While the Insolvency and Bankruptcy Code, 2016 (code), stipulates that the liquidation of a corporate debtor must be completed within one year from its commencement date, most liquidations continue beyond that period. Among other reasons attributable to such a delay, the Insolvency and Bankruptcy Board of India (IBBI) has taken special note of not readily realizable assets (NRRAs) in its discussion paper of 26 August 2020. Accordingly, the IBBI has in the discussion paper, proposed amendments to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (liquidation regulations), to ensure the timely completion of the liquidation process and to avoid loss of value on realization.
The IBBI noted that there are assets which are not easily realizable in a reasonable time frame. Such assets have been described as NRRAs in the discussion paper, which include refunds from the government and its agencies, contingent receivables, disputed receivables, sub-judice receivables, disputed assets, and assets underlying preferential, undervalued, extortionate and fraudulent transactions as defined in the code.
Due to its very nature, liquidators face challenges in realizing the value of NRRAs as liquidators are not able to arrange funds to institute and maintain legal proceedings because creditors are not willing to fund such proceedings. Hence, the IBBI has proposed that the liquidator should be allowed to assign NRRAs to third parties. The assignees of such NRRAs will then fund the legal proceedings in order to realize their value. The rationale for the proposed amendment seems to be that liquidators may assign these assets to realize value and to complete the liquidation process within the timelines in the code as far as possible. The prospective assignees are likely to be entities that will be able to bear the costs of maintaining the legal proceedings and realizing the value of NRRAs. They should be able to conclude these processes at a lesser cost and in a shorter time than the liquidator could achieve because of their expertise and through economies of scale. The assignees would aim to recover a net value greater than the amount they paid the liquidators for the assignment of the NRRAs.
It is proposed that these assignments may be undertaken by way of public auction or, if not feasible, by direct purchase at arm’s length. Such assignments may be absolute or include recompense conditions. The liquidator while making the assignment of NRRAs will be subject to certain reasonable checks. Where the potential assignee is not eligible under section 29A of the code, the liquidator will not be permitted to assign the NRRAs to such assignee.
In the process of such assignment, the liquidator shall seek maximization of the value of the liquidation estate and shall take into consideration the non-binding advice of the stakeholders’ consultation committee (SCC) constituted under regulation 31A of the liquidation regulations. The proposed amendment mandates that if the liquidator takes any decision that is contrary to the views expressed by at least 66% of the SCC he shall record the reasons in writing for that decision and mention it in any subsequent progress report or final report submitted to the adjudicating authority. The IBBI has also proposed an amendment to the liquidation regulations to allow early exit to creditors who cannot wait for the completion of the liquidation process or who are in urgent need of liquidity. During the liquidation process creditors will be permitted to assign debts due to them provided that they and the assignee furnish the terms of such assignment or transfer and the identity of the assignee or transferee to the liquidator. The IBBI has taken into consideration creditors with low financial capacity who may wish to get the amounts due to them urgently rather than wait for distribution of the realized funds under the waterfall mechanism provided in section 53 of the code. This amendment may benefit many stakeholders initially but they may lose out on possible higher pay-outs under the waterfall mechanism.
In conclusion, the IBBI has acknowledged in the discussion paper that time is of the essence in the liquidation process by enabling the assignment of NRRAs by the liquidator and the assignment of debts by creditors. This is also an attempt to align the liquidation provisions with best international practices. However, the IBBI has also acknowledged that the market for the assignment of such NRRAs will develop over a period of time and it therefore remains to be seen whether liquidators will be able to find any takers for NRRAs. After the amendment, third-party litigation funding is expected to gain momentum. Also, it would be interesting to witness a new line of funding products and structures around the assignment of NRRAs in times to come.
Satish Anand Sharma is a senior associate and a qualified insolvency professional, and Aniket Sawant is an associate at SNG & Partners.
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