The government on 15.12.2016 notified the rules by which companies can go through liquidation under the Insolvency and Bankruptcy Code (IBC), 2016. These Regulations provide for the details of procedures from issue of liquidation order under Section 33 of the Code to dissolution order under Section 54 (i.e Chapter III of Part II of IBC). These Regulations will come into force with immediate effect. Currently, liquidation is process is carried by Official Liquidators, who are appointed by High Courts. They act pursuant to the directions of High Court, thus a big amount of delay occurs in the current regime (as they have to wait for direction of High Court at every stage of Liquidation). IBC has significantly reformed how insolvent companies can be liquidated. The rules require an insolvency professional to be independent of the corporate debtor in order to act as a liquidator for the company. Under IBC, a liquidator attempts to realise the assets of the company at the best possible value under the supervision of the National Company Law Tribunal (NCLT).

It is clear that the regulations will ensure timely and efficient realization of the assets. Moreover, the fee payable to a liquidator shall form a part of liquidation cost. This makes liquidators accountable to the market for their actions, and is likely to make the conduct of liquidation both market-oriented and result-oriented. This incentive to liquidator, to liquidate the asset in an efficient/ time bound manner, maximizes the return to the stakeholders.

As per the regulations, liquidator shall be entitled to fee as has been decided by the committee of creditors (in compliance of Section 33(1)(a) or 33(2) of IBC i.e before proceeding with liquidation. Cases which are not falling under sub-regulation (2), the liquidator shall be entitled to a fee as a percentage of the amount realized net of other liquidation costs, and of the amount distributed, the same is reproduced below :-

Amount of Realisation / Distribution (In rupees)

Percentage of fee on the amount realized / distributed

In the first six months

In the next six
months

In the next
year

Thereafter

Amount of Realisation (exclusive of liquidation costs)

On the first 1 crore

5.00

3.75

2.50

1.88

On the next 9 crore

3.75

2.80

1.88

1.41

On the next 40 crore

2.50

1.88

1.25

0.94

On the next 50 crore

1.25

0.94

0.68

0.51

On further sums realized

0.25

0.19

0.13

0.10

Amount Distributed to Stakeholders

On the first 1 crore

2.50

1.88

1.25

0.94

On the next 9 crore

1.88

1.40

0.94

0.71

On the next 40 crore

1.25

0.94

0.63

0.47

On the next 50 crore

0.63

0.48

0.34

0.25

On further sums distributed

0.13

0.10

0.06

0.05

 

According to IBC, priorities [waterfall] wherein the proceeds from the realization of assets of the CD are to be distributed to its creditors in case of liquidation. The priority as envisaged in the code is as follows:

  1. Insolvency Resolution Process costs and liquidation costs paid in full;
  2. the following debts which shall rank equally between and among the following:

    1. Workmen dues for the period of twenty-four months preceding the liquidation commencement date; and
    2. Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
  3. wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
  4. financial debts owed to unsecured creditors;
  5. the following dues shall rank equally between and among the following:

    1. any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
    2. Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
  6. any remaining debts and dues;
  7. preference shareholders, if any; and
  8. equity shareholders or partners, as the case may be.