Stuck in corporate liquidation hurdles? Here are some solutions

One of the fundamental features of the Insolvency and Bankruptcy Code, 2016 (Code) is to resolve disputes in a timely manner — a window of 180 days extendable to 90 days — — given to the Insolvency Professional to help revive the company. Otherwise, it triggers mandatory liquidation due to non-approval of the resolution plan. Though there is an established process of liquidation devised by the Code, it is seen that the Insolvency Professionals appointed as liquidators do face practical hurdles while undergoing the process of liquidation.

Following are some possible hurdles and the underlined solutions.

1. Submission of claims by the Creditors of the Corporate Debtor (CD)
The liquidator has to make a public announcement for submission of claims by the creditors of the company. However, some creditors may take the announcement as a repetitive attempt and do not submit their claim. There is also an additional cost and time on the part of creditors to submit their claims i.e. of stamp paper, notary, etc.

The workers may think that while a company was going through Corporate Insolvency Resolution Process (CIRP), there was no time limit for submission of their claim till the resolution plan is approved. However, in the liquidation process there is a time limit of 30 days from the liquidation commencement date. This leads to either no submission of claim by the creditor or late submission.

Section 34 of the Code transfers all the powers of CD’s board of directors and KMPs to liquidator on commencement of liquidation. This gives inherent power to Liquidator to decide about receipt of claims. Section 38 of the Code read with Rule 12 of IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) provides Liquidator to receive claims within 30 days from Liquidation commencement, which cannot be reduced but may be extended by liquidator by using his inherent powers in the interest of the stakeholders. Going by the spirit of the provisions, it is intended for the minimum time to be provided by Liquidator and not the upper cap. For better clarity, the word ‘not less than 30 days’ may be inserted in place of existing wording of Section 38 and Rule 12.
Section 40(2) allows Liquidator 7 days’ time period to admit or reject claim. Regulators may bring more clarity to allow Liquidator to consolidate the time period within the bracket of receipt and acceptance/rejection of claim.
If Section 39 of the Code (verification of claims) can facilitate liquidator to consider only those claims or provisions as appearing in the latest audited accounts prior to Liquidation Commencement date and claims for the further period to be accepted based on documentary evidence like invoice, this will be of great relief in this direction.

After Liquidation commencement date, Workers shall remain in touch with their Unions or Head of the Department (HOD) for joint submission of their claims through their Union or HODs as provided in Form F of Schedule II of the Liquidation Regulations.

Specific provision in Section 35 of the code (powers and duties of Liquidator) empowering Liquidator to accept repeated claims from the same creditors in Liquidation after accepting it in CIRP, without requiring the creditors to pay again for stamp duty, notarisation will also be very useful.

2. Protection of the assets of the company during liquidation
When the plants, factories, guest house, offices, etc. are empty and there is no activity happening in the premises, probability of theft is higher. Even the workers/employees/officers of the Corporate Debtor could also be involved being frustrated by not getting his claim.

Section 35 (1)(d) of the Code empowers Liquidator to take such measures to protect and preserve assets of CD as he considers necessary, subject to directions of Adjudicating Authority (AA). By using this inherent power, Liquidator may designate a specific person to take charge of all the assets and properties of the company during the time of liquidation, who can report him as and when required. If Regulators could empower Liquidator to appoint such persons without approaching AA would make his actions fast.

To transfer possession of assets smoothly from the present management to the Liquidator or Resolution Professional (RP) some mechanism is required so that assets are not stolen/destroyed. In case of Factory assets, Occupier under Section 7A of the Factories Act, 1948 may be duty bound to protect the assets and properties of the Company till possessions/charge is taken by the Liquidator/RP. Similarly, for office assets or vehicles etc. person in charge of maintenance and running of such assets may be required under the law to transfer the possessions to Liquidator/RP under the applicable law or by enacting section under the Code.

3. Retention of erstwhile employees of the CD
It is always important for the Liquidator to understand that which employees of the CD need to be retained in order to understand the business of the CD and hence be able to liquidate the same. Further, considering the funds available, Liquidator may have to try to negotiate the remuneration of the employees prior to retaining them.

There in an ambiguity with respect to discharge of the officers, employees and workmen of the CD as per the language of Section 33(7) of the Code which states that Liquidation Order 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. Law is not clear whether this notice allows time period before discharge or it is an immediate discharge from services of CD.
To address the ambiguity, Law should provide that even after the Liquidation Order, Officers, employees and workmen of the company will get discharged from their services only after personally placing their resignations with and on their acceptance by the Liquidator. The wording ‘notice of discharge’ in Section 33 (7) of the Code may be changed to ‘prior notice to discharge’ to serve the purpose.

4. Distribution of funds/assets by the liquidator is also called as a challenge for Liquidator considering the demands of Creditors.

However, Liquidator shall distribute the funds /assets in the Order provided in Section 53 of the Code.

5. Liquidator is required to open a separate bank account as required by Reg. 41 of the Liquidation Regulations with addition of the words “in liquidation”.
Change in the bank account of CD may lead to series of procedure to be followed by transferor of funds in favour of CD.

This will not cause any hurdle as the same account remains alive till the end of liquidation.