When resolution fails,
the questions get sharper.

The tribunal orders liquidation under Section 33 where no resolution plan is received before the resolution process period expires, where the committee of creditors resolves to liquidate by the voting share Section 33(2) requires, where the tribunal rejects a plan for non-compliance with the requirements of Section 31, or where an approved plan is contravened. A liquidator is appointed, and a moratorium of a different character applies: no suit or other legal proceeding may be instituted by or against the corporate debtor, though the liquidator may institute a suit or other legal proceeding on its behalf with the prior approval of the tribunal.

The liquidator takes custody of the assets forming the liquidation estate, verifies claims afresh, values and sells assets, distributes the proceeds and applies for dissolution. The Liquidation Process Regulations set the period for submission of claims and the period within which the liquidation is to be completed. The estate does not include everything in the company’s possession. Assets held in trust for third parties, and security a creditor has chosen to realise outside the process, fall outside it.

A secured creditor faces a decision under Section 52 that is often taken without proper analysis. It may relinquish its security to the liquidation estate and share in distribution under the waterfall, or stand outside the process and realise the security itself, accounting to the liquidator for any excess and for its share of the costs. The choice depends on the arithmetic. Where the security is comfortably worth more than the debt, realising it independently keeps the whole benefit. Where it is worth substantially less, relinquishment is usually better, because a creditor who realises outside the estate ranks for its shortfall far down the order rather than at the priority relinquishing creditors enjoy. The difficulty is that the decision has to be taken on a valuation of an asset in a distressed market, at a point when nobody yet knows what the estate will realise, and within the period the Code and the regulations allow. Where the liquidator is not informed within that period, the security interest is deemed to have been relinquished to the liquidation estate.

Section 53 sets the order in which liquidation proceeds are distributed, and it overrides anything inconsistent in other law. The insolvency resolution process costs and the liquidation costs are paid in full first. Next, ranking equally between themselves, come workmen’s dues for the period preceding the liquidation commencement date that Section 53(1)(b) specifies and debts owed to a secured creditor who relinquished its security. Wages of other employees for the period Section 53(1)(c) specifies follow, then financial debts owed to unsecured creditors. Below that sit government dues for the period Section 53(1)(e) specifies, together with the shortfall of a secured creditor who enforced outside the process, and then remaining debts, preference shareholders and equity. Two features of the order are easy to miss. Statutory dues rank below unsecured financial creditors, which is the opposite of the position in most other recovery work, and the Section 52 election decides which of two widely separated rungs a secured creditor occupies. The order is also why classification of a claim matters here as much as it did in the resolution process. Classification decides voting rights during the resolution process and priority in the liquidation waterfall. In the liquidation itself there is no committee of creditors and no vote, and the liquidator consults a stakeholders’ consultation committee whose advice is not binding.

Liquidation and resolution both reopen the company’s recent past. The resolution professional or liquidator may apply to the tribunal in respect of preferential transactions that put a creditor in a better position than the waterfall would have, undervalued transactions where assets left the company for significantly less than their worth, and extortionate credit transactions on exorbitant terms. Each of those categories runs back from the insolvency commencement date over the look-back period its own section fixes. For preferential transactions under Section 43 and undervalued transactions under Section 46 the period is longer where the counterparty is a related party, while the period for extortionate credit transactions under Section 50 does not vary with the relationship. Fraudulent and wrongful trading under Sections 66 and 67 sit separately, and they run against directors rather than against a transaction: business carried on to defraud creditors, or continued when the director knew or ought to have known that there was no reasonable prospect of avoiding insolvency and did not exercise due diligence in minimising the potential loss to creditors. Relief can include reversal of the transaction, restoration of property, and a personal contribution order against directors. A director’s protection has to be created at the time: board minutes recording the commercial reasoning, valuations obtained then, advice taken and acted on. Records created after the event carry little weight.

A transfer in the ordinary course of business, or one supported by new value given at the time, is treated differently from a payment to a favoured creditor on the eve of collapse.

Not every liquidation follows distress. Section 59 of the Insolvency and Bankruptcy Code, 2016 provides a route for a solvent company to wind itself up. It requires a declaration by a majority of the directors, verified by affidavit, that the company has no debt or can pay its debts in full from the proceeds of its assets, and that it is not being liquidated to defraud any person. The declaration is accompanied by the audited financial statements and the record of business operations that section requires. A special resolution of the members follows within the period Section 59(3) allows, and where the company owes debt, creditors representing the proportion in value that section specifies must approve the resolution within the period allowed. Section 59 is commonly used to wind up dormant subsidiaries, and a defective declaration carries consequences for the directors who signed it.

A pre-packaged process was added to the Code by amendment in 2021, in Chapter III-A of Part II, for corporate debtors classified as micro, small and medium enterprises. Section 54A sets the conditions. They include a bar where the corporate debtor has completed a corporate insolvency resolution process or a pre-packaged process within the preceding period that section specifies, a requirement that it is not undergoing such a process and is not subject to a liquidation order, and a requirement that the corporate debtor itself is eligible to submit a resolution plan under Section 29A. The default must be of not less than the amount notified for the purpose. Existing management stays in control under supervision, and initiation requires the approval of unrelated financial creditors representing the share in value Section 54A(3) requires, together with a special resolution of the members or approval by the proportion of partners that section specifies.

Proceedings against a personal guarantor to a corporate debtor are dealt with under Part III of the Code. Where a corporate insolvency resolution process or a liquidation is pending against the corporate debtor, an application lies before the same tribunal under Section 60(1), which allows both to be seen together; where no such process is pending, the adjudicating authority is the Debts Recovery Tribunal. Either the guarantor or a creditor may apply. An interim moratorium arises on filing, protecting the guarantor from action in respect of that debt, and a resolution professional examines the application and reports within the period Section 99 allows, before the tribunal decides on admission within the period Section 100 allows. The moratorium that follows admission runs for the period Section 101 specifies. If the application is admitted, the guarantor may propose a repayment plan, prepared in consultation with the resolution professional, which requires the approval of creditors representing the proportion in value Section 111 specifies. If no plan is approved or implemented, an application for bankruptcy may be made within the period Section 121 allows, and a bankruptcy order brings in a bankruptcy trustee and an estate that excludes specified assets, with discharge by order of the tribunal under Section 138.

The corporate moratorium does not protect the guarantor, and a right of indemnity against a company being liquidated is worth little. This affects what a promoter will accept in a settlement.