Who Can Initiate the Liquidation Process?

In the Insolvency and Bankruptcy Code (IBC), 2016, liquidation is the last resort when a corporate debtor is unable to resolve its financial distress through the Corporate Insolvency Resolution Process (CIRP). The liquidation process may be initiated in specific circumstances, and various stakeholders can take steps to trigger liquidation under the IBC.

Who Can Initiate the Liquidation Process?

Under Section 33 of the IBC, the liquidation process can be initiated by:

The Committee of Creditors (CoC)

After CIRP has failed, if the Committee of Creditors (CoC) believes that no resolution plan can be successfully approved or implemented, the CoC can decide to file a petition for liquidation.

The CoC may file a liquidation application if no resolution plan is accepted within the prescribed time frame (330 days).

Once the CoC decides to initiate the process, they can recommend liquidation, which must be approved by the National Company Law Tribunal (NCLT).

The Corporate Debtor

If the corporate debtor itself concludes that it is unlikely to resolve its financial issues under CIRP, it can voluntarily apply for liquidation under Section 33(1)(a) of the IBC.

The corporate debtor may file a petition if there are no assets or a viable business plan, or if it is not possible to reach an agreement on a resolution plan.

The corporate debtor’s board or management can initiate liquidation in such cases.

The Financial Creditors

A financial creditor can also file a petition for liquidation after the CIRP has failed.

Financial creditors, especially those with secured claims, have significant influence in the decision-making process of the CoC, and if they are dissatisfied with the resolution process or its outcome, they can push for liquidation.

Financial creditors are typically more invested in the outcome as they have the highest priority in the repayment process.

The Operational Creditors

Operational creditors (such as suppliers or service providers) can also apply for liquidation if the CIRP fails and if they have not been able to get a favorable resolution under the CoC or NCLT.

Operational creditors have a lower priority compared to financial creditors, but in the absence of a resolution plan, they may resort to liquidation as an alternative.

The Adjudicating Authority (NCLT)

In certain circumstances, the National Company Law Tribunal (NCLT) can pass an order for liquidation suo-motu (on its own) even if no party files a petition.

This could happen if the CIRP fails and no viable resolution plan is available, or if there is a delay in the process and no one moves the court. The NCLT is empowered under Section 33 of the IBC to order liquidation after the CIRP has failed.

Circumstances Under Which Liquidation Can Be Initiated:

Failure of CIRP Process

If the CIRP does not result in a resolution plan being approved by the CoC, the corporate debtor must face liquidation.

CIRP failure occurs if the CoC rejects all resolution plans, or if no resolution plan is submitted within the specified time period (330 days).

Voluntary Liquidation by Corporate Debtor

The corporate debtor can voluntarily initiate liquidation even if it has not gone through CIRP.

This is typically done when the company is unable to pay its debts and is no longer operational, and the creditors agree that liquidation is the best course of action.

Insolvency Proceedings Are Not Initiated

If the corporate debtor or its creditors do not initiate the CIRP and there is no resolution plan, the NCLT may intervene and initiate liquidation proceedings under its powers as per Section 33.

Failure to Submit a Viable Resolution Plan

After CIRP is initiated, if a viable resolution plan that meets statutory requirements is not submitted, the NCLT may order liquidation.

Liquidation Process After Initiation:

Once the liquidation process is initiated by any of the authorized parties, the following key steps occur:

Appointment of Liquidator:

The NCLT appoints an insolvency professional (IP) as the liquidator. The liquidator assumes control over the assets and liabilities of the corporate debtor.

Asset Realization:

The liquidator identifies and realizes the assets of the corporate debtor. The assets are sold to pay creditors.

Creditor Claims:

Creditors submit their claims to the liquidator, who reviews and approves the claims based on the priority order.

Distribution of Proceeds:

The proceeds from the sale of the debtor's assets are distributed to the creditors in the following order:

• Liquidation costs.
• Secured creditors.
• Employee dues.
• Unsecured creditors.
• Equity shareholders.

Closure of the Company:

Once the assets are sold, and creditors are paid according to their priorities, the company is formally dissolved, and its registration is canceled.

Example: Initiating Liquidation

ABC Ltd.

Debt: ABC Ltd. owes ₹150 crore to its creditors.

CIRP Failure: The CIRP process fails as no viable resolution plan is approved by the CoC within 330 days.

CoC Decision: The CoC recommends liquidation as no agreement on a resolution plan could be reached.

Liquidation Application: The CoC files a petition with the NCLT for liquidation.

NCLT Orders Liquidation: The NCLT passes an order for liquidation and appoints a liquidator.

Asset Sale: The liquidator sells ABC Ltd.'s assets (land, machinery, etc.) for ₹80 crore.

Payment to Creditors: The proceeds are distributed to creditors in the order of priority. Secured creditors recover 60% of their claims, and unsecured creditors recover much less.

Conclusion

The liquidation process under the Insolvency and Bankruptcy Code (IBC), 2016 can be initiated by various parties, including the Committee of Creditors (CoC), the corporate debtor, financial creditors, operational creditors, or even the NCLT itself. Once initiated, the liquidator takes charge of selling the debtor’s assets and distributing the proceeds to creditors based on their priority. Liquidation is often the final step after all attempts at restructuring the business through CIRP have failed.