IBBI: Bankruptcy Regulator Proposes A Market For Illiquid Assets

IBBI suggests liquidators and creditors be allowed to assign not readily realizable assets to third parties. 

Reeling under tight liquidity conditions, NBFCs and HFCs begin relying on loan sell-downs to banks to raise funds. (Photographer: Dhiraj Singh/Bloomberg)
Reeling under tight liquidity conditions, NBFCs and HFCs begin relying on loan sell-downs to banks to raise funds. (Photographer: Dhiraj Singh/Bloomberg)

Barely one in 18 companies undergoing liquidation have been fully dissolved under the process. And more than a third of the 914 such companies breach the statutory timeline of one year for dissolution under the Insolvency and Bankruptcy Code.

That’s according to the latest report of the Insolvency and Bankruptcy Board of India. Delays to liquidation can reduce the realisable value of such assets.

To address the issue, the bankruptcy regulator has proposed that liquidators must be allowed to assign the beneficial interest in these assets to third parties. Creditors, too, must be allowed to transfer their debts during liquidation and move on without awaiting the final sale.

The proposals, according to the analysts BloombergQuint spoke with, will ensure liquidation doesn’t kill a company’s assets and would create a new market for them.

Creating A Market For Illiquid Assets

As per law the liquidation process must be completed within one year and the resulting proceeds distributed as per the waterfall mechanism.

But in reality, creditors have to wait for years before they get any amounts against their claims. And while creditors are permitted to assign their claims or interests in favour of third parties at the resolution stage, such assignment is currently not permissible under the liquidation regulations.

The regulator has now proposed a course correction.

It has recommended assignment of illiquid assets like sundry debts, contingent, awaited or sub-judice receivables, which don’t have an element of certainty and can take an indefinite amount of time to be converted into cash. A liquidator may not have the required resources to pursue recovery of such not-readily realisable assets.

Further, such assets can extend the liquidation timeline, remain unsold, reduce the realisable value and deprive the creditors of their recoverable amounts.

And so, the IBBI has suggested that:

  • Liquidators be allowed to assign or transfer beneficial interest in illiquid assets in favour of any third party. Let’s say, a company under liquidation is locked in a property dispute that can fetch it a large sum in the future. But, as the case may remain pending for years, a liquidator can transfer the recoverable interest in such property to any person except those who are debarred from submitting a resolution plan under the IBC.
  • In case the liquidator sees a probability of recovery and wants to retain a partial interest in the transferred asset, he may enter into an agreement which would give him a share of the proceeds, known as a recompense arrangement.
  • Lastly, creditors can assign the debts due from the company in favour of a third party, so that it can quickly monetise its assets. Any assignee receiving such interest will replace the creditor in the NCLT’s records.

Enabling the liquidator to monetise actionable claims will assist in ensuring that liquidation doesn’t kill the asset of the corporate debtor, Mohit Saraf, senior partner at L&L Partners, said.

Monetising actionable claims or multiple pending arbitrations initiated by companies in liquidation will assist all stakeholders and ensure that winding up doesn’t kill the company’s assets. While solely money claims may attract value, it will be important to ensure how obligations of corporate debtor, which are attached to actionable claims, are taken care of so that appropriate value is ascribed to them.
Mohit Saraf, senior partner, L&L Partners.

For instance, company X owns a 50% stake in a manufacturing plant whose title is disputed. X is also legally bound to contribute a yearly sum for maintenance and upkeep of the plant as per the agreement with the other owner. If X’s beneficial interest in the plant is transferred by the liquidator, he will have to factor in the value of such contributions while arriving at the consideration for the beneficial interest.

The IBBI’s proposals will help create a niche market for actionable claims which emanate from liquidation proceedings, Ramakant Rai, partner at Trilegal, said.

Allowing creditors to transfer their debts and liquidators to assign a company’s beneficial interest would attract specialized players who have the wherewithal to eek out returns from actionable claims and disputed assets.
Ramakant Rai, Partner, Trilegal

Assignment of assets covered under avoidance, fraudulent, undervalued or extortionate credit transactions, which may remain under adjudication for an indefinite time, can be attractive both for creditors and companies if there’s a recovery potential in them, he said.