PROPOSED CHANGES IN LIQUIDATION PROCESS

[Mr. M. GOVINDARAJAN]

Liquidation

The Adjudicating Authority, on the application filed by the Resolution Professional, may order for liquidation of corporate debtors (‘CD’ for short) on any one of the following grounds-

• No resolution plan is received by the Resolution Professional before completion of Corporate Insolvency Resolution Process (‘CIRP’ for short)
• The resolution plan is rejected by Adjudicating Authority;
• The Resolution Professional, before the confirmation of resolution plan, may intimate the decision of the Committee of Creditors (‘CoC’ for short) approved by 66% of creditors to liquidate the corporate debtor;
• The resolution plan approved by the Adjudicating Authority is contravened by the corporate debtor or any person other than the corporate debtor, whose interests are prejudicially affected by contravention, may make an application before the Adjudicating Authority.

Proposed changes

Vide Notice dated 18.01.2023 the Ministry of Corporate Affairs issued draft proposal for the changes to be made in the Code so as to streamline the procedure involved in the CIRP, liquidation etc., and to reduce the timelines in this procedure.

Direct dissolution

The CD can be dissolved once the liquidation process is over and the assets are distributed to stakeholders.  There is no direct dissolution of corporate debtor in the present scenario.  Presently liquidation proceedings are conducted in cases no recoverable assets are there which cause unnecessary costs and time. 

It is proposed to amend the code by which the CoC can request the Adjudicating Authority to dissolve the CD, if it believes that the conduct of liquidation proceedings may not be feasible or beneficial for the stakeholders.  If the Adjudicating Authority thinks just and reasonable to do so, allow the dissolution of the corporate debtor without going into liquidation on the request of the CoC.

This proposal is a welcome one since it reduces the cost and prolonged procedure in liquidation.

Changes in claims

On the appointment, the liquidator within five days from the date of liquidation shall cause a public advertisement inviting the creditors of the CD to file their claim.  Already claims are received in the CIRP, verified by the Resolution Professional and allowed the claim to the extent possible and appoint CoC.  On liquidation the Resolution Professional shall transfer all the claims to the liquidator.  Despite this detailed process, the liquidator is again required to invite and verify the claims during the liquidation process.  The duplication of these activities causes unnecessary delays in the liquidation process.

Therefore it is proposed to omit Section 38 (consolidation of claims) and Section 42 (Appeal against the decision of liquidator in the matter of allowing the claims) and also Section 35(1)(j) which provides to invite and settle claims of creditors and claimants and distribute proceeds in accordance with the provisions of this Code.  It is proposed to substitute a new Section 35(1)(j) which provides that the liquidator shall maintain a list of creditors during the liquidation process, for the existing section which provides  to verify claims of all the creditors. 

This proposal is an excellent one since it avoids duplication work, unnecessary costs and reduction of time in liquidation proceedings.

Continuance of proceedings

It is proposed to impose an obligation on the liquidator to investigate the financial affairs of the CD to trace any avoidable proceedings be substituted with a new provision to empower the liquidator to continue such proceedings if initiated during the CIRP while also having the power to initiate fresh proceedings as and when she comes across such transactions during the conduct of the liquidation process.

CoC to monitor liquidator

The liquidator is fully responsible for the conduct of liquidation proceedings till dissolution.  Even though the Code provides for the constitution of Stakeholders’ Committee to have discussion by liquidator but it is not mandatory to accept the decisions of the said Committee and the liquidator is to take his own decision.  As such there is no supervision on the functioning of the liquidator.

It is proposed that the Committee of Creditors in liquidation should supervise and support the functions of the liquidator.  The composition of the CoC for the liquidation process should be modified to include a more broad-based representation of creditors in the manner specified by the IBBI.   The CoC in liquidation may take all decisions by a simple majority of 51% or more of the voting share.

Whether the existing provisions for the constitution of Stakeholders Consultation Committee will be continuing or they will be omitted in the said proposal.  This aspect is not clear in the proposal.

Replacement of liquidator

There is no provision in the Code to replace the liquidator in the liquidation   process except where a change is recommended by IBBI or if the RP fails to perform its duties related to the examination of the resolution plan. Unlike CIRP, there is no provision to replace liquidators, even if the circumstances warrant, during the liquidation process.

It is proposed to amend the Code to empower the CoC to replace the liquidator at any time during the process by a vote of not less than 66% of voting shares.

In some cases the Adjudicating Authority replaced the liquidator and another liquidator was appointed.  This will have come into force after amendment.

Institution/continuation of suits

Section 33(5) of the Code provides that subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the CD.  However a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.

The said section does not bar the continuation of any pending suit or legal proceeding once the moratorium imposed during the CIRP is terminated which retards the activities of the liquidator.  Therefore it is propose d to amend Section 33(5) to prohibit the continuation of the suit or other legal proceedings during the liquidation process, apart from proceedings under section 52. The leave of the Adjudicating Authority should also be required for continuing any suit or other legal proceeding by or against a CD undergoing liquidation.

It is a similar one to that of the conditions for moratorium in CIRP.  Such restrictions will allow the liquidator for his smooth functioning.

Avoidance transactions

Once the liquidation process is complete the corporate debtor shall be dissolved on the order of Adjudicating Authority.  Suppose if there is any pending suit or legal proceeding, concerning a claim against the CD, shall not affect the dissolution of the CD and such CD may be dissolved under section 54 despite the pendency of any such proceeding against the CD.  The liquidator shall, before such dissolution, make appropriate arrangements for pursuing the suit or proceeding against the CD and, where an order is made against the CD, the distribution of proceeds from the sale of the liquidation assets shall be in such manner as may be specified.  Like that the passing of the dissolution order shall not affect the continuation of avoidance proceedings, and the CoC shall determine how to pursue and distribute the proceeds from such proceedings.

Secured creditors

The secured creditors may, during liquidation, choose to recover their dues either by realizing their security interest outside of the liquidation proceedings or by relinquishing their security interest to the liquidation estate.  The liquidator may not have sufficient clarity on the total claims to be processed and considered as part of the liquidation process.

Therefore, it is proposed to restrict the secured creditor’s right to either realize the security interest or relinquish it within a stipulated period. If such secured creditors do not convey their decision to the liquidator within this period, they shall be deemed to have relinquished the security interest.

It is also proposed to amend the Code to provide a presumption that all assets owned by the CD shall form part of the liquidation estate unless all secured creditors holding pari passu charge over the secured assets of the CD declare to realize their security interest outside the liquidation process. A similar approach may be followed in case of secured assets in which the creditors have an inter-se hierarchy of charges.