Liquidation and Distribution of Asset In Insolvency And Bankruptcy Code
When clients face financial issues, the biggest worry they experience is related to the distribution of assets and the liquidation value. As far as the assets are concerned, they include land, movable and immovable property, money and personal belongings. Many are worried whether they can keep their home, car, retirement savings, and property.
The definition of liquidation value is available in Regulation 35 of the Insolvency and Bankruptcy Code of 2016 in India. According to this, the value of liquidation is the supposed value of the assets of the corporate debtor to be realized if the liquidation takes place on the date of insolvency. Based on the cursory reading of the regulation, the estimated value of the realizable assets of the corporate debtor at the time of liquidation and on the date of initiation of insolvency is to be considered as the value of liquidation. For the insolvency process, the value is to be used in the Information Memorandum under Regulation 36 of the CIRP Regulations.
Things to know
When you consult with a bankruptcy law lawyer, you will come to know that the code of bankruptcy and insolvency in India does not provide the exact meaning of the estimated value of the realizable assets as mentioned in Regulation 35 of CIRP or Corporate Insolvency Resolution Process. However, the regulation shows the ways in which the value of liquidation is to be determined. The Regulation states that two valuers who are registered and appointed under Regulation 27 of the CIRP are going to provide the value of the assets calculated in compliance with the standards that are internationally accepted. If the resolution professional holds the opinion that there is a significant difference in the values, another registered valuer is to be appointed who is also going to submit the calculations in a similar manner. After the submission of both reports, the average of the estimates is to be considered as the true value of liquidation.
Inclusion of retirement savings
According to the New Delhi bench of the National Company Law Tribunal or NCLT, it has stated that the dues of pension, gratuity, and provident fund cannot form a part of the liquidation asset of the corporate debtor, and cannot be included in the assets to be liquidated for settling the dues of the creditors as per Section 53 of IBC. Furthermore, another section of the code reveals the sources of funds to be used to pay for the following.
- The costs of the insolvency resolution process and says that the process costs are to be paid in priority to the other creditors.
- Liquidation value that is to be duly paid to the operational creditors in priority to the financial creditor and must be completed before the period of expiry of thirty days after the approval of the resolution plan by the Adjudicating Authority.
- Finally, the value of liquidation that is to be duly paid to those financial creditors before the financial creditors make the recoveries and those who favored the plan of resolution.
When a public listed company declares bankruptcy, the shareholders of the company may be entitled to get a part of the liquidated assets depending on the shares they hold and the liquid assets that remain. However, the stocks become worthless, thereby not allowing the shareholders to sell the defunct shares. When it comes to corporate bankruptcy, the leftover amount from the liquidated assets becomes a source of payment to the shareholders. After the declaration of insolvency, a company is required to sell its assets for paying the debts and the order in which the payment is to be made is
- the government,
- the financial institutions,
- the other creditors,
- the preferred shareholders, and the
- common shareholders.
Usually, the common shareholders receive nothing as there is hardly anything left after selling the assets for paying off the debts.
Calculation of the liquidation value of the assets
The value of liquidation of the assets of the corporate debtor is calculated in full and the total amount of debt payable to the creditors is to be paid through the sale of assets at first and after this, the management of the corporate sector is usually held liable for the payment of debts. Logically speaking, the liquidation value of the financial or operational creditor that is mentioned several times may be the minimum value to be paid to the creditors in a supposed liquidation on the starting date of insolvency. Ideally, the liquidation value to be duly paid to the creditors is to be arranged in a specific order.
Valuation of assets is one of the most important features of the process of insolvency resolution of the corporate debtors according to the code. However, several clarifications are still not provided by the Insolvency and Bankruptcy Board of India about the liquidation and valuation of the assets. Although the CIRP Regulations have not yet provided the priority list for the distribution of assets, the priority list for the liquidation is presently followed.