The Insolvency and Bankruptcy Board of India’s (IBBI) suggested changes to liquidation regulations, if implemented, could help banks maximise recoveries in a time-bound manner, said at least six bankers and legal experts Moneycontrol spoke to on June 23.
“The proposed amendments are possibly a solution to practical difficulties faced in the liquidation regime and the failure to achieve the timelines,” said Sushmita Gandhi, partner, IndusLaw. “It is a genuine attempt to fill those gaps to work out a comparatively efficacious regime.”
“The amendments hold a strong potential for reducing banks’ haircuts by imposing stricter timelines for the completion of the liquidation process,” Gandhi added.
Liquidation is the process of monetising a company’s assets, and using those funds to repay the company’s debts. The liquidation process starts in case the insolvency resolution process fails or the committee of creditors (CoC) decides to liquidate the company at any time during the insolvency process.
What are the proposed amendments?
In a 15-page discussion paper released on June 14, the IBBI said that the goal of a time-bound liquidation process in India is yet to be achieved. To reduce delay by further streamlining the process, the IBBI has proposed a slew of regulations with an aim to provide a better monitoring framework of the liquidation process and prescribe a timeline framework for auction of assets.
Under the proposed changes, the IBBI has said that a CoC may act as a stakeholders’ consultation committee (SCC). The latter works as a monitoring mechanism for liquidation, and is typically set up within 60 days from the date of commencement of liquidation.
It is also proposed that creditors can now replace the liquidator, by a majority vote not less than 66 percent, in case his conduct is not satisfactory.
Further, the IBBI has proposed that the CoC, in its last meeting, may decide whether it would explore a compromise or arrangement when the liquidation is proposed. If so, the CoC will use the time taken by the adjudicating authority for exploring a compromise or arrangement.
“Since this time will also be available with the members of CoC who are also members of the initial SCC, time of 90 days given for concluding compromise or arrangement is proposed to be reduced to 30 days,” the IBBI said.
The IBBI has sought public feedback on the proposals by July 5.
“The proposed amendments, though they would not vastly impact the resolution process, would still strengthen the position of the creditors and secure them,” said Sonam Chandwani, managing partner, KS Legal and Associates. “If the creditors manage to secure a strong place despite being in an advisory position, it could surely reduce the extent of a haircut for banks.”
What do the numbers tell us?
As per data available with the IBBI, 1,666 corporate insolvency resolution processes ended up with an order for liquidation as on May 31. Out of these, liquidators submitted final reports in compliance with the adjudicating authority only in 346 cases. These cases took an average completion period of 471 days. The completion period has been increasing steadily from 2018.
Further, out of 1,320 ongoing liquidation cases, almost half have already crossed two years. The law requires that the liquidator should liquidate the corporate debtor within a period of one year from the liquidation commencement date.
Such an inordinate delay compromises the objective of the Insolvency and Bankruptcy Code (IBC) to maximise recoveries for creditors as the value of assets declines with time.
“The proposed amendments would definitely make the entire process more transparent and accountable leading to the maximisation of the value of the assets of the corporate debtor by cutting down the timeline for completing the entire liquidation process,” said Sandeep Bajaj, managing partner, PSL Advocates & Solicitors.
If the liquidation regulations are amended thereby making advice of the stakeholders binding upon the liquidator, it will lead to greater accountability, Bajaj added.
Bankers agreed with Bajaj’s view.
“Banks already brace themselves for a large haircut when a company is admitted into the insolvency process and ultimately liquidation. The proposed amendments, if implemented, will go a long way in empowering creditors and realise the best value of assets,” said a banker with a state-run bank on condition of anonymity.
Key lies in implementation
Experts said that the IBBI appears to be inclined to put more checks and balances to regulate the conduct of the liquidators who currently have more flexibility to make decisions. It could also give more power to creditors in the liquidation process.
However, the key lies in implementation. In the current scenario, banks are forced to opt for liquidation given the long-drawn legal process and the tepid bidding appetite of suitors following the COVID-19 pandemic. Strict timelines prescribed under the IBC, multiplicity of cases and lesser number of tribunals have increased the backlog of cases.
“Although the extent of the haircut depends on a case-to-case basis, some increase in recoveries is expected, albeit all will depend on execution,” said another banker at the stressed asset department of a state-run lender. “While the proposals seem excellent on paper, the implementation and execution part will be key.”
According to Kumar Saurabh Singh, partner at law firm Khaitan & Company, the IBBI should also consider engaging more with the National Company Law Tribunal (NCLT) so that the timelines prescribed by it are not diluted through the tribunal’s orders. Most NCLT orders tend to lean towards equity rather than adherence to strict timelines, Singh said.
As far as the reduction of time frame from 90 days to 30 days for concluding compromise or arrangement is concerned, it seems really difficult as putting all the pieces together within 30 days may not be practical, said Ajay Shaw, partner at DSK Legal.
“In fact, where sale of assets has not happened despite several attempts, it may be advisable to put the entire assets in trust for the benefit of the stakeholders as per the waterfall under Section 53 (where as and when the assets are monetised the amounts can be distributed basis the pre-agreed waterfall) and formally liquidate the corporate debtor,” added Shaw.A waterfall provision sets out the economic consequences of an investment or the business deal among parties.