Winding Up of a Company under the Insolvency and Bankruptcy
Code (IBC), 2016
The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation
aimed at restructuring and resolving corporate insolvencies efficiently. It provides a
mechanism for winding up or liquidation of a company when revival or restructuring is
not feasible.
Key Provisions for Winding Up Under IBC
1. Applicability
The IBC applies to:
• Corporate persons (companies, LLPs)
• Individuals and partnerships (personal insolvency provisions)
2. Grounds for Winding Up Under IBC
A company can be liquidated when:
1. Insolvency resolution has failed.
2. The resolution professional or creditors conclude that the company cannot be
revived.
3. The National Company Law Tribunal (NCLT) orders liquidation due to:
• Lack of a resolution plan.
• Violation of the resolution plan terms.
4. The debtor or creditor voluntarily applies for liquidation under IBC.
Steps in the Winding-Up Process
Step 1: Initiation of Corporate Insolvency Resolution Process (CIRP)
• Who Can Initiate?
• Financial Creditors (e.g., banks, financial institutions)
• Operational Creditors (e.g., suppliers, vendors)
• Corporate Debtors (the company itself)
• NCLT Admission:
• Application submitted to the NCLT.
• NCLT evaluates whether the default exceeds ₹1 crore (threshold for initiating
CIRP).
Step 2: Insolvency Resolution Process
• An Insolvency Resolution Professional (IRP) or Resolution Professional
(RP) is appointed to manage the debtor’s affairs.
• A Committee of Creditors (CoC) is formed to evaluate resolution plans.
• If no resolution plan is approved within the prescribed time (330 days), the
company proceeds to liquidation.
Step 3: Liquidation
• Liquidation is ordered by the NCLT under Section 33 of the IBC if:
• No resolution plan is approved.
• CoC recommends liquidation.
• The debtor violates the approved resolution plan.
Liquidation Process Under IBC
1. Appointment of a Liquidator
• The NCLT appoints a Liquidator, usually the same person who acted as the RP
during CIRP.
2. Public Announcement
• The liquidator issues a public announcement to invite claims from creditors.
3. Verification of Claims
• The liquidator verifies the claims submitted by creditors.
4. Formation of Liquidation Estate
• The liquidator consolidates the assets of the corporate debtor into a liquidation
estate for sale.
5. Distribution of Proceeds
• The proceeds from the sale of assets are distributed according to the waterfall
mechanism under Section 53 of the IBC.
6. Dissolution
• After all assets are sold and proceeds distributed, the liquidator files an
application with the NCLT for the dissolution of the company.
Waterfall Mechanism for Distribution of Assets (Section 53)
The distribution of liquidation proceeds follows a priority order:
1. Insolvency Resolution Process Costs and Liquidation Costs (paid in full).
2. Secured Creditors and Workmen’s Dues (up to 24 months).
3. Employees’ Dues (up to 12 months).
4. Unsecured Creditors.
5. Government Dues and remaining secured creditors (for any unpaid amount).
6. Any remaining debts and dues.
7. Equity Shareholders or Partners (residual amount, if any).
Key Features of Winding Up Under IBC
1. Time-Bound Process
• CIRP must be completed within 330 days, including litigation or judicial
interventions.
2. Creditor-Driven Process
• Creditors play a pivotal role through the CoC in deciding the company’s fate.
3. Focus on Revival First
• Winding up is initiated only when no viable resolution is possible.
4. Transparency and Efficiency
• IBC ensures a structured and transparent process for asset liquidation and debt
recovery.
Advantages of Winding Up Under IBC
1. Unified Framework: Replaces fragmented laws like the Companies Act, SICA,
and RDDBFI Act.
2. Creditor Empowerment: Gives financial and operational creditors a stronger
say in insolvency proceedings.
3. Time Efficiency: Mandates a fixed timeline for resolution and liquidation.
4. Fair Distribution: Ensures an equitable distribution of proceeds among
stakeholders.
Conclusion
The IBC, 2016, has streamlined the process of winding up companies in India, making it
transparent, efficient, and time-bound. By prioritizing resolution and ensuring fair asset
distribution through the waterfall mechanism, the Code has significantly improved the
insolvency ecosystem in India.
