Liquidation

IBC, 2016 — Chapter III

The process of winding up a company's affairs by selling assets and distributing proceeds to creditors. Under the IBC, liquidation is triggered when the NCLT rejects a resolution plan, the CoC decides to liquidate, or the corporate debtor contravenes the resolution plan. The distribution waterfall under Section 53 of IBC gives secured creditors priority over unsecured creditors.

In practice, liquidation is what happens when rescue fails. Under the Insolvency and Bankruptcy Code, 2016, if no resolution plan is approved within the CIRP timeline (or the committee of creditors resolves to liquidate), the National Company Law Tribunal orders liquidation and a liquidator takes control to sell the corporate debtor's assets and distribute the proceeds. For a secured creditor the central decision is whether to relinquish its security to the common pool and share in the statutory waterfall, or stand outside it and enforce the security interest separately — a choice that turns on the realisable value of the collateral. Distribution follows the priority order the Code lays down, with insolvency costs and secured creditors ranking high and unsecured creditors and equity far lower, so many operational creditors recover little. Because liquidation usually yields less than a going-concern resolution, well-advised creditors weigh it against restructuring before voting, and confirm their security is perfected and their claim properly filed with the liquidator.