REMOVAL OF COMPANY LIQUIDATOR UNDER IBC

REMOVAL OF LIQUIDATOR

Under section 275 of the Companies Act, 2013 for the purposes of winding up of a company by the Tribunal, the Tribunal at the time of passing winding up order shall appoint an Official Liquidator or a liquidator from a panel maintained under sub-section (2) as the Company Liquidator. The sub-section (2) of section 275 was amended by the Insolvency Code, 2016, providing that the provisional liquidator or the Company Liquidator, as the case may, shall be appointed by the Tribunal from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016. 

  1. Removal of the Liquidator:

The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 read with section 60 (5) C

  1. Rule 11 of the NCLT Rules is carefully worded
  2. Section 60 (5) C of Insolvency & Bankruptcy code 2016

 

An Overview of Liquidator under Companies Act, 2013

Section 60 (5) C

 Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—

 

(a)…

(b)…

(c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.

 

11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.”

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place, it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

Section 276. Removal and replacement of liquidator: [Effective from 15-12-2016]

  1.  The Tribunal may, on a reasonable cause being shown and for reasons to be recorded in writing, remove the provisional liquidator or the Company Liquidator , as the case may be, as liquidator of the company  on any of the following grounds, namely:—

 

  • Misconduct;
  • fraud or misfeasance;
  • professional incompetence or failure to exercise due care and diligence in performance of the powers and functions;
  • inability to act as provisional liquidator or as the case may be, Company Liquidator;
  • conflict of interest or lack of independence during the term of his appointment that would justify removal.

 

 

  • In the event of death, resignation or removal of the provisional liquidator or as the case may be, Company Liquidator, the Tribunal may transfer the work assigned to him or it to another Company Liquidator for reasons to be recorded in writing.
  • Where the Tribunal is of the opinion that any liquidator is responsible for causing any loss or damage to the company due to fraud or misfeasance or failure to exercise due care and diligence in the performance of his or its powers and functions, the Tribunal may recover or cause to be recovered such loss or damage from the liquidator and pass such other orders as it may think fit.
  • The Tribunal shall, before passing any order under this section, provide a reasonable opportunity of being heard to the provisional liquidator or, as the case may be, Company Liquidator.

 

According to the Black’s Dictionary term Misfeasance includes ,strictly is not doing a lawful act in a proper manner, omitting to do it as it should be done; while malfeasance is the doing an act wholly wrongful;  and nonfeasance is an omission to perform a duty or a total neglect of duty. But “misfeasance” is often carelessly used in the sense of “malfeasance.”


  1. Section 16 of the General Clauses Act, 1897

“Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.”

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers, it is said:

“The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court in Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma

“It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…”

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

In M.K. Subramania Iyer v. Muthulakshmi Ammal, held that.

“It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, .that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.

The same reasoning was also used in  Chacko v. Jaya Varma

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

INITIATION OF LIQUIDATION:

Liquidation may be initiated under Section 33 of the Code when Adjudicating Authority (“AA”) either does not receive the Resolution Plan under Section 30(6) of the Code or the maximum period prescibed for corporate insolvency resolution process expires or in case where AA rejects the resolution plan under Section 31 of the Code. Further, the Committee of Creditors (“CoC”) may also, with at least 66 % votes, decide to liquidate the Corporate Debtor (“CD”) under Section 33(2), any time before the resolution plan is approved and the Resolution Professional intimates AA of such decision. Also, if the CD contravenes any terms of an approved resolution plan, any person whose interest is prejudicially affected by such contravention may apply for liquidation of CD.

AA while passing the order of Liquidation of CD, shall direct issuance of public announcement under Section 33(1) of the Code that the CD is in liquidation and require that such order is also sent to registering authority of CD, such as Registrar of Companies in case of companies.

MORATORIUM:

As in the Corporate Insolvency Resolution Process, moratorium kicks in on passing of the order of liquidation also. No suit or legal proceedings shall be instituted by or against the CD. However, the liquidator may file such proceedings on behalf of CD, with prior approval of AA.

DIRECTORS AND EMPLOYEES:

All powers of the Board of Directors, Key Managerial Personnel and the Partners of the CD, as the case may be, shall cease to have effect and shall vest with the Liquidator.

Furthermore, an order for liquidation shall be deemed to be notice of discharge to all employees of the CD. However, they may be retained where business of CD is proposed to be continued during the liquidation process.

All persons viz. Officers, Directors, Partners, Auditors, and Resolution Professional as well as those holding properties of CD have a duty to assist and cooperate with the Liquidator in managing the affairs of CD.

The CD is also required to add the phrase ‘In Liquidation’ after its name in all correspondence.

LIQUIDATOR AND FEES:

While passing the order of liquidation, AA is required to name an Insolvency Professional (IP) as Liquidator. In case any IP is already appointed as Resolution Professional for Corporate Insolvency Resolution Process, he may be continued or another IP can be appointed, subject to his consent for appointment and independence etc. There are provisions for his replacement in certain circumstances as mentioned under Section 34(4) of the Code.

Fee payable shall be decided by CoC under Regulation 39D of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, where they do not approve the resolution plan. Financial creditors are also required to advance sums required for liquidation cost over liquid assets available, which would be refunded with interest out of proceeds of liquidation. In all other cases, fees would be on percentage basis on realizations and distribution to stakeholders, as prescribed under Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations).

POWERS AND DUTIES OF A LIQUIDATOR:

A liquidator is required to oversee the entire process of liquidation, right from the liquidation order to the dissolution of the CD. He has to take custody of all the assets, evaluate them properly and dispose them in a transparent manner keeping in mind the objectives of the Code. In the interim, he has to preserve and protect them. He has to invite claims and verify them for consolidation. Thereafter, he may admit or reject the claims. He has to defend any suit, prosecution or other legal proceedings, civil or criminal, in the name and on behalf of the CD.

A creditor may appeal to the AA, against the decision of the liquidator, accepting or rejecting the claims within fourteen days of the receipt of such decision.

Liquidator has the power to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Furthermore, in case any clarification is required, AA’s direction can be obtained.

ROLE OF COC IN THE PROCESS OF LIQUIDATION:

In Punjab National Bank vs. Kiran Shah, the liquidator of ORG Information Ltd.1 , National Company Law Appellate Tribunal (NCLAT) held that after Liquidation order is passed, CoC has no role to play and they are merely claimant. They cannot even seek replacement of liquidator in absence of any such provision in law.

A Creditors Consultation Committee is required to be formed, but the liquidator is not bound by their advice.

The liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds. Further, record of such consultation would be available to all stakeholders for the sake of transparency. The liquidator also has the power to access any information systems for the purpose of admission and proof of claims and identification of the assets relating to CD from any source, such as information utility, credit information systems regulated under any law for the time being in force, any agency of the Central, State or Local Government including any registration authorities, data bank maintained by the Insolvency and Bankruptcy Board of India.

REPORTS:

Liquidator must prepare and submit the following as per Regulation 5 of the Liquidation Regulations:

  1. A preliminary report within 75 days of liquidation commencement date;
  2. An asset memorandum;
  3. Progress reports on quarterly basis;
  4. Sale report;
  5. Minutes of consultation with stakeholders; and
  6. The final report prior to dissolution to the AA.

Liquidator should also get accounts completed and brought up to date, wherever they are found incomplete. He is also required to maintain cash book and ledgers and various registers for assets, security and investment. Further, the liquidator is required to preserve physical and electronic copy of reports and books for 8 years after dissolution.

DISSOLUTION OF CORPORATE DEBTOR:

Where the assets of the CD have been completely liquidated, the liquidator shall make an application to the AA for the dissolution of such CD under Section 54 of the Code. Early dissolution can be applied for under Regulation 14 of the Liquidation Regulations any time after preliminary report is prepared, where it appears to liquidator that there are insufficient realizable assets to cover the liquidation cost and no further investigation into affairs of CD is required. Once order of dissolution is passed, same is required to be filed with authority where CD is registered.