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Company Liquidation Process in India Under IBC

Company Liquidation Process in India Under IBC

Table of Contents

Liquidation essentially means that the revival or restructuring of the company was unsuccessful. The Company Liquidation Process is the final step of the insolvency process under the Insolvency and Bankruptcy Code, 2016 (IBC). Under IBC and the relevant regulations, there is a systematic manner in handling the process of company liquidation

What is liquidation of a company?

The term of ‘liquidation’ is not provided specifically defined under the IBC, however through the liquidation process given under Part II, Chapter III under the IBC, it can be implied of what it is. The liquidation of a company is a process in which the company’s operations are terminated and the company is wound up. The process includes selling the assets of the company, using these proceeds to pay the creditors, and the remaining assets are distributed amongst the shareholders.

What are the types of liquidation of a company?

There are two types of liquidation of a company, i.e., compulsory liquidation and voluntary liquidation. The compulsory liquidation process is initiated under section 33 when the resolution plan has failed or when the company fails to pay their debts by the Adjudicating Authority, the National Company Law Tribunal (NCLT). The process of compulsory liquidation is also governed under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereon forward known as “Liquidation Process Regulations”) The process of Voluntary liquidation is initiated under section 59 of the IBC by the company when the creditors of the company or the shareholders decide that the company should be wound up as per the process given under the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (hereon forward known as “Voluntary Liquidation Process Regulations”).

What are important terms needed to understand liquidation under IBC

(i)      Claim: A claim under section 3(6) is

(ii)    Corporate Debtor: A corporate debtor is given under section 3(8) is a corporate person who owes a debt to any person under the insolvency process.

(iii)  Creditor: Section 3(10) defines a creditor to any person to whom a debt is owed. There are two types of creditors given here, the financial creditor and operational creditor.

(iv)  Financial Creditor: Any person to whom a financial debt, such as money borrowed against the payment of interest, is owed as defined under section 5(7). There are two types of financial creditors: secured creditors and unsecured creditors.

(v)    Secured Creditor: A secured creditor under section 3(30) means is a financial creditor in favour of whom security interest is created.

(vi)  Unsecured Creditor: This term is not defined in the IBC or Regulations,

(vii) Operational Creditors: An operational creditor, as per section 5(20), means any personal to whom an operational debt, such as provision of goods or services, is owed.

(viii)   Liquidation Cost: Under section 5(16) the liquidation cost is any cost that is incurred by the liquidator during the period of liquidation. For instance, as per Regulation 2(1)(ea) of Liquidation Process Regulations includes costs to be given to the liquidator such as the fee and remuneration payable to the liquidator and costs incurred by the liquidator during liquidation such as those for the carrying on the  business of the corporate debtor as a going concern. The liquidators remuneration is part of the liquidation cost under Regulation 7 of the Voluntary Liquidation Process Regulations.

(ix)   Liquidation Commencement Date: The Liquidation Commencement Date (LCD) is the date on which the liquidation proceedings commence for compulsory liquidation or voluntary proceedings as defined under section 5(17) of IBC.

(x)    Corporate Insolvency Resolution Process:  The definition of the Corporate Insolvency Resolution Process (CIRP) is not particularly defined under IBC, it is a process for resolving insolvency of the company. It has the main aim to rehabilitate, restructure or revive a financially distressed company. If this rehabilitation, restructuring, or revival of a company has failed, then the company moves forward with liquidation.

What is the liquidation order of a company?

The liquidation order is not particularly defined under the IBC, but through the provisions of IBC and the relevant regulations, it can be implied.

As per section 33 of the IBC, the conditions of the liquidation order are:

(i)      Under section 33(1)(a), the liquidation order may be given by the NCLT if the resolution plan was not received during the time period specified under the IBC for the completion of the insolvency resolution process or the fast track corporate insolvency resolution process, then further measures may be required

(ii)     Section 33(1)(b), the resolution plan is rejected under the NCLT for non-compliance of the requirements of section 31.

(iii)   By the decision of the Committee of Creditors (CoC) to liquidate the company, by not less than 66% of the CoC, initiated by the resolution professional (RP) at anytime before the confirmation of the resolution plan.

(iv)   If the NCLT decides that the corporate debtor has contravened the provisions of the resolution plan as given under section 33(3).

What is the process of liquidation of a company?

The liquidation process of a company commences when the rehabilitation, restructuring, or  revival of the company has failed or the CoC decides to liquidation the company by a majority of 66% vote. Once the NCLT passes a liquidation order it appoints the RP of the insolvency process to be the liquidator during the liquidation process and this RP must submit a written consent to act as the liquidator under Form AA of Schedule II of the Liquidation Process Regulations. Then the liquidation takes control of the assets, operations, and management of the company. During the liquidation process, the liquidator has a necessary role for consolidation and verification of the claims of the financial and operational creditors, securing the assets, and selling these assets for maximising recovery of the company. The proceeds are then distributed as per priority  order listed in section 53 of IBC. The last step for a company’s liquidation process is the dissolution of the company under section 54.  

 What is the process of initiating the liquidation process?

The initiation of the liquidation process is depending on the type of liquidation:

 1. Voluntary Liquidation Process (Section 59)

The voluntary liquidation process is explained under section 59 of IBC and Regulation 3 of the Voluntary Liquidation Process.  Under section 59(2), a declaration must be submitted by a majority of the directors with an affidavit that after an enquiry into the company and the company does not have any debts and will be able to repay the outstanding debts in full from proceeds, and  that the intent behind liquidation is not to defraud any creditor. Along with the declaration, the audited accounts of the company and the reports of the company’s affairs  of the last 2 years or since its incorporation if the company is not been existence for 2 years, and a if it prepared, a valuation report.  As per section 59(2)(c) a special resolution must be passed by the company in a general meeting, or the members must pass a resolution if the company has a particular duration  or event after which the company should be dissolved.  The company shall then notify the Registrar of Companies and the Insolvency and Bankruptcy Board of India (IBBI), within 7 days of this resolution or the approval of the creditors as per section 59(4) of IBC. After the approval of the creditors, the liquidation process commences from the date of passing such a resolution.[1]

 

2. Compulsory Liquidation Process (section 33)

The initiation of the compulsory liquidation process by the NCLT is specified under section 33. The terms and conditions of this process is listed this section:

  •       If the resolution plan not received within the timeline for completion of CIRP as per section 33(1)(a), which is 270 days (180 days with an extension of 90 days).[2]
  •       As stated under section 33(1)(b), the resolution plan may also be rejected by the NCLT due to the non-compliance of requirements under section 30(2), such as the payment of the CIRP costs, the NCLT shall make a liquidation order.
  •       The CoC may also decide to liquidate the company with a vote sharing of 66%, the RP may make an application to the NCLT for liquidation as per section 33(2) of IBC.
  •       An application for liquidation may be submitted by the creditor or the resolution applicant, or any person that is connected with the approved resolution plan has contravened this approved plan. If the NCLT finds that the there has been a contravention the NCLT then makes a liquidation order.[3]

Appointment of liquidator

The RP during the CIRP is appointed as the liquidator by the NCLT under section 34(1) of IBC after initiation of the Company Liquidation Process under section 33. The RP can act as the liquidator by submitting written consent as per Form AA of Schedule II of the Liquidation Process Regulations. Under section 34(4), the NCLT can replace the RP if the resolution plan was rejected, the IBBI recommends the replacement of the RP for reasons submitted in writing, or the RP failed to submit the written consent in Form AA of Schedule II

Read more : Who Is Eligible For Graduate Insolvency Programme ?

Fees of liquidator

Once the liquidator has been appointed, as per section 34(8), the liquidation fees to be received for their services during the liquidation process, proportionate to the value of the liquidation estate assets. The fees to be paid to the liquidator will be paid from the proceeds of the liquidation  estate under section 53.[4] Regulation 4 of the Liquidation Process Regulations specifies the details of the liquidators’ fees.  The liquidation fees is decided by the CoC once they pass a resolution for the initiation of the liquidation process. As per Regulation 4(1A) if no fee has been decided by the CoC, the consultation committee can fix the fee in its first meeting. If there are insufficient funds in the liquidation estate, the stakeholders may agree to pay the fee, however the liquidator can make an application to the NCLT for directions if no agreement is reached.

 Powers and duties of liquidator

The powers and duties of the liquidator is listed under section 35 of IBC:

a)       Verification of claims

b)     Custody and Control of assets

c)       Evaluation and preservation of assets

d)     Settling claims and defending legal proceedings

e)     Evaluating and avoiding undervalued transactions

f)       Reporting to and seeking directions from the Tribunal

g)       Consultation with stakeholders

Other powers and duties of the liquidator includes:

a)       Section 37 of IBC states that the liquidator has power to access any information or information system to verify or identify assets for liquidation. This means that the liquidator has access to information utility that are registered with the Insolvency and Bankruptcy Board of India (IBBI) under section 210 of IBC, credit information which are regulated and provide accurate or dependable information about borrowers and credit scores, any government authority or registered authority under the central, state or local governments, information systems for financial or non-financial liabilities, information systems for securities and assets, databases maintained by the IBBI, and any sources specified by the IBBI.

b)     The liquidator has the duty to submit regular reports to the NCLT[5], the liquidator has the duty to complete and update the registers and books of accounts of the corporate debtor,[6] and appoint professionals to discharge him of his duties, obligations and functions for a remuneration that is included in the liquidation costs.[7]

 Claims in liquidation process

After the appointment of the liquidator, the creditors have to submit their claims with the proof of claims and the liquidator has the power to consolidate these claims, verify the claims, settle the claims, and either admit the claims or reject the claims:

a)     Consolidation of claims: As per section 38(1) of IBC, the liquidator will receive and collect the claims of the financial creditor and operational creditor within 30 days of the LCD. Claims submitted by the operational creditor’s under Regulation 17 of the Liquidation Process Regulations along with the proof under Form C of Schedule II, which includes, the records available with an information utility and other relevant documents which adequately establishes the debt. The financial creditors, as per section 38(3) of IBC should submit proof of these claims submitted under Form D of Schedule II under Regulation 18 of the Liquidation Process Regulations. Those creditors who are partly financial and partly operational creditors submit their claims to the liquidator till the extent of their financial debt and operational debt.

b)     Verification of claims: Under section 39 of IBC, the liquidator has the duty to verify the claims submitted under section 38. The liquidator also has the duty to request the creditor or corporate debtor to produce any document or evidence required for the verification of the whole or any part of the claim.

c)       Admission or rejection of claims: Once the claims have been verified, the liquidator may admit or reject the claims and convey this admission/ rejection to the creditor and corporate debtor within 7 days of such.

 Appeal after Rejection of Claims

If the liquidator rejects the claims submitted by the creditors, the creditor or a member that is aggrieved by this decision can file for an within 14 days of receiving the decision of the liquidator  to the NCLT as stated under Section 42 of IBC

 What are Avoidance transactions?

Avoidance transactions are those transactions which can be reversed or invalidated by the RP and the liquidator. There are three types of avoidance transactions under sections 43-51 in IBC:

 Preferential transactions

This have been stated under section 43(2) of IBC when the corporate debtor transfers the property or interest to benefit the creditor or guarantor for any previous debt/ liability or when the transfer places the creditor in a more beneficial position if the assets were shared equally amongst the creditors. There are certain transactions under which transactions which will not be considered as a ‘preferential transaction’ listed under section 43(3) and includes transactions occur during ordinary course of business and transactions when the company creates a security interest in property acquired by the corporate debtor to secure new value  and that this transfer was registered with the information utility on or before 30 days after the corporate debtor receives this property. Under section 44 of IBC, the liquidator has the option to make an an application to the NCLT to give an order to ‘undo it’. The NCLT can return the property to the company, the security interest can be cancelled, any benefit may be repaid, revive any debts that was reduced/ cancelled by a preferential transaction, or the NCLT may create a new security interest to cover any debts that were unfairly paid off.

 The avoidance of the undervalued transactions

It is provided under section 45, undervalued transactions include gifts made to a person, transferring one or more assets for a value which is significantly less than the value of the consideration provided by the corporate debtor. In order to prove that such a transaction was undervalued the RP or liquidator has to prove as listed under section 46(1) that:

  •       The transaction was made with any person within 1 year preceding the insolvency commencement date.
  •       The transaction was made with a related party within 2 years before insolvency commencement date.

The NCLT may also ask an independent expert to evaluate the evidence to determine the value the transactions. The NCLT under section 48 may pass an order that requires that any property that was transferred as a part of the transaction to be vested in the corporate debtor,  released or discharged any security interest, order any person who did receive any benefit due to undervalued transactions to pay the RP or the liquidator for such, or with reference to the opinion of the independent expert order the payment for such consideration. If the NCLT finds that the undervalued transaction was carried out to defraud the creditors or adversely affect the interest of those related to the claim, the NCLT may pass orders as per section 49 to either restore the position of the involved parties to before the transaction happened or protect the interest of anyone who were victims of such transactions.

Extortionate credit transactions

As per section 50 (1) are those transactions in which the corporate debtor was to pay an exorbitant amount of money to exchange of any credit or debt that was received. Under Regulation 11 of the Liquidation Process Regulations, there are two transactions that are considered under extortionate credit transactions which includes, any transactions in which exorbitant payments to be made for the credits and transactions that are considered unreasonable or in excess of the principles of contract law. The NCLT may provide an order regarding these transactions and restore the pre-transaction position of the involved parties, set aside, wholly or partially, any debt created as a result of the extortionate credit transactions, modify the terms of the transaction, order any party related to the transaction to repay any amount that they received, or the NCLT may relinquish the security interest created due to the transaction.

What are the rights of the secured creditors in liquidation proceedings of a company?

Section 52 of IBC mentions the rights of the secured creditors in the liquidation proceedings of a company, and is as follows:

a)       The secured creditor can either relinquish the security interest or realised the security interest.

b)     The security creditors have to notify the liquidator of their intention to relinquish or realise the security interest  and the liquidator must verify the security interest.

c)       The secured creditor may also enforce and sell the assets of the company, and if resistance is faced, the creditor can seek assistance of the NCLT.

d)     If the proceeds are surplus and exceeds remain after the debts are settled, the secured creditor has to inform the liquidator and tender the surplus amount to the liquidator.

e)     If any liquidation cost due from the secured creditor will be deducted from the proceeds of the realisation of the security interest, this amount must be transferred to the liquidator.

f)       If any proceeds of realisation of the assets are inadequate to clear the amount due to the secured, it will be paid as per section 53.

How are the assets of the company distributed?

The distribution of assets of the company are listed as per the order of priority under Section 53 of IBC.

a)       The insolvency resolution process costs and liquidation costs are to be paid in full.

b) There are debts which are ranked equally: The workmen dues, 24 months before the LCD, and the debts owed to the secured creditors who have relinquished their security interest.

c)   Any wages or unpaid dues that owed to the employees for 12 months before the LCD.

d) Any financial debts that are owed to the unsecured creditors.

e) These assets are to be ranked equally, any amount due to be paid to the Central Government and State Government, and debts that are owed to secured creditors for any unpaid amount after the enforcement of the security interest.

f)       If there are any remaining debts and dues.

g)   If there are preference shareholders.

h)     Equity shareholders or partners

 Dissolution of corporate debtor

In compulsory liquidation, after the liquidation order is given that the company has been liquidated by the NCLT and the proceeds are distributed as per section 53 of IBC, the company is dissolved under section 54. Under the voluntary liquidation process, under section 59(7) as the company has been wound up and the assets have been liquidation, the liquidator makes an application to the NCLT to dissolve the company. Once the NCLT has received the company, it will pass an order for the dissolution of the company and this order will be effective from the date of such an order.[8] The copy of the dissolution order should be forwarded to the authority under which the corporate debtor is registered with within 14 days.[9]

 What Laws Governing Company Liquidation of a Company?

  •       Insolvency and Bankruptcy Code, 2016 provides the legal framework for the liquidation process of the company.
  •       Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 makes specifications on the compulsory liquidation process under Chapter III of Part II of IBC.
  •       Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 relate to a more detailed explanation of the voluntary liquidation process given under section 59 of IBC.
  •       Companies Act, 2013, the grounds of winding up is given under section 271 of this Act and as per section 272, the company, any contributory, the Registrar of Companies, any person authorised by the Central Government, or the Central or State Government can file a petition for winding up to the NCLT. After which the NCLT appoints a liquidator under section 275, which can be removed or replaced under section 276 by the NCLT due to fraud, misconduct, misfeasance, professional incompetence, conflict of interest, lack of independence and their inability to act as the liquidator. If the NCLT finds the liquidators reasons to liquidate the company sufficient, the company will be dissolved under section 302.

 Effect & Consequences of Company Liquidation

  •       When the liquidation process has been initiated, the liquidator has the control of the company’s affairs, and as the board of directors have dissolved, the directors also lose their power to make decisions of the company as per section 34(2) of IBC.
  •       The liquidator has the power to take custody and control the assets of the company, including the sale of assets. This is done by the liquidator to maximise the returns, after which the proceeds are used to pay the creditors as per the priority basis listed in section 53 of IBC.
  •       This distribution of proceeds under section 53, the liquidator is paying off the debts and obligations of the company before the dissolution of the company.
  •       The liquidation process also leads towards the termination of employees of the company as they are considered as the operational creditors of the company. The liquidator pays them any unpaid wages or severance pay and may also receive any payments as per section 53.
  •       Once the company has been liquidated the company essentially ceases to exist.

 Conclusion

The liquidation process of a company is essentially the winding up of the company which can be done either, voluntarily by the members of the company or compulsorily by the NCLT. This process includes that the assets of the corporate debtor are sold, the claims of the creditors consolidated, verified, and accepted/ rejected by the liquidator, and the remaining the assets are distributed amongst the creditors and the shareholders. The liquidation process is governed by the IBC, the Liquidation Process Regulations, Voluntary Liquidation Process Regulations and the Companies Act, 2013. The last step of the liquidation process of a company is the dissolution order passed by the NCLT, in which the company is essentially termination and the business operations of the corporate debtor come to an end.

 

Company Liquidation Process FAQs:

 What is the Company liquidation process under IBC?

The liquidation process is the final stage of the insolvency process. The liquidation process is procedure for winding up the company when the CIRP has failed. The NCLT under section 33 orders the liquidation process due to the failure of the CIRP, upon the decision of the CoC, the NCLT rejects the resolution process or there is a contravention of the resolution plan, as per compulsory liquidation process. After this the RP is appointed as the liquidator by the NCLT under section 34. Next, the liquidator makes a public announcement that this company is undergoing liquidation, the creditors submit their claims and then the liquidation verifies these claims and accepts or rejects the claims. The liquidator will then distribute the assets of the corporate debtor as per section 53. Once the NCLT passes a dissolution order as per section 54, the company is terminated.

What triggers the liquidation process under IBC?

As per section 33, the liquidation process is initiated because the CIRP failed to rehabilitate, restructure or revive the corporate debtor within 270 days, the NCLT rejected the resolution plan, by 66% vote the CoC decides to liquidate the corporate debtor, or an affected person can make an application to the NCLT for any contravention of the resolution plan by the corporate debtor or any stakeholder.

Who can initiate liquidation proceedings under IBC?

Under compulsory liquidation as per section 34 the creditors of the company and the NCLT may initiate the liquidation proceedings. For voluntary liquidation process a corporate person, the members or shareholders of the company, or the creditors of the company as per section 59.

How are assets distributed during liquidation under IBC?

The assets of the company are distributed under section 53 of IBC, first priority goes to the insolvency resolution process costs and liquidation costs, workmen dues, secured creditors, employees’ wages and unpaid dues, unsecured creditors, dues to the government, remaining debts and dues, preference shareholders, and equity shareholders or partners.

What happens to the employees during a company’s liquidation?

Under section 33, the liquidation process may lead to the termination of the employment contract. Under section 34, once the liquidator is appointed, it is up to the liquidator to keep certain employees if their services are important as per the liquidator. Any wages and unpaid dues that are owed to the employees for 12 months before the LCD as per section 53(1)(c). The liquidators fees are deducted from the proceeds payable to each class of recipients, as stated under section 53(3), this is impliedly includes the employees.

Can a company be revived after entering liquidation under IBC?

The main aim of liquidation proceedings are to wind up the company. However, if the NCLT has the opinion that there are fair chances that the company may be revived, it may be possible.[10] An appeal is also a manner in which the corporate debtor can attempt to revive the company.  If any person is aggrieved by the liquidation order may file an appeal to the National Company Law Appellate Tribunal (NCLAT) on the grounds of material irregularity or fraud committed to such an order under section 61(4) of IBC. Any person who is aggrieved with the order passed by the NCLAT may file an appeal to the Supreme Court on the question of law within 45 days of the NCLAT’s order.

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  1. Classic Transformers Private Limited (Corporate Debtor or CD) was incorporated in 1985. It is classified as Non-Government company and it has its registered office in Ahmedabad. It has one manufacturing unit in Talegaon district in Pune, Maharashtra and a principal office in New Delhi. As per records of MCA, its authorized share capital and paid-up share capital is Rs. 200 lacs. It carries on the business of manufacture of television and radio transmitters and wireless apparatus. The directors of Classic Transformers Private Limited are Mr. Paras Singhania and Mr. Raman Nair.
  2. One of the operational creditors, Best Tradex Private Limited filed an application for initiating corporate insolvency resolution process of Classic Transformers Private Limited for non-payment of its dues to the tune of Rs. 1.30 crores. The Adjudicating Authority, after issuing notice to the CD passes an order of admission on 30th August, 2023. Mr. Rajiv Khosla was appointed as Interim Resolution Professional (IRP)on the same date. In its first meeting held on 10th October, 2023, committee of creditors appointed Ms. Anamika Rajendran as Resolution Professional (RP) in place of Mr. Rajiv Khosla.
  3. IRP had made a public announcement in Form A on 1st September, 2023 in two newspapers (one english language newspaper and one regional language newspaper) in english language circulating at the location of the registered office of the company and in Pune, as the IRP felt that the CD conducts material business operations from Pune also. It was also published on the website of CD and website designated by IBBI. The last date for submission was stated as 13th September, 2023. Mr. Rajiv Khosla incurred Rs. 80,000/- as cost of publishing. The committee of creditors ratified the expense on publication to the tune of Rs. 50,000/- in its first meeting. IRP has filed application (IA 510 of 2023) against CoC and Best Tradex Pvt Ltd. for payment of remaining publication expenses.
  4. The following claims were received and admitted by Mr. Rajiv Khosla, IRP and later on by Ms. Anamika Rajendran, RP :

S. No.

Name

Amount

Status

Date of

Admission/Rejection

1.

Janta Bank

3.60 crores

Financial Creditor

20.9.2023

2.

Parivaar Bank

3.00 crores

Financial Creditor

20.9.2023

3.

Rashi Singhania(wife of Paras

Singhania)

50 Lakhs

Financial Creditor

20.9.2023

4.

Best Tradex

1.60 crores

Operational Creditor

20.9.2023

5.

Electrolux

Supplies Inc

45 lacs

 

 

Rejected as filed late

18.12.2023

6.

70 workmen

1.60 crores

Operational creditors

20.9.2023

7.

15 Employees

1.50 crores

Operational creditors

20.9.2023

8.

GST dues

70 lacs

Operational creditors

20.9.2023

9.

Income Tax dues

30 lacs

Operational creditors

20.9.2023

10.

Provident Fund Dues

20 lacs

Operational creditors

20.9.2023

11.

Revive Finance(filed on 4th

September, 2023)

1.50 crores

Financial Creditor

10.12.2023

12.

Raman Nair (Loan to company

without interest)

1 crore

Financial Creditor

20.9.2023

13.

Electricity dues

25 lacs

Operational Creditor

20.9.2023

14.

Big Lease -Landlord forarrears of Rent onlease of Principal

Office

10 lacs

Financial Creditor

20.9.2023
  1. The break-up of claims admitted till date is as under :

Financial Creditors         – Rs. 9.70 crores

Operational Creditors – Rs. 6.15 crores

 Total                               Rs. 15.85 crores

  1. The committee of creditors was constituted by IRP as follows:
  2. Janta Bank
  3. Parivaar Bank
  4. Revive Finance
  5. Big Lease
  6. According to IRP, though Raman Nair is a financial creditor but being a suspended director, he is not part of committee of creditors. IRP had written to all operational creditors to select one of their representatives to participate in the meeting of committee of creditors but despite sending 3 emails, the operational creditors collectively have not named a single representative. 
  7. IRP and RP invited suspended directors Paras Singhania and Raman Nair to attend meeting of committee of creditors by sending them notices of all committee of creditors meetings. Three meetings of committee of creditors were held until 12th December, 2023.
  8. One of the operational creditors Electrolux Supplies Inc based in New Delhi files its claim on 15th December, 2023 with the RP for Rs. 45 lacs. After receiving the claim RP writes e-mail to Electrolux Supplies Inc. that its claim cannot be considered as it has been filed after the time limit mentioned in the Code read with CIRP Regulations though the books of account also show that Rs. 45 lacs is due to Electrolux Supplies Inc. Based on legal advice, Electrolux Supplies Inc files an application (IA 810 of 2023)  under section 60(5) before Adjudicating Authority against rejection of the claim on the ground that the delay occurred on the following grounds: 
  9. Electrolux Supplies Inc was not aware of the initiation of CIRP against the CD as it is based in Gurugram (adjacent to New Delhi) and the public announcement was not made in newspapers circulating in New Delhi. 
  10. RP should have admitted the claim of Electrolux Supplies Inc on the basis of books of account and it was not necessary for Electrolux Supplies Inc. to file its claim.
  11. Best Tradex has also filed an application (IA 633 of 2023) before Adjudicating Authority that they have not been included in committee of creditors in terms of section 21 and 24 of the Code. RP’s stand is that since individually the operational creditor’s claim is not more than 10% of the total dues, IRP or RP was under no obligation to send notice of committee of creditors meeting to operational creditors. Best Tradex, while reiterating that since total claims of OC’s is more than 10%, being a largest OC, it is entitled to participate in committee of creditors.
  12. Revive Finance, whose claim was admitted after more than 3 months of its filing, moved an application (IA 754 of 2023) to the Adjudicating Authority stating that the  decisions taken in all three meetings of committee of creditors held before they were included in committee of creditors as invalid. In these 3 meetings, they claimed, crucial decisions were taken relating to appointment of RP, ratification of expenses, appointment of valuers, approval of fees of RP and other crucial decisions relating to running of CD as a going concern. Thy also claimed that unnecessary queries were raised by IRP/RP to delay the admission of claim. On behalf of RP, it was stated that 3 emails were sent as documents filed by them are deficient, they did not submit loan agreement despite repeated emails.
  13. On 1st January, 2024, the promoters of Classic Transformers Private Limited entered  into a settlement with the Applicant Best Tradex and agreed to pay all their dues in exchange of Best Tradex filing an application for withdrawal of corporate insolvency resolution process. The promoters of the CD have filed an application (IA No. 17 of 2024) to Adjudicating Authority for withdrawal on 15th January, 2024 on the basis that their claims have been paid by the promoters in full and final.
  14. The books of account of the CD shows that loan of Rs. 1 crore was taken from Raman Nair in 2018 and is still outstanding. Another account “Advance to Raman Nair” appeared in the books of account and the last 2 financial years, 2021-22 and 2022-23 showed the following transactions:

Date

Particulars

Debit

Credit

Balance

1.4.2021

Opening Balance (Payable by Raman Nair)

 

 

20,00,000

15.5.2021

Expense Adjustment/Received by CD

 

5,00,000

15,00,000

17.8.2021

Paid by CD

7,00,000

 

22,00,000

20.12.2021

Paid by CD

2,00,000

 

24,00,000

12.4.2022

Expense Adjustment/Received by CD

 

3,00,000

21,00,000

18.9.2022

Paid by CD

1,00,000

 

22,00,000

2.1.2023

Expense Adjustment/Received by CD

 

5,00,000

17,00,000

28.8.2023

Paid by CD

6,00,000

 

23,00,000

RP has filed an application with the Adjudicating Authority (IA 25 of 2024) on 20th January 2024 claiming Rs 31 lacs (amount outstanding as on 30.8.2021 plus amounts paid by CD to Raman Nair on 20.12.2021, 18.9.2022 and 2.1.2023) as preferential transactions u/s 43 of the Code and prayed for recovery of these amounts. Raman Nair has filed a reply stating that these transactions are not preferential on the following grounds:

  1. Advance account was a running account for the expenses to be incurred on behalf of the CD and he has in his possession bills not accounted for in the books of account.
  2. RP has aggregated the amounts paid by CD and does not take into account the expense adjustment done or amounts received back by CD.
  3. He has given an interest free loan and his claim has been admitted to that extent. Assuming but not admitting that RP is correct, Raman Nair is entitled for set off.
  4. RP has filed the application beyond the stipulated period as provided in Regulations and hence the application is time barred.
  5. Draft of Forensic Audit report was not shared with the suspended directors and hence there is violation of principles of natural justice.
  6. Even otherwise the transactions were in the ordinary course of business.

RP, in rejoinder, claims that payment transaction is not to be mixed with expense adjustment or amount received from Raman Nair. For amounts paid by Raman Nair, he should file a claim and there is no provision of set off in CIRP. The application in filing preferential transaction application was delayed due to non-cooperation of suspended directors in providing information to forensic auditor who had sent 2 emails to them. The final report was placed before committee of creditors who had directed RP to file application.

  1. RP, based on forensic audit, in the same IA 25 of 2024, also alleged that substantial amounts to the tune of Rs. 1.50 crores, shown as investments, were written off on 31.3.2023 by the suspended directors as reflected in books of account. The amount was paid to 2 related parties, namely, Hi-life Technologies Pvt Ltd (Rs. 70 lacs) and Super Motors Private Limited (Rs. 80 lacs). These amounts were paid as investment in 2016 and 2017. RP has treated them as fraudulent transactions and has prayed for recovery of the amounts from suspended transactions as fraudulent and wrongful trading under section 66 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).  

Suspended directors have filed a common reply stating that by no stretch of imaginations, write offs can be treated as fraudulent transaction as there is no outflow. RP has the freedom to revise the accounts and reverse the transactions in books. The amounts relate to 2016 and 2017 and is beyond the purview of scope of RP. Further, the investments were made in good faith to expand the business of CD but could not fructify. Moreover, RP has filed a single IA u/s 43 and 66, which is not permitted.

RP, argues that suspended directors had the knowledge of the fact that CD is going under insolvency and they should have taken steps to recover the amounts. The amounts written off in the books of CD are still being shown in the books of account of Hi-life Technologies Pvt Ltd and Super Motors Private Limited and produced financial statement of both the companies filed with Registrar of companies for FY 2022-23. 

  1. The plant and machinery of CD is charged to Janta Bank and is worth 8 crores @ 18% p.a. interest. IRP  was in need of funds to run the CD as a going concern and hence obtained interim  finance of Rs 1 crore by charging plant and machinery to Perfect Finance. Janta Bank has now objected to this action by IRP by stating that neither its consent nor CoC’s consent was obtained. Janta Bank has filed the application (IA 603 of 2023) before the adjudicating authority praying that the amount received from Perfect Finance should not be classified as Interim Finance and the mortgage created on Plant and Machinery should be set aside.
  2. RP has taken up the issue of completion of audit but the statutory auditor, RAK Associates is not cooperating. RP has filed an application for non-cooperation against the statutory auditor u/s 19(2) of the Insolvency and Bankruptcy Code, 2016 (IA 540 of 2023).  Statutory auditor contends that he is not covered u/s 19 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and hence the application should be dismissed in limine. Secondly, he has provided all documents to the RP whatever was in his possession. RP states that the statutory auditor has not supplied working papers containing details of debtors of CD. 
  3. RP has also issued a letter terminating the appointment of statutory auditor and appointing a new one. Having done that, he places this fact before the committee of creditors in their meeting, who ratify his action unanimously. Previous statutory auditor is aggrieved and he files an application  (IA 56 of 2024) challenging the decision of RP and its ratification by committee of creditors to replace him.
  4. Janta Bank has filed an IA 602 of 2023 objecting the inclusion of Big Lease as financial creditor in the committee of creditors. As per them, Big Lease is an operational creditor and not financial creditor.

CSM 2 Case Study on PPIRP

ABC Ltd., a medium-sized manufacturing company based in India, has been struggling with financial difficulties exacerbated by the economic downturn caused by the COVID-19 pandemic. With mounting debt and dwindling revenues, ABC Ltd. finds itself in a situation where it needs to explore insolvency resolution options to salvage its operations and protect the interests of its stakeholders.

ABC Ltd. is classified as a medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 though registration is pending. ABC Ltd. has committed a default of Rs 54 lacs to My Bank. The company has not undergone any insolvency resolution process in the past three years. Financial creditors representing at least 66% of the financial debt due to them have proposed the appointment of an insolvency professional for conducting the PPIRP.

A majority of the directors of ABC Ltd. have made a declaration stating the intent to initiate the PPIRP and affirming that it is not for fraudulent purposes. A special resolution has been passed by the members of ABC Ltd. approving the initiation of the PPIRP. There is an application under section 43 against one of the directors of ABC Limited for his involvement in Bright Star Limited, a company under CIRP. ABC Limited has prepared a draft Base Resolution Plan. ABC Limited files an application to the Adjudicating Authority for initiating pre-packaged insolvency resolution process. Base Resolution Plan prepared by ABC Ltd contains lower payment to financial creditors with a proposal to pay in full to the operational creditors.

CSM 3- Case Study on Voluntary Liquidation

 

Sunmark Enterprises Limited, a medium-sized manufacturing company, has been experiencing financial difficulties for the past several years due to a decrease in demand for its products and heightened competition in the market. Following a comprehensive evaluation of its financial standing and future outlook, the Board of Directors opts to commence voluntary liquidation pursuant to Section 59 of the Insolvency and Bankruptcy Code (IBC) to ensure a systematic conclusion of the company’s operations.

  1. Appointment of Liquidator:
    • On 20th December 2023, the Board of Directors convenes a meeting and passes a resolution proposing voluntary liquidation.
    • Mr. John, a registered insolvency professional, is appointed as the liquidator to oversee the liquidation process on 10th February 2024.
  2. Declaration of Solvency:
    • A board meeting is held, during which a declaration of solvency is made, affirming that Sunmark Enterprises Ltd. is solvent and capable of settling its debts within a specified period not exceeding one year from the onset of liquidation.
  3. Approval of Shareholders:
    • On 10th January 2024, shareholders of Sunmark Enterprises Ltd. pass a special resolution, endorsing the decision to commence voluntary liquidation.
    • The resolution garners approval by a majority vote representing at least 75% of the shareholders’ voting power.

Following the shareholders’ approval by a special resolution, creditors of the company also consent to the voluntary liquidation with a two-thirds majority on 1st February 2024. Despite incurring losses in the previous year and anticipating further losses, the liquidator expresses intent to continue business operations during the liquidation period. Seeking professional guidance, the liquidator faces several challenges and scenarios:

  1. Preparation of Preliminary Report:
    • The liquidator drafts a Preliminary Report, estimating the assets and liabilities as of the liquidation commencement date. However, doubts arise regarding the reliability of the company’s financial records.
  2. Unfiled Claims and Foreign Creditor:
    • Despite issuing announcements inviting claims, three employees fail to file their claims. Additionally, a foreign creditor submits a claim of $2000, prompting uncertainty regarding the applicable foreign exchange rate for claim admission.
  3. Rejected Claim and Lack of Reasons:
    • One creditor disputes the rejection of their claim by the liquidator, citing a lack of justification for the decision.
  4. Bank Account Establishment:
    • The liquidator establishes a separate bank account in the name of the corporate entity for liquidation purposes.
  5. Salary Payment and Unsold Machinery:
    • An employee urgently requests a cash payment of their salary amounting to Rs. 20,000.
    • Despite extensive efforts, the liquidator struggles to sell an old machinery valued at Rs. 50,000, with consultants and brokers indicating its low marketability. However, a creditor expresses willingness to accept the machinery as part of their claim settlement.

In navigating these complexities, the liquidator must adhere to legal requirements and seek appropriate guidance to ensure fair and efficient resolution throughout the voluntary liquidation process. He seeks your answwer to following questions: –

CSM 4 – Part III Case Study

Raj Shekhar’s bankruptcy process commenced on 1st April 2024 after the unsuccessful resolution of his insolvency proceedings initiated on 1st August 2023. The Bankruptcy Trustee issued a public notice on 4th April 2024, with the deadline for claim filing set for 25th April 2024.

He possesses the following assets under his and his family’s ownership:

  •   A 2 BHK property in NOIDA acquired in 2001 for Rs. 11 lakhs.
  • A 3BHK residence in Mumbai purchased in 2015 for Rs. 50 lakhs.
  • A 2 BHK dwelling in Gurgaon under his wife Alka’s name, assessed at Rs. 66 lakhs.
  • A jointly-owned flat in Indore with his wife, booked for Rs. 27 lakhs.
  • A laptop valued at Rs. 52,000.
  • A Honda City utilized for office purposes, valued at Rs. 8.50 lakhs.
  • A Wagon R utilized for personal use, valued at Rs. 4 lakhs.
  • An Enfield Motorcycle used for leisure activities, valued at Rs. 2.50 lakhs.
  • Leased office space in Munirka with a monthly rent of Rs. 25,000.
  • A diamond ring procured for Rs. 1.50 lakhs.
  • Gold jewelry valued at Rs. 15 lakhs.
  • Gold jewelry under his wife’s name, including a Mangal sutra, valued at Rs. 22 lakhs.
  • Ornaments for his home temple amounting to Rs. 3 lakhs.
  • An iPad worth Rs. 45,000.
  • Watches valued at Rs. 1.50 lakhs.
  • Office books valued at Rs. 1.20 lakhs.
  • Home furniture worth Rs. 2.50 lakhs and office furniture worth Rs. 1 lakh.
  • Life insurance policies in various names totaling Rs. 225 lakhs.
  • Children’s bicycle valued at Rs. 5000.
  • Shares in companies worth Rs. 3.5 lakhs.
  • Mutual fund investments worth Rs. 2 lakhs.
  • Public Provident Fund (PPF) investments totaling Rs. 3 lakhs.
  • Assets belonging to his second sister residing abroad, valued at Rs. 5 lakhs.

His liabilities include:

  • Business sundry liabilities amounting to Rs. 15 lakhs.
  • GST liability totaling Rs. 2 lakhs.
  • Unpaid electricity bills of Rs. 50,000.
  • Outstanding traffic challan of Rs. 3,000.
  • Maintenance payment to his ex-wife at Rs. 50,000 per month, pending for the last six months.
  • Personal loans from friends totaling Rs. 45 lakhs.
  • Loan from his brother-in-law amounting to Rs. 3 lakhs.
  • Loan against Honda City from a bank worth Rs. 5 lakhs.
  • Student loan taken for his sister’s son, amounting to Rs. 10 lakhs.
  • Damages of Rs. 55,000 awarded by the court due to water leakage from his Mumbai flat.
  • Business loan of Rs. 75 lakhs.
  • Outstanding credit card dues of Rs. 1.60 lakhs.
  • Income tax liability of Rs. 10 lakhs.
  • School fees for his two children, unpaid for three months, at Rs. 20,000 per month each.
  • Outstanding dues at a local grocery store totaling Rs. 32,000.

 

Case Study on Business and General Laws

Avanti Roadways Pvt. Ltd., incorporated under the Companies Act, 2013, operates from its registered office situated at Plot No.1, First Floor, East Chamber, Gwalior, Madhya Pradesh. The company is structured with an authorized capital of INR 5,00,000, which is fully issued, subscribed, and paid-up. The core activities of the company are focused on constructing residential and commercial buildings and educational institutions.

The Registrar of Companies in Gwalior, citing non-compliance with the statutory requirement to file Annual Returns and Financial Statements for the fiscal years 2014-15 through 2017-18, initiated proceedings under Section 248(1) of the Companies Act, 2013, read with Rule 7 and Rule 9 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016. Consequently, a notice of intent to remove the company’s name from the register was issued. In response to this notification, the company filed an appeal with the National Company Law Tribunal (NCLT) in Gwalior under Section 252 of the Companies Act, 2013, asserting that it continued to engage actively in business operations throughout the period in question. The company admitted oversight in the non-filing of the required documents, attributing it to lapses by the management.

During the period under review, the company was involved in several significant projects, including constructing a multi-functional educational complex under a government contract, which involved intricate compliance with environmental regulations and state educational mandates. This project, along with other private commercial ventures, significantly contributed to its revenue streams, though it complicated the operational and regulatory reporting requirements.

As part of its defense, Avanti Roadways Pvt. Ltd. demonstrated through detailed documentation—including contracts, invoices, and bank statements—that it was operational and financially active during the years for which filings were not completed. Following the notice from the Registrar, the company undertook substantial revisions to its management structures, enhancing its regulatory compliance processes to include automated systems for tracking and reporting essential corporate activities and statutory filings.

The appeal by Avanti Roadways Pvt. Ltd. is pending before the NCLT, where the company seeks not only to contest the Registrar’s decision but also to establish a precedent for considering operational continuity and factual business engagement in decisions related to statutory compliance enforcement.

Case Study: The Case of Rajesh Kumar and the Corporate Insolvency Resolution Process

Background: Rajesh Kumar, an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI), faced disciplinary action following a Show Cause Notice (SCN) by the IBBI. This action originated from procedural issues during the Corporate Insolvency Resolution Process (CIRP) of M/s Indore Developers Private Limited, where he was appointed as the Resolution Professional (RP).

Legal Framework: This case is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the duties and responsibilities of an insolvency professional overseeing the CIRP. Kumar was accused of providing unequal treatment to certain decree-holding homebuyers in the resolution plan, potentially breaching several sections of the IBC and related regulations.

Investigation and Proceedings: Following a complaint from a homebuyer, the IBBI launched an investigation into Kumar’s conduct during the CIRP. After receiving the investigation report, the IBBI issued a SCN, which was later handled by its Disciplinary Committee (DC) for resolution. Kumar defended his conduct through various submissions and a personal hearing, arguing that his decisions were aligned with legal precedents and the decisions of the Committee of Creditors (CoC).

Findings and Contraventions: The DC identified discrepancies in Kumar’s management of the claims of decree-holding homebuyers. Despite legal opinions indicating that these claims should be treated as those of financial creditors, they were categorized differently in the resolution plan submitted to the CoC. This action raised concerns about Kumar’s adherence to the statutory requirements and the broader principles of fairness and transparency in the CIRP. Kumar also admitted the claim of the aforesaid decree holders as “Creditors in class” based on the said legal opinions. However, it is observed that despite having admitted the claims of these decree holders as “Creditors in class”, he has treated the claim of the said decree holders as “Other Creditors” in the resolution plan placed before the CoC, instead of “Creditors in Class”.

Legal Issues and Analysis: The main legal issue involved the interpretation and application of sections 30(2)(e) and (f) of the IBC concerning the treatment of creditors in a resolution plan. Kumar’s handling of these claims brought up questions regarding the compliance with these statutory provisions and the fundamental principles of equitable treatment of creditors.

Arguments by Kumar: Kumar submitted that he had admitted the claim of the decree holders under the category of creditors in a class based on the legal opinion. However, the resolution applicant has provided a specific treatment to all such creditors which was then approved by the CoC and the AA. As elaborated above, (a) this was in line with the applicable law at the relevant time; (b) the resolution applicant has the discretion to provide the treatment for the stakeholders including the decree holders; (c} the resolution plan has been approved by the committee of creditors in its commercial wisdom which is paramount; (d) the resolution plan has been approved by the AA. He submitted that he has not ‘deprived the decree holders from their legal rights and claims as homebuyers’, he has conducted the CIRP in terms of the Code and the treatment to be provided to the stakeholders is beyond his ambit. 

 

The DC upholds his contravention of section 30(2)(e), 30(2)(f), 208(2) (a) & (e) of the Code, regulation 39(2) of the CIRP Regulations, regulations 7(2) (a) & (h) of the IP Regulations read with clauses 1, 3 and 14 of the Code of Conduct.

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