The Insolvency and Bankruptcy Code (IBC), 2016 has revolutionized the entire process of corporate insolvency resolution in India. It has established a time-bound mechanism whereby the insolvency process must be completed while ensuring that the assets are maximized for the revival of distressed businesses. One of the most distinguishing aspects of the IBC is that once a company has been admitted to insolvency proceedings before the National Company Law Tribunal (NCLT) and is to be liquidated, that step becomes virtually irretrievable. Such irrevocability has far-reaching legal and economic ramifications, particularly for the creditors and corporate debtors. The inability to make withdrawals from insolvency cases after liquidation has raised the issue of the delicate balance between rights in favor of creditors with those providing for the revival of the corporate debtor. This article discusses the philosophical rationale leading to an irreversible status of insolvency proceedings beyond liquidation under the IBC, reviews judicial precedents, and outlines the legal implications for participants in corporate insolvency within India.
Conceptualizing The IBC Framework:
Since it truly streamlines such a process, the IBC was enacted in the year 2016 to streamline corporate insolvency resolution in India. To make this process affordable, a single framework will be provided for resolution of insolvency and bankruptcy in different sectors, which completes such proceedings in a time-bound manner. The code provides two significant stages in the corporate insolvency procedure,
- Interim Period- The time frame up to the admission date of the application for initiation of corporate insolvency resolution process before the adjudicating authority, and
- Corporate insolvency resolution process (CIRP): The process through which the insolvency of a corporate body among its creditors is adjudicated and a resolution plan prepared and implemented for such a body.
- Corporate Insolvency Resolution Process: In this process, creditors try to revive the entity by restructuring the debts. The resolution plan is expected to have the company continuing its operations, and at the same time satisfy the requirements of creditors.
- Liquidation: The code further provides for liquidation of the company where it is unable to come up with a resolution plan within the stipulated time; or where it is insolvent and cannot be revived, NCLT orders liquidation. Here, the company's assets are sold to be distributed among its creditors and the corporate debtor is wound up.
Once the liquidation process is underway, the proceedings are made virtually irreversible. This is a characteristic stemming from the IBC's aims of safeguarding creditors' interests and preventing delays by the debtors trying to escape liquidation once their assets have been processed.
Absolute Irrevocability of Insolvency Proceedings Upon Liquidation:
Liquidation can be initiated under the IBC in cases such as:
- No resolution plan is proposed during the CIRP within the given time frame
- The NCLT rejects the said resolution plan
- The committee of creditors authorize the liquidation of the company at any stage during the CIRP
- The corporate debtor fails to implement an approved resolution plan
The liquidation being passed, the administration of the company is entrusted to the liquidator, and all the assets are disposed of for paying creditors. The scope of IBC to withdraw from insolvency proceedings or reverse the liquidation process is available at this stage.
Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors.1 (2019) ruled by the Supreme Court of India held that IBC is constitutional because the code places foremost priority on maximization of value of assets and resolution of insolvency cases, on time. The Court observed that delays and tendencies of misuse are likely to counter the effectiveness of the IBC when liquidation is on course.
Legal Framework for Withdrawal of Insolvency Proceedings:
Section-12A2 IBC discusses withdrawal of insolvency application on the sanction of 90% of the committee of creditors-although more in the case of CIRP stage, prior to liquidation is directed. There is no such provision under IBC speaking of withdrawal or return to CIRP after liquidation has started.
The obvious reason for such a stringent framework is that liquidation is the last stage of the proceedings in insolvency. Here, the interest of creditors is the most important and the concern is that the company is unfit for revival. Once the case is in liquidation, it de facto denies the withdrawal of the procedure as it will change the hierarchy specified under the IBC for payment and could thus result in unfair asset distribution.
The Supreme Court's verdict in the case of Vallal RCK vs. M/s Siva Industries and Holdings Ltd.3 (2022) also made it clear that after passing the liquidation order, withdrawal of CIRP proceedings cannot be allowed because that will undermine the sanctity of the liquidation process itself. The Court has stated that such relaxation of rules giving way to withdrawal by a debtor would act as an encouragement to debtors to use the law as a means to slow down liquidation and stretch their hold on assets, thereby defeating the very purpose of the IBC.
Case Laws Pertaining to Recent Developments:
The continuing judicial trends regarding the finalization of the insolvency process after liquidation have been reinforced by several recent judgments. For instance, in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr.4 (2021), the Supreme Court observed that a corporate debtor undergoing the process of liquidation is not allowed to make a backdoor entry by proposing a settlement, after which it will control its assets. This judgment reasserted the significance of liquidation proceedings as being unconditional, final, and not easily withdrawn or reversed.
These judgments underscore the concentration of the courts in ensuring that the liquidation process remains sacrosanct and that it cannot be undone by last-minute withdrawals or settlements.
Consequences to the Stakeholders:
Irreversible closure of insolvency proceedings post-liquidation would imply much to several stakeholders, especially from the creditors', corporate debtors', and investors' perspective:
The IBC framework brings creditors to the forefront of the insolvency regime. Sale proceeds of any of the assets will then be disposed of in terms of priority dimension under Section-535 of the IBC. When liquidation is initiated, creditors will clearly follow a predictable route to the recovery of dues. Irrevocability blocks debtors from diverting the process and thereby protects their interests.
For Corporate Debtors - After commencement of liquidation, this prohibition on withdrawal from the insolvency proceedings will force corporate debtors into attempting resolution during the CIRP itself. It puts any attempts to drag the process and manipulate it for personal benefit to a halt and also strengthens the thrust for time-bound action as per the IBC.
For Investors - Investors stand to benefit from this certainty because it would make it easier for them to acquire assets from firms in distress. Where liquidation has been ordered, there is certainty as to the finality of the process; thus, it encourages investments into distressed assets.
The IBC, 2016 incorporates this aspect as a very important feature because once liquidation is ordered, insolvency proceedings cannot be revoked before the NCLT or anywhere else. It re-affirms the objectives of the code as protecting the creditors, enjoying timely resolution, and efficient distribution of assets. There is no provision in liquidation proceedings on similar lines as Section-12A6 of the IBC, which allows withdrawal of insolvency cases during the CIRP stage, mainly to prevent wrongful interference and reduce the possibility of any unfairness in the whole process of liquidation.
The latest rulings by the courts have repeatedly made it clear that liquidation is final and that corporate debtors cannot deceive the system after the commencement of asset liquidation. As the IBC continues its journey, the trend in which courts emphasize integrity during the liquidation process will remain at the heart of facilitating the wider goals of the Code with regard to economic efficiency and creditors' protection.
Footnotes
1. Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. (2019); (2019) 4 SCC 17.
2. Section-12A of Insolvency and Bankruptcy Code, 2016.
3. Vallal RCK Vs. M/s Siva Industries and Holdings Ltd. (2022); (2022) 9 SCC 803.
4. Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr.(2021); (2021) 7 SCC 474.
5. Section-53 of the Insolvency and Bankruptcy Code, 2016.
6. Section-12A of the Insolvency and Bankruptcy Code, 2016.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
