Module 4 IBC

Moving from Resolution to Liquidation

Experiences and interface under the Companies Act 2013
Role of IPs as a liquidator and liquidation process
Liquidation Estate: Determination of Claims
Voluntary Liquidation
Moving from Resolution to Liquidation
Moving from resolution to liquidation typically refers to a process where a company that was previously
under financial distress or insolvency undergoes a transition from attempting to resolve its financial
difficulties to liquidating its assets and closing down its operations. Let's break down the process and what it
entails:

1. Resolution: When a company faces financial difficulties, the first step is often to explore options for
resolving the issues and returning to financial stability. This can involve various measures such as debt
restructuring, negotiations with creditors, seeking additional funding, downsizing operations, or
implementing cost-cutting measures. The goal is to find a solution that allows the company to continue
operating and eventually recover.

2. Liquidation: If the attempts at resolution are unsuccessful or if it becomes clear that the company cannot
recover, the next step may be to proceed with liquidation. Liquidation involves selling off the company's
assets, paying off creditors, and distributing any remaining funds or assets to shareholders. The company
ceases its operations and is eventually dissolved. The decision to move from resolution to liquidation is
usually based on a thorough assessment of the company's financial situation, prospects for recovery, and the
best interests of its stakeholders, including creditors, shareholders, and employees. This decision is often
made by the company's management, board of directors, or by a court-appointed administrator or liquidator
in cases of insolvency. It's important to note that the specifics of the resolution and liquidation process can
vary depending on the legal and regulatory framework of the country in which the company operates.
Different jurisdictions have their own laws and procedures governing insolvency, resolution, and
liquidation. Therefore, it's crucial for companies facing financial distress to seek appropriate legal and
financial advice to navigate the process effectively.

Experiences and interface under the Companies Act 2013

The Companies Act, 2013 and the Insolvency and Bankruptcy Code (IBC) are two separate legislations in
India that govern different aspects of corporate law and insolvency proceedings. While the Companies Act
deals with the incorporation, management, and functioning of companies, the IBC focuses on the resolution
and liquidation of insolvent companies. However, there are some interfaces and interactions between the two
laws.

Here's a brief overview:

1. Corporate Insolvency Resolution Process (CIRP): Under the IBC, when a company defaults on its debt, a
financial creditor, operational creditor, or the company itself can initiate a CIRP. During the CIRP, the IBC
takes precedence over the Companies Act, and an insolvency professional is appointed as the resolution
professional to manage the affairs of the company.

2. Moratorium: When a CIRP is initiated, a moratorium period is imposed, during which no legal action can
be taken against the company under the Companies Act or any other law. This provides a breathing space
for the resolution process to take place without interference.
3. Powers of the National Company Law Tribunal (NCLT): The NCLT, established under the Companies
Act, plays a crucial role in the IBC process. The NCLT is responsible for admitting or rejecting insolvency
petitions, approving resolution plans, and ordering the liquidation of companies when necessary.

4. Interplay with Company Law: During the resolution process, the resolution professional appointed under
the IBC is required to comply with the provisions of the Companies Act. This includes ensuring compliance
with reporting and disclosure requirements, conducting meetings of stakeholders, and maintaining proper
books of accounts.

5. Corporate Governance: The Companies Act lays down principles of corporate governance for all
companies, including those undergoing insolvency proceedings. Directors and officers of the company are
required to fulfill their duties and obligations under the Act, even during the CIRP. It's important to note that
the Companies Act and the IBC are separate laws with distinct objectives. While the Companies Act focuses
on the functioning and governance of companies, the IBC provides a framework for the resolution and
liquidation of insolvent companies. The interface between the two laws occurs when a company enters into
insolvency proceedings, and the IBC takes precedence during that time.

Role of IPs as a liquidator and liquidation process

In the context of your question, "IPs" likely refers to "Insolvency Practitioners." Insolvency Practitioners
(IPs) are professionals who specialize in handling insolvency matters and are appointed to oversee the
liquidation process. The liquidation process occurs when a company becomes insolvent and is unable to pay
its debts. The role of IPs as liquidators involves several key responsibilities:

1. Appointment: IPs are appointed either by the court or by the creditors of the insolvent company. Their
appointment is typically based on their qualifications, experience, and regulatory requirements.

2. Investigation: IPs conduct a thorough investigation into the affairs of the insolvent company. They review
financial records, transactions, and assets to determine the company's financial position and any potential
causes of its insolvency.

3. Asset Realization: IPs are responsible for realizing and liquidating the company's assets. This includes
identifying, valuing, and selling the assets to generate funds that can be distributed to creditors. IPs may
engage professionals such as auctioneers, real estate agents, or specialists in specific asset categories to
assist with the asset realization process.

4. Debt Recovery: IPs work to recover any outstanding debts owed to the company. They may pursue legal
action against debtors, negotiate settlements, or engage in other debt recovery methods to maximize the
funds available for distribution to creditors.

5. Creditors' Claims: IPs assess and verify the claims submitted by creditors. They review the validity and
priority of each claim and determine the proportionate share of funds that each creditor is entitled to receive.

6. Reporting: IPs prepare and submit regular reports to the court and the relevant stakeholders, including
creditors and shareholders. These reports detail the progress of the liquidation process, financial statements,
and any significant findings or developments.

7. Distribution: IPs distribute the available funds to the creditors according to the established priority and
statutory requirements. Creditors with higher priority, such as secured creditors or employees, are generally
paid before lower-ranking creditors.
8. Closure: Once all assets have been realized, debts recovered, and funds distributed, IPs apply to the court
for the closure of the liquidation process. This involves finalizing the company's financial affairs, settling
any outstanding matters, and deregistering the company.

It's important to note that insolvency laws and liquidation processes may vary across jurisdictions. The
above description provides a general overview of the role of IPs as liquidators and the liquidation process,
but specific details and procedures may differ depending on the applicable laws and regulations in a
particular jurisdiction.

Liquidation Estate
Determination of Claims In the context of a liquidation estate, the determination of claims refers to the
process of evaluating and prioritizing the claims made by various creditors against the assets of the estate.
When a company goes into liquidation, its assets are sold off to repay its debts and obligations. Creditors
who are owed money by the company can submit their claims to the liquidator, who is responsible for
reviewing and assessing those claims. Here are the general steps involved in the determination of claims in a
liquidation estate:

1. Claims Submission: Creditors are notified of the liquidation proceedings and provided with a deadline by
which they must submit their claims. They are required to provide documentation and evidence supporting
their claims, such as invoices, contracts, or other relevant records.

2. Claim Verification: The liquidator examines each claim submitted to assess its validity. This involves
reviewing the supporting documentation provided by the creditor and ensuring that the claim falls within the
scope of the liquidation proceedings. Claims that are incomplete or lack proper documentation may be
rejected or require further clarification.

3. Categorization of Claims: Once the claims are verified, they are categorized into different classes based
on their nature and priority. The specific classification may vary depending on the applicable laws and
regulations governing the liquidation process. Common categories include secured claims, preferential
claims, unsecured claims, and contingent claims.

 Secured Claims: These are claims that are backed by specific collateral or security interests. Secured
creditors have a higher priority in the liquidation process as they are entitled to recover their debts
from the proceeds of the sale of the secured assets.
 Preferential Claims: Certain claims may be granted preferential status under the law. These typically
include employee wages, certain taxes, and other statutory obligations. Preferential claims are given
priority over unsecured claims but are subordinate to secured claims.
 Unsecured Claims: These are claims that do not have any specific security or preferential status.
Unsecured creditors have a lower priority in the distribution of assets and are generally paid after
secured and preferential claims are satisfied.
 Contingent Claims: These claims are based on uncertain events or conditions that may or may not
occur. They are typically treated with caution and may be subject to further verification or resolution
before being considered for payment.

4. Claims Determination: The liquidator evaluates the available assets of the estate and determines the extent
to which each category of claims can be satisfied. The available funds are distributed among the creditors
according to the priority of their claims. Secured creditors are typically paid first, followed by preferential
and unsecured creditors, and contingent claims are addressed as appropriate.
 5. Claims Dispute Resolution: In some cases, disputes may arise between the liquidator and the creditors
regarding the validity or ranking of certain claims. These disputes may need to be resolved through
negotiations, mediation, or by seeking a court's intervention. It's important to note that the specific process
of determining claims in a liquidation estate can vary based on the jurisdiction and the applicable laws
governing the liquidation proceedings. It's advisable to consult with a legal professional or insolvency
practitioner for detailed guidance specific to your situation.

Voluntary Liquidation
Voluntary liquidation, also known as voluntary winding-up, is a process by which a company chooses to
bring its operations to an end and wind up its affairs voluntarily. It involves the orderly closure of a
company's business, settling its obligations, and distributing its assets to its creditors and shareholders. Here
are some key points to understand about voluntary liquidation:

1. Voluntary liquidation can occur in two forms: Members' Voluntary Liquidation (MVL) and Creditors'
Voluntary Liquidation (CVL).

• MVL: This type of liquidation is initiated when a company is solvent, meaning it can pay its debts in
full within 12 months. The shareholders pass a resolution to wind up the company, and a liquidator is
appointed to oversee the process. The primary purpose of an MVL is to distribute the company's
assets among the shareholders.
• CVL: CVL is initiated when a company is insolvent and unable to meet its financial obligations. The
decision to liquidate is made by the company's directors, and the creditors' interests take precedence
over those of the shareholders. A liquidator is appointed to realize the company's assets and
distribute the proceeds to the creditors.

2. The voluntary liquidation process typically involves the following steps:

• Appointment of a liquidator: In both MVL and CVL, a licensed insolvency practitioner or liquidator
is appointed to oversee the liquidation process. The liquidator acts in the best interests of the
company's creditors or shareholders, depending on the type of liquidation.
• Ceasing business operations: The company stops its regular operations and starts winding down its
affairs. It may involve selling off assets, settling outstanding debts, and resolving any legal or
contractual obligations.
• Realization of assets: The liquidator identifies, values, and sells the company's assets. The proceeds
from asset sales are used to settle outstanding debts and liabilities.
• Distribution of funds: After settling all debts and expenses, any remaining funds are distributed to the
creditors or shareholders, depending on the type of liquidation. In an MVL, shareholders receive the
remaining funds after creditors are paid. In a CVL, the funds are primarily distributed to creditors
according to their priority.
• Closure: Once all the company's assets have been liquidated and funds distributed, the liquidator
prepares the necessary documentation to formally dissolve the company.

3. Voluntary liquidation can have legal and financial implications for the company and its directors. It is
essential to comply with the relevant laws and regulations governing liquidation in the jurisdiction where the
company operates.
4. Voluntary liquidation can be a strategic decision made by the company's owners or directors when the
business is no longer viable, facing significant financial difficulties, or if the owners wish to retire or pursue
other ventures. Before considering voluntary liquidation, it is advisable to seek professional advice from an
accountant, lawyer, or licensed insolvency practitioner who can guide you through the process and ensure
compliance with legal requirements and obligations.