The insolvency resolution process in
The involuntary liquidation provisions in the Insolvency and Bankruptcy Code, 2016 (“IBC”) came into effect on 15th
Every distressed company has to go through a hierarchy of processes which include a compulsory insolvency resolution process prior to liquidation and the final dissolution only after the competition of such liquidation process. Thus every company dissolved pursuant to the IBC has to mandatorily undergo the preceding Corporate Insolvency Regulation Process (“CIRP”) and liquidation process.
Now the question for consideration is whether a company has to compulsorily undergo a liquidation process?
In order to answer the question, we can refer to the following provisions.
Section 54 of IBC- Application for Dissolution- where the assets of the Corporate Debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such Corporate Debtor1.
Regulation 14 of the IBBI (Liquidation Process) Regulations, 2016- Early Dissolution- if it appears to the Liquidator that:
- the realizable properties of the Corporate debtor are insufficient to cover the cost of the liquidation process; and
- the affairs of the corporate debtor do not require any further investigation;
He may apply to the Adjudicating Authority for early dissolution2.
Rule 11- NCLT Rules, 2016- Inherent Powers of NCLT- 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 tribunal3.
Analysis
A conjoint reading of the aforementioned provisions suggests that an application of dissolution shall be made where the assets of the corporate debtor are completely sold. Hence, it may be naturally implied that where the Corporate Debtor has no assets at the very commencement of the liquidation, the liquidation period may not be required.
The following question has been answered in a number of judgements passed by the
In Synew Steel Pvt Ltd CP (IB)N.96/BB/2020 ,4 initially the application was filed under Section 10 of the IBC read with Rule 7 of I & B (AAA) Rules, 2016, inter alia seeking to initiate CIRP in respect of the
It was pointed out by the Insolvency Resolution Professional (IRP) that he is unable to constitute the
The NCLT referred to the following provisions before going into the merits of the case
- Section 54 of IBC
- Rule 14 of IBBI (Liquidation Process) Regulations, 2016
- Rule 11 of NCLT Rules, 2016
The Tribunal held that “there would be no useful purpose served, by placing the Corporate Debtor under a Liquidation Process, under the extant or provisions of Code. Since the Assets of Company were realized, the liquidation process under the provisions or Code is deemed to have been completed under Chapter III of Part II of Code and thus it would be just and proper for the Adjudicating Authority to dissolve the company as proposed by the Resolution professional and the
In another case of
The Tribunal held that “not only it is just and equitable but because of the fact that no asset is available for the purpose of Liquidation as reported by the Resolution Professional, this a fit case of Corporate Debtor to be prescribed under section 54 of the Insolvency Code”.
Before closing the matter and the proceedings, the Bench is of the conscientious opinion that an explanation is to be sought from the
In another case of Arvind Gawada vs.
Early dissolution can help reduce the pendency of the cases if the said application filed by the Resolution Professional is genuine. The genuineness of the application can be ascertained by going into the relevant documents of the company.
As per the data available for the year 2020, less than 6% of the total number of cases filed under IBC have found resolution till the end of
Conclusion
After considering the aforementioned cases and provisions we can conclude that in situations where it is clear that the assets are going to be inadequate to cover the costs of the liquidation process, the affairs of the Corporate Debtor does not require any examination, whenever after the preparation of the Preliminary Report. The liquidator can apply to the tribunal for early dissolution. But the onus to prove the legitimacy of such cases lies on the Resolution Professional so that no debtor can take advantage of the early dissolution process as provided under IBC. Also, the Adjudicating Authority in such cases shall go into the merits of the case and then pass an appropriate order.
Footnotes
1https://ibbi.gov.in//uploads/legalframwork/2020-09-23-232605-8ldhg-e942e8ee824aa2c4ba4767b93aad0e5d.pdf
2https://ibbi.gov.in//uploads/legalframwork/96336966a318bbeff79f7dc0c115f08e.pdf
3https://nclt.gov.in/sites/default/files/All-PDF/Rules_NCLT_latest.pdf
4https://nclt.gov.in/sites/default/files/December/final-orders-pdf/cp%20ib%2096%20of%202020%20%285%29.pdf
5https://nclt.gov.in/sites/default/files/Interim-order-pdf/Dev%20Blessing%20Traders%20Private%20Limited%20CP%201284-2017%20NCLT%20ON%2011.02.2019%20FINAL-DISSOLUTION.pdf
6https://www.legitquest.com/case/arvind-gawada-v-zeel-global-projects-private-limited/17328E
Originally Published by King, Stubb & Kasiva,
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