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, the NCLT orders liquidation where it does not receive a resolution plan within the CIRP period or rejects the plan (Section 33(1)) — but before doing so it must consider any application by the CoC, made by not less than 66% of the voting share, to restore the CIRP for up to 120 days, which can be done only once (Section 33(1A)–(1B)). Liquidation also follows where the CoC decides by not less than 66% of the voting share to liquidate the corporate debtor (Section 33(2)), or where the corporate debtor contravenes an approved resolution plan (Section 33(3)–(4)). Under the Section 53 waterfall, insolvency resolution process and liquidation costs are paid first; secured creditors who relinquish their security then rank equally with workmen's dues for 24 months — since 26 May 2026, only to the extent of the value of the security, the balance ranking as unsecured — ahead of financial debts owed to unsecured creditors.

In practice, liquidation is what happens when rescue fails. Under the Insolvency and Bankruptcy Code, 2016, if the National Company Law Tribunal does not receive a resolution plan within the CIRP period, or rejects the plan, it must first consider any application by the committee of creditors, made by not less than 66% of the voting share, to restore the CIRP for up to 120 days, which can happen only once (Section 33(1A)-(1B)); failing that, or where the committee of creditors itself decides to liquidate (Section 33(2)), the 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. In a liquidation initiated after 26 May 2026, a creditor that wants to enforce must inform the liquidator within fourteen days of the liquidation commencement date or its security is deemed relinquished (Section 52(2)), and must hand over the process costs, liquidation costs and workmen's dues out of the proceeds (Section 52(8)); one that relinquishes ranks as secured only to the extent of the value of its security. 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 — in a liquidation initiated after 26 May 2026, Sections 38 to 42 on consolidation, verification and admission of claims stand omitted and the liquidator must instead "maintain an updated list of claims of creditors in such manner as may be specified" (Section 35(1)(a)), so creditors check that list.