SCOPE AND EFFECT OF LIQUIDATION UNDER IBC
The Insolvency and Bankruptcy Code, 2016 was enacted with the view of bringing a complete code of reorganization and insolvency resolution of corporate debtors in a time bound manner. The Code being at a nascent stage, has seen emerging disputes regarding its interpretation vis a vis other statute, particularly so in respect to the overriding clause provided under section 238 of the Code. With the advent of Insolvency and Bankruptcy Code (IBC), 2016, a uniform, comprehensive Code was introduced which encompassed all companies, partnerships, and individuals (other than financial firms). The plan was to introduce the act back in 1992 but it was not until 2016 that this plan was officially added to complement Companies Act 2013. Its primary goal is to consolidate the Insolvency resolution process into a fast track for all companies, partnerships and individuals (other than financial firms).
Now, the IBC not only enables the insolvency proceedings of the Corporate Debtor turning Insolvent but also contains provisions for Companies who want to surrender their business and give up their right to carry on the same.
Scope under IBC
Scope of Work of the Liquidator as given under Section 35 of The Insolvency & Bankruptcy Code is as follows –
1: To affirm claims of all the banks.
2: To require into his guardianship or control all the assets, property, impacts and noteworthy claims of the corporate indebted person.
3: To survey the assets and property of the corporate obligated individual inside the way as may be demonstrated by the Board and get ready a report. To require such measures to guarantee and secure the assets and properties of the corporate obligated individual as he considers imperative.
4: To obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities.
5: To carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary.
6: To sell the corporate debtor’s immovable and movable property, as well as actionable claims, in liquidation by public auction or private contract, with the authority to transfer such property to any person or body corporate, or to sell it in parcels in a manner as may be specified, subject to section 52.
7: To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of on behalf of the corporate debtor.
8: To take all such actions, steps, or to sign, execute and affirm any paper, deed, receipt document, application, petition, affidavit, bond or tool and for such motive to apply the not unusual place seal, if any, as can be essential for liquidation, distribution of belongings and in discharge of his obligations and responsibilities and features as liquidator.
9: To follow to the Adjudicating Authority for such orders or guidelines as can be essential for the liquidation of the company debtor and to file the development of the liquidation method in a way as can be unique via way of means of the Board.
10: To perform such other functions as may be specified by the Board.
What is liquidation
Liquidation is the completing of an organization, the promoting of belongings to distribute them relying on whether or not the commercial enterprise is solvent or insolvent. Liquidation generally happens whilst a confined organization has reached a factor where, for one cause or another, it’s been determined that the commercial enterprise will now no longer continue. In this case, you may consider liquidating your organization, which essentially way turning your belongings into cash. Turning belongings into cash is generally achieved so that you can repay a whole lot of debts, relying on investments made into the commercial enterprise with the aid of using creditors, or loans taken out in developing the commercial enterprise, for example liquidation leads to dissolving the company, and bringing all activities to close. It is a way for the business that has run out of funds to cover any remaining debts.
Effects of liquidation
In the case of Compulsory Liquidation, a creditor has usually been chasing the company for payment of a significant amount, and on finding themselves unable to collect what is owed, they petition through the courts for the company’s liquidation.
While liquidation is never the ideal situation for a limited company director to find themselves in, for some it is the most appropriate way of dealing with company insolvency and minimizing the losses to outstanding creditors.
Here are a few more advantages of Creditors’ Voluntary Liquidation (CVL) for insolvent companies.
1: Outstanding debts are written off
Being unable to repay existing debts with no way of turning the company around is a stressful situation for any director. You cannot continue to trade if you are insolvent, and a CVL offers a way of dealing with these outstanding obligations in a way which aims to maximize returns for creditors.
2: Legal action is halted
Any legal action against the company is stopped when the company is in liquidation. Again, as long as you have no personal liability for a company debt, creditors will be unable to take action against you.
3: Staff can claim repetition pay Members of staff will be made repetitive by the vendor, and in the event that qualified, they can begin their claim for repetition pay and other statutory privileges. On the off chance that monies figured it out from the deal of company resources are not adequate to cover repetition installments, staff have an elective course by which to claim what is owed. The National Protections Finance pays out for excess, unpaid compensation and occasion pay ought to the company not` be able to do so utilizing it possess reserves.
4: Leases will be terminated
The terms of lease and hire purchase agreements are usually terminated at the time of liquidation, which means no additional payments are required. If there are any outstanding payments, the company leasing the products may be able to recover them from insolvency practitioners and other creditors.
5: Avoid court processes
By voluntarily choosing to liquidate the company, you can avoid being petitioned through the courts and be able to demonstrate to the public that liquidation was a company choice rather than a result of hostile creditor action.
The Legislative intent behind enacting the IBC was to rehabilitate and revive the corporate debtor in such a manner that it becomes capable of carrying on its affairs on its own. The Liquidation process is not an alternative to the resolution process but only the last measure if somehow the resolution process fails. Moreover, the Hon’ble NCLAT and Apex Court have repeatedly upheld that even if the corporate debtor goes through the process of liquidation, the liquidator should try to revive and continue the business of the corporate debtor.
Written By – Sneha Samarpita