IBBI Paper: 16 Proposals to Strengthen the Liquidation Process

On October 20, 2023, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper presenting a total of sixteen proposals to strengthen the liquidation process. In this paper, the Board has also annexed the draft of the IBBI (Liquidation Process) (Amendment) Regulations, 2023.

The changes proposed seek to address the existing issues and safeguard the interests of stakeholders. The comments on the proposals and the draft regulations may be shared by November 10, 2023.

The sixteen proposals put forward by the Board are as follows: –

  • No verification of prospective bidders

The paper proposes to do away with the verification or inspection of all prospective bidders by the liquidator and instead envisages the submission of an affidavit or declaration by them confirming that they are eligible under Section 29A of the Insolvency and Bankruptcy Code, 2016. To deter the submission of wrong affidavits and participation of ineligible bidders, the liquidator would be empowered, on due consultation with the Stakeholders’ Consultation Committee (SCC), to effect forfeiture of Earnest Money Deposit (EMD). After declaration of the highest bidder, due diligence on the eligibility of such bidder has to be done within 3 days. If the liquidator does not accept the highest bid above the reserve price, it would be imperative for the liquidator to consult with the SCC on the same.

Comment: In the existing regulations, liquidators have been provided about 14 days for completion of verification of prospective bidders and/or declaration of qualified bidder. The proposed amendment to Schedule I requires due diligence and verification of the eligibility of only the H1 bidder within three days of declaration of the H1 bidder pursuant to auction. The provision, therefore, restricts the function of the liquidator to verify by due diligence the declaration of H1 bidder only. Generally, in complicated cases where Section 29A is attracted and/or applicable for bidders, liquidators are required to engage qualified consultants for conducting the due diligence. The main purpose of such due diligence is to prevent promoters, their associates, relatives and connected persons from acquiring and/or being provided a backdoor entry into the corporate debtor or its assets in liquidation. There is no provision for an extension of this three days’ period for complicated cases and such a situation may be detrimental. The proposal indicates that the liquidator can, with consultation with SCC, not accept the highest bid in an auction for any reason. It may be important to appreciate the sanctity of an auction where an H1 bidder succeeds at a value higher than the liquidation value. In such cases, the liquidator and the SCC should be provided with minimum discretion in rejection of the H1 bidder to avoid collusion and favouritism between a particular bidder, the SCC, and the liquidator. This is of course for such cases where the H1 bidder is not rejected on the ground of eligibility.

In fact, an eligible H1 bidder who is rejected would have ample ground to challenge such rejection before the Adjudicating Authority. The liquidator may get involved in litigation thereby leading to deterioration of assets of the corporate debtor and consequential loss of value of the corporate debtor arising out of time consumed in litigation.

  • Reserve price reduction limited to 10%

Clause 1(4A) of Schedule I provides that in case the auction fails at the reserve price, the liquidator may reduce the reserve price by up to 25% in the subsequent auction. Even though the provision says, “up to 25%”, it has been observed that liquidators have been reducing the reserve price by the maximum limit instead of doing it in stages. Hence, it is proposed to remove the said provision and thereby limit the reduction in reserve price to 10% at a time.

Comment: The existing provision in Clause (4A) of Schedule I provides that the liquidator may reduce the reserve price by 25% in an auction held subsequent to the first failed auction. This provision was extremely beneficial in cases where both the liquidator and the SCC felt that the liquidation value was way above the realizable market value of liquidation assets. Every auction involves considerable liquidation expenses and time being consumed. An amendment mandating and restricting the reduction of reserve price to 10% at a time may only increase liquidation costs and delay the process in several cases. The discretion to reduce the reserve price to a percentage which is suitable for a particular auction of liquidation assets should be left for the SCC and the liquidator to decide.

  • Consultation before private sale

To improve accountability, the liquidator would be required to hold prior consultation with the SCC before the corporate debtor’s assets can be sold via private sale.

Comment: Regulation 33(2)(d) of the existing regulations contemplates a situation where prior permission of the Adjudicating Authority has been obtained for a specific private sale. The proposal made for confirmation of a successful buyer after consultation with SCC should not be made applicable to a case where a specific private sale has been approved by the Adjudicating Authority. The SCC cannot sit over and/or modify a decision of the Adjudicating Authority.

  • Centralised listing platform for assets

To enhance participation of and provide more time for conducting due diligence to potential bidders, the assets of the corporate debtor would be listed much before the auction date. The assets with the necessary details (such as envisaged mode of sale, likely date of auction, etc.) would be listed on a centralised listing platform. 

Comment: The aforesaid proposal for listing of all assets of a corporate debtor on a listing platform would also alert and notify the public at large including all persons having an interest in such properties of the corporate debtor. This would encourage the resolution of disputes arising out of interest in assets of the corporate debtor well before the stage of auction.

  • Progress reports to be shared with stakeholders

The liquidator would be required to submit progress reports to the SCC (I.e., apart from filing them with the Adjudicating Authority and the Board). The same is to ensure that the key stakeholders are updated on the progress in the liquidation process.

No comments.

  • New and simplified manner of calculating liquidator’s fee

The liquidator fee has to be calculated based on figures of realisation provided in quarterly progress reports instead of calculating the realisation in six months from the liquidation commencement date.

Comment: The Regulation should include a clear definition of “realisation” to facilitate calculation of the liquidator’s fee in a transparent manner. The definition should clearly restrict realisation to amounts received by the corporate debtor from the sale/assignment of assets only.

  • Liquidator to hold regular meetings of SCC

Through amendment of Regulation 31A(6), the liquidator would be mandated to hold regular meetings of the SCC. The gap between two such consecutive meetings should not be more than 30 days.

            No comments.

  • SCC’s views on the draft preliminary report to be obtained

Before finalising and submitting the preliminary report to the Adjudicating Authority, Board and members of the SCC, the suggestions, or observations of the SCC on the draft have to be requested for and duly considered by the liquidator under Regulation 13.    

No comments.

  • Actual liquidation cost exceeds estimated cost

If the actual liquidation cost exceeds the cost as estimated in the preliminary report or exceeds 10% of the corporate debtor’s liquidation value, the reasons for the same would have to be informed to the SCC to initiate a dialogue to rationalise it.

No comments.

  • Fresh valuation – methodology to be explained to SCC

Where fresh valuation of assets has been opted for under Regulation 35(2), the methodology adopted for arriving at the valuation has to be explained by the two registered valuers appointed by the liquidator, to the SCC. Once the valuation report is finalised, the same has to be shared with the members of the SCC.

No comments.

  • Advice of SCC for continuing or instituting legal proceeding on behalf of corporate debtor

If the liquidator seeks to continue or institute any legal proceeding on behalf of the corporate debtor, he has to present the “economic rationale” for the same and obtain the SCC’s advice after the committee’s reconstitution under Regulation 31A. In every meeting of the SCC, the consolidated status of all the legal proceedings has to be provided.

Comment: The proposed provision requires the liquidator to seek the advice of the SCC for continuing or initiating legal proceedings. Continuing legal proceedings may include proceedings filed against the corporate debtor. Some of such proceedings may also have members of SCC as interested parties. Therefore, an exception may be carved out for legal proceedings where any member of the SCC and/or the stakeholders they represent are interested.

  • Carrying on the corporate debtor’s business as a going concern

If operating the business of the corporate debtor as a going concern is economically unviable, the liquidator would be required to consult the SCC, to decide whether to keep the corporate debtor as a going concern or otherwise.

No comments.

  • Form H to include details regarding realisation and distribution

The compliance certificate in Form H to be submitted by the liquidator to the Adjudicating Authority under Regulation 45(3) should have additional details pertaining to the amount realised from the sale of the liquidation estate and the amount distributed to the stakeholders, to avoid discrepancies.

Comment: The proposed amendment should make a distinction between “realisation” and the actual amount realised/received by the liquidator. As discussed earlier, “realisation” should include amounts received from the sale of assets only. While amount realized/received should include all amounts received and/or collected by the liquidator from any source.

  • Assets underlying proceedings pertaining to preferential transactions

When it comes to proceedings before the Adjudicating Authority pertaining to preferential, undervalued, extortionate credit and fraudulent transactions of the corporate debtor referred to in Sections 43 to 51 and Section 66 of the 2016 Code, the liquidator would be empowered to assign the assets underlying such proceedings even before the matter has been adjudicated upon by the Adjudicating Authority.

No comments.

  • Consultation with SCC before applying for early dissolution

The liquidator has to consult with the SCC before applying for early dissolution of the corporate debtor under Regulation 14.

No comments.

  • Claims for withdrawal of amount from Corporate Liquidation Account

If the Board receives a claim for withdrawal of any amount deposited into the Corporate Liquidation Account under Regulation 46(7) after the submission of the dissolution application but before the order of the dissolution of the corporate person, the Board must direct the liquidator to verify such claim and submit a report to enable it to take a decision on whether to allow the withdrawal or not. The same is proposed to be incorporated in the form of a proviso to Regulation 46(8).

No comments.

Remarks

Most of the aforesaid proposals to amend the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 are being proposed to enhance the information available to SCC and their involvement in conducting the liquidation process. While the proposals, if implemented, would increase SCC’s role in the conduct of the liquidation process, a balance is required to be maintained between the liquidator’s powers as an officer of the Adjudicating Authority and the SCC/stakeholders. In situations where the SCC/stakeholders have a conflict of interest, the liquidator’s actions if taken in accordance with law including the IBC and regulations made thereunder are required to be protected and upheld. Any attempt by the SCC/stakeholders to thwart any such action and/or steps taken by the liquidator should be stopped at the threshold. The SCC should not be allowed to remove the liquidator in such cases without adequate opportunity of being heard before the Adjudicating Authority which should in such cases provide a reasoned order upholding/rejecting an application for removal of the liquidator. The aforesaid would avoid liquidators being reduced to being merely agents and/or spokespersons of the SCC.

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The existing provision in Clause (4A) of Schedule I provides that the liquidator may reduce the reserve price by 25% in an auction held subsequent to the first failed auction. This provision was extremely beneficial in cases where both the liquidator and the SCC felt that the liquidation value was way above the realizable market value of liquidation assets. Every auction involves considerable liquidation expenses and time being consumed. An amendment mandating and restricting the reduction of reserve price to 10% at a time may only increase liquidation costs and delay the process in several cases. The discretion to reduce the reserve price to a percentage which is suitable for a particular auction of liquidation assets should be left for the SCC and the liquidator to decide.

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