Insolvency regulator proposes early liquidation of defunct corporate debtors

Why waste time in trying to go for resolution of a corporate debtor which is defunct and has no or insignificant assets? In order to expedite closure of insolvency case of defunct corporate debtor, the insolvency regulator is now planning to allow early liquidation process in some cases which fulfils certain criteria.

The insolvency regulator has proposed that the CoC may take into consideration certain factors in deciding on liquidation during the early stages of CIRP, These factors include the CD being defunct or non-operational for 3-5 years, product, service offered and the technology employed being obsolete, lack of intangible assets like brand value, intellectual property, accumulated losses/depreciation, investments that are yet to mature, etc.

The regulator says other factors may also be included to decide on early liquidation. “A deliberation on these factors may form part of the recommendation of liquidation made to the adjudicating authority,” it says.

Advocating an early liquidation of defunct corporate debtors, the insolvency regulator in a discussion paper argued that there are several CIRPs in which the CD is defunct and has no assets or insignificant assets, in the extreme cases there is no office or premises, and the CD exists only on paper. In such cases the RP and the creditors have no option but to liquidate the CD. However, in most cases the RP attempts a resolution before filing for liquidation orders.

This, argues the consultation paper, forces the conduct of the CIRP where the chances of resolution do not exist and imposes a cost on the creditors in paying to the RP and other process costs. It also delays the liquidation process and leads to loss of value of the assets of the CD.

To enable early liquidation, the consultation paper suggests amendment to Regulation 40D so that the committee of creditors while considering the liquidation of the corporate debtor may consider these factors. Such consideration may be recorded and submitted in the application for liquidation order submitted by the resolution professional to the Adjudicating Authority.

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