IBBI proposes new measures to make liquidation process faster

The Insolvency and Bankruptcy Board of India (IBBI) has finally shifted its focus to the much ignored area of unending delay in closing liquidation process as it has floated a paper discussing two major issues of delay, and their possible solutions.

The issues at hand are – dealing with assets not readily realizable and transfer of the debt due to creditor to a third person during the liquidation process period.

Dealing with assets not readily realizable

According to the paper floated by IBBI, at the time of liquidation there are certain assets of the corporate debtor which can be quickly converted into cash, but then there such assets may require an indefinite time for their realisation on account of peculiar nature of such assets or special circumstances.

“Such assets fall in the category of sundry debts, including refunds from Government and its agencies; contingent receivables, disputed receivables, sub-judice receivables, disputed assets (where, for example, legal ownership is not clear), and assets underlying avoidance transactions,” says the paper.

And since value of these assets is not easily realizable, it takes indefinite time for completing the liquidation process.

The paper floated by the insolvency regulator proposes distributing such assets for whatever amount, the market is willing to pay, among stakeholders and close the liquidation process. “To benefit the stakeholders, particularly creditors, when the liquidation estate is insufficient to pay the debts, the liquidators can be provided with the right to assign certain statutory rights of action (such as avoidance transactions actions, contingent claims etc.) to the third parties, subject to certain safeguards,” says the paper.

It further proposes two options – absolute assignment and assignment with recompense facility.

In case of absolute assignment, the person or entity who or which has been assigned the asset would have full right over the assets and any action related thereafter. The assignment would include the transfer of all the legal rights, remedies and power to bring the action to an end (for example, by settlement) without the interference of the assignor.

In case of assignment with recompense facility, the liquidator will assign the asset with an initial price. Any subsequent net discovery (value realised less costs incurred in the recovery process) of the value over and above the initial price would be shared between assignee and the assignor, as per terms of the engagement entered into to enforce the assignment.

In order to make this happen, the draft paper proposes make the following amendments in the Liquidation Regulations so that the liquidator may explore the possibility of assignment of non-readily realizable assets through public auction to third parties. If auction is not possible, the assignment may be done on arm’s length basis.

The proposed amendment provides for assignment of such assets by liquidator may be absolute or with recompense facility. Asignment of such assets will be subject to section 29A of the Code.

Besides, liquidator will be required to consult a stakeholder consultation committee (SCC) and if the advice of SCC is not adhered to, he will record the reasons in writing for such contrary view and mention it in subsequent progress report/final report submitted to the adjudicating authority.

Transfer of debts due to creditors

The draft paper observed that during the liquidation process, a creditor files its claim and thereafter, waits for the liquidator to make realisation and distribute it as per the waterfall mechanism defined under section 53 of the Code. This whole process is time consuming and some stakeholders may like to assign their interests and move on.  It also argued that the same is allowed during corporate insolvency process (CIRP) under regulation 28 of the Insolvency and Bankruptcy Board of India.

Therefore, it proposed that a provision similar to that in the CIRP Regulations may be provided under Liquidation Regulations to enable exit of stakeholders who cannot wait or who are in urgent need of liquidity.

It, therefore, proposes to amend the Liquidation Regulations so that if a creditor assigns or transfers the debt due to such creditor to any other person during the liquidation process period, both parties will provide the liquidator, the terms of such assignment or transfer and the identity of the assignee or transferee.

The amendment will also provide that the liquidator may apply to the Adjudicating Authority to modify an entry in the list of stakeholders filed with the Adjudicating Authority.

The two proposed changes, argues the paper, would likely shorten the time taken for liquidation and ensure higher recovery, besides giving the creditor an additional exit route.

The draft paper has been open for stakeholders’ consultation and any final decision will be taken only after that.

While the focus of the insolvency regulators so far has been towards making the resolution process efficient, the one issue that they had ignored so far is the unending delay in the liquidation process which by law should be over within a year. But that is barely the case.

According to data collated By March 2020, out of 914 cases that have gone into liquidation only 56 had seen any closure (55 closed by dissolution and 1 sold as going concern).

With the new proposed changes, it is hoped that liquidation process will be faster and more productive.