case of rent, interest and any other such payments.
4.1.3 ADMISSION OR REJECTION OF CLAIMS
After verifying all the claims, the liquidator can either admit or reject the claim wholly or partly. Further, if he rejects a claim, reason must be stated for such rejected and must be recorded in writing. Further, the CD is required to be informed by the liquidator within seven days about the admission or rejection of claims. A creditor can appeal before the AA against the decision of liquidator for accepting or rejecting the claims within a period of 14 days of receiving such a decision.
4.2 RIGHTS OF SECURED CREDITORS IN LIQUIDATION PROCEEDINGS
The secured creditors create wealth, employment generation and encourages entrepreneurship and drives the economy. It will promote secured lending if the rights of secured creditors are kept in priority over other claims and taxation dues is recognised under the law of secured transactions as well as law of insolvency. Therefore, the code permits the rights of secured creditor in liquidation by allowing it to enforce its security, staying outside the process of liquidation. The security will not be given up by the secured creditor to the liquidation estate and it can enforced on its own.
When the process of liquidation is commenced then the secured creditors have two options for recovering money that is owed to them i.e. either relinquish their security interest to the liquidation estate and receive proceeds from the assets that is sold by the liquidator or staying outside the liquidation process and recovering debt that is owed to them by enforcing their security interest according to the code. If the security creditor chooses to relinquish their security interest to the liquidation estate and join the proceedings of liquidation, then as per the waterfall mechanism, their claim will fall with the worker’s dues for a period of 24 months before the liquidation commencement date and will be given priority over all other claims after the payment of resolution process and liquidation process costs.
If the secured creditor chooses to realize their security interest will have to be verified all by the liquidator. It is necessary to inform the liquidator about the security interest and identifying the asset that is subject to realization of security interest. The secured creditors are also allowed for realizing security interests that can be proved to exist either from the records of security interest that the IU has maintained or any other means that is prescribed by the IBBI. An application can also be made to the AA with respect to the process of realising a secured asset, if the secured creditor encounters resistance from the CD or any person connected with the taking of possession, disposing of the security.
4.3 REALISATION AND SALE OF ASSETS
The power and duty of the liquidator for carrying on the business of the CD for its beneficial liquidation and to sell the movable and immovable property of the CD by private contract or public auction, with the power for transferring such property to any person or body corporate. The code, thus, adopted a cautious approach that the market must first endeavour and rescue the CD and if it fails to just liquidate it. Rescuing the business of the CD even after the order of liquidation is passed has some advantages i.e. helping in realising at a higher value, value preservation and to rescue a viable business. Many NCLT and NCLAT decisions have directed to the liquidators to make efforts in selling the CD as a going concern.
There were instances during the winding up regime under the Companies Act, 1956 where members of creditors of the company in liquidation or winding up, application were filed for compromise or arrangement as per Section 391 of the Companies Act, 1956 and it was successful for reviving the company. Thus, a new amendment was inserted in the Liquidation Amendment Regulations for providing a mechanism in giving shareholders an opportunity in reaching a compromise or arrangement in a time bound manner i.e. if compromise or arrangement is proposed under Section 230 of the Companies Act, 2013 it must be completed within a period of 90 days from the liquidation order. Further, if any costs are incurred by the liquidator with respect to compromise or arrangement, it must be borne by the liquidator and if the AA did not sanction the compromise or arrangement, then it shall be borne by the parties who proposed such compromise or arrangement.
In the case of S.C. Sekaran Vs. Amit Gupta and Ors., appeal was filed by the management of the CD against the order of liquidation that was passed by the AA, following the failure of resolution. It was stated that the liquidator has to keep the CD as a going concern even during the liquidation period and steps can be taken under Section 230 of the Companies Act, 2013. The liquidator was directed by the NCLAT in proceeding according to law which means he should verify the claims, take control and custody of all the assets, property, actionable claims of the CD and so on, as specified under the code. But before taking any steps in selling the assets of the CD, the liquidator was directed for taking steps under Section 230 of the Companies Act, 2013 and complete the process within a period of 90 days. Further, if the revival failed, the AA as well as the liquidator must first proceed with the sale of assets of the company wholly, and if not possible, then to sell the company partly according to law.
4.4 SALE AS A GOING CONCERN
Under Liquidation Process Regulations Chapter VI deals with the provisions of realization of the assets of CD by the liquidator. If compromise or arrangement is not proposed, then such provision shall apply. In such cases, the CD must be sold by the liquidator, its business, or its assets in the manner prescribed in the Liquidation Process Regulations. The liquidator may sell an asset on standalone basis, assets that is in slump sale, assets in parcels, CD as a going concern. Like the revival of the company in the manner of compromise or arrangement, the sale of the CD as a going concern will protect the livelihood of the workers and employees and thus, result in good realisation value of the CD’s assets. Thus, in several cases, the AA ordered for selling a company as a going concern. COC may during the time of approving the resolution plan or liquidating the CD, suggests that the liquidator first explores the sale as a going concern. If COC give recommendations for sale as a going concern, it must identify and group the assets and liabilities according to its commercial considerations that ought to be sold as a going concern. Recommendation must be submitted by the RP to the AA while filing an application for submitting either resolution plan or liquidation.
CHAPTER 5 – DISSOLUTION
5.1 DISTRIBUTION OF ASSETS
The main duty of the liquidator is inviting and settling the claims of the creditors and claimants and distributing proceeds as per the provisions of the code. Thus, waterfall mechanism is provided in the IBC which states about the priority and order of distribution of proceeds towards the sale of liquidation assets among stakeholders of the corporate person. The sale of the liquidation assets shall be distributed as per the order as per the order of priority as follows –
i. The costs of insolvency resolution process and costs of liquidation to be paid in full;
ii. The debts that will be rank equally i.e. the dues of workmen for a period of 24 month preceding the date of liquidation and the secured creditor debts which owed in the event of him to have relinquished security;
iii. The unpaid dues and wages owed to the employees, other than workmen, for 12 months before the liquidation commencement date;
iv. Owed any financial debts to unsecured creditors;
v. Any government dues in relation to the whole or any part for a period of 2 years before the liquidation commencement date and owed any debts to the secured creditor for any amount unpaid following the enforcement of security interest;
vi. Any remaining dues and debts;
vii. Preference shareholders;
viii. Equity shareholders or partners.
Before the IBC, under the liquidation system, the dues of government were given high priority with respect to the outstanding debts of the CD, whereas in the code, the payment of dues to the government has much lower priority. The cost of liquidation is required to be excluded during the time of distribution to the stakeholders and so it have the highest priority in the distribution along with the costs of CIRP. With the permission of the AA, the liquidator can distribute among the stakeholders an asset that is not readily be sold because of its peculiar nature or other circumstances. During the time of applying before the AA, the liquidator has to identify the asset, provide a value of the asset, details about the selling of asset and providing reason for the distribution.
Before the liquidator used to take up to two years for liquidating the CD but after the Liquidation Process Regulations came into effect it gave a time period for completing the whole process of liquidation from the date of the liquidation commencement within a period of one year but when a sale of going concern is attempted the process of liquidation can also take ninety days additional period. If the liquidation cannot be completed within one year by the liquidator, then an application has to be made for continuing the liquidation to the AA and specifying the additional time required along with the report which have to be explained the reason for not completing within the specified time. A preliminary report shall be submitted by the liquidator to the AA within a period of 75 days of Liquidation Commencement Date. It must include CD’s capital structure, estimate about the assets and liabilities as of the Liquidation Commencement Date, whether it is necessary for further inquiry into the formation, promotion or failure of the CD or conduct of the business and the proposed plan in carrying out the liquidation which includes the timeline to do so as well as estimated costs.
When the CD is liquidated, a liquidation account has to be made by the liquidator that has to show the conduct and the manner assets are liquidated. Reasons are required to be given in preliminary report if the cost of liquidation exceeds the cost estimated. When the sale liquidation assets are done among shareholders is completed as per the order of priority under Section 53 of the code the first will be the CIRP costs and the liquidation costs.
IBBI shall be maintaining and operating an account which will be called as Corporate Liquidation Account in the Pubic Account of India. Liquidator shall deposit any undistributed proceeds and unclaimed dividends from the process of liquidation along with the income earned till the deposit date, into such Corporate Liquidation Account, before the submission of an application for closure or dissolution of the process of liquidation of the CD. Failing to deposit any amount in the account will be required to then pay the deposit with an interest of twelve percent per annum from the date due till the deposit date. Also, if any shareholder claims for any such deposit into account can apply for withdrawal of such amount. Any amount remains unclaimed for fifteen years from the dissolution order of the CD as well as any amount of interest or income earned or received in the Corporate Liquidation Account must be transferred to the Consolidated Fund of India.
Winding up of the company by the creditors voluntary winding up which have been shifted from Companies Act, 1956 to Companies Act, 2013 and then to IBC which is known as liquidation process. The code notified that the Companies Act, 2013 in according with Schedule XI of the code which defines the term “winding up” and in the Companies Act, 2013 winding up is defined by adding a section which states that winding up as per this Act and liquidation as per the IBC. There has to be declaration verified by affidavit by majority of the directors stating that they have no debt pending or if it is they will pay all the debts by the value of assets which will be obtained through sale in voluntary liquidation proceedings and company is not defrauding any process through such liquidation. If there is any debt which is payable by the company to any person then such creditors which represent two-third value of the company debts have to allow the resolution which is passed within a period of seven days. The resolution will be a special resolution which the members of the company make for liquidating the company voluntarily.
A meeting is required to be held by the liquidator within a period of 15 days from the end of one year of the commencement of liquidation date and even the end of each succeeding year till its dissolution. An annual status report is required to be presented by the liquidator to show the progress of the liquidation which includes shareholder’s settlements, any property details which is required to be sold, any distribution made to the shareholders and the report will be enclosed with the audited account of liquidation which have to disclose the income and expenses from the date of commencement of liquidation.
Further, once the liquidation process is completed, the liquidator has to prepare final report that will include the audited accounts of the liquidation which will reflect all the receipts and the payments in relation to the liquidation from the commencement of the liquidation date. Additionally, the statement must also include the assets of the corporate person which have been disposed of, the corporate person debts have been discharged for satisfying the creditors and there is no pending of litigation. Along with the said report, a final report with respect to sale relating to the assets which will contain the realization cost, value of realization, the mode and manner of the sale and the buyer to whom the sale is made. Such sale statement will also include report if the realised value is less than what was assigned by the registered valuer. Such reports will be than submitted to the IBBI and Registrar of Companies.
When all the affairs are completely wound up of the company and liquidation of the assets is also done, than the liquidator shall make an application for dissolution of a corporate person to the AA. From the application which is filed by the liquidator, the AA will pass an order about the dissolution of the CD from the issued date of the order as per the directions in the order. The order copy must be forwarded within a period of 14 days to the authority where the corporate person is registered. The order of the NCLT for liquidation will be deemed to be discharge notice to the employees, officers as well as workmen of the CD.
CHAPTER 6 – K.SASHIDHAR VS. INDIAN OVERSEAS BANK AND ORS.
FACTS OF THE CASE
Case decided by – A.M.Khanwilkar, Ajay Rastogi, JJ.
Case decided on – February 5, 2019
This case was brought before the Supreme Court where the Appellants filed a Civil Appeal against the judgment of NCLAT dated 06.09.2018.
a. The judgment of NCLAT which rendered in filing appeals with respect to insolvency resolution under the provisions of IBC with concern to Kamineni Steel and Power India Pvt. India (KSPIPL) which is having registered office at Hyderabad and Innoventive Industries Ltd. (IIL) which is having registered office at Pune, Maharashtra. With respect to NCLT Mumbai Bench which rejected the resolution plan of IIL and so was affirmed by NCLAT whereas, with respect to NCLT Hyderabad Bench which approved the resolution plan of KSPIPL was reversed by the NCLAT and NCLAT directed both the branch for initiating liquidation process under Section 33 and 34 of the code. Further held by NCLAT that since in both the cases the resolution plan did not gather support for the voting share of not less than 75% of financial creditors which constitutes the COC and therefore it was rejected and directed the initiation of liquidation process with respect to corporate debtor i.e. KSPIPL and IIL.
b. KSPIPL was a private company incorporated on 20th October, 2008. The operation for steel was commenced on 30th March, 2013 and was functioning till the financial year of 2014-2015. Because of deficient working capital and other factors such as financial crisis led to huge amount of operational loss. Afterwards, various attempts were made for reviving the company. Under Section 15(1) of Sick Industries Companies (Special Provisions) Act, 1985, the company filed an application with BIFR on 15th November, 2016. Since the act was repealed the proceedings got abated. Then, company filed a petition for initiating CIRP under Section 10 of the code and under Rule 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. It was admitted on 10th February, 2017 by Hyderabad Bench and IRP was appointed with the direction for constituting a COC.
c. Indian Bank being the lead bank needed to inform the approval person that must proceed with their valuation. Thereafter, the corporate debtor submitted the resolution plan. Further extension of 90 days was extended by the NCLT Hyderabad Bench by the application which was served by the corporate debtor. An expression of interest was submitted by the corporate debtor from the AREA Group of Companies situated in Chandigarh for infusing an amount of Rs. 150 crores in the form of debentures which are subject to approval of lenders. The proposal was concluded with resolution plan and all can be placed along with SBI Capital Market Limited. The Indian Bank and JMFRAC Limited having a voting share of 22.33% and 12.39% disapproved the resolution plan. Further, the corporate debtor sent an email on 18th October, 2017 with One Time Settlement (OTS) scheme proposal as a substitute towards the resolution plan which was submitted where it offered proposal of Rs. 525 crore with a proper repayment period. Indian Bank in its response via email called upon the corporate debtor for filing an OTS scheme proposal of 600 crore. Further in the COC meeting, the voting share of only 55.73% was considered namely by JM Financial Asset Reconstruction Co. Ltd., Indian Bank, Andhra Bank and Allahabad Bank. Further, Oriental Bank of Commerce which is having a voting share of 10.94 % conveyed their “in-principle approval” towards the resolution plan and the revised resolution plan final approval will be accordance from the co-lenders. Bank of Maharashtra having a voting share of 6.36% was also ready for considering the revised resolution plan. Thus, on 30th October, 2017 the consenting banks had a voting share of 66.67% only. Further, the IRP filed an affidavit towards the AA i.e. NCLT Hyderabad about the facts and also about not able to gather approval of not less than 75%.The Managing director of corporate debtor appeared and stated after filing a memo that the financial creditors who had chosen for not participating in the voting, their votes should be counted without their votes so eventually the creditors who participated and approved the resolution plan came around 78.63% and assuming that the resolution plan has been then approved by the COC. Central Bank of India, Bank of Maharashtra and Indian Overseas Bank who disapproved the resolution plan were aggrieved by the decision of NCLT filed appeals under Section 61 of the code before NCLAT for questioning the authority of NCLT Hyderabad for approving the resolution plan, despite knowing the fact about not receiving 75% of the vote of financial creditors. Afterwards, the Managing director filed an appeal under Section 62 with respect to the observations which was made by the NCLT Hyderabad. After hearing all the appeals along with appeals concerning to another corporate debtor which is IIL and all were disposed of in judgment dated 6th September, 2018, where it held that it is compulsory for having a voting share of not less than 75% and the AA was not open for disregarding the mandate of the COC.
d. Another set of appeals with respect to corporate debtor i.e. IIL filed Civil Appeal by promoter of corporate debtor who is holding share of 21.82% and was managing director of the company. The workers union filed a Special Leave Petition questioning the decision of the rejection of resolution plan with respect of corporate debtor against the judgment of High Court at Bombay dated 24th September, 2018 which was filed by the workers challenging the judgment of NCLT Mumbai dated 23rd November, 2017 directing the Union Bank of India for reviving the corporate debtor and saving the company from liquidation since there was a shortfall of 8% from touching the limit of 75% of consent of COC of which High court rejected it.
e. With respect to the corporate debtor IIL who suffered losses and it proposed to the bank who is lending for Corporate Debt Restructuring (CDR). 19 banking entities referred the company to CDR and invited consortium which was led by Central Bank of India. ICICI bank in December, 2016 filed Insolvency and Bankruptcy application under IBC against corporate debtor which was admitted by NCLT Mumbai and IRP was appointed as well as moratorium was declared. Despite the pending of applications, the company achieved a turnover of Rs. 337 crore with operational revenues of Rs. 125 crore and during the same period company paid indirect tax of Rs. 8.27 crore. Afterwards, IRP was appointed and screening of RA the respective resolution plan was submitted to IRP. Financial creditors holding a voting share of 66.57% voted for approving and the rest disapproved which resulted in rejection of resolution plan. IRP then filed an application before AA for initiating liquidation process against IIL. Thus, NCLT Mumbai delivered on 8th December, 2017 and directed for initiating the liquidation proceedings.
f. The Appellant which in the leading appeal of the second sets of appeal who is the former Chairman and the Managing Director of corporate debtor i.e. IIL had filed an interim application praying about the financial creditors who are rejected to direct them to disclose reasons for voting against the resolution plan and the financial creditors with malicious intention for initiating liquidation, their votes to be ignored. The worker’s union also filed interim application for opposing the liquidation and RA also filed application for allowing them to submit resolution plan in revised manner. Since NCLT directed for initiating liquidation process, appeal was filed in NCLAT. Since both had the common issue the appeal was heard and disposed of. Aggrieved with the decision of NCLAT and High Court, the Appellant and the worker’s union of KSPIPL filed appeal.
a. Whether the revised resolution plan of RA be taken into consideration by AA after the expiry of 270 days?
b. Whether an appeal can be filed against the order of adjudicating authority (NCLT) on the disapproved resolution plan?
I. BY APPELLANTS
1. By Mr. C.U. Singh
The learned senior counsel who appeared in the case of corporate debtor of KSPIPL argued that fair interpretation of unamended provisions which was applicable on the date of resolution which needs to be held and the same will not be compulsory. Even if presuming to be not compulsory the section of financial creditors which abstained from voting and their voting to be ignored for the reason of computing the required percentage of voting. If this would be taken into consideration, than it would more than 75% of voting share. Thus, NCLT Mumbai will have to approve proposal.
2. By Mr. A.M. Singhvi
The learned senior counsel who appeared in the case of corporate debtor of IIL argued that COC is the custodian of public interest, so they are in a statutory duty for exercising power under Section 30 (4) of the code which bring obligation on the COC for adopting the resolution plan which is ex facie more practical than liquidation. The dissenting financial creditors should before the AA i.e. NCLT take a commercial decision i.e. which fulfils the test for reasonable and fair approach which needs to be supported by reasons. If the reasons are absent by the COC than the NCLT must exercise jurisdiction and ascertain whether the COC is acting reasonable and within the provisions of the code.
II. BY RESPONDENTS
By Ms. Pragya Baghel
Appearing on behalf for Indian Overseas Bank and in case of KSPIPL, having a voting share of 15.15% and also one of the dissenting financial creditors argued that the code does not permit computation for voting share percentage by excluding the financial creditors votes who had abstained. Thus it makes it clear about the votes of financial creditors who abstained from voting should be computed along with rejection of resolution plan which are dissenting financial creditors. Further, any other interpretation will result into re-writing of Section 30 (4) and also the regulations under IBC will be doing violence towards the legislative intent.
Judgment passed by the Supreme Court of India.
a. The Bench comprising of Justice A.M. Khanwilkar held that, resolution plan of both corporate debtors i.e. KSPIPL and IIL was taken into consideration by the COC in the month of October, 2017 and it was approved by less than 75% of the voting share of financial creditors. Unavoidable consequences were therefore to be treated for proposing resolution plan as deemed to be rejected by the dissenting creditors. Dissenting financial creditors is defined after amendment w.e.f 1st January, 2018 in Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 as financial creditors who voted against the resolution plan or abstained from voting for resolution plan, which is approved by Committee.
b. In case of KSPIPL, it can be known about the rejection of resolution plan by not less than 25% of financial creditors. In this case, the RP cannot submit resolution plan under Section 30(6) of IBC to the AA and instead to proceed by AA under Section 33(1) of the code. Whereas, in the case of IIL, the approval for resolution plan was only 66.67% voting share of financial creditors and thus NCLAT held that, since the resolution plan is rejected by the COC, to initiate the liquidation process.
c. Further, the remedy for appeal under Section 61 (1) was against the order of NCLT. The grounds stated for instituting an appeal was against the order of an “approved resolution plan” stated under Section 31. The grounds are such as contravention in the provision of law of approved resolution plan, during CIRP the RP was irregular in exercising powers, operational creditors debts had not been provided in resolution in the manner prescribed, not providing the insolvency resolution plan costs which is in priority of all debts and the last one is the resolution plan is not complying with criteria which is specified by the Board. Thus, Section 30 (2) or Section 61 (3) of the code was with respect to testing of approved resolution plan by the COC and not with the disapproved resolution plan.
d. As per the code, there was no requirement for dissenting financial creditors for recording reasons for rejecting or disapproving the resolution plan. Also, the AA is not empowered for overseeing the justness of the approach of the dissenting financial creditors for rejecting the proposed resolution plan or for engaging in judicial review. Further, the RP does not require for expressing his opinion on matters which are within the area of financial creditors for approving or rejecting the resolution plan as per Section 30 (4) of the code.
e. Since no grounds under Section 30 (2) and Section 61 (3) of the code are reflecting with the facts of the case, NCLT and NCLAT did proper work in recording the resolution plan with concern to corporate debtor rejected. Since within the period of 270 days no alternative resolution plan was approved by the financial creditors, it was correct to pass an order for initiating liquidation process. Also by way of application by the RA for taking the revised resolution plan on record, which cannot be done since it was not permitted to AA for entertaining such revised application after the statutory period of 270 days expires. Thus, no fault can be found of NCLAT to not entertain the said application.
f. It was further held that the NCLAT had in a precise manner in their decision about the resolution plan of corporate debtors which had not been approved by the financial creditors and also in the absence of any alternative resolution plan within a period of 270 days for taking the step of initiating liquidation process as per Section 33 of the code. Hence, the appeals are dismissed with no order as to costs.
a. The judgment limits the scope towards challenges which can be taken against the decision of COC for approving or rejecting the resolution plan. While the primary aspect of the COC’s decision for approving or rejecting the resolution plan is recognised as the important part of the code by the Supreme Court and the commercial decision of the COC is non-justiciable and will not be open to inquiry by the NCLT.
b. A note of caution is also to be known from the judgment that the not all decisions or duties which are entrusted upon the COC are non-justiciable. Since there is a shift during insolvency from corporate debtor to COC, the decision of the COC can affect the rights of the stakeholders. Thus there should be proper role of COC for balancing the duties and responsibilities towards stakeholders.
c. The decision of Supreme Court in Archelor Mittal India Pvt. Ltd. vs. Satish Kumar Gupta & Ors. and Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India have stated about the responsibilities of the COC and for ascertaining the legality and eligibility of the RA and keeping liquidation as the last resort as well as protecting the rights of other creditors as well as the resolution plan to provide equal treatment to the operational creditors.
d. The judgment also states about reducing the time for inspection in the resolution plan and for doing a timely and faster approval the resolution plans and/or initiating the commencement of liquidation by the NCLT.
e. Thus, it can be stated that, the required voting share is a must for approving a resolution plan and if it does not fulfil the requirement, then the company will go under liquidation.
CHAPTER 7 – SUGGESTION & CONCLUSION
After understanding in detail about the analysis of liquidation with some of the judgments that gives us a clear idea about how the process works and also how important is the voting share of COC matters because a valid voting share as per the code can only be decided and the AA can approve or reject the plan and if the total voting share is only not as per the limit prescribed, then the company has no other option but to go under liquidation. There are few suggestions that is required for a better insolvency and bankruptcy process in our Indian system.
Firstly, the important challenge is ensuring that the law may achieve its objective for the reason it was introduced and by timely rechecking the implementation of such law can also be a good manner to maintain it. The code being a comprehensive law which makes it uniform because of having procedure for insolvency and bankruptcy of every person which includes corporate, partnership, individuals and Limited Liability Partnership but till date many of the provisions of IBC is still not notified and thus it not in force. It being a uniform code there is a necessity to bring into effect all the provisions of the code such as to bring into force the fast track corporate insolvency resolution process, insolvency in relation to individuals for effective insolvency and resolution proceedings. Fast track corporate insolvency resolution process is also not notified yet in practise and thus it is necessary to be notified so that it can come into effect.
With respect to the liquidation process, there is a need for recognising a good level of autonomy for the functioning of IPs as liquidators. The decision relating to the effective sale of a CD as a going concern or affect for any compromise or arrangement, must be ideally left upon the assessment of the liquidation. Further, the main aspect with respect to the IBC is reorganising a company for having a good position in future and the debts are paid of the creditors. So, prioritising it and looking that the company can be brought back into position by a proper resolution plan will be main objectives and if by any reasons it does not happen, the ultimate option should be liquidation and even in that the code provides with compromise or arrangement so it gives an opportunity to a company to revive.
The concept of liquidation as a going concern envisages the balance between the two processes of Insolvency and Bankruptcy law that fail to be realised as workable solutions, in light towards the factors such as the nature of the business of the company, workmen employed by the CD or size of the employees, the nature of the business of the current going concern of CD, either partially or wholly. Such factors direct towards the chain reaction effects on all the stakeholders of the operation of the business which includes employees, creditors and community as a whole.
The Insolvency Professionals who are experts are only permitted to be appointed as liquidators which will accelerate to complete voluntary winding up in a time bound manner. There is a change in the liquidation process by the IBBI which states that the completion of the process should be within a period of one year from it commencement. Further, the new regulations also state about the compromise between the stakeholders shall happen within 90 days of the order of liquidation.
The code provides a legal framework with a time bound process by CIRP for the companies to restructure or for exiting the market by liquidation process. It has particularly become legislative reform to strengthen India’s insolvency, help non-performing loans and increase the creditors overall recovery. The aim towards the resolution of debts and intending to break the chains of delay as well as non-payments or where a serious financial distress is there, then handing over the overall management to the IPs and if the resolution is not possible than from there to the liquidation. The code is a shift from “Debtor in possession” to “Creditor in control” and idea to give debtor several chances for surviving with the hope which will revive and also rise as phoenix from the ashes. Through this code timely insolvency process will help the businesses who are not performing will perish faster, to make such resources accessible to other entrepreneurs, than merely delaying the unavoidable death.
The Covid-19 pandemic is likely to destabilize and far-reaching effects on the businesses. There are many predictions about large business failures globally and it has already been started seeing around because of not able to function effectively and small businesses are required to be equipped for rapid restructuring viable business and non-viable business to be liquidated. The passing of time will bring more success of the code can be predicted. The questions relating to the functioning in effective manner and their answers are given timely is required to be done in a right away. Therefore, through this code, shareholders are ensured for India’s insolvency regime to continue in achieving its objectives and facilitating India to strengthen credit environment and further entrepreneurship in the country.
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