Insolvency and Bankruptcy Code (IBC), 2016 is an effective and adequate framework for insolvency resolution of corporate debtors. The IBC has been a game-changer for handling stressed assets in India. Designed to streamline the process of insolvency resolution, the IBC provides a robust framework that not only safeguards creditors’ interests but also paves the way for the revival of distressed businesses. By prioritizing transparency and efficiency, the Code has transformed what was once a lengthy and uncertain process into a more predictable and structured pathway, enabling companies to either recover or gracefully exit, thereby preserving value and fostering a healthier economic environment.
The IBC was enacted to address the shortcoming of existing insolvency laws and to bring them under one umbrella leading to provisions which are more effective and the proceedings under the code are primarily conducted by licensed Insolvency Professionals.
The pillars of IBC:
Under the Insolvency and Bankruptcy Code, the Corporate Insolvency Resolution Process (CIRP) is initiated by filing a petition with the National Company Law Tribunal (NCLT) or the Adjudicated Authority. This can be done by a Financial Creditor under Section 7, an Operational Creditor under Section 9, or the Corporate Debtor itself under Section 10 of the IBC. The process concludes with the NCLT’s approval of the resolution plan. If the CIRP fails, the next step is Liquidation. If reviving the company is not possible, the creditors may decide to wind up the company, leading to the distribution of the debtor’s assets.
Section 54 provides that once the affairs of the Corporate Debtor have been wound up and its assets completely liquidated, the liquidator shall make an application to the adjudicating authority for the dissolution of the Corporate Debtor. It may be noted that this section also states that the distribution of assets shall be completed within such period as may be specified by the Insolvency and Bankruptcy Board of India.
Under the IBC, the role of Liquidator is different from an IRP/RP
By reading and understanding of provisions of IBC one can clearly establish that the role, duties and powers of IRP/RP are different from Liquidator. The IRP/RP is to assist during the process of CIRP whereas as liquidator play role in dissolution of the company after determining the value of claims.
The Interim Resolution Professional (IRP) plays a crucial role in protecting and preserving the Corporate Debtor’s assets. They take control of all assets owned by the debtor and handle them until a Resolution Professional is appointed. The IRP is responsible for receiving and collating the creditor claims following a public announcement (u/s 13 and 15), setting up the Committee of Creditors, and managing operations to keep the company running. They can raise interim finance, but must get creditor consent before creating any security interests on encumbered assets. The IRP also has the authority to access financial records, appoint necessary professionals under section 20(2)(a) and manage the list of creditors. Additionally, the IRP represents the corporate debtor execution powers to act and execute in the name and on the behalf of the corporate debtor all deeds, receipts and other documents under section 17(2)(a). The IRP enter into contracts on behalf of the corporate debtors in all legal matters and can amend contracts entered into before the CIRP began.
The Resolution Professional is required to take immediate custody and control of the assets of the corporate debtor including the business records of the corporate debtor and it is duty of RP to preserve and protect the assets of the corporate debtor. The RP has power to convene and attend all meetings of the Committee of Creditors and raise the interim finance subject to the approval of the COC under section 28.
The RP has power to revise the amounts of claims admitted including the estimates of claims when he comes across additional information warranting such revision (Reg 14(2)) and shall exercise powers after suspension of powers of Board. The RP represents and act on behalf of the corporate debtor with third parties, prepare the information memorandum in accordance with section 29, this section purpose is to provide the information required by the resolution applicant to make the resolution plan after analysing the relevant information such as financial position, disputes by or against the corporate debtor and other relevant matter pertaining to the Corporate Debtor. Once the resolution plans are submitted, accompanied by an affidavit affirming eligibility under Section 29A, the Resolution Professional reviews each plan to ensure it covers the process costs and debt repayment. The RP is also entrusted with a task to prepare a strategy for marketing of assets and has powers to sell unencumbered assets other than in the ordinary course of business as per Reg 29(1), if he is in opinion that such sale is necessary for better realization of value.
If the adjudicating authority is satisfied that resolution plan is approved by the committee of creditors under sec 30, it shall by order approve the resolution plan which is binding on Corporate Debtor, its employees, members and creditors.
The Insolvency and Bankruptcy Code (IBC) is designed to address the financial distress of corporate entities in a systematic manner. When a company encounters financial distress then Corporate Insolvency Resolution Process is often the first step towards recovery. However, if the CIRP fails, the next step is liquidation, governed by Chapter III of the IBC. In this phase, a Liquidator is appointed to manage the liquidation process, wielding significant powers to ensure that the liquidation is conducted efficiently and transparently. In this blog, we delve into the key powers and responsibilities entrusted to a Liquidator under the IBC.
What does a Liquidator do?
One of the primary responsibilities of the Liquidator under the IBC is to take control of all assets, properties, effects, and actionable claims of the corporate debtor. This includes all properties over which the corporate debtor has ownership right which is irrespective of whether possession was taken over by RP or not. The Liquidator has the authority to evaluate the assets of the debtor and realize them in the manner as specified. This may involve selling the assets through public auction or private contracts, in order to determine the distribution of assets based on the principal of maximisation of recovery for the stakeholders for and on behalf of whom these responsibilities have been entrusted on the Liquidator. The Liquidator needs to keep this principle in mind whether he sells all assets in bundled form as a going concern, small bundles as a going concern or as individual assets separately.
The Liquidator is also empowered to verify and manage creditors’ claims according to section 35(1)(a) under the IBC, investigating any undervalued or preferential transactions that occurred before insolvency, and reporting findings to the Adjudicating Authority. Additionally, the Liquidator has the authority to draw, accept, and endorse negotiable instruments, access the corporate debtor’s records, and manage its operations as a going concern if it benefits the creditors. The personnel of the corporate debtor shall extend all assistance and cooperation to liquidator as may be required to managing the affairs of the corporate debtor u/s 34(3). This helps in gaining a comprehensive understanding of the debtor’s financial position, the Liquidator has the authority to manage the operations of the corporate debtor as a going concern, if it is deemed beneficial for the creditors. This includes the power to appoint professionals, agents, and employees to assist in the liquidation process.
The liquidator has power to sell immovable, movable and actionable claims by private contract or public auction subject to section 52, ensuring proceeds are distributed according to the IBC’s waterfall mechanism, prioritizing costs, workmen’s dues, and secured creditors to ensure an orderly and fair distribution. This involves paying off insolvency resolution process costs first, followed by workmen’s dues, secured creditors, and so forth, ensuring that the creditors are paid in an orderly and fair manner.
Finally, once the assets are realized and distributed, the Liquidator has the power to apply to the Adjudicating Authority for the dissolution of the corporate debtor. Upon approval, the corporate debtor is officially dissolved, and the liquidation process is concluded.
Let’s take a closer look in detail at what his role involves:
In case the IRP/RP rejects the claim of creditor then Adjudicatory Authority will decide the acceptance and rejection of the claim during the CIRP Process. Regulation 13 of the CIRP Regulation clearly states and make it clear that IRP is under statutory duty to verify each and every claim, maintain list of creditors, amount claimed by them and amount of claim admitted.
In the judgement passed by Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Vs Satish Kumar Gupta & Ors, it was concluded that that there is no statutory power vested in IRP/RP to adjudicate the claim during the CIRP like the powers vested with a liquidator regarding verification, acceptance or rejection of the claim of the creditor.
The Supreme Court discussed the liquidator’s authority in determining the eligibility of resolution applicants and overseeing the resolution process. The liquidator’s role in maintaining the corporate debtor as a going concern was also underscored.
In the matter of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (2019) , it was emphasized that the liquidator’s role is balancing the interests of all stakeholders and provide guidance on the distribution of liquidation proceeds. The Supreme Court emphasized the liquidator’s duty to maximize the value of the corporate debtor’s assets.
The National Company Law Appellate Tribunal (NCLAT) elaborated in the matter of Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudavan Pvt. Ltd. & Ors. (2017) on the liquidator’s powers to manage the operations of the corporate debtor, including the right to take possession of the assets and deal with the claims of creditors.
To perform their duties effectively, the Liquidator has the power to access the information systems, books of accounts, and other records of the corporate debtor. The personnel of the corporate debtor shall extend all assistance and cooperation to liquidator as may be required to managing the affairs of the corporate debtor.
In the matter of Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. (2019), the Supreme Court upheld the constitutionality of various provisions of the IBC, including those related to the powers of the liquidator. The Court clarified the role and responsibilities of the liquidator, emphasizing their powers to manage the affairs of the corporate debtor during liquidation.
During the liquidation process, the Liquidator has the authority to manage the operations of the corporate debtor as a going concern, if it is deemed beneficial for the creditors. This includes the power to appoint professionals, agents, and employees to assist in the liquidation process.
In the matter of ArcelorMittal India Private Limited vs. Satish Kumar Gupta & Ors. (2018), the Supreme Court discussed the liquidator’s authority in determining the eligibility of resolution applicants and overseeing the resolution process. The liquidator’s role in maintaining the corporate debtor as a going concern was also underscored.
The Liquidator has the authority to evaluate the assets of the debtor and realize them in the manner as specified. This may involve selling the assets through public auction or private contracts, in order to determine the distribution of assets.
The Liquidator is also empowered to verify the claims of all creditors according to section 35(1)(a) under the IBC. This includes admitting or rejecting claims, determining the value of the claims, and distributing the proceeds of the sale of assets accordingly.
Innoventive Industries Ltd. vs. ICICI Bank & Anr. (2018) This case provided clarity on the initiation of the CIRP and the subsequent role of the liquidator. The Supreme Court highlighted the liquidator’s powers to take control of the assets, evaluate claims, and distribute the proceeds among the creditors.
Why the Liquidator’s Role Matters
The Liquidator plays a crucial role in not just sorting out the company’s assets, but also in keeping the insolvency process fair and transparent. By managing the assets, checking and verifying creditor claims, and ensuring everyone gets their fair share, the Liquidator helps wrap up the company’s financial issues in a structured and legal way.
For creditors and employees, understanding the Liquidator’s role provides clarity on how their interests are addressed during insolvency. It reassures them that the process is being managed fairly and that efforts are being made to maximize the returns from the company’s remaining assets.
It shows them how their interests are being taken care of during the insolvency. It also assures them that the process is handled fairly and that everything possible is being done to get the best value from the company’s remaining assets.
The role of a Liquidator in the Corporate Insolvency Resolution Process is significant. With extensive powers granted under the IBC, the Liquidator ensures that the process is conducted transparently, efficiently, and in the best interest of the creditors and other stakeholders. Interpretation of these powers is crucial for stakeholders to navigate the complexities under liquidation effectively post completion of corporate insolvency resolution process.
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