Mr. K Sridhar and Mr. K. Murali are the Directors of M/s S & M Engineering Enterprises Limited (SMEEL). Unfortunately, being the victims of COVID 2019 pandemic, by both the brothers and their respective families, the

CS Professional · Insolvency - Law and Practice · PYQS · June 2024
Mr. K Sridhar and Mr. K. Murali are the Directors of M/s S & M Engineering Enterprises Limited (SMEEL). Unfortunately, being the victims of COVID 2019 pandemic, by both the brothers and their respective families, they could not concentrate on the day-to-day affairs of the business and in the short run, the top line and the bottom line of the business went southwards and ultimately, they had to face the brunt of huge debts. An application for initiation of Corporate Insolvency Resolution Process (CIRP) against M/s SMEEL under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) was moved by an 'Assignee' of an Operational Creditor for Non-payment of dues. The Adjudicating Authority admitted the application because there was no intimation of any dispute within the 10 days. After following all the compliances prescribed under the IBC, 2016, the Adjudicating Authority passed an order to Liquidate the Corporate Debtor, on an intimation from the Resolution Professional to do so, as decided by the Committee of Creditors (CoC) by requisite voting, before the approval of the resolution plan. The relevant information related to M/s SMEEL for the purpose of liquidation is produced as follows: Liabilities ₹ in Lakhs Assets ₹ in Lakhs Capital : Fixed Assets : Equity 300 Land and Buildings 350 Preference 200 Plant and Machinery 150 Financial Creditors : Current Assets : Secured 250 Inventories 100 Unsecured 150 Trade Receivables 300 Operational Creditors : Other Current Assets 50 Secured 60 Cash and Cash Equivalents 100 Unsecured 70 Fictitious Assets 190 Government Dues 50 Workmen's Dues 80 Employees Dues 80 Total 1,240 Total 1,240 Other Information : Workmen's dues represent the amounts payable for the period of 30 months preceding the liquidation commencement date. Employee's liability includes ₹ 72 Lakhs outstanding to employees for a period of 12 months, preceding the liquidation commencement date. Land and Buildings would realize 110% of its book value, Plant and Machinery would realize 60% of its book value, net of any realization cost. Inventories and Trade Receivables would realize 72% of its book value. The secured financial creditors worth ₹ 45 Lakhs decided to enforce their security interest in the other current assets and they could realize 80% of its value. There has been a pending court case against the Company for use of child labour which could result in a penalty of approximately ₹ 30 lakhs. This has been reflected as a contingent liability only. It has been finally decided to pay ₹ 25 lakhs and settle the case. Based on the amount realized and distributed, the cost of liquidation and insolvency period cost is computed to be ₹ 20 lakhs and ₹ 12 lakhs respectively. In the light of the above inputs and with reference to the relevant provisions of the IBC, 2016, answer the following questions : State the order of priority with notes indicating the relevant Section of the Code in which the liquidator shall distribute the proceeds under the IBC, 2016. Briefly show the workings.

Answer & Explanation:

Workings (in Lakhs): Particulars ₹ ₹ Value Realized by the Liquidator: 350 L × 110% + 150 L × 60% + 100 L × 72% + 300 L × 72% 763 Add: Cash 100 Total Amount of Funds Available 863 Less: Section 53(1)(a) Insolvency Resolution process costs and the Liquidation Costs (i). Cost of Liquidation 20 (ii). Insolvency Professional related costs 12 Balance Available 32 831 Less: Section 53(1)(b) (i). Workmen's dues for the period of 24 months preceding the liquidation commencement date (80 lakhs × 24/30) 64 Debts Owed to Secured Creditors (a). Secured Financial Creditors (250 L-45 L) 205 (b). Secured Operational Creditors 60 Balance Available 329 502 Less: Section 53(1)(c) Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date 72 Balance Available 72 430 Less: Section 53(1)(d). Financial Debts owed to Unsecured Creditors 150 Balance Available 150 280 Less: Section 53(1)(e) - Debts to rank equally Amount due to the Central Government and the State Government 50 Penalty for the use of Child Labour - Court Case. 25 Amount remaining unpaid to secured financial creditors who enforced their security interest [50 lakhs X 80% 40 Lakhs, unpaid amount=45 Lakhs (-) 40 lakhs = 25 Lakhs 5 Balance Available 80 200 Less: Section 53(1)(f). (i) Workmen's dues pending beyond 24 months of Liquidation commencement date 16 (ii) Employees' liability pending beyond 12 months of liquidation commencement date 8 (iii) Unsecured Operational Creditors 70 Balance Available 94 106 Less: Section 53(1)(g). Amount to be given to Preference Shareholders 106 Balance Available 106 NIL Less: Section 53(1)(g). Amount to be given to Equity Shareholders NIL Balance Available NIL

Topics: Liquidation Process

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