Almost every third firm admitted for resolution has faced liquidation in the five years after India's bankruptcy legislation went into effect. The number of firms that have been liquidated is more than three times the number of companies that have worked out a resolution plan. Because most troubled firms admitted for resolution have gone bankrupt or discontinued operations years ago, a greater level of liquidation is conceivable. The current tendency appears to be at odds with the principal goal of the Insolvency and Bankruptcy Code of 2016, which is to resolve insolvency. The liquidation procedure begins only if the corporate insolvency resolution process fails to provide a resolution plan.
Given the importance of the liquidator's position in the corporate insolvency process, the regulator has chosen to close loopholes in the law by recommending amendments to make them more accountable. The proposals include requiring liquidators to state their reasons for rejecting the highest bid for a company; prohibiting the use of commission agents in the sale of a stressed company's assets; and requiring all significant matters, such as the appointment and remuneration of professionals and the sale of assets, to be discussed with a committee of all stakeholders.
The recommendations are part of an Insolvency and Bankruptcy Board discussion paper titled "Strengthening Regulatory Framework of Liquidation Process." The ideas are open for public comment through 17 September.
The regulator suggested that a clarification be added to the ‘Liquidation Regulations,' requiring the liquidator to expressly notify the top bidder why their bid was rejected in the auction.
According to a resolution expert who has worked on several big insolvency cases, the idea to ask the liquidator for reasons for rejecting the highest bid was superfluous because, in most situations, the liquidator does not reject such a bid. “In any event, the liquidator will not accept an offer below a reserve price, so this provision looks unnecessary,” he added. According to the regulation, appointing commission agents to sell assets adds to the load on the liquidation estate, as well as overlapping work with the liquidator, and should be avoided.
Such agents are paid a proportion of the assets' realization, and because the liquidator's fee is determined in advance, this payment becomes an extra hardship. Again, many insolvency experts may object to the idea since it would increase their workload without increasing their pay, and it may create a parallel underground market for commission agents. Other ideas include giving the stakeholder consultation group a bigger role in the liquidation process. This committee is made up of all types of stakeholders in a stressed firm, and it is presently not required that a liquidator contact the stakeholders before selling the assets.
The board cited the case of PC Gaggar, Liquidator v. Multichemical Industries, in which the liquidator sought dissolution without creating a committee despite the fact that the business had five operating creditors and promoters/shareholders. Before dissolving the troubled business, the National Company Law Tribunal ordered the liquidator to create a stakeholder group.
The IBC was established in 2016 with the goal of assisting financial creditors of distressed firms in recouping a portion of their debts. Although the code has resulted in the resolution of a number of high-profile bankruptcy cases, it continues to be criticized for its faults. Not only has liquidation outpaced settlement, but the process has also been plagued by excessive delays. According to IBBI data, 1,264 cases have dragged on for more than 270 days over the date for settlement. Almost every third ongoing case will be postponed as a result of this.
As of June of this year, the average time it took to resolve 396 cases was 482 days. In 1,349 cases, it took 362 days to pass orders for liquidation. The IBBI has begun suggesting modifications to the way the IBC process has operated in the past, following a rap from the Parliamentary Standing Committee on Finance about several faults in the code. It has suggested regulatory supervision for the all-powerful committee of creditors, as well as increased openness from liquidators. Most other insolvency process players, such as resolution experts, valuation professionals, and liquidators, are currently regulated. The Committee of Creditors (CoC) is a group of all a stressed company's financial creditors, each of whom is given a voting share based on the amount of debt outstanding.