Liquidation on or after Failing of Resolution Plan

Regulation 31A of the IBBI (Liquidation Process) Regulations, 2016 mandates that the Liquidator shall constitute a Stakeholders’ Consultation Committee (SCC) comprising of all creditors of the corporate debtor, within sixty days from the liquidation commencement date.

SCC comprises of all creditors of the corporate debtor, includes representatives from all classes of stakeholders, such as financial creditors, operational creditors, workmen, and employees.

It is formed to advise him on matters-

(a)remuneration of professionals appointed under regulation 7;

(b)sale under regulation 32, including manner of sale, pre-bid qualifications, reserve price, marketing strategy and auction process.;

(c)fees of the liquidator;

(d)valuation under sub- regulation (2) of regulation 35;

(e)the manner in which proceedings in respect of preferential transactions, undervalued transaction, extortionate credit transaction or fraudulent or wrongful trading, if any, shall be pursued after closure of liquidation proceedings and the manner in which the proceeds, if any, from these proceedings shall be distributed;

(g)continuation or institution of any suits or legal proceedings by or against the corporate debtor;

(h)extension of payment of balance sale consideration as provided in clause (12) of Para 1 of Schedule I, beyond ninety days, to be disclosed in the auction notice.

It may be noted that-

A secured creditor who has not relinquished his security interest under section 52 shall not be part of the consultation committee; Promoters, directors, partners or their representatives may attend the meeting of the consultation committee, but shall not have any right to vote. Financial creditor or his representative, if he is a related party of the corporate debtor, shall not have right to vote.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 6A(ii) (Syllabus 2022).

Regulation 31A of the IBBI (Liquidation Process) Regulations, 2016 mandates constitution of Stakeholders’ Consultation Committee by the Liquidator, comprising of all creditors of the corporate debtor, within sixty days from the liquidation commencement date, based on the list of stakeholders prepared under regulation 31, to advise him on matters

(a)remuneration of professionals appointed under regulation 7;

(b)sale under regulation 32, including manner of sale, pre-bid qualifications, reserve price, marketing strategy and auction process.;

(c)fees of the liquidator;

(d)valuation under sub- regulation (2) of regulation 35;

(e)the manner in which proceedings in respect of preferential transactions, undervalued transaction, extortionate credit transaction or fraudulent or wrongful trading, if any, shall be pursued after closure of liquidation proceedings and the manner in which the proceeds, if any, from these proceedings shall be distributed;

(f)review of marketing strategy in case of failure of sale of corporate debtor as a going concern;

(g)continuation or institution of any suits or legal proceedings by or against the corporate debtor;

(h)extension of payment of balance sale consideration as provided in clause (12) of Para 1 of Schedule I, beyond ninety days, to be disclosed in the auction notice.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 5(a) (Syllabus 2017).

Section 38 of the IBC, 2016 prescribes a time period for the collection of claims by the liquidator. It also specifies the methods by which different categories of creditors can submit and prove their claims.

Receipt or collection of claims - Section 38(1) provides that the liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process.

Submission of claim by financial creditor - According to section 38(2), a financial creditor may submit a claim to the liquidator by providing are cord of such claim with an information utility.

In cases where the information relating to the claim is not recorded in the information utility, the financial creditor may submit the claim in the same manner provided for the submission of claims for the operational creditor under sub-section (3).

Submission of claim by operational creditor- An operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board. [Section 38(3)].

Claims by creditor who is partly a financial and partly an operational creditor- A creditor who is partly a financial creditor and partly an operational creditor shall submit claims to the liquidator to the extent of his financial debt in the manner as provided in sub-section (2) and to the extent of his operational debt under sub- section (3). [Section 38(4)]

Withdrawal or variation of claims - A creditor may withdraw or vary his claim under section 38 with in fourteen days of its submission. [Section 38(5)]

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 5(e) (Syllabus 2017).

The Adjudicating Authority, in exercise of powers may order for liquidation of the Corporate Debtor. However, keeping in view liquidation is the last resort because revival is the priority for the economy.

Section 33 of the Insolvency and Bankruptcy Code, 2016 provides that the Adjudicating Authority shall pass an order requiring the corporate debtor to be liquidated if:

1)No resolution plan is received under section 30(6) 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;

2)the resolution plan under section 31 is rejected by the Adjudicating Authority for noncompliance of the requirements specified therein;

3)Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of 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;

4)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, makes an application to the Adjudicating Authority for a liquidation order and such a contravention is determined by the Adjudicating Authority.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 5(b) (Syllabus 2017).

Section 36 (3) of the Insolvency and Bankruptcy Code, 2016 (IBC) specifies the assets of the Corporate Debtor that should be taken into custody as Liquidation Estate.

a)In a similar way, Section 36 (4) of IBC illustrates the following assets which shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation assets owned by a third party which are in possession of the corporate debtor, including-

i)assets held in trust for any third party;

ii)bailment contracts;

iii)all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund;

iv)other contractual arrangements which do not stipulate transfer of title but only use of the assets; and

v)such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

b)assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;

c)personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;

d)assets of any Indian or foreign subsidiary of the corporate debtor; or

e)any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 5(e) (Syllabus 2017).

The IBBI (Liquidation Process) Regulations, 2016 defines “contributory” means a member of the company, a partner of the limited liability partnership, and any other person liable to contribute towards the assets of the corporate debtor in the event of its liquidation.

Regulation 40 of the Liquidation Process Regulations provides for Liquidator to realize uncalled capital or unpaid capital contribution as follows:

•The liquidator shall realize any amount due from any contributory to the corporate person.

•ReaIisation of uncalled capital and calls in arrear: The liquidator shall be entitled to call and realize the uncalled capital of the corporate person and to collect the arrears if any due on calls made prior to the liquidation commencement date.

•The liquidator shall exercise this power notwithstanding any charge or encumbrance on the uncalled capital of the corporate person.

•A 15 days demand notice shall be served to the contributory to make the payments within fifteen days from the receipt of the notice.

Along with right to serve demand notice to collect dues or calls-in-arrear, the liquidator is vested with the right to hold all moneys so realized subject to the rights, if any, of the holder of any such charge or encumbrance.

Subject to the directions of the Adjudicating Authority, Liquidator under Section 35(1) (h) of Insolvency & Bankruptcy Code shall have power to take out, in his official name, letter of administration to any deceased contributory and to do in his official name any other act necessary for obtaining payment of any money due and payable from a contributory or his estate which cannot be ordinarily done in the name of the corporate debtor.

No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporate person.

According to Section 295(3) of the Companies Act, 2013 in the case of any company, whether limited or unlimited, when all the creditors have been paid in full, any money due on any account whatever to a contributory from the company may be allowed to him by way of set- off against any subsequent call.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 6A(i) (Syllabus 2022).

The following shall not be included in the liquidation estate assets under the Insolvency and Bankruptcy Code: -

(a)assets owned by a third party which are in possession of the corporate debtor, including –

(i)assets held in trust for any third party;

(ii)bailment contracts;

(iii)all sums due to any workman or employee from the provident fund, the pension fund and the gratuity

fund;

(iv)other contractual arrangements which do not stipulate transfer of title but only use of the assets; and

(v)such other assets as may be notified by the Central Government in consultation with any financial sector

regulator;

(b)assets in security collateral held by financial services providers and are subject to netting and set-off in

multi-lateral trading or clearing transactions;

(c)personal assets of any shareholder or partner of a corporate debtor as the case may be provided such

assets are not held on account of avoidance transactions that may be avoided under this Chapter;

(d)assets of any Indian or foreign subsidiary of the corporate debtor; or

(e)any other assets as may be specified by the Board, including assets which could be subject to set-off

on account of mutual dealings between the corporate debtor and any creditor.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 5(a) (Syllabus 2017).

According to Schedule I read with Regulation 33 of Insolvency & Bankruptcy Board of India (Liquidation Process) Regulations, 2016 -

1.Where assets are to be sold through auction, the Liquidator shall do so in the manner specified herein

2.Prepare strategy with the help of professional. The strategy may include -

a.Release of Advertisement

b.Information & Description of Assets

c.Preparing a Notice of Sale and

d.Liasoning with Agents

e.Terms and Conditions of Sale

f.Reserve Price, Earnest Money Deposit

g.Reserve Price shall be the value arrived in accordance with Regulation

h.It auction fails, the reserve price can be reduced upto 25% in subsequent auction

i.Public announcement

j.Liquidator shall provide all assistance for conduct of due diligence by interested buyers

k.Sale through an electronic auction as an online portal

l.For physical auction, the Liquidator shall obtain approval of NCLT

m.Highest bid at any time shall be visible to other bidders

n.The highest bidder shall be directed to provide balance amount within the time prescribed in Sale Notice

o.On receipt of payment, Liquidator shall execute certificate of sale or sale deed to transfer the assets and deliver the assets as per the terms of sale.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 5(e) (Syllabus 2017).

As per Sections 53 of the Insolvency and Bankruptcy Code, 2016, the proceeds from the sale of the liquidation assets shall be distributed in the order of priority and within such period as specified thereunder.

Accordingly, in the present question, the Order of priority payment is given as under:

i.Liquidator's remuneration;

ii.Debts owed to a secured creditor who has relinquished the security;

iii.Wages and any unpaid dues owed to employees other than workmen for 24 months preceding the liquidation commencement date;

iv.Financial debts owed to unsecured creditors;

v.Preference shareholders

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 4(c) (Syllabus 2017).

Section 37(1) of the Insolvency and Bankruptcy Code, 2016 provides that notwithstanding anything contained in any other law for the time being in force, the liquidator shall have the power to access any information systems for the purpose of admission and proof of claims and identification of the liquidation estate assets relating to the corporate debtor from the following sources:

a)an information utility;

b)credit information systems regulated under any law for the time being in force;

c)any agency of the Central, State or Local Government including any registration authorities;

d)information systems for financial and non-financial liabilities regulated under any law for the time being in force;

e)information systems for securities and assets posted as security interest regulated under any law for the time being in force;

f)any database maintained by the Board; and

g)any other source as may be specified by the Board.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 6A(i) (Syllabus 2017).

Calculation of remuneration payable to Liquidator

Step I : Calculation of amount available for unsecured creditors

Amount (Rs.)

Step Il : Calculation of Remuneration to Liquidator

Amount (Rs.)

Remuneration on realisation of assets

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 6A(ii) (Syllabus 2017).

For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned, which will be called the liquidation estate in relation to the corporate debtor. The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors. All the assets of the Corporate Debtor in liquidation are to be taken into custody by the Liquidator on receipt of the order of appointment by National Company Law Tribunal.

Section 36 of the Insolvency and Bankruptcy Code, 2016 (IBC) elaborates the term Liquidation Estate. Accordingly, all such assets that are either in the possession of the Corporate Debtor at its own premises or any other place including encumbered assets, intangible assets such as intellectual property rights, securities, insurance policies, any assets that have been recovered through proceedings for avoidable transactions and assets that have been relinquished by the secured creditors.

Liquidation Estate does not include assets held in trust for third parties, bailment contracts, and amounts due to workmen towards provident fund, pension or gratuity, leased assets, such other assets as prescribed. Liquidator needs to distinguish between assets that could be included and excluded for taking into custody.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 6(c) (Syllabus 2017).

Normally, liquidator has to dispose the assets of the Corporate Debtor through auction in a transparent manner and hence many liquidators resort to online auctions.

However, Regulation 32 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 enables the liquidator to dispose either on standalone basis, Slump sale, as set of assets or in parcels, as a going concern either the Corporate Debtor or its businesses.

Further, Regulation 33 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 prescribes the mode of Sale as specified in Schedule I to the Regulations. It need not be sale by auction but a private sale could be done in cases of perishable assets, assets value may deteriorate requiring immediate sale, assets may fetch more than reserve price in case of failed Auction or permission is obtained from the adjudicating authority.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 6A(ii) (Syllabus 2017).

Regulation 40 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 lays down the provisions relating Liquidator to realize uncalled capital or unpaid capital contribution. According to Regulation 40:

(1)The liquidator shall realize any amount due from any contributory to the corporate debtor.

(2)Notwithstanding any charge or encumbrance on the uncalled capital of the corporate debtor, the liquidator shall be entitled to call and realize the uncalled capital of the corporate debtor and to collect the arrears, if any, due on calls made prior to the liquidation, by providing a notice to the contributory to make the payments within fifteen days from the receipt of the notice, but shall hold all moneys so realized subject to the rights, if any, of the holder of any such charge or encumbrance.

(3)No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitutional documents of the corporate debtor.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 5(c) (Syllabus 2017).

Yes, the liquidator can sell assets by a route other than auction method when:

(a)the asset is perishable;

(b)the asset is likely to deteriorate in value significantly if not sold immediately;

(c)the asset is sold at a price higher than the reserve price of a failed auction; or

(d)the prior permission of the Adjudicating Authority has been obtained for such sale.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 5(e) (Syllabus 2017).

Section 53 of the Insolvency and Bankruptcy Code, 2016 has significantly altered the priority of claims for distribution of liquidation proceeds of a corporate debtor. The priority of claims as enumerated in the Insolvency and Bankruptcy Code, 2016 provides for payment to unsecured financial creditors before payment towards Government dues.

Section 53(1) of the Code stipulates that the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority:

(a)the insolvency resolution process costs and the liquidation costs paid in full;

(b)workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and debts owed to a secured creditor;

(c)wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d)financial debts owed to unsecured creditors;

(e)Government dues and remaining secured creditors (any remaining debt if they enforce their collateral);

(f)any remaining debts and dues;

(g)preference shareholders, if any; and

(h)equity shareholders or partners, as the case may be.

***

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 6A(iii) (Syllabus 2017).

Section 53 of the Insolvency and Bankruptcy Code 2016 deals with distribution of assets in liquidation. The Insolvency and Bankruptcy Code, 2016 makes significant changes in the priority of claims for distribution of liquidation proceeds.

In case of liquidation, the assets will be distributed in the following order:

(i)fees of insolvency professional and costs related to the resolution process;

(ii)wormen’s dues for the preceding 24 months and secured creditors;

(iii)employee wages;

(iv)unsecured creditors;

(v)government dues and remaining secured creditors (any remaining debt if they enforce their collateral);

(vi)any remaining debts and dues

(vii)preference shareholders, if any; and

(viii)equity shareholders or partners, as the case may be.

Before the enactment of the Code, the government dues were immediately below the claims of secured creditors and workmen in order of priority. Now, the Central and State Government’s dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 6(c) (Syllabus 2017).

As per Section 49 of the IBC, 2016, a transaction shall be considered as defrauding creditors where transaction was deliberately entered into by such corporate debtor -

(a)for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or

(b)in order to adversely affect the interests of such a person in relation to the claim.

Section 49 strikes at transactions entered into with the intention of prejudicing the interests of a person who has made or may make a claim against the corporate debtor. According to section 49, where the corporate debtor has entered into an undervalued transaction as referred to in subsection (2) of section 45, the Adjudicating Authority shall make an order-

(i)restoring the position as it existed before such transaction as if the transaction had not been entered into; and

(ii)protecting the interests of persons who are victims of such transactions.

The proviso appended to section 49 makes it clear that an order under section 49 -

(a)shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and

(b)shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 1(d) (Syllabus 2017).

Preferential transaction in reference to corporate insolvency resolution process or the liquidation process means preferential transaction made with any person within the period of one year preceding the insolvency commencement date or transaction made with a related party within a period of two years preceding the insolvency commencement date.

An application may be made to the Adjudicating Authority by the Liquidator or Resolution Professional for avoidance of such preferential transaction.

Section 44 of Insolvency & Bankruptcy Code, 2016 specifies the orders that may be passed by the Adjudicating Authority in relation to the avoidance of a preferential transaction. These orders are passed to reverse the effects of the preferential transaction and require the person to whom the preference is granted to pay back any gains he may have made as a result of such preference.

Section 44 lays down that the Adjudicating Authority, may on an application made by the resolution professional or liquidator under sub-section (1) of section 43, by an order:

(a)require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;

(b)require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;

(c)release or discharge (in whole or in part) of any security interest created by the corporate director;

(d)require any person to pay such sum in respect of benefits received by him from the corporate debtor, such sum to the liquidator or the resolution professional, as the Adjudicating Authority may direct;

(e)direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;

(f)direct for providing security or charge of any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and

(g)direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 4(c) (Syllabus 2017).

Section 48 of the Insolvency and Bankruptcy Code, 2016 lists out the orders that may be passed by the Adjudicating Authority setting aside the transaction at undervalue. According to section 48, the order of the Adjudicating Authority under sub-section (1) of section 45 of the Code may provide for the following:

(a)require any property transferred as part of the transaction, to be vested in the corporate debtor;

(b)release or discharge (in whole or in part) any security interest granted by the corporate debtor;

(c)require any person to pay such sums, in respect of benefits received by such person, to the liquidator or the resolution professional as the case may be, as the Adjudicating Authority may direct; or

(d)require the payment of such consideration for the transaction as may be determined by an independent expert.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 6(b) (Syllabus 2017).