IBC: Bankruptcy Regulator Amends Liquidation Framework To Empower And Discipline Creditors 

To ensure that every possible effort is made at the liquidation stage to keep the operations of an insolvent company intact, the bankruptcy regulator amended its regulations to give lenders oversight of the process.

The Insolvency and Bankruptcy Board of India also specified stricter timelines for completing liquidation, and also for creditors to make a decision on their security interest. It also offered clarity on the withdrawal process once insolvency is triggered.

Here are the key changes and their implications:

Making ‘Going Concern' A Priority

The hesitation of courts in allowing insolvent companies to be liquidated in a way that ceases their operations has been visible in quite a few cases—Reid & Taylor, Bharati Defence and Gujarat NRE Coke, to name a few. In all these cases, the National Company Law Tribunal directed the liquidator to ensure that the companies are sold as a going concern. In April this year, the Banking Law Reforms Committee too had stressed on the sale of a part or an entire company as a going concern.

But creditors have complained that once an insolvent company goes into liquidation, they have no say in the process. The Insolvency and Bankruptcy Code is designed to give the committee of creditors control over the resolution process, but once the insolvent company reaches the liquidation stage, the decision-making power shifts to the liquidator, Rajkumar Bansal, managing director and chief executive officer of Edelweiss Asset Reconstruction Company, had told BloombergQuint.

And so, the bankruptcy regulator amended its regulations in a way that puts ‘sale as a going concern' route front and centre, while also giving creditors a say in the process.

The amended regulations empower the CoC to recommend to the liquidator that a corporate debtor undergoing liquidation must be:

• sold in entirety as a going concern, which means that the corporate debtor will continue to retain its corporate identity or;
• the business of the corporate debtor can be sold as a going concern which implies that the corporate identity may not be retained.

The amended regulations put the onus on the CoC to identify and group the assets and liabilities of the corporate debtor which must be sold as a going concern. Post this, the liquidator must submit the committee's recommendations to the NCLT for its approval.

While the Bankruptcy Law Reforms Committee and the bankruptcy board's intent is to ensure higher realisation by selling the company or business as a going concern, lawyers pointed to practical challenges in this approach. Liquidation as a going concern is an oxymoron—once the restructuring phase during the insolvency process fails, it means that the company has no commercial resolution other than being liquidated, Suharsh Sinha, partner at AZB & Partners, had told BloombergQuint.

Liquidation as a going concern will increase inter-creditor conflicts, delay recoveries and lead to further litigation, Sinha had pointed out at when the BLRC had made its recommendations.

Be that as it may, the amended regulations now prescribe that a liquidator must consult with the CoC during sale of a corporate debtor as a whole or part of its business as a going concern:

First: If the CoC recommends, the liquidator must try to sell on a going-concern basis:

• The corporate debtor as a whole.
• The business of the corporate debtor.

Then, the liquidator must complete such a sale within 90 days of going into liquidation. While pursuing such a sale, the liquidator must ensure that the assets and liabilities identified by the CoC to be sold as a going concern are sold so.

Second: In case no such assets are identified by the CoC, the liquidator must himself identify the assets that must be sold on a going-concern basis after discussing with the stakeholders consultation committee. This committee will comprise creditors, government, employee and shareholder representatives.

Third: If a liquidator fails to sell the corporate debtor as a whole, or its business, he must proceed in the following order:

• Sell the assets on a standalone basis.
• Sell the assets via a slump sale—when groups of assets are sold on a lump-sum basis without values being assigned to any particular asset or liability.
• Sell the assets collectively or in parcels.

Liquidation: Disciplining Creditors

Under the insolvency code, the liquidator has at its disposal all assets of the company, barring those in which lenders have created security interest and have not relinquished such interest in favour of the liquidator. Lenders may either sell the assets secured to them on their own or relinquish the security interest and allow the asset to form part of the general estate, which may be disposed as necessary by the liquidator.

The BLRC had pointed out that many creditors hold back on the decision to relinquish their security interest, slowing down the liquidation process significantly.

Neither the relinquishment nor release of security interest comes easy, Sumit Binani, liquidator for Gujarat NRE Coke, had told BloombergQuint earlier. He had explained that a liquidator cannot sell assets without all the secured creditors relinquishing their security interest but the secured creditors don't want to surrender until they are assured of receiving distribution from sale proceeds. Providing any such guarantee is, of course, impossible, he had pointed out.

To address this issue, the regulator has now stated that secured creditors must make this decision within 30 days of the liquidation commencement. If they fail to do so, assets covered under the security interest will be presumed to be part of the liquidation estate.

Secured creditors who choose to realise their security interest will have to pay as much towards liquidation costs and workmen dues as they would have if they had chosen to relinquish their security interest.

Liquidation: Stricter Timelines

The amended liquidation regulations provide for a stricter timeline for completion of the process. It says:

• The process must be completed within one year from the liquidation commencement date instead of the current limit of two years. The timeline must be adhered to irrespective of any pending application filed by the liquidator with the NCLT for avoidable or undervalued transactions by the corporate debtor.
• In case the liquidator attempts a sale of assets of the corporate debtor on a standalone basis, the regulations provide an extension of 90 days.
• Additional time may be granted by the NCLT but only after the liquidator has filed a report stating the reasons for not completing of the process.

Insolvency Application: Withdrawal

Besides amendments to its liquidation framework, the regulator has also clarified the mechanism for withdrawal of an insolvency application under code. Effective June 2018, via section 12A, an amended IBC permits withdrawal from insolvency if an application is made by the creditor who triggered the insolvency process, and if 90 percent of the committee of creditors (by vote share) approve the withdrawal. The regulations prescribe that such an application can be made before the expression of interest has been issued by the resolution professional.

But in several cases, the NCLAT and the Supreme Court have permitted withdrawal even after the expression of interest stage.

And so, the regulator has now clarified that an insolvency application can be withdrawn:

• Before the constitution of CoC by submitting an application to the interim resolution professional. The IRP must submit the application to the adjudicating authority within three days of its receipt.
• After CoC's constitution by submitting an application to the resolution professional. In this case, the CoC is now mandated to consider the withdrawal within seven days of receiving the proposal. Once approved, the committee must approach the NCLT to seek its approval within three days.
• After invitation of an EoI by stating the reasons for withdrawal of the application. In this case, the CoC must consider the withdrawal within seven days of receiving the proposal. Once approved, the COC must approach the the NCLT to seek its approval within three days.

The withdrawal application must be accompanied by a bank guarantee that covers amounts due to the suppliers of essential goods like electricity, water and IT services, etc. and fees to be paid to the IRP or any other professional engaged for the insolvency process.