Waterfall mechanism for liquidation

Context: In a recent judgment, the NCLAT set aside an order of Chennai NCLT on the grounds that BHEL’s charge over Surana Power assets was equal to the other 10 financial creditors, and therefore it could not be given precedence. The National Company Law Appellate Tribunal (NCLAT) has ruled that the liquidation process of a company under the Insolvency and Bankruptcy Code (IBC) holds precedence over the outcome of an arbitration proceeding.

Relevance:
Prelims: Current events of national and international importance.
Mains: GS III-

• Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.

• Liquidation is the winding up of a corporation or incorporated entity under the supervision of a person or “liquidator” and they are empowered under the law for such operation, for distribution of proceeds to the various creditors as per an agreed formula.
• Only firms can be liquidated. Defaulting individuals cannot be liquidated.
• Insolvency is the trigger that causes bankruptcy or liquidation and when the debtor goes into liquidation, an insolvency professional administers the liquidation process.
• Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence:
  1. insolvency resolution costs, including the remuneration to the insolvency professional,
  2. secured creditors, whose loans are backed by collateral, dues to workers, other employees, iii) unsecured creditors,
  3. dues to the government,
  4. priority shareholders and
  5. equity shareholders.

• The NCLAT’s judgment essentially holds that if a corporate debtor is being liquidated, a creditor can not claim superiority over other secured creditors in the same band and that everyone must receive their fair share by following the waterfall mechanism of liquidation.
• As the name suggests, the waterfall mechanism under Insolvency and Bankruptcy Code gives priority to secured financial creditors over unsecured financial creditors.
• The mechanism says that if a company is being liquidated, these secured financial creditors must be first paid the full extent of their admitted claim before any sale proceedings are distributed to any other unsecured creditor.
• Under Section 53 of the IBC, which deals with the waterfall mechanism, the topmost priority, however, is given to costs related to the liquidation process and dues of workmen of the corporate debtor.
• The dues of the workmen include all their salaries, provident, pension, retirement, and gratuity fund, as well as any other funds maintained for the welfare of the workmen. 

• The waterfall mechanism under Insolvency and Bankruptcy Code gives priority to secured financial creditors over unsecured financial creditors. 
• The mechanism says that if a company is being liquidated, these secured financial creditors must be first paid the full extent of their admitted claim before any sale proceedings are distributed to any other unsecured creditor.
• Under Section 53 of the IBC, which deals with the waterfall mechanism, the topmost priority, however, is given to costs related to the liquidation process and dues of workmen of the corporate debtor.

• Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament.
• The law was necessitated due to a huge pile-up of non-performing loans of banks and delays in debt resolution. 
• Companies have to complete the entire insolvency exercise within 180 days under IBC and the deadline may be extended if the creditors do not raise objections to the extension. 
• Insolvency and Bankruptcy Board of India has been appointed as a regulator and it can oversee these proceedings. IBBI has 10 members( from the Ministry of  Finance,  Ministry of Law & Justice, and the Reserve Bank of India).

• It applies to both individuals and companies.
• Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
• It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
• It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
• The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. 
• Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.

• The proceedings of the resolution process will be adjudicated by the National Companies Law Tribunal (NCLT), for companies and the Debt Recovery Tribunal (DRT) for individuals.
• The courts approve initiating the resolution process, appointing the insolvency professional and giving nod to the final decision of creditors. The Insolvency and Bankruptcy Board regulates insolvency professionals, insolvency professional agencies, and information utilities set up under the Code.

• National Company Law Appellate Tribunal (NCLAT) was constituted under Section 410 of the Companies Act, 2013 for hearing appeals against the orders of National Company Law Tribunal(s) (NCLT), with effect from 1st June 2016.
• It is also the Appellate Tribunal for hearing appeals against the orders passed by NCLT(s) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) and it is also the Appellate Tribunal for hearing appeals against the orders passed by Insolvency and Bankruptcy Board of India under Section 202 and Section 211 of IBC.
• It is also the Appellate Tribunal to hear and dispose of appeals against any direction issued or decision made or order passed by the Competition Commission of India (CCI)  as per the amendment brought to Section 410 of the Companies Act, 2013 by Section 172 of the Finance Act, 2017.