Summary: Under the Insolvency and Bankruptcy Code (IBC), liquidation is a formal process for realizing a company’s assets and distributing the proceeds to creditors and other stakeholders. This guide explains how liquidation works, how the payout hierarchy affects bondholders, and what factors influence recovery.
Quick Overview
- Liquidation can follow when a CIRP fails to produce an approved resolution plan or the Committee of Creditors votes for liquidation
- The NCLT appoints a liquidator who verifies claims, values assets and oversees their sale
- Unsecured bonds rank below secured creditors and certain employee dues in the liquidation waterfall
- How much you recover from your bond depends heavily on the bond’s security, priority, and the value realized from asset sales
- Liquidation recoveries are generally much lower than recoveries through successful resolution plans
- Security cover, rating trends, covenants, and charge registration can provide useful context when assessing liquidation risk
When pondering bond investment, or fixed income for that matter, investors have an underlying concern: what might happen if the company fails to repay? Even with mechanisms and processes in place, the risk of investors not receiving money back persists. For you as a bond investor, understanding how liquidation works helps you put the recovery process into context if an issuer faces financial distress. If an issuer cannot be resolved through the insolvency process, the IBC provides for liquidation, a formal route for realizing its assets and distributing the proceeds to creditors and other stakeholders.
Liquidation generally produces lower recoveries than a successful resolution, since it typically means selling assets rather than preserving the business as a going concern. What you recover depends on how much value those assets realize and where your bond ranks among competing claims.
What is Liquidation?
Liquidation is the formal process of realizing a company’s assets and distributing the proceeds to its creditors and other stakeholders. Under the Insolvency and Bankruptcy Code (IBC), 2016, liquidation is not simply a synonym for financial distress or default.
The trigger for the liquidation process is specific. If an eligible creditor initiates insolvency proceedings and the National Company Law Tribunal (NCLT) admits the case, the company enters the Corporate Insolvency Resolution Process (CIRP). During CIRP, creditors consider whether the business can be resolved through a viable resolution plan.
Liquidation under Section 33 of the IBC can follow when any one of the following circumstances applies:
- No resolution plan is submitted in time
- NCLT rejects the submitted resolution plan
- The Committee of Creditors (CoC) approves liquidation with at least 66% of the voting share
- The corporate debtor contravenes the terms of an approved resolution plan (Section 33(3))
At that point, the NCLT passes a liquidation order and appoints a liquidator.
For you as a bondholder, this is the point where “will I get repaid” turns into “how much will I get back, and in what order?” That answer depends on the kind of bond you hold and where it ranks in the liquidation waterfall.
Types of Liquidation: Voluntary vs Compulsory Liquidation
Liquidation in India falls into two categories, but for you as a bond investor, compulsory liquidation is generally the more relevant route when assessing default and recovery risk. Voluntary liquidation is available to a corporate person that has not committed a default and can meet its debts in full from asset-sale proceeds.
- Voluntary liquidation (Section 59): This is a self-initiated process where a solvent company that has not defaulted elects to wind up and dissolve. The directors and shareholders decide to close the business, an insolvency professional oversees the orderly wind-up, and the company must be able to pay its debts in full from the proceeds of its assets. This makes voluntary liquidation different from the distress-driven liquidation typically associated with default.
- Compulsory liquidation (Section 33): This route follows an NCLT liquidation order and is more relevant when assessing the default and recovery risk associated with a financially distressed issuer. It is the route you are more likely to encounter if an issuer whose bonds you hold gets into serious financial trouble.
Selling the company’s assets is a multi-step process, and the rules governing how those asset sales occur changed drastically in late 2025.
Liquidation Process: How a Liquidator Sells Off the Assets
Traditional liquidation frameworks often included a “going-concern sale,” where the entire business was sold as a running unit to preserve its value. That option is no longer available for new cases.
From October 14, 2025, IBBI removed the provisions that allowed the corporate debtor or its business to be sold as a going concern during liquidation. The change applies prospectively and does not automatically invalidate going-concern sales that had already commenced.
IBBI’s data showed that going-concern sales recovered about 2.4% of admitted claims on average, compared with roughly 3.7% through regular dissolution. However, going-concern sales achieved a higher share of the liquidator’s own asset valuation. IBBI cited these figures as evidence that going-concern sales had not provided an additional value-preservation advantage over regular dissolution.
With that route no longer available for new cases, the liquidator may sell assets in different ways depending on their nature and the circumstances of the case:
- Slump sale: The liquidator bundles a business division or undertaking and sells it for a lump-sum price
- Asset-wise sale or auction: The liquidator sells individual assets, such as machinery and property, separately
- Private sale: The liquidator may use a private sale in specified circumstances, including where auctions fail to produce a result
Asset-wise sales or auctions remain common, but the method your issuer’s liquidator uses can affect how quickly assets are monetized and the value ultimately realized for creditors.
What Happens After the Liquidation Order is Passed?
Once the NCLT issues the liquidation order, control of the company passes immediately from its board of directors to a liquidator, usually the same insolvency professional who handled the resolution process. The board loses all decision-making power at that point.
The liquidator’s workflow follows a strict chronological order:
- Public notice: Invites creditors to submit their claims
- Claim verification: Gathers and verifies outstanding claims, including bondholder claims
- Asset valuation: Appraises all remaining physical and financial holdings
- Asset sale: Commences the multi-stage asset monetization process
Claim verification matters because the amount and status of an admitted claim affect the amount you can receive from the liquidation estate. The IBC sets timelines for the liquidation process, but actual cases can take considerably longer.
While the IBC sets a 330-day statutory cap for CIRP resolution, actual cases can run considerably longer. ICRA reported an average resolution timeline of 744 days as of March 31, 2026, up from 713 days a year earlier, while liquidation cases averaged 531 days, up from 508 days over the same period.
Individual cases can take less time or considerably longer, and distributions may occur at different stages of the process. If an issuer whose bonds you hold enters liquidation, the recovery process may therefore extend well beyond the applicable statutory timelines.
When assets are realized, the proceeds are not distributed based on when creditors submitted their claims. Section 53 of the IBC sets out the legal order in which different classes of claims are paid.
Where Does Your Bond Rank in the Liquidation Waterfall?
Section 53 of the IBC lays out the distribution order, known as the liquidation waterfall. The waterfall establishes the priority between classes. Within a class that ranks equally, claims are paid in full if sufficient proceeds are available or in proportion if the available proceeds are insufficient.
Here’s where your claim falls in the liquidation waterfall:
- Tier 1: Insolvency resolution and liquidation process costs (paid first in full)
- Tier 2: Workmen’s dues for the preceding 24 months and secured creditors who relinquished their security to the liquidation estate, ranked equally
- Tier 3: Wages and unpaid dues owed to employees other than workmen for the preceding 12 months
- Tier 4: Unsecured financial debts, including unsecured bonds
- Tier 5: Government dues and the unpaid balance of secured creditors who enforced their security separately and faced a shortfall, ranked equally
- Tier 6: Remaining debts and dues (e.g., subordinated debt)
- Tier 7: Preference shareholders
- Tier 8: Equity shareholders (Paid last, usually receiving 0%)
The actual recovery can still vary significantly depending on the assets available and the size and priority of your claim. The treatment of secured creditors depends on what they choose to do with their security. A secured creditor that relinquishes its security to the liquidation estate ranks in Tier 2. If it enforces the security separately and the proceeds do not fully cover its debt, the unpaid balance ranks in Tier 5.
What Bond Investors Actually Get Back?
Liquidation and successful resolution can produce very different recovery outcomes. Recent ICRA data shows materially lower average recoveries in liquidation cases. Therefore, liquidation generally results in lower recoveries for creditors who are still owed money.
Recoveries were around 31% in successful resolution plans, compared with around 4% in liquidation cases, according to ICRA’s May 2026 report. These are system-wide figures, not estimates of what you will recover from a specific bond. Your recovery depends on the value realized from the issuer’s assets and where your claim falls in the liquidation waterfall.
A secured bond may recover more than an unsecured bond, depending on the collateral available and the claims that rank ahead of it.
The takeaway isn’t that liquidation always means losing everything. It’s that liquidation, on average, returns a small fraction of what’s owed. Your bond’s security and priority can materially influence the recovery it receives relative to broad system-wide averages. Asset values, competing claims and the amount ultimately realized also affect the outcome.
What Should You Check When Assessing Liquidation Risk?
These checks are most useful before an issuer comes under financial stress:
- Audit the Security Cover Ratio: Compare the security cover with the outstanding debt and check whether the collateral provides sufficient coverage under the terms of the bond. Lower security coverage can leave less room for asset-value declines or competing claims during recovery.
- Track the Rating Trajectory: The direction of a credit rating can provide useful context alongside the rating itself. Sequential downgrades, such as a move from AA to A and then to BBB-, may indicate weakening credit quality. Consider the reason given by the rating agency along with the issuer’s other financial indicators.
- Dissect the Covenant Structure: These provisions can determine what happens if the issuer’s financial position worsens or another debt obligation goes into default. Read the actual Information Memorandum and review provisions such as cross-default clauses, rating-downgrade acceleration triggers and the Debt Service Reserve Account (DSRA).
- Verify the ROC Registration: Check whether the security interest has been duly registered with the Registrar of Companies (ROC) and whether the relevant charge certificate has been issued. Under Section 77 of the Companies Act, 2013, an unregistered charge generally cannot be taken into account by the liquidator.
- Understand Structured Finance: If you are evaluating a Securitized Debt Instrument (SDI), the risk structure differs from that of a corporate bond. An independent, SEBI-regulated SPV Trust typically holds the underlying receivables, which can provide bankruptcy remoteness from the originating company.
Conclusion
Liquidation can materially affect your recovery as a bondholder, but the outcome depends on more than the issuer’s default. It is a structured process with a defined order of who gets paid. The bond’s security, priority in the liquidation waterfall, and the value realized from the issuer’s assets all influence what you may recover.
When evaluating a corporate bond, review the issuer’s rating trajectory, security cover, charge registration, and the bond’s position in the liquidation waterfall. These factors can help you understand the bond’s repayment structure and potential recovery outcomes rather than relying only on its coupon or yield.
