The Insolvency and Bankruptcy Code, 2016 (Code) that came into effect on December 1, is one of the most important economic reform projects to be implemented recently.
The Insolvency and Bankruptcy Code, 2016 (Code) that came into effect on December 1, is one of the most important economic reform projects to be implemented recently. The Code’s thrust on developing a framework for resolving insolvency has caught the imagination of the industry. However, the Code has, equally significantly, reformed how insolvent companies can be liquidated.
The purpose of liquidation is to provide a collective forum for creditors to maximise the money they can receive in repayment of debt when the company does not have a viable business. This is typically achieved by selling the company’s assets at the best possible value and distributing proceeds of such sale as efficiently as possible so as to preserve the value of assets and maximise returns to the creditors. Currently, liquidation in India is conducted by Official
Liquidators attached to High Courts. Official Liquidators are government servants, not market professionals, responsible for the liquidation of all the companies in a particular region. They are closely supervised by the High Courts, and are usually dependent on the High Courts for directions at every stage of the liquidation process.
This creates three problems—first, since courts can only expend limited time on these matters, the liquidation process gets severely delayed, which erodes returns to creditors and other stakeholders; second, arguably the Official Liquidators do not have adequate resources or expertise to run the liquidations of a variety of companies in an efficient way; and third, there are few incentives for courts and Official Liquidators to maximise returns to the creditors, with the main emphasis being on revival at any cost. Since the liquidation process has not been adequately market-oriented, we see that India’s performance on carrying out liquidations is extremely poor.
The Code seeks to change this. In this regard, the regulatory body for matters under the Code—the Insolvency and Bankruptcy Board of India—issued Regulations on Liquidation Processes on December 15. On first glance, the liquidation of companies under the Code follows a similar process to the one currently followed. Here too, the liquidator attempts to realise the assets of the company at the best possible value under the supervision of the National Company Law Tribunal. However, the Code and Regulations introduce innovations that are likely to improve liquidation processes significantly.
The Code puts the responsibility of conducting the liquidation process in the hands of private persons called insolvency professionals. In most cases, these professionals will be appointed by the creditors of the company (subject to confirmation by the Tribunal), based on their expertise and efficiency. These insolvency professionals will also charge fees that the creditors decide. If the creditors do not decide, the fee shall be based on a prescribed scale that rewards higher and faster returns. This makes insolvency professionals accountable to the market for their actions, and is likely to make the conduct of liquidation both market-oriented and result-oriented.
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Moreover, while insolvency professionals are to act under the supervision of the National Company Law Tribunal (NCLT), they are empowered to take commercial calls on their own and are not required to take directions from the NCLT. This is likely to speed up the process of liquidation considerably, and enable the liquidators to be more creative in the conduct of liquidation. In this regard, the Regulations provide mandatory standards for recovering debts, selling assets and distributing money to provide comfort to insolvency professionals to develop more market-oriented practices and produce better outcomes.
Finally, the Regulations also prescribe strict timelines to ensure that liquidation is conducted in a speedy fashion. In what is an unprecedented move, the liquidator is required to finish every liquidation in not more than two years. If he does not do so, his fee will reduce considerably and he will have to explain the reasons for the delay to the NCLT. An inefficient liquidator is also likely to go out of business if he fails to meet the market’s expectations.
The innovations in the Code and Regulations are quite well-intentioned, but it remains to be seen how they play out in practice. While the Regulations have several safeguards to prevent misconduct and abuse, the Insolvency and Bankruptcy Board of India must play a key-role role in ensuring compliance with the requirements such that unprofessional conduct on part of such highly empowered insolvency professionals does not go unpunished.
By- Shreya Prakash
The author is a research fellow, Vidhi Centre for Legal Policy