LIQUIDATION OF CORPORATE DEBTOR UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016
The purpose of the Insolvency and Bankruptcy Code is revival and resolution of the Corporate Debtor. But if all the efforts do not fructify in resolution and revival of the Corporate Debtor, the only option left is liquidation of the Corporate Debtor.
Section 33 deals with liquidation of the Corporate Debtor, which is as under:
33. Initiation of liquidation. – (1) Where the Adjudicating Authority, –
(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast-track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan under sub-section (6) of section 30; or
(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein, it shall –
(i) pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter;
(ii) issue a public announcement stating that the corporate debtor is in liquidation; and
(iii) require such order to be sent to the authority with which the corporate debtor is registered.
(2) Where the Resolution Professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the Committee of Creditors [approved by not less than sixty-six per cent. of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
Explanation. – For the purpose of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.
(3) Where the resolution plan approved by the Adjudicating Authority under section 31 or under sub-section (1) of section 54L, is contravened by the concerned Corporate Debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) sub-section (1).
(4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).
(5) Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor: Provided that 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.
(6) The provisions of sub-section (5) shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.
Section 33 provides circumstances wherein a Liquidation Order can be passed by the Adjudicating Authority.
Liquidation Order
Under Section 33 (1) (a) Liquidation Order can be passed against Corporate Debtor, if no Resolution Plan is received before the expiry of the insolvency resolution process period or the maximum period permitted for completion of CIRP under Section 12 or Fast Track Corporate Insolvency Resolution Process under Section 56.
Under Section 33 (1) (b), Liquidation Order can be passed if Resolution Plan submitted before the Adjudicating Authority has been rejected under Section 31 for non-compliance of mandatory requirements of a Resolution Plan mentioned under Section 30 (2) of the Code.
Under Section 33 (2), Liquidation Order can also be passed by Adjudicating Authority if Committee of Creditors passes a resolution approved by not less than sixty six percent of voting share to liquidate the Corporate Debtor after initiation of CIRP but before confirmation of Resolution Plan.
CIRP Regulation 40D provides that the Committee of Creditors while considering the liquidation of the Corporate Debtor may consider factors including but not limited to non-operational status for preceding three years, goods produced or service offered or technology employed being obsolete, absence of any assets, lack of any intangible assets or factors which bring value as a going concern over and above the physical assets like brand value, intellectual property, accumulated losses, depreciation, investments that are yet to mature. Such consideration may be recorded and submitted in the application for liquidation submitted by the Resolution Professional to the Adjudicating Authority
Under Section 33 (3), Liquidation Order can be passed by Adjudicating Authority on the application of any person other than Corporate Debtor, whose interests have been prejudicially affected due to contravention of provisions of Resolution Plan by the Corporate Debtor which has been approved by the Adjudicating Authority under Section 31 in respect of CIRP or Section 54L in respect of Pre-Packaged Insolvency Resolution Process.
In aforesaid circumstances, the Adjudicating Authority, may pass an order requiring the Corporate Debtor to be liquidated and cause issuance of public announcement stating that the Corporate Debtor is in liquidation. A copy of such order has to be sent to the authority with which the Corporate Debtor is registered.
The NCLAT in Gulabchand Jain1 has held that even after approval of the Resolution Plan by the Committee of Creditors and laying it before the Adjudicating Authority, the Committee of Creditors can change its mind and pass a resolution liquidating the Corporate Debtor subject to only exception that such course cannot be adopted after its confirmation i.e. after approval of the Resolution Plan by the Adjudicating Authority.
Restriction on Institution of Suit or Other Legal Proceedings
Under Section 33 (5), subject to Section 52 of the Code, when Liquidation Order has been passed, no suit or other legal proceedings can be instituted by or against the Corporate Debtor, but suit or legal proceedings can be initiated by the Liquidator on behalf of the Corporate Debtor with prior approval of the Adjudicating Authority.
Provisions of Section 33 (5) is subject to Section 52 as such, provision of Section 33 (5) is not applicable to provisions of Section 52, which is in respect of realisation of security interest by Secured Creditor. Under Section 52, a Secured Creditor has been given liberty to either realise secured interest separately or relinquish security interest to Liquidation Estate during Liquidation Process. Thus Section 33 (5) does not restrict the Secured Creditor from realising his interest.
No new suit or proceedings can be initiated by a person against the Corporate Debtor but a Corporate Debtor can initiate suit or any legal proceedings against third person with prior approval of the Adjudicating Authority.
There does not seen to be any bar against continuation of suit or legal proceedings which has been initiated prior to the liquidation commencement date.
Thus, it can easily be discerned that the bar under Section 33(5) on initiation and continuation of suits and any other legal proceedings is not as comprehensive as is the case with Moratorium under Section 14 of the Code.
Discharge of Officers, Employees and Workmen
The Liquidation Order is deemed to be notice of discharge to the officers, employees and workmen of the Corporate Debtor, except when the business of the Corporate Debtor is continued during the Liquidation Process.
The NCLAT in Milind Dixit2 has held that if Corporate Debtor has been sold as going concern, the order of liquidation will not be deemed to notice of discharge to the officers, employees and workmen of the Corporate Debtor.
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1. Gulabchand Jain vs Mr. Ramchandra D. Chaudhary; Company Appeal (AT) (Insolvency) No. 142/2021
2.Milind Dixit & Anr Vs. Elecon Engineering Compnay; CA (AT) Insolvency) 500/2019
Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
