The process of dissolving or winding up a corporation is known as liquidation. The corporate debtor’s dissolution or winding up indicates that it will cease to exist or close down completely. The process of liquidation is started under the IBC when a corporate debtor becomes incapable of repaying its debts and going on its business as usual. The corporate debtor’s debts are settled by selling its assets and dividing the revenues to its creditors, employees, shareholders, partners, and, in some situations, the government.
The start of the liquidation process is governed by Section 33 of the Insolvency and Bankruptcy Code, 2016.The following events can lead to the liquidation of a corporate debtor:
- If the Adjudicating Authority does not receive a resolution plan before the end of the Insolvency Resolution Process period or the maximum period allowed for completion of the Corporate Insolvency Resolution Process,
- When the Adjudicating Authority rejects the resolution plan because it fails to meet the conditions set out in section 31 of the IBC.
- The Adjudicating Authority shall pass a liquidation order if the resolution professional informs the Adjudicating Authority of the committee of creditors’ decision to liquidate the corporate debtor at any time during the Corporate Insolvency Resolution Process but before confirmation of the resolution plan.
- Any person other than the corporate debtor whose interests are prejudicially affected by the contravention of the Adjudicating Authority’s resolution plan may apply to the Adjudicating Authority for a liquidation order if the corporate debtor violates the resolution plan approved by the Adjudicating Authority.
- If the Adjudicating Authority concludes that the corporate debtor has violated the resolution plan’s terms after receiving an application under sub-section (3) of section 33,its hall issues a liquidation order.
The Adjudicating Authority will make a public notice once the order of liquidation has been issued, stating that the corporate debtor’s liquidation process has begun. No suit or other legal action may be brought by or against the corporate debtor once a liquidation order has been issued
Steps followed for liquidation:
(Chapter III Sec 33 to 54)
- The moratorium will begin once the liquidation process has begun in accordance with the above-mentioned criteria. Following the moratorium, a public statement of the corporate debtor’s liquidation will be published.
- A liquidator is appointed in accordance with section 34, and the fee to be paid to him for the proceedings is established. The liquidator’s fee is deducted from the liquidation estate’s proceeds. Unless NCLT replaces him, the resolution professional also serves as a liquidator. Section 36 of the IBC establishes a liquidation trust. This section is crucial to the company liquidation process because it specifies which assets of the corporate debtor will be included in the liquidation estate, how the assets will be allocated by the liquidator, and who will retain the estate as a fiduciary for all creditors.
- After that, the creditors’ claims are processed. This process is aided by a number of sections. Section 38 explains how to combine claims from financial and operational creditors, section 39 explains how to verify claims, section 40 explains the claim acceptance and denial process, and section 42 explains how to appeal the liquidator’s decision.
Voluntary Liquidation of Company:
The Code allows for voluntary liquidation by a corporation that chooses to dissolve itself, has not made any defaults, and can fully repay its debts from the profits of its assets liquidation. A majority of the company’s directors must sign a declaration to that effect, as well as a statement that the firm is not being liquidated to mislead anyone. A resolution to this effect must be accepted by creditors who account for two-thirds of the company’s debts. When the creditors pass the above-mentioned resolution, voluntary liquidation begins. Voluntary liquidation is subject to the provisions of the liquidation process. The NCLT issues an order for the debtor’s dissolution once it has been completely wound up and its assets liquidated.
The purpose of implementing the IBC was to rehabilitate and revitalize the corporate debtor to the point where it could carry on its business on its own. The liquidation process is not intended to be a replacement for the resolution process, but rather a final resort if the settlement process fails.