Liquidation Cost as per the Insolvency and Bankruptcy Code, 2016
Regarding the Corporate Insolvency Resolution Process Costs (CIRP Costs), there is clarity in the Insolvency and Bankruptcy Code, 2016 (the Code). CIRP costs are defined under section 5(13) of the Code. Regulation 31, 33 and 34 of the IBBI (CIRP) Regulations, 2016 also elaborates the CIRP costs defined u/s 5(13) of the Code.
Further, the Insolvency and Bankruptcy Board of India (IBBI) issued Circular No. IP/004/2018 dated 16th January, 2018 regarding the fee of the Insolvency Professional. Similarly, Circular No. IBBI/IP/013/2018 dated 12th June, 2018 was issued by the IBBI regarding Fees and other expenses incurred for CIRP.
There is clarity with regard to Liquidation costs also. Section 5(16) of the Code says that “Liquidation cost” means any cost incurred by the liquidator during the period of Liquidation subject to such regulations as may be specified by IBBI. Section 53(1)(a) gives first priority to CIRP costs and Liquidation costs. Section 240(2)(e) gives power to IBBI to make regulations regarding cost incurred by the Liquidator during the period of Liquidation. This is the limited reference to Liquidation Cost in the Code itself.
Coming to Regulations, Regulation 2(ea) of the IBBI (Liquidation Process) Regulations, 2016, defines “Liquidation Cost” as under:
Liquidator Fee
- Fee payable to professionals appointed by the Liquidator under Regulation 7(1)
- Costs incurred by the Liquidator for verification of claims under Regulation 24(2)
- Costs incurred by the Liquidator for preserving and protecting the assets of the Corporate Person.
- Costs incurred by the Liquidator in carrying out the business of the Corporate person as a going concern.
- Interest on interim finance for 12 months or from Liquidation commencement date till repayment of interim finance, whichever is lower.
- Repayment of amounts to financial creditors who contributed to liquidation costs in proportion to their claims as per Regulation 2A(3).
Any other cost incurred by the Liquidator which is essential for the Liquidation process.
However, cost incurred by the liquidator u/s 230 of the Companies Act, 2013 towards Compromise and Arrangement, shall not form part of liquidation cost.
As per Regulation 45(2), if the actual liquidation cost exceeds the estimated liquidation cost as per the Preliminary Report, the Liquidator shall explain reasons for the same.
Coming to the IBBI (Voluntary Liquidation Process) Regulations, 2017, As per Regulation 7, the remuneration payable to the Liquidator forms part of the Liquidation cost. Fee payable to professionals engaged under Regulation 11(2) also is Liquidation Cost. Costs incurred by the liquidator for verification of claims is part of liquidation cost. Other than this, there is no reference to Liquidation costs anywhere. So, in Voluntary Liquidation, the liquidation costs have limited reference.
But, coming to Section 59(6) clearly says that the provisions of Section 35 to 53 (relating to normal liquidation) shall apply to voluntary liquidation proceedings with such modifications as may be necessary. This consequently includes the Liquidation Process Regulations also. So, it is safe to say that “Liquidation Cost” can be safely read from Regulation 2(ea) of the IBBI (Liquidation Process) Regulations, 2016 for the purpose of voluntary liquidation also.
However, there are some doubts:
There is no clarity on the public announcement expenses. In my humble opinion, the public announcement expenses can be considered part of the liquidation costs, taking analogy from the CIRP Regulations wherein it was mentioned that cost approved by the Committee of creditors is CIRP cost, the public announcement expenses can be considered as CIRP cost if approved by the CoC even though it is the triggering creditor that pays the expenses in the first place. Hence, it can be said that public announcement expenses can form part of liquidation cost.
Whether employee cost form part of the liquidation cost?
The liquidator order acts as a discharge to employees. However, if the business is carried on, the employee cost has to form part of the liquidation cost. This is as per Regulation 2(ea) of Liquidation Process Regulations.