The Liquidation Process of a company in India is a structured procedure outlined under the Insolvency and Bankruptcy Code (IBC), 2016 for companies that cannot be revived through the Corporate Insolvency Resolution Process (CIRP). Liquidation involves selling the company’s assets to pay off creditors in a predetermined order of priority. This process helps to maximize the value of the company’s assets and distribute it fairly among the stakeholders.

Here’s an in-depth look at the liquidation process in India, covering when liquidation is triggered, its key steps, the role of the liquidator, priority of claims, and compliance requirements.

1. When is Liquidation Triggered?

Under the IBC, liquidation is initiated in the following circumstances:

• Failure to Approve a Resolution Plan: If the Committee of Creditors (CoC) fails to approve a resolution plan within the prescribed 330-day timeframe (including extensions), the company automatically enters liquidation.
• CoC Decides to Liquidate: The CoC, with at least 66% of voting power, may decide to liquidate the company if they believe it is in the best interest of creditors.
• Violation of Approved Resolution Plan: If a company fails to adhere to the terms of an approved resolution plan, the resolution applicant or creditors can file for liquidation.
• Voluntary Liquidation: Solvent companies that wish to shut down operations can voluntarily initiate the liquidation process, provided they can settle all outstanding debts.

2. Role of the Liquidator

A liquidator is appointed by the National Company Law Tribunal (NCLT) to oversee the liquidation process. The liquidator’s primary responsibilities include:

• Taking Custody of Assets: The liquidator takes control of the company’s assets, records, and accounts.
• Claims Verification: The liquidator verifies claims from creditors, determining the amount owed and the priority of each claim.
• Asset Valuation and Sale: The liquidator assesses the value of the company’s assets and conducts sales through auctions or private sales to maximize proceeds.
• Distribution of Proceeds: Following the sale of assets, the liquidator distributes the proceeds among creditors according to the IBC’s priority order.
• Compliance and Reporting: The liquidator files regular reports with the NCLT, ensuring transparency and adherence to IBC regulations.

3. Liquidation Process under IBC

The liquidation process consists of several key steps to ensure compliance, transparency, and fairness in the distribution of assets.

A. Application to NCLT for Liquidation Order

• When liquidation is triggered, the NCLT passes a liquidation order and appoints a liquidator to begin the process. The liquidator may be the same insolvency professional who conducted the CIRP, or another qualified individual.

B. Declaration of Moratorium

• Upon commencement of liquidation, a moratorium is declared, staying all legal proceedings against the company. This ensures that no external litigation or claims interfere with the liquidation process.

C. Public Announcement and Claim Collection

• The liquidator makes a public announcement inviting all creditors to submit their claims within a specified time frame, usually within 30 days of the liquidation commencement date.
• Claim Submission and Verification: Creditors submit claims, which the liquidator verifies to determine authenticity and amounts owed.

D. Preparation of Asset Memorandum

• The liquidator prepares an asset memorandum listing all assets available for liquidation, including their valuation, descriptions, and estimated market prices.
• Asset Valuation: The valuation is usually conducted by professional valuers to ensure that fair market values are assigned to each asset.

E. Sale of Assets

• The liquidator sells the assets through auctions or private sales, aiming to maximize the recovery value.
• Mode of Sale: The method of sale (auction, private sale, or negotiation) depends on asset type, market conditions, and interest from potential buyers.

F. Distribution of Proceeds

• After the assets are sold, the proceeds are distributed to creditors based on the priority of claims outlined in the IBC.
• Distribution Priorities: The distribution follows a strict order of priority, ensuring fair treatment of creditors based on their claim type.

G. Compliance, Reporting, and Final Liquidation Report

• Throughout the liquidation, the liquidator submits regular reports to the NCLT, documenting claim verification, asset sales, and distributions.
• Final Liquidation Report: Once all assets are sold and proceeds distributed, the liquidator prepares a final liquidation report, filed with the NCLT, indicating that the company’s affairs have been completely wound up.

4. Priority of Claims in Liquidation

The IBC specifies a fixed order of priority for distributing the proceeds from liquidation. The priority order is as follows:

1. Insolvency Resolution and Liquidation Costs: All expenses related to the CIRP and liquidation, including fees of the liquidator and insolvency professional, are paid first.
2. Secured Creditors and Workmen’s Dues: Secured creditors and dues owed to workmen for up to 24 months are given priority.
3. Employees’ Salaries and Dues: Salaries and dues owed to employees (excluding workmen) for up to 12 months are paid next.
4. Unsecured Creditors: Unsecured creditors, such as suppliers and lenders without collateral, are prioritized after secured claims and employee dues.
5. Government Dues and Remaining Secured Creditors: Dues owed to the government and remaining secured creditors (whose claims are unmet from asset sale) follow.
6. Preference Shareholders: Holders of preference shares are paid if any surplus remains after settling creditor dues.
7. Equity Shareholders: Common shareholders are last in line and are compensated only if assets remain after meeting all prior obligations.

5. Fast-Track Liquidation Process for Smaller Companies

For small companies and startups, the IBC provides a fast-track liquidation process that simplifies and speeds up liquidation. Companies eligible for this process include:

• Small companies as defined under the Companies Act, 2013.
• Startups recognized by the Department of Industrial Policy and Promotion (DIPP).
• Unlisted companies with total assets and liabilities below ₹1 crore.

The fast-track process follows similar steps as the regular process but is designed to complete within a shorter timeframe.

6. Voluntary Liquidation Process

The IBC allows solvent companies that wish to cease operations to initiate voluntary liquidation. This process applies to companies with no outstanding debt obligations or those able to repay all creditors. Steps for voluntary liquidation include:

• Board Resolution: The company’s board passes a resolution to liquidate and appoint a liquidator.
• Shareholder Approval: The resolution is approved by shareholders, with at least 66% voting in favor.
• Creditors’ Consent: If the company has debts, creditors representing at least two-thirds of the outstanding debt must approve the voluntary liquidation.
• Application to NCLT: The liquidator files an application with the NCLT for final dissolution, along with an affidavit affirming that all debts have been settled.

7. Compliance and Reporting During Liquidation

• Regular Reporting: The liquidator must submit regular updates to the NCLT, detailing the progress of liquidation, asset sales, and distribution of proceeds.
• Asset Memorandum and Final Report: The liquidator prepares an asset memorandum, a preliminary report, and a final report on completion, documenting all liquidation activities.
• Records Maintenance: The liquidator maintains records of claim verification, asset sales, and distribution details, ensuring transparency and accountability.

8. Advantages of the IBC Liquidation Process

• Predictable Process: The structured, time-bound liquidation process ensures transparency and predictability for creditors and stakeholders.
• Fair Distribution: IBC’s priority of claims ensures equitable distribution, protecting the interests of creditors, employees, and other stakeholders.
• Asset Value Maximization: Liquidation conducted by a professional liquidator optimizes asset value through fair valuations and structured sales.
• Enhanced Creditor Confidence: Clear procedures and legal backing improve creditor confidence, encouraging lending and investment.

9. Challenges in Liquidation under IBC

• Backlog at NCLT: High case volumes can lead to delays in liquidation approvals and resolution, increasing costs for creditors.
• Valuation and Sale Difficulties: Achieving fair market value in asset sales can be challenging, particularly in volatile or distressed markets.
• Administrative and Legal Costs: Insolvency resolution and liquidation processes entail significant costs, which can reduce the overall recoverable value for creditors.
• Complexities with Group Companies: Liquidation of companies within large corporate groups or conglomerates can be complex, as the IBC does not address group insolvency specifically.

10. Recent Amendments and Updates in Liquidation under IBC

The IBC has seen amendments to streamline the liquidation process and address emerging challenges:

• Reduction in Time Limits: Amended provisions have reduced timelines for liquidation, helping to speed up the process and maximize asset value.
• Pre-Packaged Insolvency for MSMEs: For MSMEs, a pre-packaged insolvency option was introduced, allowing a quicker resolution process while avoiding formal liquidation.
• Encouragement of Going Concern Sales: To maximize asset value, amendments encourage the sale of businesses as a going concern rather than through asset-by-asset sales.
  
  Conclusion
  The liquidation process under the Insolvency and Bankruptcy Code, 2016, provides a transparent, structured approach for companies that cannot be revived through resolution. It ensures fair distribution of assets among stakeholders and offers a streamlined exit for distressed businesses. While challenges like valuation difficulties and NCLT delays remain, the IBC’s framework continues to evolve to improve efficiency and effectiveness.
  For companies, creditors, and stakeholders, understanding the IBC liquidation process and the priority of claims can help in managing financial risks and optimizing outcomes.