The Insolvency Bankruptcy Board of India has issued a discussion paper on amendments to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017.
Review of Auction Framework
| The existing provisions result in: |
| Prospective bidders effectively get only 14 days to participate in the auction. |
| Liquidators spend a significant amount of time verifying/ inspecting the eligibility of all bidders. |
| Possibility of collusion between liquidator and bidders. |
| Exercise of discretion of a single person, i.e., liquidator in rejecting the highest bidder even when the bid is above the reserve price instead of the collective wisdom of stakeholders who are the real beneficiaries of proceeds of the process. |
The discussion paper proposed allowing the prospective bidders in the auction process on the basis of an affidavit/declaration of their eligibility under section 29A.
Compromise or arrangement
Suggesting a case wherein the liquidator finds that a prospective bidder has submitted a wrong affidavit of being section 29A compliant, then apart from losing the right to participate in the auction, the EMD shall stand forfeited.
The provision for forfeiture of EMD will act as a deterrent and ensure that only serious and eligible participants enter the bidding process.
The discussion paper notes that, since bidders, a priori, would be careful in submitting correct information, the possibility of forfeiture of EMD would be rare and as the liquidator will consult the SCC before effectuating the forfeiture, the possibility of misuse of this proposed provision will be insignificant.
Further proposing that in case the highest bid above the reserve price, is being rejected by the liquidator, for any reason, consultation with SCC shall be mandatory.
The discussion paper highlighted that issue related to no specific provision related to the closure of the liquidation process by the submission of the final report and compliance certificate to the adjudicating authority in cases where the corporate debtor is sold as a going concern.
The paper proposed the liquidator file the final report along with Form H whenever an application for approval of a scheme under section 230 of the Companies Act, 2013 is submitted.
The objective is to enhance oversight, transparency, and accountability in the liquidation process. Further suggesting that Implementing this measure will improve the regulatory framework and ensure that all stakeholders are adequately informed.
To address the challenge related to IBBI’s managing of the funds through separate bank accounts in a scheduled bank as an interim measure, and with the corporate liquidation account in Public Accounts of India not being operationalized yet.
The Paper proposed that the IBBI may be allowed to operate and manage the Corporate Liquidation Account permanently, and the requirement of having the Corporate Liquidation Account within the Public Accounts of India (PAI) may be dispensed with.
Uncalled Capital or Unpaid Capital Contribution
The discussion paper proposes Regulation 33 be amended to provide for the completion of the process even if there is uncalled capital. The current regulation already protects the rights of secured creditors by stating that any uncalled capital realized by the liquidator is subject to the rights of holders of charges or encumbrances.
This means that even if there is uncalled capital, creditors with legal claims on the company’s assets are prioritized and their interests are protected before any distribution to shareholders.
“The proposed amends as per the discussion paper relate to the liquidation process and the voluntary liquidation process will have a far-reaching impact on the mechanism in which these cases are being handled at present,” said Jyoti Prakash Gadia, Managing Director at Resurgent India
The chief criticism of the IBC mechanism primarily underscores the undue delays and the excessive haircuts involved in the resolution process . These are partly proposed to be addressed through the proposed amendments.Jyoti Prakash Gadia, Managing Director at Resurgent India
The Board accordingly solicits comments on the proposals discussed above. The discussion paper was issued in pursuance of Regulation 4 of the Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations) Regulations, 2018.
The comments are invited electronically by December 9, 2024.
