Realisation and Distribution of Assets by Liquidator | IBC

Topics covered in this article are as follows:

1. Realisation of assets by Liquidator

1.1 Mode of sale

2. Distribution of assets

2.1 Distribution of assets from sale of liquidation assets

2.2 Fees payable to liquidator to be deducted from distribution

2.3 Insolvency resolution process costs

3. Completion of liquidation within one year
4. Final report by Liquidator prior to dissolution

4.1 Unclaimed proceeds of liquidation or undistributed assets to be transferred to Corporate Liquidation Account

5. Dissolution of corporate debtor

Note: To view Amended, Updated & Annotated Insolvency and Bankruptcy Code 2016 [as amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021], refer to [14th Edition] of Taxmann's Insolvency & Bankruptcy Law Manual

1. Realisation of assets by Liquidator

The liquidator may (a) sell an asset on a standalone basis; or (b) sell the assets in a slump sale (c) sell of assets collectively (d) sell the assets in parcels or (e) the corporate debtor as a going concern (f) the business(es) of the corporate debtor as a going concern. However, if the asset is subject to security interest, it shall not be sold under any clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate – Regulation 32 of IBBI (Liquidation Process) Regulations, 2016.

1.1 Mode of sale

Provisions are contained in Regulation 33 of IBBI (Liquidation Process) Regulations, 2016.

The liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified in Schedule I of IBBI (Liquidation Process) Regulations, 2016.

2. Distribution of assets

The proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within specified period and in specified manner only.

These are overriding provisions, notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force – section 53(1) of Insolvency Code, 2016.

The priority as indicated in section 53 of Insolvency Code, 2016 override provisions of sections 326 and 327 of Companies Act, 2016, as per section 327(7) of Companies Act, 2016 as inserted by Schedule XI of Insolvency and Bankruptcy Code, 2016.

This priority overrides any contract between corporate debtor and recipients to the contrary – section 53(2) of Insolvency Code, 2016.

2.1 Distribution of assets from sale of liquidation assets

The proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within specified period and in specified manner only.

These are overriding provisions, notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force – section 53(1) of Insolvency Code, 2016.

The priority as indicated in section 53 of Insolvency Code, 2016 override provisions of sections 326 and 327 of Companies Act, 2016, as per section 327(7) of Companies Act, 2016 as inserted by Schedule XI of Insolvency and Bankruptcy Code, 2016.

The priority as provided in section 53(1) of Insolvency Code applies to statutory dues of Government and Local Authority.

Section 53(1) of Insolvency Code prescribes priority of distribution of assets in liquidation. Validity of this section has been upheld in Swiss Ribbons v. UOI (2019) 4 SCC 17 = 152 SCL 365 = 101 taxmann.com 389 (SC).

The priority is as follows:

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

(b) The following debts which shall rank equally between and among the following:-

(i) workmen’s dues as assigned to it in section 326 of the Companies Act, 2013, for the period of twenty-four months preceding the liquidation commencement date and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52 of Insolvency Code, 2016.

(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) The following dues shall rank equally between and among the following:—

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

(f) Any remaining debts and dues.

(g) Preference shareholders, if any, and

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

2.2 Fees payable to liquidator to be deducted from distribution

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under section 53(1) of Insolvency Code, 2016, and the proceeds to the relevant recipient shall be distributed after such deduction.

Distribution on proportionate basis of proceeds are insuffic-
ient – At each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full – Explanation (i) below section 53(3) of Insolvency Code, 2016.

Position of tax dues, trust money, secured creditors etc. – Though section 53 of Insolvency Code gives basic provisions relating to distribution of assets, there are various issues relating to tax dues, other statutory dues, trust money, secured creditors etc.

2.3 Insolvency resolution process costs

“Insolvency resolution process costs” means – (a) the amount of any interim finance and the costs incurred in raising such finance (b) the fees payable to any person acting as a resolution professional (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern (d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process and (e) any other costs as may be specified by the Board (IBBI) – Section 5(13) of Insolvency Code, 2016.

3. Completion of liquidation within one year

The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, even if application for avoidance of transaction is pending. For sale as going concern, additional 90 days are available.

If the liquidator fails to liquidate the corporate debtor within one year, he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been completed and specifying the additional time that shall be required for liquidation – Regulation 44 of IBBI (Liquidation Process) Regulations, 2016 as amended on 25-7-2019.

4. Final report by Liquidator prior to dissolution

When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.

If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.

The final report shall form part of the application for the dissolution of the corporate debtor to the Adjudicating Authority to be made under section 54 of Insolvency Code, 2016 – Regulation 45 of IBBI (Liquidation Process) Regulations, 2016.

4.1 Unclaimed proceeds of liquidation or undistributed assets to be transferred to Corporate Liquidation Account

Corporate Liquidation Account means the Corporate Liquidation Account operated and maintained by IBBI under regulation 46 – Regulation 2(1)(ca) of IBBI (Liquidation Process) Regulations, 2016 inserted w.e.f. 6-1-2020.

IBBI will maintain Corporate Liquidation Account with a sche-duled bank (till such account is opened in Public Accounts of India) – Regulation 46(1) of IBBI (Liquidation Process) Regulations, 2016 inserted w.e.f. 6-1-2020.

Liquidator shall deposit amounts of unclaimed dividends and undistributed proceeds and income earned thereon in Corporate Liquidation Account before he submits application under Regulation 45(3) of IBBI (Liquidation Process) Regulations, 2016 – Regulation 45(2) of IBBI (Liquidation Process) Regulations, 2016 inserted w.e.f. 6-1-2020.

The details of account have been specified in IBBI circular No. IBBI/LIQ/027/2020, dated 9-1-2020.

5. Dissolution of corporate debtor

After the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.

The Adjudicating Authority shall then order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly – section 54(2) of Insolvency Code, 2016.

A copy of an order of Adjudicating Authority under section 54(2) shall within seven days from the date of such order, be forwarded to the authority with which the corporate debtor is registered – section 54(3) of Insolvency Code, 2016.

Continue Reading: 

1. Background of the Insolvency & Bankruptcy Code
2. Insolvency Resolution of Corporate Persons
3. Conducting Corporate Insolvency Resolution Process
4. Liquidation process for Corporate Persons
5. Adjudicating, Appeals and Penalties for Corporate Persons
6. Bankruptcy for Individuals and Partnership firms