IBC Answer Writing Practice II: Liquidation and Appeals

This second practice paper covers what happens when resolution fails, and the proceedings that run alongside: liquidation and distribution, guarantors, recovery of assets lost before insolvency, and appeals. As in the first paper, each question raises several issues. Number them, take each through section and case, and end with the order sought. This note closes the applied part of the series.

Figure 1: Order of analysis for liquidation questions

1. Restoration, PF Funds and the 14-Day Notice

• Issues. (i) A second restoration; (ii) the gratuity fund; (iii) CD Bank's election.
• Law. Restoration under section 33(1A) is available only once (section 33(1B); Topic 125). Gratuity, provident fund and pension sums are outside the liquidation estate (section 36(4)(a)(iii); Sunil Kumar Jain, 2022; Topic 126). A secured creditor intending to realise must notify the liquidator within fourteen days of the liquidation commencement date, failing which its security is deemed relinquished (section 52(2), 2026; Topic 127)
• Application. Restoration has already been used. The gratuity fund belongs to employees. CD Bank's notice on 20 October came nineteen days after commencement.
• Conclusion. (i) No second restoration; the bidder may buy assets at auction. (ii) The ₹4 crore must be paid to employees from the fund, not distributed under section 53. (iii) CD Bank's security is deemed relinquished; it ranks under section 53(1)(b) up to the value of its security and as unsecured for the balance.

2. Waterfall with the 2026 Secured Creditor Cap

• Issues. The order of distribution and the effect of the 2026 cap on secured priority.
• Law. Clauses are paid in order and shared pro rata within a class (section 53; Topic 128). A relinquishing secured creditor ranks in clause (b) only up to the value of its security, and as an unsecured financial creditor in clause (d) for the balance (Explanation to section 53(1)(b)(ii), 2026). Government dues for two years rank in clause (e)
• Application. Clause (b): workmen ₹40 crore and CD Bank ₹200 crore, total ₹240 crore, paid in full, leaving ₹60 crore. Clause (c): employees ₹20 crore, leaving ₹40 crore. Clause (d): unsecured financial creditors ₹100 crore and CD Bank's balance ₹150 crore, total ₹250 crore, share ₹40 crore pro rata, that is 16 per cent: ₹16 crore and ₹24 crore. Nothing remains for clause (e)
• Conclusion. Workmen ₹40 crore; CD Bank ₹224 crore (₹200 crore plus ₹24 crore); employees ₹20 crore; unsecured financial creditors ₹16 crore; GST nil.

3. Guarantors, Interim Moratorium and Double Recovery

• Issues. (i) Mr G's interim moratorium; (ii) the forum; (iii) EF Ltd's liability.
• Law. After 2026, no interim moratorium applies on an application against a personal guarantor to a corporate debtor (section 96(4); Topic 133). The application must be before the NCLT dealing with AB Ltd (section 60(2)). The guarantor's liability is co-extensive, a creditor may pursue the borrower and guarantors, and recoveries are credited without double recovery (BRS Ventures, 2024; Topic 104)
• Application. Mr G has no interim moratorium. CD Bank recovered ₹224 crore, leaving ₹126 crore unpaid.
• Conclusion. (i) The DRT case may proceed until the NCLT admits the section 95 application, when the section 101 moratorium applies. (ii) The section 95 application must be filed before the NCLT handling AB Ltd. (iii) CD Bank may proceed against EF Ltd under section 7 for the unpaid ₹126 crore, with interest as the guarantee provides, but not for amounts already recovered.

4. Avoidance after CIRP and Appeal Limitation

• Issues. (i) Whether the creditor could apply after the CIRP; (ii) the remedies available; (iii) the appeal's timeliness.
• Law. Section 47, as substituted in 2026, lets a creditor apply for unreported avoidance transactions and section 66 matters, and section 26 provides that completion of the CIRP does not affect such proceedings; the liquidator may also continue them (section 35(1)(l)). An undervalued sale to a related party within two years is voidable (section 45; Topic 122), and diversion of business with intent to defraud attracts section 66 (Topic 124). An appeal to the NCLAT lies within 30 days of pronouncement, extendable by 15 for sufficient cause, and no further (section 61(2); National Spot Exchange, 2021; Topic 136)
• Application. The NCLT's view that the end of the CIRP barred the application is wrong. The sale was within two years to a related party at one-sixth of value. But the appeal was filed 39 days after the order, needing condonation for nine days.
• Conclusion. If the creditor shows sufficient cause for the delay, the NCLAT should set aside the order and remit the section 45 and section 66 claims, directing the IBBI to act against the professional under section 47. If no sufficient cause is shown, the appeal fails; the liquidator may still pursue the claims under section 35(1)(l)

5. Frequently Asked Questions

What is the best way to revise for applied IBC questions?

Work through Topics 97 to 139 one stage at a time, then attempt these two mixed papers under timed conditions and compare your answers with the models.

Where are the leading cases collected?

In Topics 91 to 93, with the amendments in Topic 94 and the revision chart in Topic 96.

In a waterfall question, what is the most common error?

Forgetting that a relinquishing secured creditor ranks in clause (b) only up to the value of its security after 2026, and failing to move the balance to clause (d).

Can a liquidator continue avoidance claims the resolution professional began?

Yes. Section 35(1)(l), as substituted in 2026, lets the liquidator continue or institute avoidance and section 66 proceedings, and section 26 keeps them alive after the CIRP ends.

6. Related Topics

• Topic 96: Revision Chart. The Code at a glance.
• Topic 128: Section 53 IBC Waterfall. Section 53 with figures.
• Topic 140: IBC Answer Writing Practice I. Initiation to resolution.