The Discussion Paper On The Corporate Liquidation Process Under Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Board of India or for short known as the IBBI in the discussion paper which was dated on 26th August, 2020 asked for comments on 2 issues. Those issues were:

1. The determination of corpus of liquidation estate
2. The entitlement of stakeholders so that the new regulations are brought into play.

Moving forward, a new concept of NRRA has been included in this discussion paper. This NRRA mentioned here stands for Not Readily Realisable Assets. NRRA are the assets which have indefinite waiting time & are not easily realisable (looking at the ability & time for these assets to be realised). These assets generally fall under the category of sundry debtors, which includes the refunds from Government & its agencies in the form of different refunds like contingent receivables, disputed receivables, disputed assets, assets underlying avoidance transactions, and etc.

According to the Regulation 44(1) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 or in other words called as the ‘Liquidation Regulations’, the liquidator has to liquidate the corporate debtor within a time period of one year from the commencement date of the liquidation process, but the non-realisation of NRRA (Not Readily Realisable Assets) always ends up stumbling the whole procedure and interrupts the timely completion of liquidation process since these assets are not ready to realised. And as the time passes, not only the value of the assets depreciates but also the liquidation cost also increases over that passage of time in terms of Security, Legal expenses, and etc. This goes against the fundamental objectives of the code which was to maintain a proper time limit under which the realisation of maximum value of assets should be done. The Bankruptcy Law Reforms Committee or for short known as BLRC which conceptualised that the above mentioned code was already aware of it & therefore proposed that the liquidator with the permission of adjudicating authority should close down the case right there & create a trust whereas any of the net realisation received from contingent assets will be deposited & subsequently be then distributed to the stakeholders. One thing that is relevant to note is that the Regulation 38(1) of the Liquidation Regulations also provides the stakeholders with the distribution of asset with the permission of the Adjudicating Authority.

Now what happened next was that the IBBI invited the public to comment on the newly proposed regulations whereas the NRRA is to be assigned as per given options. These options were as follows:

1. Option I: Absolute Assignment of NRRAs

This very first option available according to the regulation states that the assignment of the NRRAs will be absolute and the assignee or the party to whom the assets are assigned by the assignor who in this case is the liquidator, would now have complete right over all the assigned assets & any other action related to them. In this assignment, the transfer of all the legal rights, remedies and power will take place in order to bring the action to an end by complete settlement and without any interference from the liquidator who is the assignor carrying out this assignment.

2. Option II: Assignment with the Recompense Facility

This second option will allow the liquidator to assign the assets with an initial price and any subsequent net recovery will be shared between the assignee & the assignor of the assignment as per its terms.

However, these assignments are subject to some conditions. Those conditions are as follows:

1. The assignor of NRRA should not be disqualified as under Section 29A of the code.
2. The Liquidator who is the assignor is supposed to consult with the Stakeholders Consultation Committee (SCC) for their advice, but their advice will not be binding him in anyway as per Regulation 31A of the Liquidation Regulations. However, the liquidator will have to record the reasons in writing for having contrary views on topic as compared to the advice he received from the SCC.
3. The Liquidator must also follow all usual laid down rules, regulations, & principles like acting in the best interest, maximization of value, assignment through an action, following Section 29A, and etc.

The IBBI also mentioned in their paper of the similar best international practices that the law doesn’t prohibit this kind of assignment according to the various rulings set by various apex courts in other statues & interpretation of Section 5(7) of the Code. However, the IBBI still wished to explicitly provide the same by incorporating the new Regulations of 30A & 38A. The IBBI also feels that after the amendment was done a market may also develop where all the NRRA can be bought.

In the background of all this happening, an author being an insolvency professional in IBC practice offers the following comments when the IBBI asked for them in the public:

1. The thought process behind asking the public for commenting is a welcoming step from the IBBI in consonance with opinion of honourable Apex Court in other statutes and best International practices. However, all these ruling are already present in the definition of Section 5(7) of the Code and a financial creditor is to mean any person to whom a financial debt is owed & includes a person to whom such debt has been legally assigned to or transferred to (emphasis on the part of getting it assigned instead). Is there a need for us to separate the regulations as more regulations give rise to interpretational issue which always results in more litigation grand scheme of things overall?
2. At the present time, liquidator although without any success with the consent of SHC (Supreme High Court) trying to recover money by assignment of debts. We should understand that according to the present economic conditions most of the markets are buyer markets & have buyers like ARC (Asset Reconstruction Companies) who are willing to invest money in the NRRAs, especially for contingent asset which comes pursuant to Section 43 to 66 of the Code. I am afraid to say that there’s no such market & all these provisions shall remain good on paper only. The regulator has to come out with the scheme for creation of such companies like Information Utility or for short know as I.U. who should be readily available as buyer to prospective assignor (Liquidator) as exists in developed economies of countries like the UK, USA, Australia, and etc.
3. According to the proposed Regulation 38 A (2), a NRRA can be assigned with a recompense arrangement. In case of a recompense arrangement, the money shall come after dissolution of CD has been done accordingly in relation to Section 55 and then the regulation must provide the mechanism for keeping that money in an escrow account which shall be jointly operated by the assignee & the assignor. This is also in consonance with the BLRC (Bankruptcy Law Reforms Committee) report.
4. Liquidator shall assign NRRA at a definite price to the assignee. However, the price of goods in the buyer’s market is determined by buyer at the time of buying which may subsequently change on realisation as all these assets are subject to huge uncertainties in their prices, for example in case of favourable court order against fraudulent transaction by promoter, huge recoveries may come or in case of unfavourable court order there may be Nil recovery. If amount of realisation which is substantially on the higher side, then the regulator will always see the NRRA assigned prices with suspicion. The proposed regulation must also provide an inherent mechanism to safeguard the liquidator or valuers who acted in good faith from any blame against them.
5. According to the proposed Regulation 38 A (1), the concept of beneficial interest which is perhaps an equivalent to the concept of NRRA has been explained with inclusive definition. It is very strange that the discussion paper talks at length about NRRA but uses the words “beneficial interest” in the proposed regulation. Respectfully, it is necessary for the IBBI to clarify this aspect of the discussion paper because according to the discussion paper, assets which are not easily realisable and have indefinite waiting time qualifies only as NRRAs which in the grand scheme of things are not at all defined in the beneficial interest. I am afraid to say that the Courts later on including all the assets of liquidation estate as beneficial interest is against the discussion paper & BLRC report.

And these were the comments which were left by the insolvency professional on the discussion paper about the corporate liquidation process under IBC, 2016. As a professional, we can see that he has already the read and covered all the topics in the discussion paper and based on his knowledge it seems that he makes some valid points. If it is correct to assume that the constructive criticisms from the above mentioned comments are true & are needed for better and effective results, then the IBBI should definitely take these comments into account and make changes if possible depending on the whole situation so that they receive better results in return.