Liquidation of Corporate Debtors

Liquidation of Corporate Debtors Under Insolvency and Bankruptcy Code

Liquidation of Corporate Debtors Under Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”), was implemented to mend the broken and unstable system of insolvency. The Code has been corroborated in a manner where it assimilates all aspects of an insolvent or bankrupt company or corporate debtor. The ideology behind framing a law dedicated specifically to this subject was to safeguard the operations of the corporate debtor.

The Supreme Court in the landmark judgment of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. has defined the primary objective of the Code. It states that the fundamental focus of The Code is to ensure the revival of the corporate debtor. The revival is against the management that led it to defaulted payments and to also safeguard it from corporate death. However, liquidation is the only viable option when all other alternatives exhaust. The Code also provides for the corporate debtor to file an application for insolvency before the adjudicating authority, against itself.

The insolvency system requires the parties involved i.e. the Committee of Creditors, to prepare a resolution plan. This is done to rectify the corporate debtor’s consequences for the act of insolvency and to also keep its operations as a going concern. However, not every insolvency proceeding concludes with a successful resolution plan. The Code lays down alternative provisions in the event a resolution plan is not implemented,. When this happens, the adjudicating authority orders to initiate a liquidation proceeding against the corporate debtor.

Liquidation of the corporate debtor is the absolute last resort that the adjudicating authority and the Resolution Professional (RP) intend to reach. The fundamental ideology behind such an extensive mechanism is to prevent the corporate debtor from liquidating. However, in certain unavoidable circumstances, to recover the defaulted payment, liquidation has to be initiated. This article will discuss the major aspects leading up to liquidation of a corporate debtor by the adjudicating authority.

As mentioned above, the adjudicating authority passes an order for liquidation when all other options have exhausted. In the case of Innoventive Industries v. ICICI Bank Ltd, the Supreme Court ruled that as soon as the liquidation order comes into effect, the moratorium period will end. The following describe the cases in which the adjudicating authority can pass liquidation orders;

Resolution plan not submitted in designated time

The Corporate Insolvency Resolution Process (CIRP) has a meticulous timeframe in effect of The Code. As per the Code and subsequent amendments, CIRP has to be concluded within 330 days of commencement of insolvency date. The adjudicating authority has the discretionary power to extend the moratorium period of 180 days by 90 days only under special circumstances.

Committee of Creditors (COC) has to approve a resolution plan during the moratorium period. Once the COC approves the plan with a minimum majority of sixty-six per  cent, it presents the same before the adjudicating authority u/s 30(6). However, if the COC does not submit the plan to the adjudicating authority in the due course, then the court can pass an order for liquidation.

Adjudicating authority rejects the resolution plan

An approved resolution plan submitted to the adjudicating authority within the required time frame can still anticipate a liquidation order. Section 30(2) of The Code lays down the essential requirements that a resolution plan must comprise.

The resolution plan submitted must have a provision that complies with the requirements of section 30(2). On submission, the adjudicating authority assesses the merits of the plan. If it finds that the resolution plan meets the requirements, then it passes an order to execute the resolution plan. However, if it finds that the plan does not meet with the requirements, then it rejects the plan and consequently, pass an order for liquidation.

COC does not approve a resolution plan

As discussed above, the COC has to approve a resolution plan proposed by bidders, with a majority of minimum sixty-six per cent. However, there is a possibility that the COC does not come to a consensus or reach a majority of sixty-six per cent.

However, there could be a scenario, where the COC holds a vote in favour of liquidation of the corporate debtor. In this case, as well, the approval rate must be at a minimum of sixty-six per cent. If the COC approves the vote for liquidation with the said approval rate, then the RP has the authority, to intimate the adjudicating authority of the same. The adjudicating authority can pass an order for liquidation.

Violation of resolution plan

Once the resolution plan approved by the COC and the adjudicating authority, the RP has to ensure its implementation. All parties and stakeholders involved have to respect the order passed by the adjudicating authority.

However, if the corporate debtor acts in a manner which infringes the norms of the resolution plan, then this can be contested. Any stakeholder, whose right stands violated as a consequence of this infringement, can make an application to the adjudicating authority for liquidation of the corporate debtor. On receiving the application, the adjudicating authority examines the same. Court can pass a liquidation order, if the corporate debtor stands in violation of the resolution plan.

Since the implementation of The Code, the courts have adjudicated several cases. The purpose has been to bring some clarity on concerned provisions. As a result of the same, liquidation under The Code has also been challenged in numerous cases. The court has successfully set precedents that have to be complied with for future references. However, the area still remains to be a subject of discussion amid the legal community and the stakeholders.

Post by Drishti Saxena

Drishti Saxena is a Lawyer and holds a post-graduate diploma degree in IPR from University of Mumbai. With experience in Immigration Law (UK and Canada), she has been an independent content creator in the field of law and politics.