Liquidation process: Secured creditor cannot sell assets to entities ineligible for insolvency plan

A secured creditor cannot sell assets of a company undergoing liquidation process to any person barred from submitting an insolvency resolution plan, as per a new amendment made to the norms by the Insolvency and Bankruptcy Board of India (IBBI).

Besides, a secured creditor will have to contribute its share towards insolvency resolution and liquidation process costs and workmen's dues within 90 days of the liquidation commencement date, an official release said on Tuesday.

The Insolvency and Bankruptcy Code (IBC) provides for time-bound and market-linked resolution process for stressed corporates. In case the resolution process does not materialise, then the entity goes for liquidation.

The release said the IBBI has notified changes to the liquidation process regulations with effect from January 6. The amendment also provides a process for a stakeholder to seek withdrawal from the corporate liquidation account.

"The amendment clarifies that a person, who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013," it said.

Further, a secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor.

"The amendment provides that a secured creditor, who proceeds to realise its security interest, shall contribute its share of the insolvency resolution process cost, liquidation process cost and workmen's dues, within 90 days of the liquidation commencement date," the release said.

Also, the secured creditor has to pay excess of realised value of the asset, which is subject to security interest, over the amount of its claims admitted, within 180 days of the liquidation commencement date.

According to the release, where the secured creditor fails to pay such amounts to the liquidator within 90 days or 180 days, as the case may be, the asset should become part of the Liquidation Estate.

Among others, the amendment provides that a liquidator should deposit the amount of unclaimed dividends and undistributed proceeds in a liquidation process along with any income earned thereon into the corporate liquidation account before an application for dissolution is submitted.