Initiation of Liquidation under IBC

Liquidation represents the final step in the insolvency framework under the Insolvency and Bankruptcy Code, 2016 (IBC). It takes place when a corporate debtor becomes unable to pay its debts and no viable resolution plan is approved. The primary objective of liquidation is to ensure the fair and orderly distribution of the debtor’s assets among creditors, employees, workmen, shareholders, and the government.

The IBC aims to promote corporate rescue and revival, and liquidation is considered only when resolution is not possible. As the Supreme Court observed in Swiss Ribbons Pvt. Ltd. v. Union of India, liquidation is a last resort, not the primary goal of the Code. Even during liquidation, efforts are made to sell the business as a going concern to preserve its economic value and protect employment.

Meaning of Liquidation

The IBC does not define the term liquidation. In general terms, liquidation refers to the process of dissolving or winding up a corporate person when it becomes financially unviable. It involves the sale of the corporate debtor’s assets and distribution of the proceeds to stakeholders in accordance with the prescribed priority order.

Once the liquidation order is passed by the Adjudicating Authority (National Company Law Tribunal or NCLT), the corporate debtor ceases to operate as an active business entity. The officers, employees, and workmen are discharged from their duties unless the liquidator continues the business for beneficial realisation of assets.

The liquidation process also imposes a moratorium, preventing any legal proceedings from being initiated by or against the corporate debtor. However, the liquidator can file proceedings on behalf of the corporate debtor with the prior approval of the Adjudicating Authority. This protection ensures that the liquidation process proceeds smoothly without interference from multiple courts.

Legal Framework of Liquidation under IBC

The provisions related to liquidation are contained in Chapter III of Part II (Sections 33 to 54) of the Insolvency and Bankruptcy Code, 2016, read with the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

Section 33 lays down the circumstances in which liquidation is initiated, while subsequent sections deal with the appointment and powers of the liquidator, the formation of the liquidation estate, distribution of assets, and the final dissolution of the company.

Circumstances Leading to Liquidation under Section 33

Section 33 specifies four major circumstances in which the Adjudicating Authority may order liquidation of a corporate debtor. These are explained below.

Non-receipt of a Resolution Plan

If the Adjudicating Authority does not receive a resolution plan before the expiry of the Corporate Insolvency Resolution Process (CIRP) period, it is required to order liquidation. The Code provides a maximum time limit of 330 days for completion of the CIRP, including extensions and time taken in litigation.

Example: In Pariman Enterprises Pvt. Ltd. v. Atlantis Life Sciences Pvt. Ltd., liquidation was ordered as the maximum CIRP period had expired without submission of a viable resolution plan despite several meetings of the Committee of Creditors (CoC).

This ensures that the insolvency process remains time-bound and that no company remains indefinitely under resolution proceedings.

Rejection of the Resolution Plan by the Adjudicating Authority

The Adjudicating Authority can reject a resolution plan if it does not comply with the requirements of Section 31. For instance, a plan must be approved by at least 66% of the CoC’s voting share and must provide for payment of insolvency costs, operational debts, and management of the corporate debtor post-resolution.

If any of these requirements are not met, the Adjudicating Authority can reject the plan and direct liquidation.

Case Example: In Rajput Ana Properties Pvt. Ltd. v. Ultra Cement Ltd., the Tribunal held that the Adjudicating Authority has the power to reject a resolution plan that fails to comply with statutory requirements and to order liquidation under Section 33(1).

This ensures that only legally compliant and feasible plans are approved for revival.

Decision of the Committee of Creditors to Liquidate

The CoC, by exercising its commercial wisdom, may decide to liquidate the corporate debtor any time after its constitution and before the confirmation of a resolution plan. This decision must be approved by at least 66% of the CoC’s voting share and then communicated to the Adjudicating Authority by the Resolution Professional.

The Adjudicating Authority has no power to question the commercial wisdom of the CoC once the required majority has approved the decision.

Judicial Approach:

• In Punjab National Bank v. Sri Guruprabha Power Ltd., the Tribunal upheld the CoC’s unanimous decision to liquidate the corporate debtor, observing that such decisions are commercial in nature.
• In K. Sashidhar v. Indian Overseas Bank, the Supreme Court clarified that the Adjudicating Authority cannot interfere with the CoC’s commercial decision if it is approved by the requisite majority.
• In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, the Supreme Court reaffirmed that the CoC’s decisions are subject only to limited judicial review and cannot be substituted by the NCLT or NCLAT.

This provision respects the financial creditors’ expertise in assessing the viability of the corporate debtor and ensures that liquidation is pursued only when resolution is commercially unviable.

Contravention of an Approved Resolution Plan

If a resolution plan approved by the Adjudicating Authority is later violated or not implemented properly, any person affected by such contravention may apply for liquidation.

If the Adjudicating Authority finds that the corporate debtor has failed to comply with the plan, it must order liquidation.

Case Example: In Yavar Dhala v. JM Financial Asset Reconstruction Company Ltd., the resolution applicant failed to fulfil the financial obligations under the approved plan. The NCLAT ordered liquidation, holding that non-compliance with the resolution plan justifies liquidation under Section 33(3).

Key Provisions after Passing of Liquidation Order

Once the Adjudicating Authority orders liquidation, it must also:

• Issue a public announcement declaring that the corporate debtor is in liquidation.
• Send the liquidation order to the authority with which the corporate debtor is registered.
• Notify that all officers, employees, and workmen are discharged unless the business continues under the liquidator’s control.

A moratorium is imposed, prohibiting new legal actions against the corporate debtor. However, the liquidator may initiate proceedings with the Adjudicating Authority’s permission.

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 reduced the CoC’s approval threshold for liquidation from 75% to 66%, making decision-making faster and more practical.

Process of Liquidation under IBC

After the liquidation order is passed, the process unfolds in several structured steps as prescribed under the Code and the Liquidation Regulations.

Appointment of the Liquidator

Generally, the Resolution Professional who conducted the CIRP is appointed as the liquidator, provided he or she gives written consent in the prescribed form.
The liquidator acts under the supervision of the Adjudicating Authority and performs several statutory duties, including:

• Taking control of the corporate debtor’s assets,
• Evaluating and selling assets,
• Verifying and admitting creditor claims,
• Carrying on the business if required for beneficial liquidation, and
• Distributing proceeds among stakeholders.

The liquidator’s powers and duties are laid down under Section 35 of the IBC.

Public Announcement

Within five days of appointment, the liquidator must issue a public announcement in Form B of Schedule II of the Liquidation Regulations.

This announcement invites all creditors and stakeholders to submit their claims within thirty days from the commencement of liquidation. The announcement is made through newspapers and on the website of the IBBI.

Verification and Consolidation of Claims

The liquidator receives claims from creditors and verifies them based on supporting documents. If necessary, the liquidator may ask for additional evidence.

Each claim can be either admitted or rejected, and the decision is communicated to both the creditor and the corporate debtor within seven days.

Valuation of Claims and Asset Distribution

Once the claims are verified, the liquidator determines their value and prepares a list of stakeholders. The proceeds from the sale of assets are then distributed according to the priority order under Section 53 of the IBC — starting with insolvency costs, followed by secured creditors, employees, unsecured creditors, government dues, and finally shareholders.

This structured hierarchy ensures fairness and transparency in distribution.

Time Limit for Liquidation

According to Regulation 47 of the Liquidation Regulations, the entire liquidation process should be completed within one year from the date of commencement. This time-bound approach ensures efficiency and prevents undue delays that were common under earlier company laws.

Dissolution of the Corporate Debtor

Once the liquidator has realised and distributed all assets, an application is filed before the Adjudicating Authority for dissolution. After verifying that all procedures have been duly followed, the Adjudicating Authority passes an order dissolving the corporate debtor.

The dissolution order is then forwarded to the Registrar of Companies, bringing the legal existence of the corporate debtor to an end.

Appeal against Liquidator’s Decision

Under Section 42 of the IBC, any creditor aggrieved by the decision of the liquidator can file an appeal before the Adjudicating Authority within fourteen days from the date of communication of the decision.

This provision ensures transparency and provides a legal remedy against any unfair action or error by the liquidator.

Conclusion

Liquidation under the IBC represents the final stage in the corporate insolvency framework. While it leads to the dissolution of a company, it also ensures equitable distribution of assets and closure in a transparent and time-bound manner.

The Code has successfully shifted India’s insolvency regime from a debtor-friendly to a creditor-driven system, promoting discipline and financial accountability. However, liquidation is not intended to be punitive—it is a structured legal process aimed at maximising value and ensuring fair treatment of all stakeholders.

In essence, the initiation of liquidation under IBC underscores the Code’s dual focus: encouraging corporate rescue wherever possible and ensuring orderly exit when revival is no longer feasible.