Liquidation Process and Liquidation Waterfall

 

Liquidation Process and Liquidation Waterfall

If no resolution plan is approved during the CIRP or the resolution process fails, the company moves into liquidation. During this stage, the liquidator takes control of the company’s assets and proceeds with their sale to satisfy outstanding debts.

A. Appointment of Liquidator

• The liquidator is appointed by the National Company Law Tribunal (NCLT) and replaces the Interim Resolution Professional (IRP) or the Resolution Professional (RP). The liquidator is responsible for the management, sale, and distribution of the company’s assets.

• The liquidator must act in good faith, transparently, and ensure the liquidation process adheres to the IBC guidelines.

B. Liquidation Waterfall: Order of Priority in Payment

The liquidation waterfall is the process by which the proceeds from the sale of the debtor’s assets are distributed among the creditors. The order of priority for distribution is strictly defined under the IBC.

1. Secured Creditors (1st Priority):

   • These creditors hold collateral or security interests in the debtor’s assets.

   • They are paid first from the proceeds of the sale of the secured assets.

   • If the proceeds from the sale of secured assets are insufficient to cover their debt, they may have a claim against the remaining assets of the debtor as unsecured creditors.

2. Workmen's Dues (2nd Priority):

   • Workmen and employees of the company are given priority after secured creditors. Their dues, such as wages, salaries, and other employee benefits, are paid from the liquidation proceeds.

   • The employees are prioritized over other unsecured creditors, reflecting the importance of their claims.

3. Unsecured Creditors (3rd Priority):

   • After workmen’s dues, unsecured creditors (both financial and operational creditors) are paid.

   • Unsecured creditors have no collateral or security interests but will receive a proportionate share of the liquidation proceeds, based on the total amount of claims.

   • Financial creditors usually receive a higher proportion of the distribution compared to operational creditors, as they generally hold a larger debt.

4. Government Dues (4th Priority):

   • Government dues, including taxes, duties, and other statutory obligations, are paid after unsecured creditors.

   • This includes sales tax, GST dues, customs duty, and any other regulatory obligations owed to the government.

5. Residual Shareholders/Equity Holders (5th Priority):

   • Shareholders or equity holders are the last in line to receive any remaining proceeds after all debts and statutory dues have been paid.

   • If there are any assets left after paying creditors, the shareholders may receive the remainder, but this is rare in liquidation scenarios where the company has substantial debts.

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C. Role of Liquidator in Distribution

The liquidator’s responsibilities during liquidation include:

1. Realizing Assets:

   • The liquidator sells the debtor’s assets through auction or private sale to maximize recovery for creditors.

2. Verification of Claims:

   • The liquidator verifies the claims submitted by creditors and determines the amount owed to each creditor.

3. Distribution of Proceeds:

   • The liquidator distributes the proceeds from asset sales according to the liquidation waterfall.

4. Final Report:

   • After distributing the proceeds, the liquidator must submit a final report to the NCLT, outlining the liquidation process and how assets were sold and distributed.