Govt proposes sweeping changes to strengthen the liquidation process

In a consultation paper floated on 27 August 2021, the insolvency regulator in India – Insolvency and Bankruptcy Board of India – has proposed a few amendments in the Liquidation Regulations to strengthen the whole process of liquidation.

Here are some of the key amendments proposed in the consultation paper:

Expanding the scope of Stakeholders’ Consultation Committee: It has proposed to provide in the Liquidation Regulations that the liquidator shall consult Stakeholders’ Consultation Committee (SCC) for all significant matters related to liquidation process, including appointment of professionals (and their remuneration), and sale of assets (including major aspects such as fixation of reserve price, manner of sale, etc.)

According to the consultation paper, the expanded and enriched role of SCC in terms of mandatory consultation regarding appointment of professionals, sale of assets including fixation of reserve price, etc., is felt necessitated for enhancing accountability of liquidator, stakeholders’ confidence and participation in the process, effective supervision and monitoring, and improved outcomes of the process

Refining the process for constitution of SCC: It has been proposed that the liquidator may facilitate the stakeholders of each class to nominate their representative(s), while adhering to the voting principle of majority of value of claims of those present and voting, for inclusion in the consultation committee.

The proposed amendments, according to the IBBI’s Consultation paper, will ensure availability of domain expertise of various classes of stakeholders, which is highly appreciated in the complex and challenging liquidation cases. Further, it will promote transparency, reduce the scope of arbitrariness to minimum and prevent abuse of the process, thereby ensures overall value maximization of the corporate debtor.

Engagement of Marketing Professionals for Sale of Asset(s): It is proposed to modify Schedule I of the Liquidation Regulations to provide that the liquidator should not engage a professional/agent for sale of asset(s) on commission/success fee basis, and that the liquidator should prepare a marketing strategy for sale of assets of the corporate debtor in consultation with SCC.

It has been argued in the consultation paper that the liquidator gets remunerated in terms of fees fixed by the committee of creditors for performance of his duties stipulated under the Code/Liquidation Regulations. The payment of commission/success fee as a percent of realisation of assets leads to payment of dual fees for the sale of same asset(s), especially in situations where the liquidator is drawing his remuneration as a percentage of realisation of proceeds and distribution thereof.

Pre-bid qualifications for auctions: It is proposed to that for participation in the auction, the liquidator should not require payment of any fee or non-refundable deposit from potential bidders; and prescribe Earnest Money Deposit (EMD) in excess of 10% of reserve price of the asset(s).

This according to the consultation paper will promote competition in auction(s) conducted during liquidation process.

Power of liquidator in auction: It has been proposed to insert the clarification in sub-clause (11) of clause 1 of Schedule I of the Liquidation Regulations to explicitly provide that the liquidator should provide the reason(s) for rejection of highest bid in the auction process, if applicable, to the highest bidder and shall record the same in the quarterly progress report submitted to AA.

Relinquishment of Security Interest: The consultation paper proposes that if secured creditors with 60% of the value in the secured debt decide to relinquish or realize the security interest, such decision should be binding on the other charge holders.

The proposed amendment enables the secured creditors to exercise their right of relinquishment or otherwise in deadlock situations, thereby, ensures timely completion of the liquidation process and promotes overall value maximization. It further supports collective liquidation action envisaged in the Code.

The consultation paper also discusses Swiss Challenge as a mode of auction under the liquidation process. According to the paper, there is a need to deliberate whether a guided path is to be explicitly stipulated for the adoption of Swiss Challenge Method for the auction under liquidation, especially in the context of absence of prohibition on adoption of any method of auction in the Liquidation Regulations currently.

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