The Liquidator – A Demigod Under the Insolvency and Bankruptcy Code, 2016?

Recently on August 28, 2022, a three-judge bench of the Supreme Court of India delivered a judgement in R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others[1], interpreting the provisions of IBC concerning the powers of the liquidator vis-à-vis mode of sale of assets by the liquidator. This watershed judgement reaffirms the powers available to the liquidator to decide the best mode of sale for maximising the value of assets of the CD.

Under the Insolvency and Bankruptcy Code, 2016 (“IBC”), an order for liquidation is passed by an Adjudicating Authority, i.e., the National Company Law Tribunal (“NCLT”), when the corporate insolvency resolution process (“CIRP”) of a corporate debtor (“CD”) fails.

Liquidation is initiated when the NCLT[1]:

  • Does not receive a resolution plan during CIRP.
  • Rejects the resolution plan submitted under Section 31 of the IBC.
  • Passes an order for liquidation based on the approval of Committee of Creditors (“CoC”).
  • Passes an order for liquidation resulting from an application made by an aggrieved person for violation of the resolution plan.

The liquidator is appointed vide the liquidation order passed by the NCLT, and ordinarily, the resolution professional appointed for conducting the CIRP will be appointed as the liquidator. A liquidator, on his appointment, gets the powers of the board of directors, key managerial personnel, and the partners of the corporate debtor[2]. Among other things, a liquidator can verify the claims of all the creditors, can take into his custody or control all the assets, property, effects, and actionable claims of the corporate debtor, etc.[3] While a resolution professional acts under the instructions of the CoC during a CIRP, the liquidator is not bound by the opinion or advice provided by the stakeholders’ consultation committee[4] (“SCC”) during the liquidation process of a CD. As a result, under the scheme of the IBC, the liquidator has been given broad powers to ensure that the liquidation of a corporate debtor’s assets can be carried out with minimal disruption in order to maximise the realisation from such assets.

Facts in Brief:

The CD in R.K. Industries (Unit-II) LLP[6] was ordered to be liquidated vide order of NCLT dated April 25, 2019. Following that, the liquidator held 5 (five) e-auctions, the first 4 (four) of which failed auctions were for the sale of consolidated assets of the CD, and the fifth one offered sale of the assets on a stand-alone basis; however, the majority of assets did not attract any interest in the fifth e-auction. Under the circumstances, an application was made to the NCLT for conducting a private sale which was granted and the “Swiss Challenge Process”[7] was adopted for the sale of certain assets of the CD (Dahej material) through a private sale. The first Swiss Challenge Process was unsuccessful, and so a second one was conducted wherein the appellant submitted the bid, an earnest money deposit, and an affidavit stating that it will be bound by the terms of the Swiss Challenge Process[8].

The terms of the Swiss Challenge Process (Anchor Bid Document), inter alia, were:

“e. It is clarified that issuance of the Process Document does not create any kind of binding obligation on the part of the Liquidator or ABG to effectuate the sale of the assets of ABG.”

xxx xxx xxx

“x. The Liquidator reserves the right to cancel, abandon or reject a Bidder/Successful Bidder at any time during the process, and the Liquidator also reserves the right to disqualify a Successful Bidder, in case of any irregularities found such as ineligibility under the I & B Code.”

xxx xxx xxx

“y. Liquidator of ABGSL, reserves the right to suspend/abandon/cancel/extend or modify the process terms and/or documents and/or reject or disqualify any Bidder at any stage of process without assigning any reason and without any notice liability of whatsoever nature.”   

While the second Swiss Challenge Process was being challenged before the NCLT, Welspun Steel Resources Private Limited (Respondent No. 7) submitted a bid much higher than the appellant for the purchase of both the Dahej Material and the land (Shipyard). SCC was of the view that a composite sale of the Dahej Material and the Shipyard would be more beneficial than the sale of the Dahej Material alone. When the hearing for the application filed by the appellant was taken up, NCLT passed an order on August 16, 2021, permitting the liquidator to go in for Private Sale of all the assets of the Corporate Debtor and complete the entire sale process in consultation with the SCC within a period of three weeks. The liquidator was also directed to permit all the parties before the NCLT to participate in the bidding process.

The order of the NCLT was challenged before the National Company Law Appellate Tribunal (“NCLAT”) and the NCLAT held that the second Swiss Challenge Process would stand cancelled, and that the private sale process should be undertaken in accordance with the directions contained in NCLAT’s judgment and as per relevant legal provisions.

Aggrieved by NCLAT’s judgement, the appellant in R.K. Industries (Unit-II) LLP[9] filed a limited appeal with regard to the directions issued in the penultimate paragraphs of NCLAT’s judgement of restarting the process of private sale after issuing an open notice to all prospective buyers instead of confining the same to the parties who had earlier participated in the process.

Issues:

The Supreme Court framed the following issues[10]:

  1. Whether the liquidator was justified in discontinuing the Second Swiss Challenge Process for the sale of a part of the assets of the CD, wherein the appellant was declared an anchor bidder, and opting for a private sale process through direct negotiations in respect of the composite assets of the Corporate Debtor?

If so, was the NCLAT justified in directing the liquidator to restart the entire process of Private Sale after issuing an open notice to prospective buyers instead of confining the process to those parties who had participated in the process earlier?

Holding of the Supreme Court:

The Supreme Court expounded the following holdings on the aforementioned issues:

  • On a conjoint reading of various provisions of the IBC and Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), the liquidator is authorised to sell the immovable and movable property of CD in liquidation through a public auction or a private contract, either collectively, or in a piecemeal manner.
  • The liquidator can apply to the NCLT for appropriate orders and directions considered necessary for the liquidation of the CD.
  • The liquidator is permitted to consult with the stakeholders who are entitled to a distribution of the sale proceeds. However, the proviso to Section 35(2) of the IBC makes it clear that the opinion of the stakeholders will not be binding on the liquidator. Though the advice offered is not binding on the liquidator, he must give reasons in writing for acting against such advice.
  • Regulation 33 of the Liquidation Regulations is couched in a language that shows that ample latitude has been given to the liquidator, who may “ordinarily” sell the assets through auction, thereby meaning that, in peculiar facts and circumstances, the liquidator may directly go in for a private sale.
  • The liquidator can approach the NCLT in terms of Section 35(1)(n), IBC read with Regulation 33(2) of the Liquidation Regulations to seek permission to sell the assets of the CD through Private Sale.
  • The issuance of the Anchor Bid Document does not create any binding obligations on the liquidator to proceed with the sale of the assets of the CD; the Anchor Bid Document does not constitute an offer, a commitment or an assurance of the Liquidator. It is a well-settled principle that in matters relating to commercial transactions, tenders, etc., the scope of judicial review is fairly limited, and the court ought to refrain from substituting its decisions for those of the tendering agency.
  • The Swiss Challenge Process is just another method of private participation that has been recognised by this Court for its transparency. Ultimately, the IBC has left it to the discretion of the liquidator to explore the best possible method for selling the assets of the CD in liquidation, which includes a private sale through direct negotiations with the object of maximising the value of the assets offered for sale.
  • IBC enjoins the liquidator to sell the immovable and movable assets of the CD in a manner that would result in maximisation of value, lead to a higher and quicker recovery for the stakeholders, cut short the delay, and afford a guaranteed timeline for completion of the process.
  • IBC empowers the liquidator to take an independent decision for the sale of the assets of the CD in liquidation.

Based on the above observations and holding, the Supreme Court ruled in R.K. Industries (Unit-II) LLP[11] that there was good reason for the liquidator to have halted the Second Swiss Challenge Process midstream and approached the NCLT armed with an offer of Rs. 675 crores received from Welspun, who had shown interest in the composite sale of the Dahej assets. The Supreme Court added that the Appellant was not able to demonstrate that the decision of the liquidator to discontinue the Second Swiss Challenge Process and go in for a private sale through direct negotiations with prospective bidders was a mala fide exercise.

The Supreme Court went on to state that from a reference to the Anchor Bid Document, it was apparent and explicit that even if the public auction had been completed and the respondent was the highest bidder, no right had accrued to him till the confirmation letter had been issued to him. The Court added that the decision taken by the liquidator cannot be treated as arbitrary, capricious, or unreasonable for interference by the Supreme Court and that it is a purely commercial decision centred on the best interest of the stakeholders. The stakeholders have unanimously endorsed the view of the liquidator, and thus it was not for this Court to undertake a further scrutiny of the desirability or the reasonableness of the said decision or substitute its own views for those of the liquidator.

As a result, the impugned NCLAT[12] judgment was quashed and set aside to the extent that it modified the NCLT[13] order and directed restraining of the private sale process. The Supreme Court also ruled that the liquidator should proceed with the private sale of the CD’s composite assets without further delay and conclude it as soon as possible. All the eligible bidders who have made Earnest Money Deposits would be entitled to participate in the negotiations to be conducted by the liquidator for privately selling the consolidated assets of the CD. The Supreme Court concluded that the liquidator must bring the process of private negotiations to a logical conclusion and close it within four weeks of its order.

Conclusion

The wide amplitude of the liquidator’s powers to determine the mode of sale has been fortified in R.K. Industries (Unit-II) LLP. This decision of the Supreme Court has also been followed recently in Sauria Corporation vs. Kohinoor Pulp & Paper Private Limited[14], wherein the NCLT stated that “it is the Liquidator who has to take a call on what mode of sale is in the best interest of maximization of the value of the assets. He may not be bound by the recommendations or advice of the Stakeholder’ Consultation Committee, however, in exercising the process of consultation, if something better transpires, he can take that into consideration.”

R.K. Industries (Unit-II) LLP’s decision has made it lucid that a liquidator is armed with powers to determine the mode, method and manner of sale of assets in liquidation and is not bound by the advice of stakeholders. Also, the Supreme Court is attempting to exercise minimal judicial intervention in matters pertaining to the IBC and has historically allowed the CoC and liquidators to exercise their commercial wisdom in matters relating to CIRP and liquidation of a CD. However, it is pertinent to note, the judiciary has also made it crystal clear that it will intervene in cases where the decision(s) of the CoC or the liquidator, among other things, are tainted with arbitrariness, capriciousness, or are unreasonable. R.K. Industries (Unit-II) LLP is yet another step to ensure that the process under the IBC is conducted efficiently and in a time-bound manner to ensure that the stakeholders get maximum value from assets under liquidation.

[1] 2022 SCC OnLine SC 1124.

[1] Section 33 of IBC.

[2] Section 34(2) of IBC.

[3] Section 35 of IBC.

[4] Constituted under Regulation 31A of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

[5] 2022 SCC OnLine SC 1124.

[6] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124.

[7] A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project. The government then puts the details of the project out in the public and invites proposals from others interested in executing it. On the receipt of these bids, the original contractor gets an opportunity to match the best bid (Aarati Krishnan, All you wanted to know about…Swiss Challenge The Hindu BusinessLine (2018), https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-swiss-challenge/article24194034.ece (last visited Sep 19, 2022)).

[8] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 2 and 3.

[9] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124.

[10] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 27.

[11] R.K. Industries (Unit-II) LLP vs. H.R. Commercials Private Limited and Others, 2022 SCC OnLine SC 1124, para 54.   

[12] Order dated 10 December, 2021 in IA No. 273 of 2021.

[13] Order dated 16 August, 2021.

[14] Order dated August 31, 2022 in I.A (IB) No. 892/KB/2022 in C.P. (IB) No. 511/KB/2018, National Company Law Tribunal – Kolkata Bench-I.

The decision has made it lucid that a liquidator is armed with powers to determine the mode, method and manner of sale of assets in liquidation and is not bound by the advice of stakeholders. Also, the Supreme Court is attempting to exercise minimal judicial intervention in matters pertaining to the IBC and has historically allowed the CoC and liquidators to exercise their commercial wisdom in matters relating to CIRP and liquidation of a CD. 

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Remuneration of Insolvency Professionals – A Progressive and Performance Oriented Approach  

An Insolvency Professional (IP) is entrusted with the management and administration of a Corporate Debtor’s affairs throughout the Corporate Insolvency Resolution Process (CIRP). He is responsible for managing, operating, and running the Corporate Debtor as a going concern during the said period by taking over the day-to-day affairs of the Corporate Debtor, complying with all the applicable laws, etc. An IP is also entrusted with the obligation of calling for the Resolution Plans, putting them before the Committee of Creditors (CoC) and having the best of all the Resolution Plans approved by the CoC, putting in his best efforts while doing so, and then by the Adjudicating Authority (AA). His obligations necessitate the highest level of professionalism, dexterity, and honesty. Therefore, taking into account his abilities, obligations, and responsibilities that he discharges, he needs to be compensated fairly for the professional services he provides.

Insolvency Professional’s Remuneration in Foreign Jurisdictions

Different jurisdictions have different frameworks for dealing with the insolvency matters arising in their jurisdictions. As a result, it is only natural for such jurisdictions to have different parameters for determining fees for their IPs (or the person equivalent to or performing the functions and duties of Indian IP in their jurisdictions).

In the United Kingdom (UK), matters relating to insolvency are dealt with under the Insolvency (England and Wales) Rules, 2016. The said rules provide for the determination of the “administrator, liquidator or trustee” (the IP equivalent) on the basis of either a percentage of the value of the property realised or distributed, or time spent in attending to the matter, or a fixed amount, or any combination of the aforesaid three parameters. In the United States of America (US), Section 326 of the US Bankruptcy Code provides that a court may allow a reasonable compensation to the “trustee” (the IP equivalent) that should not be more than a varied percentage of the amount disbursed or turned over by him to the creditors. While the US and UK follow a variable fee model, in Canada, the law relating to insolvency provides that the trustee’s (the IP equivalent) fees are to be fixed by the creditors by way of an ordinary resolution and in case the creditors fail, the trustee shall be entitled to a maximum of 7.5% of the amount remaining after the secured creditors have been paid out of the amount realised from the properties of the Corporate Debtor.

Insolvency Professional’s Remuneration in India

In India, the relevant provisions having a bearing on fees and other expenses of CIRP are envisaged under the Insolvency and Bankruptcy Code, 2016 (the Code) and regulations made thereunder. Section 5(13) & Section 208(2) of the Code, regulations 31, 33, 34 and 34A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (CIRP Regulations) clauses 16, 25, 25A, 26, and 27 of the First Schedule (under regulation 7(2)(h)) to Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, and the circulars issued by the Insolvency and Bankruptcy Board of India (the IBBI) dated 16th January 2018 bearing no. IBBI/IP/004/2018 and 12th June 2018 bearing no. IBBI/IP/013/2018 deal with the fees of IPs.

While the sections and regulations lay down what costs amount to the CIRP Cost and how such costs including an IP’s fees are to be dealt with, the circulars mainly provide that an IP shall render services for a fee that is a “reasonable reflection” of his work, raise bills/invoices in his name towards such fees, and have such fees paid to his bank account. However, none of the provisions or the circulars provide for a specific parameter to determine the IP’s fees. The fixation of the fees of the IPs, therefore, is a duty cast upon the Applicant and the CoC and that of the AA upon their failure. In the absence of a specific parameter and proper definition of “reasonable reflection”, the AA is often faced with cases involving fee disputes between IP and Applicant and IP and the CoC. The AA had been issuing various directives to the Board, directing it to fix the fees of the IP and to consider issuing guidelines or preparing a reasonable fee structure.

The IBBI has dealt with the AA’s references with respect to the fixation of IP’s fees on a case-to-case basis up until now. However, to avoid unnecessary disputes between the parties leading to litigation and to save the time of the parties as well as the AA from it, on 9th June 2022, the IBBI issued a discussion paper addressing the issue of fees payable to the IPs acting as IRPs and RPs. The paper proposes amendments to regulations 34A and the insertion of regulations 34B and Schedule II in the CIRP Regulations, specifying a model fee structure for the IPs. The fee structure proposes not only to resolve the issue with respect to the fixation of fees but also encourages IPs to facilitate timely resolution of a Corporate Debtor keeping in mind the maximisation of its value through the introduction of performance linked incentive fees, while very aptly mentioning in the discussion paper that “Maximisation of value does not mean maximum recovery from the assets during the process of liquidation. It is a concept that helps CD to get a fair valuation in return.”

Fixed Fee Structure

The proposed regulation 34A provides that the Applicant, the AA and the CoC shall fix the IP’s fee that shall be payable to him from the date of his appointment till the submission of the Resolution Plan before the AA after approval of the CoC, in accordance to the following minimum fee: –

 

Quantum of Claims Admitted

 

Minimum Fee Per Month

(Rs. Lakh)

(i)     

<= Rs. 50 crores

1.50

(ii)   

> Rs.50 crore < = Rs.100 crores

2.00

(iii)           

 > Rs.100 crore < = Rs.500 crores

2.50

(iv)  

> Rs.500 crore < = Rs.1,000 crores

3.00

(v)    

> Rs.1,000 crore < = Rs.2,500 crores

3.50

(vi)  

> Rs.2,500 crore < = Rs.10,000 crores

5.00

(vii)          

> Rs.10,000 crores

7.50

The regulation also enables the CoC to ratify an amount higher than the amount envisaged in the aforesaid table. It further provides that the CoC may also decide the fee for the interregnum period between the submission of the Resolution Plan before the CoC and its approval by the CoC.

 

Performance Linked Fee

Since time is the essence of the Code, the IPs must adhere to the timelines and facilitate a time-bound process as envisaged under the Code read with regulations made thereunder. Keeping in mind the timely resolution of a Corporate Debtor and maximization of its value, in addition to the aforesaid, the amendment further proposes that an IP may also be paid a performance linked fee to ensure timely completion of the CIRP in the following manner: –

 

Timelines

Fee as % of actual realizable value

(i)     

<= 180 days

1.00

(ii)   

> 180 days < = 270 days

0.75

(iii)           

 > 270 days < = 330 days

0.50

(iv)  

 > 330 days

0.00

The amendment further provides that the aforesaid performance linked fee shall form a part of the CIRP Cost and the same shall in no case exceed Rs.5 crore. However, the discussion paper states that the said performance linked fee is only of indicative nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. 

Escrow account mechanism

According to the IBBI, in addition to determining fees, the applicant or the CoC, is also responsible for ensuring that any amounts payable to IP are paid. As a result, an escrow account system has been proposed to ensure the timely payment of the fee to the IP.

At the first CoC meeting, IP must provide an estimate of the fixed fee and expenditure on hiring other professionals, support services, and so on, and the CoC will either contribute to an escrow account or secure interim financing for the estimated fees and expenses for the first six months. It, therefore, proposes the following additions to the CIRP Regulations through the insertion of regulation 34B.

Immediately upon his appointment as an IRP, an IP shall open an escrow account in the name of the Corporate Debtor in respect of his fee and the fee for the RP. Within 72 hours following the submission of the statement by the IP, the applicant or the CoC, as the case may be, shall deposit in the escrow account, or arrange for interim finance for deposit in the escrow account, amount fixed under regulation 34A. The IRP or the RP may withdraw money from the escrow account to cover his fee, and they must disclose the withdrawals to the CoC in the statement prepared under regulation 34A. The balance in the escrow account, if any, will be released upon approval of a resolution plan under section 31 or the passing of an order for Corporate Debtor’s liquidation under section 33.

The IBBI has invited comments from the public on the aforesaid amendment and the last date for submission of the same is June 30, 2022. Once approved, the new regulations would resolve the long pending issue with respect to the fee payable to the IP and with it, it would also decrease the number of litigations arising out of the said issue, thereby, further cutting down on the unnecessary and avoidable time consumption in the CIRP process. The performance linked fee would further encourage the IPs to work towards the maximization of value of the Corporate Debtor, reduce the amount of time consumed in the process, and keep the IPs motivated towards work.

Conclusion

Apart from decreasing the number of litigations related to IP fees, thereby reducing time consumed in the CIRP and keeping the IPs motivated towards maximisation of value of Corporate Debtor’s assets in a time bound manner, the proposed amendments would resolve several other issues.

Be it any profession, it becomes difficult to balance the efficiency, quality of work and professionalism when the remuneration of the professional involved is not decided upon or still being negotiated upon, due to which the beneficiary of the work being or proposed to be performed suffers. There have been several instances where during the CoC meetings the CoC and the IP either hard-negotiate upon the IP’s fees or the expense incurred by the IP, due to which the Corporate Debtors suffer. The proposed fixed fee structure that provides for a minimum amount to be paid as fees to the IP, if enforced, would leave no room for such hard-negotiations. By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

Further, the proposed fixed fee structure based on the quantum of claims admitted by the IP would also ensure that the fees being paid to him are equitable and commensurate with the amount of work done by him. The professionals who were reluctant to agree to take up the baton of CIRP of the Corporate Debtors that had Creditors with a history of haggling with the IPs for their fees would also pitch to take up the CIRP of such Corporate Debtors, thereby, providing a better opportunity of resolution to such Corporate Debtors.

The CIRPs under the Code are plagued with slow progress with most of the cases extending beyond the 180 days period and several cases crossing the 330 days’ period. The proposed provision with respect to the performance linked fee would encourage the IPs to endeavour and finish the entire CIRP within a time bound period by providing an additional maximum performance-based remuneration to them for the completion of the entire CIRP within 180 days as compared to no additional remuneration for the completion of the CIRP after the expiration of 330 days.

The amendment proposed with respect to the escrow account would resolve the issue where the CoC of the Corporate Debtors do not contribute to the running CIRP cost due to various reasons, thus slowing down, and in some cases halting, the entire resolution process. The said inclusion of regulation 34B would ensure that the IPs actually get their fees and that they have the finances to conduct the CIRP at all times. This would drastically reduce the number of litigation with respect to the payment of IP’s fees before AA and save the time wasted in pursuing such litigation.

The proposed amendments have certain drawbacks too. The fixed fee structure provides for the determination of the minimum fees based on the quantum of claims admitted. The duty to admit or reject the claim is that of the IP which, in some cases, might be affected inasmuch as some of the IPs may be encouraged to admit a larger number of claims.

Insofar as the provision relating to the performance linked fee is concerned, the same is otiose inasmuch as it provides that the performance linked fee is indicative in nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. By giving the CoC the authority to devise other incentive structures or to not give any incentive at all, the said provision would only be a toothless tiger, for in most of the cases the CoC will try to bring down such amount substantially if not completely wriggle out of paying it.

Further in addition to the aforesaid performance linked fee, to maximise the value of the assets of the Corporate Debtor, the IBBI may consider providing for value linked fee in cases where the IPs bring about resolution under which the realisable value of the Corporate Debtor is appreciably higher than the liquidation value of the Corporate Debtor. A percentage of the difference between the realisable value and the liquidation value may be paid to such IPs. This would ensure the value maximisation of a Corporate Debtor to its core.

Image Credits: Photo by FIN on Unsplash

By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

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