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Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

Under the Insolvency and Bankruptcy Code, liquidation procedures cannot be initiated by creditors as a first resort on payment default. Instead, the code prescribes that a financial or operational creditor can initiate the corporate insolvency resolution process in case of failure by the corporate debtor to pay at least Rs100,000. In addition, the corporate debtor can initiate the corporate insolvency resolution process. However, in case of failure to work out a resolution plan under the corporate insolvency resolution process prescribed under the code, the corporate debtor must be liquidated.

The corporate debtor can also initiate voluntary liquidation proceedings with the approval of the board of directors, shareholders and creditors. Any corporate entity may initiate a voluntary liquidation proceeding if:

  • it has not committed any default;
  • a majority of the directors or designated partners of the corporate person make a declaration verified by an affidavit to the effect that:
    • the corporate person has no debt or can pay its debts in full out of the sale proceeds of the assets under the proposed liquidation; and
    • liquidation is not initiated to defraud any person;
  • such declaration is accompanied by the audited financial statements and valuation report of the corporate person;
  • within four weeks of such declaration, a special resolution (an ordinary resolution would suffice in cases of voluntary liquidation by reason of expiry of its duration or occurrence of any dissolution event) is passed by the contributories requiring the corporate person to be liquidated and appointing an insolvency professional as liquidator; and
  • creditors representing two-thirds of the total debt (in value) owed by the corporate person approve the resolution within seven days of its passage.

Voluntary liquidation is largely an out-of-court process. Only once the affairs of the corporate person have been completely wound up and its assets fully liquidated can the liquidator apply to the National Company Law Tribunal for its dissolution along with a final report. Pursuant to this application, the tribunal must pass an order for dissolution and the entity will be dissolved from the date of the order.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

The procedure for the liquidation of a company (along with limited liability partnerships and other limited liability entities) on account of insolvency (compulsory liquidation) and on account of application made for voluntary liquidation is enshrined under the Insolvency and Bankruptcy Code (leaving winding-up for other grounds under the Companies Act 2013).

Compulsory liquidation following corporate insolvency resolution process A financial or operational creditor or a corporate debtor may apply to the National Company Law Tribunal for the initiation of the insolvency resolution process following the default by the corporate debtor to pay dues of at least Rs100,000.

The code prescribes a timeframe of 180 days for the insolvency resolution process, which begins from the date that the application is admitted by the tribunal (and may be extended a further 90 days). During this time, no suits, proceedings, recovery or enforcement action can be commenced or continued against the corporate debtor. The committee of creditors shall consider and approve resolution plans which are placed before it for evaluation and viability determination.

In the event of a liquidation trigger, the following may occur:

  • the committee of creditors cannot agree on a workable resolution plan within 180 days (which can be extended once by 90 days);
  • the committee of creditors decides to liquidate the company;
  • the tribunal rejects the resolution plan;
  • the corporate debtor contravenes resolution plan provisions; or
  • the tribunal passes an order for the company’s compulsory liquidation.

Voluntary liquidation A company may initiate the voluntary liquidation process with the approval of a majority of the directors of the board, followed by the approval of the majority of its shareholders and creditors.

How are liquidation procedures formally approved?

Compulsory liquidation must be approved by the National Company Law Tribunal on occurrence of any of the liquidation triggers. Under compulsory liquidation, the consent of the company, its shareholders or directors is immaterial.

Voluntary liquidation requires the process to be initiated by the corporate debtor itself, through its directors or partners, and it must be approved by both its shareholders (in the case of a company) and creditors. 

What effects do liquidation procedures have on existing contracts?

For the purposes of liquidation, the liquidator forms an estate of the assets and holds the liquidation estate as a fiduciary for the benefit of all creditors. The liquidation estate assets include contractual rights.

What is the typical timeframe for completion of liquidation procedures?

The compulsory liquidation process is typically completed within two years of the date of initiation.

However, voluntary liquidation can be completed in a shorter period. The regulations under the Insolvency and Bankruptcy Code set out that in the event that the liquidation process is not completed within 12 months, the liquidator shall hold a meeting of the contributories within 15 days of expiry of the 12-month period and at the end of every succeeding 12-month period thereafter until the dissolution of the corporate person. The liquidator will also present an annual status report indicating the progress of liquidation at each meeting. 

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The resolution professional appointed for conducting the corporate insolvency resolution process usually acts as the liquidator for the purpose of the liquidation process, unless the National Company Law Tribunal replaces the resolution professional with a different insolvency professional.

The liquidator is empowered to:

  • verify the claims of all creditors;
  • take into his or her custody or control and sell all of the corporate debtor’s assets;
  • evaluate and take such measures to protect and preserve the assets and property of the corporate debtor;
  • conduct the corporate debtor’s business until liquidation;
  • investigate the corporate debtor’s financial affairs; and
  • institute or defend any suits or legal proceedings.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

After the National Company Law Tribunal passes an order for liquidation and appoints a liquidator, it periodically supervises the liquidation process. The law mandates that a preliminary report be submitted to the tribunal within 75 days of the commencement of liquidation, detailing the capital structure of the corporate debtor and the estimates of assets and liabilities based on the corporate debtor’s books. Following the preliminary report, the liquidator must submit quarterly progress reports to the tribunal indicating progress in liquidation, details of stakeholders and details of property that remains to be sold or realised. Thereafter, the sale and distribution of assets to the claimants are also conducted under the tribunal’s supervision.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Creditors have more involvement in the corporate insolvency resolution process where the affairs of the corporate debtor are managed under the supervision of the creditors. However, once the corporate debtor is ordered to be liquidated, the liquidator takes control over the debtor’s assets, liquidates them and distributes the sale proceeds as per the claims received under the supervision of the National Company Law Tribunal. The lenders must submit their claims to the liquidator; however, the liquidation process is conducted under the supervision and control of the tribunal.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

If the resolution plan under the corporate insolvency resolution process fails, the National Company Law Tribunal will order the debtor’s liquidation and appoint a liquidator to take control of the debtor’s assets. On appointment of the liquidator, all powers of the board of directors, key managerial personnel, shareholders and partners of the corporate debtor shall cease to have effect and be vested in the liquidator. Further, personnel are required to extend all assistance and cooperation to the liquidator as may be required in managing the corporate debtor’s affairs. 

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