Should Swiss Challenge Method be adopted for auction of assets under liquidation?
Is Swiss Challenge Method the best way for realising maximum value of an asset under liquidation? A consultation paper floated by the Insolvency and Bankruptcy Board of India (IBBI) discusses the merits and legal position of using Swiss Challenge as a type of auction for assets under liquidation.
To begin with let us understand what is a Swiss Challenge Method (SCM).
It is a bidding process wherein a bidder makes an unsolicited bid to the auctioneer. Once approved, the auctioneer then seeks counter proposals against the original proposal and chooses the best amongst all options (including the original bid). The original bidder in most cases is granted the ‘right to first refusal’. If the original bidder agrees to match its offer to the challenging proposal, the project is awarded to him, else it is awarded to the challenging bidder.
The legal position
The insolvency laws do not prescribe any specific method of auction for assets under liquidation.
The report of Bankruptcy Law Reforms Committee which had conceptualized the Code does not provide for any specific type of auction to be adopted during liquidation process and guides that “The Liquidator can call for bids, run auctions, hire the services of third party valuation experts in order to assess the value of the assets in the Liquidation trust …”.
The regulatory framework for sale of assets during liquidation process provides that the liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified under the law. Schedule I under regulation 33 of the Liquidation Regulations, which provides for Mode of Sale, provides that the sale may happen either through auction or private sale. Therefore, there is no express prohibition on the adoption of SCM for sale of assets under liquidation process.
In the absence of express provision for adoption of Swiss Challenge Method for sale of assets during liquidation process, the High Court of Delhi, while disposing off a writ petition in the matter of M/s Amira Pure Foods Private Limited, in an order dated 15 December 2020, has directed the insolvency regulator to consider the petition as a representation on the issue of adoption of Swiss Challenge Method as a form of auction under its regulations.
There are several types of auctions such as English auction, Sealed-bid auction, Dutch auction, Swiss Challenge Method, etc. The choice of type of auction to be used in the liquidation process for sale of assets lies within the domain of the liquidator, in consultation with Stakeholders Consultation Committee (SCC) so long as the provisions of the Code and the Liquidation Regulations are complied with.
Even the Companies Act does not prescribe any specific method of auction. Rule 273 of the Companies (Court) Rules, 1959 prescribe that all sales shall be made by public auction or by inviting sealed tenders or in such manner as the Judge may direct. This Rule also prescribes every sale shall be held by the Official Liquidator or if the Judge so directs by an agent or auctioneer approved by the Court. Similar provision has been provided under section 290 of the CA 2013 read with Rule 166 of Winding up Rules 2020 specifying the power of company liquidator in respect to sale.
However, RBI has in its Guidelines on Sale of Stressed Assets by Banks in 2016 had envisaged Swiss Challenge Method to be introduced for sale of stressed assets. The banks have also resorted to the method to offload their stressed assets under the SARFAESI Act, 2002.
Issues under Swiss Challenge Method
The SCM begins with a base bid. A liquidator may not have any preferred party or bid at its first place. It may be noted that recently under the Pre-packaged Insolvency Resolution Process (PPIRP) framework, a process like Swiss challenge has been adopted, but the base resolution plan submitted by promoters there forms the base bid for Swiss challenge.
There may be concerns regarding transparency in choosing the preferred bidder, or it has to be a two-stage bidding, first stage to become preferred bidder and second stage for the Swiss challenge, which has cost and time implications.
Given the current legal position and issues under Swiss Challenge Method, the insolvency regulator and other stakeholders now 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.
Also See: Govt proposes sweeping changes to strengthen the liquidation process
