By Sikha Bansal
The Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 (“Amendment Regulations”) and introduced major changes in the existing law. Majority of the amendments are curative, therefore, intended to resolve practical difficulties arising in liquidation proceedings as have been experienced so far.
The note below discuss salient features of the amendments, regulation-wise. Read also, Liquidation Regulations: Wide-ranging, far-reaching changes to make liquidations faster, smoother, by Mr. Vinod Kothari.
1. Date of enforcement
The Amendment Regulations shall come into force from the date of their publication in the official gazette, which is 25th July, 2019 (“date of enforcement”).
While the amendments would be clearly applicable to liquidation proceedings commencing on or after the date of enforcement of the Amendment Regulations; the applicability and manner of application of the Amendment Regulations on the ongoing proceedings need to be assessed.
Given the curative nature of amendments, it would be reasonable to apply the amendments to ongoing proceedings as well; as is also evident from the fact that the Amendment Regulations carve out exceptions wherever needed (e.g. regulation 4).
2. Regulation 2(1)(ba) – Definition of consultation committee
Section 35(2) empowers liquidator to consult such stakeholders who are entitled to distribution of proceeds, and it explicitly provides that the consultation shall not be binding on the liquidator.
The regulations, while maintaining the non-binding nature of the consultations, calls for constitution of a ‘consultation committee’ of stakeholders, which shall be constituted in the manner described in the Amendment Regulations – see notes below.
3. Regulation 2(1)(ea) – Expanding the scope of liquidation cost
The definition of “liquidation cost” has been expanded.
The liquidators have to incur several costs on ongoing basis to run the liquidation proceedings. These were simply ‘operational costs’ during liquidation period, which were to be paid from the liquidation estate. However, the earlier definition of liquidation cost was too narrow – thereby, not including such operational costs. As such, there was lack of clarity as to how such operational costs be accounted for.
The Amendment Regulations, by amending the definition of liquidation cost, includes all such costs as may be incurred by the liquidator for completing the liquidation process. Therefore, the liquidation cost shall be determined accordingly.
This will also impact the computation of liquidator’s fee, as the net realisation on which liquidator’s fee is computed under regulation 4 will also stand reduced. In our view, the amended definition of liquidation cost will apply to computation of liquidator’s fee in ongoing liquidation proceedings, although regulation 4 will apply as it stood before amendment – see our notes below.
Liquidation cost, as it has been clarified, shall not include the costs incurred in relation to compromise or arrangement under section 230 of the Companies Act, 2013 – such costs are to be incurred by the corporate debtor (where scheme is sanctioned by the Tribunal) or by the parties proposing the scheme (where scheme is not sanctioned by the Tribunal).
4. Regulation 2A – Contribution to liquidation cost by financial creditors
The amendment has to be read in synchronization with the newly inserted regulation 39B of the CIRP Regulations (inserted vide amendments w.e.f. 25.07.2019).
Regulation 39B of the CIRP Regulations provides for meeting liquidation cost. While approving a resolution plan or deciding to liquidate the corporate debtor, the committee of creditors may make a best estimate of the amount required to meet liquidation costs, in consultation with the resolution professional, in the event a liquidation order is passed by the adjudicating authority. The committee of creditors shall also make a best estimate of value of the “liquid assets” available to meet the estimated liquidation costs. In case there is a deficit in meeting the estimated liquidation costs, the committee of creditors shall also approve a plan “providing for contribution for meeting the difference between the two”. Such plan is to be submitted by the resolution professional to the adjudicating authority along with the submission of resolution plan or decision of committee of creditors to liquidate the corporate debtor.
Regulation 2A of the Liquidation Regulations, shall be read in continuation of Regulation 39B of the CIRP Regulations. Regulation 2A will apply by default when the committee of creditors did not approve a plan (as under regulation 39B) for meeting the liquidation costs. In such a case, financial creditors (that too, only financial institutions) shall be required by the liquidator to contribute for the deficit, in proportion to the financial debts owed to them by the corporate debtor. The contribution is to be deposited by the liquidator in a designated escrow account in a scheduled bank, within 7 days of the liquidation order. Such contribution is also eligible for interest at bank rate, and shall be repaid as part of liquidation cost.
(i) There is no specification as to what comes under “liquid assets” (neither under CIRP Regulations, nor under Liquidation Regulations) – therefore, in our view, the same may be taken to be cash and bank balances and expected cash flows during liquidation (say, where the corporate debtor gets regular income in the form of dividends, interest, rents, etc.);
(ii) The contributories are financial creditors, that too, only financial institutions. Therefore, a financial creditor, which is not a financial institution, may not be required to make a contribution, inspite of being highest in priority order u/s 53;
(iii) Financial creditors may be secured or unsecured – there is no specification. However, in general, since the contributory is a financial institution, it would be a secured creditor;
(iv) Though, not treated as interim-finance, the contributions made by the creditors being contributed towards liquidation costs are to be paid in priority alongwith interest. The tenure of interest shall be from the date of contribution to the date of repayment, in the absence of any provision in the Amendment Regulations;
(v) Such contributions cannot be used for costs incurred in relation to compromise or arrangement u/s 230 of the Companies Act, 2013;
(vi) Notably, such contributions cannot be attached in any recovery proceedings (by ED, etc.) as these are not assets of the corporate debtor.
5. Regulation 2B – Compromise or arrangement post liquidation order
Several NCLAT Rulings facilitated compromise or arrangement under section 230 of the Companies Act, 2013 even after liquidation order being passed under section 33 of the Code. There had been no explicit enabling provision under the Code or the Regulations for such compromise/arrangement.
The Amendment Regulations insert regulation 2B in the Principal Regulations to provide for compromise and arrangements post liquidation order – though the window of 90 days seems to be short. Such time shall not be included while determining the liquidation period (which has now been capped to 1 year).
The costs of such compromise/arrangement shall be borne by the corporate debtor (where the scheme is sanctioned by the Tribunal), or by the parties proposing the scheme (where the scheme is not sanctioned by the Tribunal).
The liquidator’s fee for such period may be fixed by the committee of creditors (refer, newly inserted regulation 39D of the CIRP Regulations), or otherwise, shall be at the same rate as resolution professional was entitled to during the corporate insolvency resolution process.
The Amendment Regulations are silent on whether persons ineligible under section 29A can propose a compromise/arrangement – the answer may evolve gradually with judicial intervention.
As to detailed logistics or procedure, one will have to follow the provisions of the Companies Act, 2013 and the relevant rules framed under the Companies Act, 2013 – however, given that there is no maximum time limit imposed under the Companies Act, 2013 for completion of the process, there might be anomalies/gaps in implementation of the process under the Code.
6. Regulation 4 – Liquidator’s fee
As evident, the manner of computation of liquidator’s fee will change because of the following –
(i) Introduction of provisions relating to compromise/arrangement – The liquidator will get fee at the same rate as the resolution professional was getting during corporate insolvency resolution process;
(ii) Reduction in liquidation period from 2 years to 1 year – The third column relating to “next 1 year” has now been skipped. However, the slab as was existing before the Amendment Regulations shall continue to apply to ongoing liquidation proceedings.
(iii) Change in the scope of liquidation costs – Net realisation on the basis of which liquidator’s fee is calculated, will now be lesser than before. This interpretation, in our view, should apply to ongoing liquidation proceedings as well – as there is no retention clause with respect to definition of liquidation cost.
7. Regulations 12 and 16 – Submission of claims vs. updation of claims during liquidation
The stakeholders can now “update” their claims, if they have submitted the same during corporate insolvency resolution process. However, it seems inevitable that even updation would need submitting a formal proof, as amendment in regulation 16 clearly requires that a person shall prove its claim as on the liquidation commencement date.
8. Regulation 21A – Relinquishment of security interest & Proportionate sacrifice for workmen claims
The Amendment Regulations have come up with 2 notable amendments –
(i) The decision of relinquishment, if the secured creditor decides to do so, shall be intimated along with the claim (that is, within 30 days of public announcement) submitted in the form itself;
(ii) The secured creditor, if decides to realise the security, shall have to forego the value realized from security interest, in favour of – (a) insolvency resolution process costs and liquidation costs, and (ii) workmen dues for 24 months preceding the liquidation commencement date, in proportion of the amounts due as such. This seeks to bring back the proviso to section 529 of the Companies Act, 1956.
9. Regulation 31A – Stakeholders’ Consultation Committee
Certain important observations from the amendments –
(i) The consultation committee is to be constituted within 60 days of liquidation commencement date.
(ii) This committee shall be based on the list of stakeholders. Note that stakeholders are those who are entitled to distribution under section 53. Hence, those persons who have not filed their claims (except workmen/employees who have not been mandated to do so) and those secured creditors who have not relinquished security interests are not entitled to be on the seat.
(iii) The role of this committee is limited to advising on matters relating to sale. As such, they shall have access to all relevant details required to provide advice to liquidator.
(iv) Subject to certain conditions, secured creditors (relinquishing) get a maximum of 4 seats, unsecured financial creditors get 2 seats (max.), workmen and employees together get 1 seat, government is to have 1 seat, residuary operational creditors can have 1 seat, as also shareholders/partners. It is not clear as to whether persons falling in any of these categories but belonging to ex-management/board of directors of the corporate debtor can be made part of the consultation committee, even if there are legal proceedings pending against them under the Code.
(v) Each class may select its own representative, failing which, the liquidator shall include highest ranking claimant in the class, in the committee.
(vi) The advice is to be given by way of voting. Note that there is no decision-making by creditors. The liquidator just gets to know the majority sense by way of voting. The advice shall be given by at least 66% of the representatives present and voting. If the liquidator decides differently from such 66% majority, he has to record reasons in writing. It implies that where the limit of 66% is not achieved, the requirement of recording reasons will not be attracted.
10. Regulation 32A – Sale as a going concern
Going concern sale has been advocated to be preferred mode of sale where – the committee of creditors had recommended such sale, or where liquidator is of the opinion that such sale will maximise value. The maximum time limit within which going concern sale is to be attempted is 90 days from the liquidation commencement date. In case the sale does not happen as such, the liquidator shall attempt other modes of sale – slump sale, piecemeal sale, etc.
Note that as provided under regulation 44, where sale is attempted as going concern, the liquidation process may take an additional time upto 90 days beyond the liquidation period of 1 year.
Further, where the sale of corporate debtor is on going concern (and not business of the corporate debtor), the liquidator, instead of applying for dissolution of the corporate debtor, shall apply for closure of liquidation proceedings at the conclusion of the process.
11. Regulation 35 read with Schedule I – Optional revaluation of assets & Determination of Reserve Price
As per existing requirement, where the valuations have been conducted during corporate insolvency resolution process, the liquidator would have to consider the valuations as done during corporate insolvency resolution process, and it was mandatory for the liquidator to use the same valuations.
However, the Amendment Regulations provide an option to the liquidator to either take reference of existing valuations or go for fresh valuations, if in his opinion, it is so required under the circumstances.
Also, the reserve price shall be determined on the basis of valuations done under regulation 35. The Amendment Regulations have done away with the requirement of revaluing the assets every 6 months. Instead, the liquidator can reduce the reserve price gradually in case of failed auctions – 25% at the first instance, and then 10% at each instance. Conservatively, 10% shall be calculated on diminishing value of the asset.
12. Regulation 42 – Reduced time gap between realisation and distribution
The Amendment Regulations reduces the time gap between realisation and distribution from 6 months to 90 days. That is, moneys realized shall be distributed within 90 days.
13. Regulation 44 – Reduction in maximum period allowable for liquidation
The Amendment Regulations have reduced the allowable liquidation period from 2 years to 1 year. Therefore, for any extension beyond this period, the liquidator shall have to apply to the adjudicating authority.
Notably, the liquidation proceedings can be concluded notwithstanding pendency of any application for avoidance of transactions before adjudicating authority.
Hence, corporate debtor can be dissolved even if such applications are pending.
14. Regulation 45 – Compliance report by liquidator along with application for dissolution
The application for dissolution of the corporate debtor or closure of liquidation process, as the case may be, shall be accompanied by final report (as required earlier), and also one compliance certificate in the prescribed format. The format has been provided in the Amendment Regulations.
Schedule I, para 12 – Delay in tendering sale consideration to attract interest
The time period of tendering payments against liquidation sale has been extended from 15 days to 90 days. However, payments after 30 days will attract interest @ 12% (note: Per annum is not mentioned in the regulations; however, it seems to be an inadvertent omission).
Sale shall be cancelled if payment is not received within 90 days.
Note that the regulations are still not clear on the penal consequences that will follow if the buyer fails to pay within the timeframe and the sale is cancelled. Such terms are therefore, to be indicated in terms of sale.
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