Bankruptcy regulator seeks to fix flaws in liquidation process

In the five years since India’s bankruptcy code came into force, almost every third company admitted for resolution has faced liquidation.

The number of companies liquidated is more than three times the number where a resolution plan was worked out. A higher level of liquidation is possible because most distressed companies admitted for resolution had turned defunct or ceased operations years ago.

The trend appears to go against the primary objective of the Insolvency and Bankruptcy Code, 2016, which is insolvency resolution. Only upon failure of the corporate insolvency resolution process to yield a resolution plan does the liquidation process commence.

With the role of the liquidator assuming importance in the corporate insolvency process, the regulator has decided to streamline gaps in the code by proposing changes to make them more accountable.

The proposals include asking liquidators to state the reasons for rejecting the highest bid for a company; banning the engagement of commission agents in the sale of a stressed company’s assets, and a mandatory consultation with the committee of all stakeholders for all significant matters, including the appointment and remuneration of professionals and the sale of assets.

The suggestions are part of a discussion paper titled ‘Strengthening Regulatory Framework of Liquidation Process’ released by the Insolvency and Bankruptcy Board. Comments on the proposals have been sought until September 17.

The regulator proposed that a clarification be inserted in the ‘Liquidation Regulations’ to explicitly require the liquidator to inform the highest bidder why its bid in the auction was rejected.

Unnecessary provision?

The proposal to seek reasons from the liquidator for rejecting the highest bid was unnecessary because, in most instances, the liquidator does not reject such a bid, a resolution professional who was involved in some large insolvency cases told Moneycontrol.

“In any case, there is a reserve price below which the liquidator will not accept the bid, so this provision appears unnecessary,” he said.

The regulator said the appointment of commission agents for the sale of assets increases the burden on the liquidation estate, in addition to amounting to the overlapping of work with the liquidator and must be avoided.

Such agents are paid a percentage of the realisation from the assets and since the fee charged by the liquidator is fixed beforehand, this payment becomes an additional burden.

Again, the proposal may not find favour with many insolvency professionals because it would increase their workload without a commensurate increase in their remuneration and it could fuel a parallel underground market for commission agents.

Wider consultations

Other proposals include a larger role for the stakeholder consultation committee in the liquidation process. This committee comprises all classes of stakeholders of a stressed company and it is currently not mandatory for a liquidator to consult the stakeholders before liquidating the assets.

The board highlighted the case of PC Gaggar, Liquidator vs Multichemical Industries, where the liquidator applied for dissolution without forming the committee despite the existence of five operational creditors and promoters/shareholders of the company.

The National Company Law Tribunal asked the liquidator to form the stakeholder committee before coming back to it for dissolving the distressed company.

The IBC was introduced in 2016 with the aim of helping financial creditors of stressed businesses recover part of their dues. The code has since led to the resolution of some high-profile bankruptcy cases but continues to face criticism for inherent flaws. Not only has liquidation been greater than resolution, there have also been inordinate delays in the process.

As many as 1,264 cases have dragged on for more than 270 days, the deadline to conclude resolution, according to IBBI data. This means almost every third ongoing case is delayed.

The average time taken in the resolution of 396 cases as of June this year was 482 days. The time taken to pass orders for liquidation in 1,349 cases was 362 days.

Now, after a rap from the Parliamentary Standing Committee on Finance about various flaws in the code, the IBBI has started proposing changes to the way the IBC process has worked so far. Along with more transparency from liquidators, it has proposed regulatory oversight for the all-powerful committee of creditors.

As of now, most other participants in the insolvency process including resolution professionals, valuation professionals, and liquidators are under regulatory oversight. The CoC is a panel of all a stressed company’s financial creditors, each of which is assigned a voting share on the basis of debt owed.