Liquidator – Functions and Role Under Insolvency & Bankruptcy Code
Liquidator – Functions and Role Under Insolvency & Bankruptcy Code
Liquidation is a process under which a corporate debtor, or a company, ceases to operate and all its assets are dissolved. Prior to Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”), the liquidation process of a company was governed by the Companies Act, 2013. Since the implementation of The Code, the creditors of a corporate debtor i.e. financial creditors or operational creditors, cannot file an application for liquidation at the first instance.
The creditors, or the corporate debtor itself, first has to initiate an application for insolvency before the adjudicating authority prior to filing an application for liquidation. The resolution process first takes place intending to redeem the defaulted payments while reviving the corporate debtor. However, if the insolvency process stands unsuccessful, then the adjudicating authority can pass an order for liquidation. Liquidation under The Code remains to be the last resort with the adjudicating authority for the corporate debtor.
Appointment of Liquidator
An adjudicating authority can pass an order for liquidation, u/s 33, under several circumstances. Once the order passes, it has to be obliged by all the stakeholders involved. A structured procedure is followed to carry out the liquidation process. The next step, following the liquidation order, is for the adjudicating authority to appoint a liquidator. The adjudicating authority appoints the person, who acted as a Resolution Professional (hereinafter referred to as “RP”) in the insolvency process, as the liquidator.
Replacement of Liquidator
The RP has to submit a written consent to act as a liquidator for the corporate debtor to the adjudicating authority. The adjudicating authority can order to replace the liquidator under the following two circumstances as per Section 34(4):
- The RP failed to meet the requirements necessary to be met in the resolution plan as per Section 30(2); or
- The Insolvency and Bankruptcy Board of India (IBBI), recommends to replace the RP by providing written reasons.
In case the the adjudicating authority replaces the RP, u/s 34(4)(a), the following takes place;
- The adjudicating authority reaches out to the IBBI for a recommendation of a new RP.
- The IBBI proposes a recommendation for a fresh RP. This has to be accomplished within ten days of the order requested by the adjudicating authority.
- On receiving the proposed recommendation from the IBBI, the adjudicating authority appoints the recommended RP, by an order, as a liquidator.
In the case of Sahara Fincon v. Tirupati Ceramics, the National Company Law Tribunal (NCLT) ruled that an RP cannot be replaced for reasons other than as mentioned u/s 34(4) of The Code.
On its appointment, the liquidator is vested with all the powers of the key managerial personnel, board of directors and all or any partner(s) of the corporate debtor. The said entities will lose any powers or rights they retained with the corporate debtor before the order of liquidation.
Powers and Duties of Liquidator
Once confirmed, The Code vests certain powers and duties in the liquidator. Section 35 of the Code defines the powers and duties of a liquidator. The powers and duties are as follows;
- The creditors of the corporate debtor, make certain claims in the course of Corporate Insolvency Resolution Process (CIRP). The liquidator has to analyse and verify the accountability of these claims
- The liquidator takes custody of all the properties, effects, actionable claims and assets of the corporate debtor. The directors and other management lose all the operational and managerial right over the corporate debtor.
- On acquiring the property and assets of the corporate debtor, the liquidator has to evaluate the same and prepare a report. IBBI prescribes the manner in which the evaluation has to be conducted.
- While evaluating, the liquidator has to ensure the best interest of the corporate debtor and preserve the properties and assets involved as necessary.
- Even though liquidation process means that the business of corporate debtor ceases to exist, the liquidator, at his discretion, can carry out the business for beneficial liquidation.
- In liquidation, the liquidator has the power to transfer the corporate debtor’s assets. So, it can put up the corporate debtor’s actionable claims and properties to public auction or sell them on a private contract. This provision is subject to Section 52 of The Code.
- The liquidator will bear same right as the corporate debtor, over actions on any negotiable instrument of the corporate debtor. This is with respect to the liability arising on the assets from liquidation.
- The liquidator has the authority to demand payments in the name of the corporate debtor from any deceased contributory, which cannot be done in the ordinary course of business. He can pursue the same by taking out a letter of administration in his official name.
- If the liquidator requires professional assistance, he can appoint another person for the same. He can also appoint another professional to discharge his obligation, responsibilities and duties.
- The liquidator can settle claimant and creditor claims. He can also distribute proceeds by adhering to the provisions of the Code.
- The liquidator can file or defend any suit that may be filed, for or against the corporate debtor.
- The liquidator can commence investigations of the corporate debtor’s financial affairs. He can do this for the determination of preferential and undervalued transactions.
- The liquidator can ratify, verify or execute any document pertaining to the liquidation proceeding of the corporate debtor. This includes any affidavit, bond, application or instrument among other things.
- The liquidator has to send a report to the adjudicating authority regarding the progress of the liquidation. The procedure is specified by the IBBI. The liquidator can also apply for any direction or order, as necessary, to the adjudicating authority.
- Any other function as directed by the IBBI.
The adjudicating authority passes the order for liquidation u/s 33. This date becomes the date of commencement of liquidation. To conduct liquidation, the liquidator forms a liquidation estate, which is an accumulation of all the assets of the corporate debtor as per Section 36. The liquidator keeps the estate as a security for the creditors.
The liquidator collects the claims of the creditors within thirty days of the commencement date of liquidation as per Section 38. The creditors have a right to withdraw any claim within fourteen days of submission of the said claim.
As per section 39 of the Code, the liquidator assesses the claims submitted by the creditors. The duration is specified by the IBBI. The liquidator makes an analysis and u/s 40 of the Code can either reject or accept the claims. Whether the liquidator rejects or accepts the claim, he has to provide a written reason for the same.