Treatment of surplus/undistributed proceeds after payment of all stakeholders in the Liquidation Process.
Query; What are the options available to the Liquidator for disposal of surplus/undistributed proceeds after payment of all stakeholders in the Liquidation Process.
A large no. of insolvency professionals are of the view that any surplus/undistributed proceeds available after payment of all stakeholders in the Liquidation Process is required to be given to shareholders taking analogy of section Section 178 (5) applicable for distribution in the Bankruptcy Process for individuals, wherein the recommendations of BLRC for distribution of surplus (Para 6.5.8 – Box 6.18) in Bankruptcy Process for individual were accepted & found reflection.
Let’s look into the provisions of the Code & Regulations.
Insolvency and Bankruptcy Code, 2016.
PART II
Insolvency Resolution and Liquidation for Corporate Person
# 35. Powers and duties of liquidator. -
(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely: -
(a) to verify claims of all the creditors;
(b) to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor;
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(f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified:
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(j) to invite and settle claims of creditors and claimants and distribute proceeds in accordance with the provisions of this Code;
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(o) to perform such other functions as may be specified by the Board.
53. Distribution of assets. -
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following
(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following: -
(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case may be.
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Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# 16. Submission of claim.
(1) A person, who claims to be a stakeholder, shall submit its claim, or update its claim submitted during the corporate insolvency resolution process, including interest, if any, on or before the last date mentioned in the public announcement.
(2) A person shall prove its claim for debt or dues to him, including interest, if any, as on the liquidation commencement date.
# 17. Claims by operational creditors.
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# 18. Claims by financial creditors.
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# 19. Claims by workmen and employees.
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# 20. Claims by other stakeholders.
(1) A person, claiming to be a stakeholder other than those under Regulations 17(1), 18(1), or 19(1), shall submit proof of claim to the liquidator in person, by post or by electronic means in Form G of Schedule II.
# 31A. Stakeholders’ consultation committee.
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(3). The liquidator may facilitate the stakeholders of each class namely financial creditors in a class, workmen, employees, government departments, other operational creditors, shareholders, partners, to nominate their representative for participation in the consultation committee.
(4) If the stakeholders of any class fail to nominate their representatives, under sub-regulation (3), such representatives shall be selected by a majority of voting share of the class, present and voting.
# 46. Corporate Liquidation Account.
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(2) A liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon till the date of deposit into the Corporate Liquidation Account before he submits an application under sub-regulation (3) of regulation 45.
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(4) A liquidator, who fails to deposit any amount into the Corporate Liquidation Account under this regulation, shall deposit the same along with interest thereon at the rate of twelve percent per annum from the due date of deposit till the date of deposit.
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Insolvency and Bankruptcy Code, 2016.
PART III
Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms.
# Section 178. Priority of payment of debts. –
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(5) Any surplus remaining after the payment of the debts under sub-section (1) shall be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date.
(6) Interest payments under sub-section (5) shall rank equally irrespective of the nature of the debt.
(7) In the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts and the separate property of each partner shall be applicable in the first instance in payment of his separate debts.
(8) Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property.
Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019.
# 36. Unclaimed proceeds of bankruptcy or undistributed assets.
(1) After filing the final report under regulation 11, the bankruptcy trustee shall, within three days from the date of such filing, apply to the Adjudicating Authority for an order to credit to the Insolvency and Bankruptcy Fund formed under the Code, any unclaimed dividends of bankruptcy process or undistributed asset or any other balance amount payable to the creditors, left with him.
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BLRC Report
5.5.9 The role of the liquidator (Companies)
Box 5.22: Drafting instructions for the priority of payout in Liquidation
The Code will state that the priority of payout of the dividends from the Liquidation trust will be as follows:
Tier 0: Costs of IRP and liquidation costs.
Tier 1: Secured creditors and Workmen dues capped up to three months from the start of IRP.
Tier 2: Employees wages and unpaid dues capped up to three months.
Tier 3: Dues to unsecured financial creditors, workmen’s dues in respect of the nine month period beginning twelve months before the liquidation commencement date and ending three months before the liquidation commencement date.
Tier 4: Any amount due to the State Government and the Central Government in respect of the whole or any part of the period of two years before the liquidation commencement date; any debts of the secured creditor for any amount unpaid following the enforcement of security interest.
Tier 5: any remaining debt
Tier 6: surplus to shareholders/partners.
At each point in the waterfall, there will be no differentiation between domestic and international creditors.
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BLRC Report
6.5 Bankruptcy proceedings (Individuals)
6.5.8 Priority of payout
Box 6.18 – Drafting instructions for the distribution of proceeds in bankruptcy
The optimal waterfall should be as follows:
Costs and expenses incurred by the bankruptcy trustee for the bankruptcy process.
The second priority will be to
(a) Secured creditors,
(b) Workmen dues for the period of three months prior to the date of the bankruptcy commencement.
Employee wages and unpaid dues for the period of three months prior to the date of the bankruptcy commencement
The next priority will be to
(a) amounts due to the Central and State Government in respect of the whole or any part of two years before the bankruptcy commencement date.
(b) dues payable to workmen of the bankrupt for whole or any part of the nine month period beginning from twelve months before the bankruptcy commencement date and ending three months before the bankruptcy commencement date;
(c) wages and unpaid dues payable to employees of the bankrupt for whole or any part of the three month period beginning from six months before the bankruptcy commencement date and ending three months before the bankruptcy commencement date
Lastly all other debts payable by the bankrupt.
Debts of the same class will rank equally between themselves
Any surplus remaining after the payment of the debts will be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the bankruptcy commencement date.
Interest payments will rank equally irrespective of the nature of the debt.
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Comments/Observations;
BLRC was constituted by the GOI to submit recommendations for framing Insolvency Law.
BLRC submitted its report to GOI on 04.11.2015. Alongwith the report BLRC recommended drafting instructions. On the basis of recommendations IBC, 2016 was introduced by GOI in the parliament, which was later referred to the Joint Committee of Parliament. Later on the bill (IBC, 2016) was adopted by the parliament along with certain amendments suggested by the Joint Committee of Parliament. So now it is obligatory to follow the provisions which are expressly specified in the Code (IBC, 2016) & Regulations. However for clarity in certain areas/cases, the recommendations of BLRC/ report of the Joint Committee of Parliament can be looked into. Recommendations of BLRC do not carry any legal sanctity & are not binding on any person involved in the insolvency/liquidation processes.
In case of liquidation process of the companies,though BLRC in its report (Para 5.9.9 - Box 5.22) had recommended for distribution of surplus to shareholders/partners. However this recommendation has not found place in the Code [Section 53(1)(h)] as adopted by the Parliament. Instead Liquidation Regulations [46(1)] specifically provides that Liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, into the Corporate Liquidation Account, maintained by the Board (IBBI).
BLRC recommendations for distribution of surplus (Para 6.5.8 – Box 6.18) for individuals, speaks for utilisation of surplus funds towards interest of debts for the bankruptcy period, which is well reflected in Section 178 (5) applicable for distribution in the Bankruptcy Process for individuals in the Bankruptcy Process for Individuals & Partnership Firms. However, the BLRC report is silent on the distribution of surplus funds after payment of interest for the Bankruptcy Period.
In both the cases (i). Liquidation process of Companies & (ii). Bankruptcy of Individuals & Partnerships, concerned regulations provide for deposit of surplus funds with the Board (IBBI)[
(i). Under Regulation 46(1) in Liquidation Regulations &
(II). Regulation 36 of Bankruptcy Regulations.
As per the provisions of the Liquidation Regulations for Corporate Person all the stakeholders (including shareholders & partners) have to file their claims. [Regulation 16(1) read with Regulation 31A (3) & (4)]
All the claims have to be submitted & admitted by the Liquidator as on liquidation commencement date.[Regulation 16(1)]
Shareholders are stakeholders upto the extent of their investment in the CD. for which they have to submit proof of claim.
Though BLRC in its report (for Corporate Persons) had recommended for distribution of surplus to shareholders/partners (Box 5.22), this recommendation is not reflected in the Code [Section 53(1)(h)] as adopted by the parliament.
Instead as per Regulation 46(1) the Liquidator is obliged to deposit the amount of unclaimed dividends, if any, and undistributed proceeds, into the Corporate Liquidation Account, maintained by the Board (IBBI).
Thus the only option available to the Liquidator in the Liquidation process of a Corporate person is to deposit surplus or undistributed proceeds, after satisfaction of admitted claims of all stakeholders, with the Board (IBBI) under the provisions of Regulation 46(2) of Liquidation Regulations.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
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