The Insolvency and Bankruptcy Board of India (“IBBI”/ “Board”) vide Notification No. IBBI/2019-20/GN/REG053, dated 06.01.2020, introduced the IBBI (Liquidation Process) (Amendment) Regulations, 2020 (“Amendment Regulations”) w.e.f. the same day.
In what seems to be an adaptation of the ideas proposed in the Discussion Paper dated 03.11.2019, the Amendment Regulations seem to have provided for “out-and-out ouster” approach towards persons ineligible under section 29A of the Code, in liquidation processes too, thereby imbibing in the Liquidation Process Regulations, the orders of the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018) and State Bank of India v. Anuj Bajpai (Liquidator) (Company Appeal (AT) (Insolvency) No. 509 of 2019)
Further providing for a specific timeline for sale by secured creditors in case of outside-liquidation sale, and introduction of the “Corporate Liquidation Account”, the Amendment Regulations, in essence, seem to be plugging gaps in Liquidation Process Regulations, and furthering tightening the timelines under the Code.
In this article, the author has made a humble attempt to analyse the amendments and the probable repercussions/ impact.
Ousting the ineligible
It may not be an exaggeration to say that the section 29A of the Code, acts as the shield between the Corporate Debtor and those persons who are either responsible for the debacle of the company, or may not be instrumental for its revival. While section 29A is literally applicable under corporate insolvency resolution process during submission of resolution plans, its underlying principles are adopted during liquidation processes too. Proviso to section 35 (1) (f) of the Code mandates that a liquidator shall not sell the immovable and movable property or actionable claims of a corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.
The previous amendment to the Liquidation Process Regulations, brought into the law yet another escape route from liquidation; schemes of compromise/ arrangement. However, while on one hand the Code explicitly bars sale of assets of the corporate debtor to those ineligible under section 29A, there was no such restriction/ prohibition from proposing compromise or arrangement under section 230 of the Companies Act, 2013, which may result in an ineligible person under section 29A acquiring control of the corporate debtor; hence defeating the purpose of law.
The said concern was also brought before the Hon’ble NCLAT in the case of Jindal Steel vs. Gujarat NRE Cokes (supra), wherein the Hon’ble NCLAT held that, while a scheme under section 230 is maintainable for companies in liquidation under the Code, the same is not maintainable at the instance of a person ineligible under section 29A of the Code. The Hon’ble NCLAT further relied upon the landmark order of the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors, wherein it is observed that that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.
Hence, now that the order of the Hon’ble Appellate Tribunal is made a part of the Liquidation Process Regulations, and is settled that section 29A shall also be applicable to schemes of compromise/ arrangement under liquidation process, we shall now delve into a few lingering questions, more specifically pertaining to impact of the said amendment on the erstwhile promoter, directors of the corporate debtors.
Extent of the expression “shall not be a party in any manner”
Vide insertion of proviso to regulation 2B (1) of the Liquidation Process Regulations, the Amended Regulations ad-verbatim states that-
“Provided that a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.”
A question that now arises is what shall be the purport of the term “any manner”? While it is evidently clear that the ex-promoters/ ineligible persons shall not be eligible to propose a scheme of compromise/ arrangement during liquidation, the following questions remain unanswered-
- Will such persons be allowed to attend and vote the class meeting?
- Whether the proposed scheme can provide for reinstating the ex-promoters/ directors in such position?
- Who shall be the proposer?
The author is of the view that the term “any manner” is to signal that the promoters/ ineligible persons shall be ousted from participation from the very nascent stage i.e. from the stage where the scheme is structured.
Hence, while the question of ineligible persons’ right to attend and vote at such meeting may be in negative, On the question whether the scheme of arrangement may propose the continuation of control of existing promoters, there is a potential line of argument that may run as follows.
Reinstating the control of ex-promoters by way of the scheme-
First, the Liquidation Process Regulations, as amended, bar ineligible persons from being a party to the scheme. A scheme has a proponent/applicant who proposes the scheme. Thereafter, the scheme is taken to creditors and members in separate meetings for voting in accordance with sec 230 of the Companies Act, 2013. It may be convincing to hold that the promoters/ineligible persons should be excluded from voting, so that they don’t vote themselves back on the driving seat. Since the resolution u/s 230 is a special resolution, it will therefore become “double special”, because it excludes the promoter shareholders.
However, if on the strength of vote of independent shareholders, and creditors, the existing promoters are handed the reins of control, does it in any way defeat the intent of the Code? The intent of the Code cannot be to disrupt the existing continuity of control even where creditors and members with overwhelming majority want the control to be continued. Scheme of revival is a fresh chance of hope for survival outside liquidation or insolvency. Hence, if the creditors want it that way, and the members too want it, there is no reason to bring sec. 29A to cause a new person to come into control.
Who shall be the proposer?
By virtue of section 230 of the Companies Act, 2013 provides that an application for compromise or arrangement may be filed by the liquidator in case of the company under liquidation under the provisions of the Code. Hence, it is clear and certain that the application can be filed by the liquidator. Further, in Rasiklal s Mardia v. Amar Dye Chemical Ltd., (Company Appeal (AT) No.337 of 2018), the Hon’ble NCLAT held that liquidator is only an additional person and not exclusive person who can move application. Hence, in general, even when a company is under liquidation under the Code, a creditor, a member or the liquidator can propose a scheme of arrangement under section 230
It can thus be said that the scheme for compromise/ arrangement may be proposed by a member/ creditor who is not ineligible under section 29A, and the liquidator comes as an additional person who can make such application.
Analysis of questions w.r.t. extent and applicability of section 29A in scheme of compromise/ arrangement under liquidation is also discussed in our article Schemes under Section 230 with a pinch of section 29A – Is it the final recipe? Authored by Ms. Sikha Bansal.
Leaving no window open for ex-promoter directors- a demotivator?
While one may argue that it is necessary to shield the corporate debtors from those persons who led the company to insolvency, it must also be appreciated that an outright bar from participation under the Code may not be complementary to the focal intent of the Code- revival of companies.
While a negative provision of law, here section 29A, is indispensable for ensuring sufficient safeguard from misuse of law, the extent of such negative provisions shall be determined with much care, so that it does not become a de-motivator for the entrepreneurial spirit in general.
Sale outside Liquidation Process- Secured creditors now subject to timelines
Enacting the proposals put forward in the Discussion Paper, the Amendment Regulation has now imposed a specific timeline for sale outside liquidation processes too. The author is of the view that in its stride to ensure maximum realisation from sale, one of the fundamental principles on which the Code operates is its timeliness. Further, the added factor of the curtailed liquidation time-frame from 2 years to 1 year, makes it reasonable for imposition of a timeline on realisation of security interest in case a creditor does not relinquish its security interest.
The Code broadly provides for three modes by which assets can be sold under liquidation-
(a) By the liquidator, where the security is relinquished by the secured creditors;
(b) By way of assignment of value by the secured creditors; and
(c) By the creditor itself, where security is not relinquished.
It must be noted that where sale under (a) or (b) is bound by a stipulated time frame- the liquidator is required to complete the entire liquidation process including sale within a period of 1 year; and in case of assignment of value, the timelines as provided for in Regulation 37 of the Liquidation Process Regulations are applicable. Hence, it is most prudential to regulate sale by the creditor in case of non-relinquishment also.
The Amendment Regulations further substitute regulation 21A (2) of the Liquidation Process Regulations, to the effect that the secured creditor who chooses to NOT relinquish its security interest shall pay-
- as much towards the amount payable under section 53 (1) (a) and (b) (i), as it would have shared in case it had relinquished the security interest, to the liquidator within 90 days of liquidation commencement; i.e. towards liquidation costs and contribution towards workmen dues for a period of 2 years prior to liquidation commencement;
- the excess of the realised value of the asset, over the amount of his claims admitted, to the liquidator within 180 days of liquidation commencement;
- Where such excess sum is not determined within the said period of 180 days, the secured creditor shall pay the sum as may be estimated by the liquidator in terms of Liquidation Process Regulations;
- Further, the difference between the sum to be paid under (2) and already paid under (1) shall be made good by the secured creditor or the liquidator, as the case may be, as soon as the amount payable under (1) is ascertained.
- Where the secured creditor is unable to sell the asset within 180 days from commencement of liquidation, the asset shall mandatorily fall back in the liquidation estate.
The purpose of the said amendment is to provide for a stipulated time-frame for the secured creditors to realise the security interest, where they choose not to relinquish the same, so that necessary contributions to – (i) liquidation costs, and (ii) workmen dues, can be brought in the liquidation estate, and the liquidation is wrapped with stipulated time frames.
To summarise, a harmonious reading of the Code and the Liquidation Process Regulations along with the Amended Regulations, gives us the follow picture
- A secured creditor will have 2 options – realise or relinquish;
- The decision shall be taken within the time period of 30 days allowed for submission of claims.
- If such decision is not communicated within 30 days of the liquidation commencement date, the asset shall be deemed to be a part of the liquidation estate;
- If the secured creditor communicates that the decision is to realise, then he will have to make contributions into the liquidation estate as follows –
- Towards liquidation cost and workmen dues within 90 days
- Towards surplus realisation within 180 days
- As regards quantification of contributions in (a), the contribution shall be equal to the amount as the secured creditor “would have shared in case it had relinquished the security interest”.
- As regards quantification of contribution in (b), the contribution shall be “the excess of realizable value of the security over the admitted claim amount of such secured creditor”.
- On failure to make contributions as above, the asset shall be deemed to be a part of the liquidation estate
The rider that in case of failure of sale by secured creditor within 180 days from liquidation commencement may act as a good motivator in guise of an ultimatum to ensure timely and maximum realisation from the assets.
Prohibition from sale to ineligible persons-
In its stride to de-bar the ex-promoter directors of corporate debtors and other persons who are ineligible under section 29A from participating under the Code in any manner at all, the Amendment Regulations vide insertion of regulation 37 (8) has provided that “A secured creditor shall not sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor.”
Hence, not only does the law bar the ex-promoters from participation under the Code, it now goes on to bar sale outside liquidation process also. However, it poses a big question on the extent to which the Code can interfere the rights of a secured creditor who has already opted out of the liquidation process.
The question of sale of ineligible persons by secured creditors has also been dealt with by the Hon’ble NCLAT in State Bank of India vs. Anuj Bajpai (supra), analysed in details in out article Outstretching section 29A to realisations by secured creditors: Will it work?, authored by Ms. Sikha Bansal.
Creation of Corporate Liquidation Account
What IEPF is for dividends under Companies Act, 2013; the “Corporate Liquidation Account” is for unclaimed dividends and undistributed properties in case of liquidation under the Code.
The Amendment Regulation substitutes regulation 46 to provide for creation of a Corporate Liquidation Account, to be maintained and operated by IBBI in the Public Accounts of India. The Amendment provides that a liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon till the date of deposit into the Corporate Liquidation Account before making an application for dissolution.
It further provides a transition period of 15 days in case an application has been made prior to the effective date of the Amendment Regulations (i.e. 06.01.2020). A liability of interest @ 12% p.a. shall be required to be paid by the liquidator who fails to deposit the amount into the Corporate Liquidation Account due date of deposit till the date of deposit.
Any amount which remains in the said account for a period of 15 years or more from the date of order of dissolution of the corporate debtor shall be subsequently transferred to the Consolidated Fund of India.
Meaning of “Dividends” and “Distributions”
Colloquially, the term “dividend” is understood as a share of profit given to the shareholders of a company. However, it is pertinent to note that such meaning is a mere derivation, and rather the most common one, of the true sense of the term dividends.
Dividend refers to the share of any asset distributed to its rightful beneficiary. Hence, in the Code’s parlance, the term dividend refers to the share of sale proceeds distributed to the creditors in accordance with section 53 of the Code. Hence, for the purpose of the Code and regulation 46, the term “unclaimed dividends” shall refer to those sums which have been distributed by the liquidator, however, not claimed by the rightful creditor.
On the other hand, the term “distribution” is generally used for assets/ properties which can be distributed, like in the case of an in-specie distribution.
Hence, while depositing unclaimed dividends and distributions in accordance with the newly substituted regulation 46, one must keep the above connotations in mind.
What is likely to be deposited
While the chances of undistributed property/ unclaimed dividend seems to be rare case scenario, it is most highly probable that the dues of workmen/ employees may remain uncashed following unclaimed dividends/ distribution to be transferred by the liquidator to the Corporate Liquidation Account.
On a bare reading of the amendments brought in the Liquidation Process Regulations, the lawmakers have made clear their intent of keeping the ex-promoter directors/ other ineligible persons completely aloof from the corporate insolvency/ liquidation process.
However, it shall be interesting to ensure that what is done as a step towards protecting the corporate debtor from its initial wrong-doers, does not turn out to be the undoing of the recovery of prospect corporate debtors.
 Vide notification no. IBBI/2019-20/GN/REG047, dated 25th July, 2019 (w.e.f. 25-07-2019)