What are the consequences of company liquidation in India?

Running a business successfully is a challenging job and there could be hundreds of reasons why businesses decide to shut down their operations. Technically, when a company closes its business operations, the process is called liquidation. In most cases, it happens when a business owner finds himself unable to carry out the business functions smoothly. Debt is one of the most common reasons why businesses get liquidated these days. The process of business liquidation comes under the purview of Insolvency and Bankruptcy Code that we already discussed in our previous post. Let’s get to know everything about business liquidation in this post. 

What is liquidation for a company?

During the commencement of a business in India, money investors are advised to keep in mind the fact not all businesses will become successful and some of them may turn to liquidation because of various reasons like increasing debt, lowering demand, looming economic crisis, and others. As per the guidelines set under Indian law, the liquidation process means the way in which company’s assets are winded up and allotted to the concerned parties. 

There can be two types of liquidation – voluntary and non-voluntary.

In the case of voluntary liquidation, the company’s operations are termination given the interference of business’s creditors and other stakeholders. In such a case, the liquidation process is carried out without the involvement of a regional court and the company can hire a specialist to do all the formalities and documentation associated with business liquidation. 

On the other hand, if there is involuntary liquidation, the company has asked by a court to stop its operations due to the pending debts that the company is able to repay. This type of liquidation is usually processes when the company is unable to meet its liabilities due to insufficient assets. 

Company Liquidation Procedure

If you want to know how a company is liquidated, below is a step-wise procedure highlighted for your reference.

Stage 1: Selection of Liquidator

• The first thing is the selection of Liquidator (Section 34) who is held responsible for the submission of the written consent in Form AA of Schedule II
• A public notification is released in Form B of Schedule II within 5 days of the statement of the order for liquidation to get entry for claims, that would be submitted within a period of 30 days from the liquidation notification date
• After the passing of the liquidation order, the resolution expert is supposed to do the filling of CIRP-5

Stage 2: Claim & Reporting Validation

• Verification and receipt of claims and appointment related to the Valuers.
• Initial draft of Asset Memorandum and other reports-
• Asset Memorandum- To check the assets of the CD and ready a detailed report within 75 days. (Section 35(1)(c), Reg 5(1), Reg 34)
• Growth Report- The reportage of the overall growth of the liquidation within 15 days from the end of each quarter. (Sec. 35(1)(n))
• Primary Report- Report is readied by Regulation 13 to be acquiesced within 75 days. (Reg 2(1)(f) r.w. Reg 13)
• Initial Progress report- The quarterly report under Regulation 15 needs to be prepared and submitted within 15 days of the end of every quarter (Reg 2(1)(g) r.w. Reg 15).
• Following Progress Report- If the insolvency expert stops to work as a liquidator, a subsequent progress report would be submitted within 15 days from the date of termination.
• Sale Reports- These need to be attached with the Progress report after the sale of each asset as per the Reg 5(1) r.w. Reg 36.
• Reporting of the cosultation with the stakeholders – Post ever session, Minutes of discussion with the stakeholders are to be prepared and distributed as per Reg 5(1) r.w. Reg 8.
• The Eventual Report, prior to release, needs to be submitted within a year according to Reg 5(1) r.w. Reg 45

Don’t forget to furnish the Copies of the reports and minutes to stakeholders in both digital and paper formats: on submission from stakeholders; receipt of the cost of preparing reports or minutes; acceptance of a confidentiality activity. (Reg 5(3))

Stage 3 – Distribution of proceeds

• The Liquidator is liable to create Liquidation Estate (given the additions and eliminations) and open a bank account in the name of the corporate borrower, chased by the words “in liquidation,” in a booked bank, for the recovery of the money due to the CD and start the sale of assets.
• The process of company liquidation of any CD under the IBC Code needs to be done within a year from the date of liquidation initiation, even if applications for avoidance transactions are in process.
• The liquidator is not meant to sell any property, be it steady, movable or any actionable claims of the corporate debtor under liquidation, to any individual who is unqualified under section 29A of the Code to become a resolution candidate.
• The incomes from comprehension need to be distributed by the Liquidator within 3 months (previously six months) from the acceptance of the amount to the stakeholders. (Regulation 42)
• The liquidator would allocate the assets following the waterfall mechanism (Section 53) after the submission of stakeholders and the asset memorandum with the Adjudicating Authority.

Stage 4 – Dissolution of Corporate Debtor under IBC

• After the liquidation of all the assets of the company, the Liquidator needs to submit an application before the Adjudicating Authority to make way for the corporate debtor’s dissolution as per the Section 54 of the Code.
• If the Liquidator has an understanding that the actual assets that can be realized are insufficient for the recovery of the cost of the company liquidation and no additional inquiry is required about the activity of the company in debt, they may choose to go with early dissolution (Regulation 14 of the Company Liquidation Regulations) after the submission of the primary report.
• The final dissolution orders need to be submitted with the suitable authority where the CD is itemised.

Laws Overriding Company Liquidation Process in India

Arbitrating Authority has the right to sanction the Resolution Plan under section 31 (1) or release an order for liquidation of the Corporate Debtor (CD) as per the requirements of Section 33 (Liquidation Commencement Date) (i.e., Chapter III of Part II of IBC) in the below-mentioned scenarios: –

• If there is no submission is made with the Adjudicating Authority (NCLT) regarding the sanction of the resolution roadmap within the arranged timeline (180 to 270 days, prolonged to 330 days, from submission)
• If NCLT castoffs the resolution plan due to non-compliance
• If the Committee of Creditors(CoC) agrees to liquidate the CD before validation of a resolution plan; or
• if the CD breaches, the terms settled in the resolution plan permitted by the NCLT
• The Section puts in place certain procedures for Company Liquidation which must be comprehended in accordance with the IBBI (Liquidation Process) Regulations, 2016 (herein after referred to as Company Liquidation Regulations).

Consequences of Company Liquidation in India

The consequences of company liquidation in India can be divided into two parts – Individuals and Companies.

Consequences for Individuals

As per the guidelines of the Insolvency and Bankruptcy Code, a person is considered insolvent if he or she finds itself unable to clear a liability of Rs. 1000 or more within a period of 3 months from the receipt of the demand notice from the lender. The creditor is hence authorized to lodge an application before the Debt Recovery Tribunal (DRT) that will then kick-off the insolvency resolution process (IRP) against the defaulter. The tribunal will then select a resolution professional (RP) who would look after the activities of the debtor and come up with a repayment strategy with the agreement of the creditors. 

Such a repayment strategy will postulate the time frame, roadmap, and repayment amount by the debtor. The tribunal has to sanction or reject the repayment roadmap within 180 days of the application. If the submitted repayment plan gets approved, the debtor will be released from the pending debts after meeting the underlying obligations. In the case of rejection, the creditor is liable to submit an application for bankruptcy before the tribunal.

The significances of bankruptcy for a person are as follows:

• A bankrupt individual would have no authority over the underlying assets that are supposed to be conferred in a bankruptcy trustee decided by the tribunal. The trustee can liquidate the assets and allot the incomes among all the creditors given the priority.
• The bankrupt will be governed under specific limitations and incapacities. For example, he will become ineligible from fielding some public offices. He or she won’t be allowed to get into some indenture and take any control on his or her property, and averted from travelling overseas without prior permission, etc.
• The personal will be freed his or her debts after 3 years from the final bankruptcy notification unless the order gets extended by the tribunal for a period of 2 years. The order will release the bankrupt from all obligations regarding the pending debts, except those that are non-dischargeable like fraud, stubborn default, upkeep responsibilities, etc.

• Sections 78 to 187 of the IBC is related to the insolvency steadfastness and bankruptcy for both people as well as partnership firms.

Consequences for Businesses

As per the guidelines stated under the Insolvency and Bankruptcy Code, a corporation is considered insolvent if it defaults on a debt of Rs. 1 lakh or more but the same has been increased to Rs.1 crore with effect from 24.03.2020. The creditor or the company itself can file an application before the National Company Law Tribunal (NCLT) to kick-off the corporate insolvency resolution process (CIRP) against the organization. The NCLT would select an interim resolution professional (IRP) to look after the management and activities of the organization and create a committee of creditors (CoC) to determine the  

The CoC is meant to inspect diverse resolution strategies proposed by resolution candidates and choose one that optimizes the overall worth of an organization’s assets and guarantees its feasibility. The NCLT would accept or reject the resolution strategy within 180 days of the complaint which is extendable by additional 90 days in a few scenarios. If the plan is approved, the organization will continue as a concurrent thing under the management of the resolution professional (RP) and the specifications of the strategy. In the case of rejection, the company would be liquidated.

The consequences of liquidation for a business are as follows:

• The liquidator chosen by the NCLT will take the cognizance of the organizational assets and sell them easily and quickly. 
• The incomes of the sale will be scattered among the stakeholders given the priority of their rights, as stated under the Section 53 of the IBC.
• The liquidator would start activities to recover any amount from the directors, promoters, or other stakeholders responsible for the organization’s insolvency.
• The liquidator will liquify the business after the completion of the liquidation process and getting the approval of the NCLT.
• The closure will wipe out the presence of the business and discharge it from all liabilities, excluding those that cannot be realized under the law including fraud, etc.

The Conclusion

The Company Liquidation is clearly mentioned under the Insolvency and Bankruptcy Code, 2016 (IBC) is considered the last option. This is because of the fact that the most crucial job of the Insolvency and Bankruptcy Code is to keep a check on the financial status of a corporate debtor and in case of goofs, make the use of corporate restructuring to make a way out. According to the NCLT, the company liquidation process is time-bound, well-organized, carried out under the guidance of the Arbitrating Authority. However, the Company Liquidation procedure is quite intrinsic and extremely drawn-out and mostly leads to the total elimination of asset worth. The liquidator is liable to choose from different options as available in the Company Liquidation Regulations so as to keep the corporate debtor as an ongoing thing even after the passing of the liquidation order.

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FAQs

Q.1 Who can be a liquidator in India?

A liquidator is meant to be a licensed insolvency expert according to guidelines of the Insolvency and Bankruptcy Board of India.

Q.2 What is the effect of the liquidation of the shareholders?

Shareholders usually carry partial involvement and stand at least when it comes to receiving funds. In the case of company liquidation, the shares possessed by them would face down value and or zero worth. 

Q.3 What happens to a director and employees when a company goes into liquidation?

When a company is liquidated, directors cannot be held personally liable for the debts owned by the company. This is considered unless they have provided individual guarantees or there is a case of illegal or deceitful trading.

Q.4 What happens to employees when a company faces liquidation in India?

In the case of business liquidation, all its employees become jobless according to the process. This is due to the fact that liquidation means a company has no existence as of now. 

Q.5 Is it possible for a creditor to make an appeal to the liquidator’s acceptance or rejection of claims?

Creditors have the right to appeal to a tribunal within 14 days of the receipt of the liquidator’s decision (section 42 of the Code).

Q.6 Shall the corporate debtor stop its business after the company liquidation proceedings are started?

The liquidator will cease the corporate debtor company for its helpful liquidation due to necessary considerations. (sec 35(1)(e) of the Code)