Changes in Liquidation Process to Benefit Creditors

With the objective of facilitating a smoother process for liquidation, ensuring accountability, and bolstering the confidence of stakeholders in the liquidation process, the Insolvency and Bankruptcy Board of India (IBBI) has introduced changes in the liquidation process. The same was implemented through the IBBI (Liquidation Process) (Amendment) Regulations, 2024, which were notified on February 12, 2024.

These were finalised after considering the public feedback received on the draft amendment regulations released a few months back.

The highlights of the amendment regulations of February 12, 2024, are as follows: –

  • Reserve price reduction limit – whether fresh valuation conducted

As per the amendment regulations, if an auction fails at the reserve price, the reserve price in auctions subsequent to the failed auction can be reduced by up to 10% at a time. Prior to the amendment, the reserve price in such subsequent auction could be reduced by 25% and if such auction also failed, the reserve price could be further reduced by up to 10% at a time. This particular change was considered necessary in light of the blanket reduction (by the maximum limit) carried out by liquidators.

The Board, however, has deemed it prudent to provide an exception to the rule vide a proviso. The said proviso covers cases where the reserve price was fixed as per the valuation under Regulation 35(1), i.e., valuation done considering the average of the estimates arrived under the Corporate Insolvency Resolution Process (CIRP) and fast-track CIRP regulations. In such cases, the reserve price can be reduced by up to 25% by the liquidator, on the advice of the Stakeholders’ Consultation Committee (SCC). It is clarified that this can be done only once during the liquidation process. This proviso did not find a place in the draft released earlier and was seemingly added pursuant to stakeholder consultation.

  • Sale of corporate debtor’s assets through private sale requires prior consultation

The amendment regulations mandate that the corporate debtor’s assets can be sold through private sale only after holding prior consultation with the SCC under Regulation 31A. Previously, there was no such provision. It has been added to enhance accountability and ensure transparency in the process.

There are certain scenarios, under Regulation 33(2), wherein the sale of the corporate debtor’s assets can be effected through a private sale. For instance, if the asset is perishable, the liquidator may sell it through private sale instead of auction. Earlier, Regulation 33(2)(c) permitted the sale of assets through private sale if it was sold at a price higher than the reserve price of a failed auction. Though such a provision seemed to be beneficial at first glance, the Board noticed that it could a) cause potential buyers to wait for an auction to fail so that they can negotiate a private sale, and b) discourage participation in public auctions. Both such situations have the potential to adversely affect the asset price and hence, the said Regulation has been omitted.

  • At least one SCC meeting to be convened in each quarter

The liquidator is under an obligation to ensure that SCC meetings are held within 30 days of the previous meeting so that stakeholders are regularly updated on the critical aspects of the liquidation process and expenses. The period between these meetings can be extended by the SCC. Further, according to the amendment regulations, at least one such meeting has to be conducted in each quarter.

  • SCC meeting – details to be shared by the liquidator

A new Regulation 31A(6B) has been introduced by the amendment regulations whereby the SCC must be presented with details regarding the actual liquidation cost, the status of legal proceedings and the progress made in the process, at every SCC meeting by the liquidator.

In the consultation paper, however, Regulation 15 was proposed to be amended to ensure that the liquidator submitted the progress reports to not only the Adjudicating Authority and the Board but also the SCC. With this, it was sought to keep the creditors informed of requisite information regarding the status of the sale of assets, expenses incurred by the liquidator, distribution to stakeholders, and other such matters.

It is quite clear that IBBI has consciously introduced Regulation 31A(6B) which is under the principal provision, Regulation 31A dealing with matters relating to SCC and provides for the constitution of SCC, convening and conduct of SCC meetings and matters on which advice is to be sought by the liquidator from the SCC. The intention is clear that the SCC has been given an opportunity to deliberate, discuss and advise the liquidator, if necessary, on certain critical aspects affecting the stakeholders during the liquidation process, which may not have been so effectively possible by merely mandating furnishing of copies of progress reports.

  • Valuation methodology and deviation from CIRP valuations to be explained

If a fresh valuation of assets is undertaken and two registered valuers are appointed under Regulation 35(2), the liquidator is required to facilitate a meeting to ensure that the valuation methodology adopted and the reasons for significant deviation (25% in asset valuation) from the CIRP valuations are explained by said valuers to the SCC. It is also envisaged that valuation reports would be shared with the SCC members upon receipt of a confidentiality undertaking. These amendments are expected to expedite the decision-making process.

  • SCC’s advice on legal proceedings

A new provision has been added to the 2016 Regulations, requiring liquidators to present the economic rationale for initiating or continuing any legal proceedings and seek the SCC’s advice on the same. The provision aims to address the issues pertaining to delays in the process and the increased liquidation costs resulting from unnecessary and undesirable litigation.

  • Sale or running of corporate debtor as a going concern

The liquidator can sell the corporate debtor as a going concern exclusively only at the first auction (and such a sale cannot be offered as the only option for bidders after the first auction). If the auction fails, the liquidator has to review the marketing strategy, seeking advice from the SCC, as per the amendment regulations. This is to draw the attention of potential bidders as in certain cases, the corporate debtor’s dissolution would be disadvantageous and its sale as a going concern would result in better returns.

The draft amendment regulations had envisaged obtaining SCC’s approval for running of the corporate debtor’s business as a going concern if it was economically “unviable”. This was proposed to be effected by the addition of clause (j) in Regulation 31A. The same was in consideration of the operational expenses and the costs involved in continuous operation. But the Board has proceeded to insert sub-regulation (5) in Regulation 32A mandating the liquidator, if it considered it to be “viable”, to consult the SCC before proceeding to run the affairs of the corporate debtor as a going concern. Such modification vests a greater degree of control with the SCC. This is because, under the proposed amendment, the liquidator would’ve been bound to approach the SCC only if running the corporate debtor’s business as a going concern was economically unviable. It was also not clear if this was to be unilaterally decided by the liquidator.

  • Early dissolution of the corporate debtor – prior consultation necessary

The liquidator is bound to consult the SCC before applying for early dissolution of the corporate debtor, to the Adjudicating Authority. A detailed report including the SCC’s views also needs to be submitted to the Adjudicating Authority. The aforesaid amendments protect the interests of stakeholders where early dissolution may be considered detrimental to the interests of stakeholders.

  • Relief to allottees in real estate projects – homebuyers

Wherever an allottee in a real estate project has been put in possession of his allotted property or unit by the corporate debtor, such asset shall not form part of the liquidation estate of the corporate debtor. The liquidators have therefore been restrained from selling these assets as part of the liquidation estate during the liquidation process.

  • Compliance certificate to include further information on realisation and distribution

Certain changes have been made to the compliance certificate under Form H of Schedule II. It now includes further information on the realisation and distribution made during the process. This certificate is required to be submitted by the liquidator to the Adjudicating Authority under Regulation 45(3).

The modification has been made to avoid inconsistency in the amount realised and the amount distributed to stakeholders.

However, a note that was proposed to be included in clause (b) of para 4 has been removed. It stated that the total amount of realisation had to be equal to the total amount distributed (to stakeholders under Section 52 or 53 of the Insolvency and Bankruptcy Code, 2016) in clause (c) of said para. The aforesaid note has probably not been included as this may not have been practicable for implementation without undue complications arising out of various expenses required to be made during the liquidation process. The IBBI has instead given stress on control and accountability with regard to amounts realised and expenses made by the Liquidator to the SCC and left such aspects to the commercial wisdom of the SCC.

  • Withdrawal of amount deposited in Corporate Liquidation Account

If a stakeholder seeks to withdraw an amount deposited in the Corporate Liquidation Account, the amendment regulations state that the application has to be made to the liquidator if it is to be done before the dissolution of the corporate person. The liquidator would then conduct verification and ask the Board to release the amount. If, on the other hand, the application is made after dissolution, the claimant has to apply to the Board.

Earlier, the stakeholder who claimed to be entitled to an amount from the said Account could apply for its withdrawal only to the Board. Moreover, there was no provision enabling the distribution of the amount after the final report’s submission but before the dissolution order. It was also noticed that on average, it takes around 5 months for dissolution or closure of the liquidation to take place from the date of the final report’s submission. In light of the volume of claims received during this period, it was thought necessary to allow the distribution of the amount during the said period.

  • Compromise or arrangement proposal to be filed only on recommendation

A proposal of compromise or arrangement can be filed by the liquidator only when a recommendation to such effect is made during the CIRP by the committee of creditors. Such a proposal cannot be filed after the expiry of 30 days from the liquidation commencement date.

  • Balance sale consideration – payment period can be extended beyond 90 days

The amendment regulations allow the liquidator to extend the period for making payment of the balance sale consideration, beyond 90 days, after consultation with the SCC. The period so extended has to be mentioned in the auction notice. Interest at the rate of 12% would be payable for balance payments made after 30 days.

A 90-day deadline is set under the 2016 Regulations, for the highest bidder to make payment of the balance sale consideration, on the close of the auction. This period couldn’t be extended before.

  • Details of meetings incorporated in proforma

The proforma for reporting consultations with stakeholders under Form A of Schedule II has been amended, making it more comprehensive. It now contains details regarding the date of meetings, the period between two meetings, agenda items, liquidator’s fee, etc.

Remarks

The changes brought in by the amendment regulations are significant in so far as these create a check and balance on critical areas of the liquidation process significant to the interests of stakeholders where the liquidators used to exercise discretion and power in a unilateral manner. The SCC has now been empowered to be involved in various issues such as early dissolution of the corporate debtor, private sale of assets, fixation of the reserve price, the conduct of litigations, mode/manner/procedure of sale of assets including the running and sale of the corporate debtor as a going concern. The amendments make an appreciable change in terms of introducing increased accountability of liquidators and the contribution of the SCC on critical aspects of the liquidation process by providing for provisions mandating meaningful participation in crucial matters by the SCC. We can clearly see that a meaningful attempt has been made to introduce the concept of commercial wisdom being exercised on critical matters by the SCC in a balanced manner. The amendments can also be seen to reduce the exposure of liquidators to various risks and liabilities on which he is now required to consult and rely on the commercial wisdom of the SCC instead of taking unilateral decisions which would be open to criticism and challenge from minority stakeholders.

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The changes brought in by the amendment regulations are significant in so far as these create a check and balance on critical areas of the liquidation process significant to the interests of stakeholders where the liquidators used to exercise discretion and power in a unilateral manner. The SCC has now been empowered to be involved in various issues such as early dissolution of the corporate debtor, private sale of assets, fixation of the reserve price, the conduct of litigations, mode/manner/procedure of sale of assets including the running and sale of the corporate debtor as a going concern. The amendments make an appreciable change in terms of introducing increased accountability of liquidators and the contribution of the SCC on critical aspects of the liquidation process by providing for provisions mandating meaningful participation in crucial matters by the SCC. We can clearly see that a meaningful attempt has been made to introduce the concept of commercial wisdom being exercised on critical matters by the SCC in a balanced manner. The amendments can also be seen to reduce the exposure of liquidators to various risks and liabilities on which he is now required to consult and rely on the commercial wisdom of the SCC instead of taking unilateral decisions which would be open to criticism and challenge from minority stakeholders.

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