Bankruptcy Commission tightens noose around IBC liquidation process

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In June of this year, 4,541 troubled companies were taken to bankruptcy courts. Of this total, 2,859 resulted in insolvency proceedings. Almost 47% of these closures took place through liquidation.

Given the high number of insolvencies that end in liquidation, the Insolvency and Bankruptcy Board of India wants to further strengthen the process. To this end, the IBBI has made several important proposals for the liquidation process:

  • Swiss Challenge as a mode of auction.

  • Empower the stakeholder consultation committee.

  • Fight the deadlock between secured creditors.

  • Make pre-offer qualifications less stringent.

  • Except commission agents.

Prompted by the Delhi High Court’s suggestion in the Amira Pure Foods case, the IBBI asked stakeholders if it was justified to mandate Swiss Challenge as an auction method under the liquidation regulations.

Here’s how a Swiss Challenge works: A preferred bidder makes an unsolicited bid. Once approved, the auctioneer searches for counter-proposals against the initial bid and chooses the best of all the options. In most cases, the original bidder is granted the “right of first refusal”. If the original bidder agrees to match the highest bid, the project or asset is awarded to them. Otherwise, it goes to the highest bidder.

Currently, the regulations do not specify an auction method. Thus, the liquidator can sell assets through an English auction, a sealed auction, a Dutch auction, a Swiss challenge, etc. as long as the process is transparent, leads to maximum realization and favors the interests of creditors.

The Swiss Challenge method may raise concerns about transparency: which should be the preferred auction? To overcome this obstacle, a two-step bidding process may be necessary: ​​first to arrive at a preferred bidder; and second, for the Swiss Challenge. This can lead to increased costs and time.

Thus, the regulator asked stakeholders whether it is necessary to specify an auction methodology under the law and whether Swiss Challenge is the best available option.

Currently, the law obliges liquidators to consult the stakeholder consultation committee. It is similar to a creditors’ committee that is formed during insolvency, but its recommendations are not binding on the liquidator.

This leads to ineffective participation, information asymmetry, lack of accountability and sometimes even abuse of the process, the IBBI pointed out.

Thus, he proposed a mandatory consultation of the liquidator with the SCC on all important matters, including the appointment of professionals, their remuneration, the sale of assets, etc. Based on the share of votes, stakeholders from each category may be allowed to participate in the consultation. Committee.

Under the Insolvency Code, the liquidator disposes of all the assets of the company, except those in which the lenders have provided security and have not waived this interest in favor of the liquidator.

Lenders can either sell the assets guaranteed to them themselves or waive the collateral and allow the asset to form part of the general patrimony. Secured creditors must transmit this decision within 30 days of the start of liquidation.

But when more than one secured creditor has an equal charge on an asset, liquidation processes are delayed, the IBBI noted.

Some secured creditors with a relatively smaller share in the value of the secured debt have decided not to forfeit the security. While the remaining secured creditor holding the majority of the portion of the secured debt has decided to waive its interest.

Thus, the IBBI proposed that if the secured creditors holding 60% of the value of the secured debt decide to waive or realize the security, this decision will be binding on the other holders of pari-passu charges.

The law allows private auctions as an eligible mode of sale of assets during liquidation.

In a few liquidations, unreasonable pre-offer qualifying conditions such as exorbitant down payment, non-refundable participation fees, among others, have been imposed. These negatively impact the extent of participation in the auction, which is reflected in the realization of the assets, the IBBI said.

Thus, he proposed to prohibit the collection of any fees or non-refundable deposit from potential bidders and to provide that only up to 10% of the reserve price of the asset can be set as a down payment.

Insolvency law allows a liquidator to appoint marketing professionals to design a marketing strategy to maximize the value of assets when sold.

But, according to IBBI, agents are often hired on the basis of commissions or success fees. And paid as a percentage of the realization of assets. This creates an additional charge on the liquidation asset.

To remedy this, the regulator proposed to explicitly ban the appointment of agents or professionals for the sale of assets during the liquidation process, based on commissions or success fees.

Finally, to address the issue of arbitrary rejection of the highest bids, the IBBI proposed that liquidators be required to provide reasons.


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