Comments on Discussion Paper on Corporate Liquidation Process

-Resolution Division 

(resolution@vinodkothari.com)

The Insolvency and Bankruptcy Board of India (‘IBBI’/ ‘Board’) issued Discussion Paper on Corporate Liquidation Process, dated 26^th August, 2020 (‘DP’)[1] which envisages the introduction of (a) Assignment of Not Readily Realisable Assets (‘NRRA’) and (b) Assignment of Claims/ Interests.

Herein below we put forth our general and specific comments/ suggestions on the DP-

A. General Comments

I. Issue 1- Assignment of Not-Readily Realisable Assets (‘NRRA’)

We hereby put forward our general comments and thoughts on the proposed Discussion Paper on assignment of NRRA-

1. Scope of ‘NRRA’

The scope of NRRA as set out under the DP includes ‘refunds from Government and its agencies’. Generally, inclusion of refunds from government/ bodies would include income-tax refunds, refunds of security deposits, etc. kept with the statutory bodies/agencies.  In practical circumstances, where the sale of the CD/business of the CD results in the change of name of the CD or where such kinds of refunds are separately assigned to a party, it might be practically difficult to do so without obtaining the consent of the government authority/agency. As such, an explicit provision in the law should facilitate assignment of such refunds. It may be clarified therein that no consent of the authority/agency shall be required, and that a mere intimation should suffice.

Further, in our view, there is no need of defining NRAA in the Code. The word ‘property’ as defined under the Code, as well the provisions of section 36 are wide enough to encompass such assets.

2. Repository for information on all assets for sale

At present, there is no ready-to-refer repository for assets put up on sale during liquidation process. It is therefore suggested, that there must be a single window where all assets during liquidation process can be publicised. That should enable the potential buyers to filter out the assets they are interested in. Such repository will also facilitate development of an open market for all assets, including NRAA.

3. Certain issues pertaining to assignability

It may be noted that, before deciding on whether NRAA should be assigned, it would be important to determine whether at all NRAA can be assigned. For instance, see the following –

(a) Non-assignment clause in the contract

It is a trite law that assignability of a right can be curtailed by way of explicit provisions in the contract itself. Therefore, a non-assignment clause will restrict the assignability of rights under the contract.

In Khardah Company Ltd v. Raymon & Co (India) Private Ltd. AIR 1962 SC 1810, SC stated, “An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties.”

However, Article 9.1.9 of UNIDROIT Principles of International Commercial Contracts states, “(1) The assignment of a right to the payment of a monetary sum is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to the obligor for breach of contract.” The said article talks about ‘balancing the interests’ – that is, while the obligor suffers a violation of its contractual rights (assignment irrespective of non-assignment clause), but the assignee must be equally protected. Further, at a more general level, it is also important to favour the assignment of rights as an efficient means of financing. Therefore, the assignee is fully protected against non-assignment clauses but the assignor becomes liable to the obligor.

Nevertheless, the UNIDROIT Principles also recognise that the assignor is not entitled to assign the right if there is a legal or contractual prohibition to assign the right [see, article 9.1.15(2) of UNDROIT Principles].

(b) Discharge of the obligor

Article 9.1.10 of the states that, until the obligor receives a notice of the assignment from either the assignor or the assignee, it is discharged by paying the assignor. After the obligor receives such a notice, it is discharged only by paying the assignee.

(c) Defences, rights of set-off, and counter claims of the obligor

The obligor may assert against the assignee all defences that the obligor could assert against the assignor [see, article 9.1.13 of the UNDROIT Principles]. The rationale is that the obligor’s situation should not deteriorate as a result of the assignment.

This would potentially result in counter-claims being raised against the assignee, as was being raised against the assignor. Now the question is, whether there is any restriction of assignment of a claim, which is burdened with counter-claims.

Reference can be drawn to Stein v. Blake [1996] 1 AC 243, which appears to be a direct authority on the issue in hand. What seems to be the judicial perspective is the fact that a claim being brought by the insolvent is subject to a counter- will not of itself stop it from being assigned.  The counter claim will, though, affect the value of the claim and, therefore, the value of the consideration that the official receiver may receive for the assignment. The trustee may assign the right to the net balance like any other chose in action. The Court also quoted Ramsey v. Hartle [1977] 1 WLR 686, wherein it was held that even a bare right of action was property which the trustee was entitled to assign. His statutory duty to realise the estate excluded the doctrines of maintenance and champerty which would otherwise struck down an assignment.

In general, one may have to first identify whether the rights and obligations under the contracts are severable or otherwise. The rights would be assignable if the rights arising under the contract are not arising out of or connected to the obligations, however, assigning only rights, where such rights arise out of the obligations, may not be possible.

(d) How to establish that the assets are infact NRRA; will there be any determining criteria?

Classification of assets as NRRA, shall be at the discretion of the liquidator, in consultation with the SCC. As is envisaged, the views of SCC shall be taken into account by the liquidator to take the decision, however, the views of SCC are not binding on the liquidator. In case, the liquidator takes a decision, which deviates from the majority views of SCC, he shall record the reasons in writing.

Certain indications which might reflect that the asset has become an NRAA can be as follows –

• Inherent nature of the asset
• Multiple failed sale attempts, even after consistent reduction of reserve price
• In case of avoidance proceedings, if the proceedings are not concluded within a reasonable time frame or appear to be only impediment to conclusion of liquidation proceedings or the liquidator is of the opinion that the proceedings cannot be culminated within a reasonable time.
• In case of disputed receivables/ sub-judice receivables/ arbitral proceedings, where the legal proceedings are such that there are no/bleak chances of conciliation/settlement, or are such that may require prolonged involvement of the liquidator and/or where the chances of conclusion of such proceedings in the near future are low. 

5. Is it mandatory to first attempt assignment by way of auction? Or assignment can directly be done on arm’s length basis?

Para 13 (d) of the DP states that the assignment shall be done through an auction or if an auction is not possible, on an arm’s length basis. Hence, it appears from the Discussion Paper that it would be mandatory that the liquidator shall be first required to attempt assignment by way of an e-auction. Only where such auction fails, the assignment may be done by privately, on arm’s length basis.

We are of the view that the assignment of NRAA should follow the same rules as are there for other assets – sale ‘ordinarily’ by e-auction, or by private treaty with prior approval of AA.

It may also be important to deliberate on determination of ‘realisable value’ of NRAA – that is, if at all, NRAA is to be valued as per regulation 35 of the Liquidation Regulations?

6. Mode of assignment-

As provided in the DP, the assignment can be done by way of absolute assignment or with recompense facility.  As indicated in several rulings (see above), the assignment of rights by the office-holder/trustee/liquidator is excluded from the doctrines of champerty. The liquidator, in consultation with SCC, can decide on the mode and intricacies of the assignment.

7. Valuation of NRRAs

While it may be difficult to assess the value of NRRAs with complete certainty, it must be appreciated that valuation involves estimations based on facts in hand. Hence, it may be provided that valuation of NRRAs, once classified as such, be conducted by two registered valuers, like in case of other assets. 

8. Discretion with Liquidator for further reduction in prices

Under the Liquidation Regulations, the Liquidator is given the discretionary power to reduce the reserve price of the asset, if the auction fails. Considering that the ultimate objective in case of NRRAs or otherwise, is to ensure timely realisation, it is suggested that in case of NRRAs also, the Liquidator be given the discretionary power to reduce the reserve price if auction fails. However, such reduction shall be in accordance with Clause 1 (4A) and (4B) of Liquidation Regulations. 

9. Distribution in case of recoveries after dissolution in Recompense Arrangement

In case of the Recompense Arrangement, where the recovery is made after dissolution of the corporate debtor, how shall such recovery be distributed? In our view, the concern should be addressed by the parties mutually entering into the arrangement. The arrangement should clearly specify the modus of distribution. For instance, the arrangement can define the obligations of the assignee to pass on ‘additional’ benefits to the beneficiaries under the arrangement. In that case, the involvement of liquidator would not be required. The beneficiaries (that is, the creditors) will have the right to demand the recompense from the assignee.

10. Where the NRRA comprises of expected recoveries from litigated assets, will assignment of the same also assign the responsibility of continuing the litigation proceedings?

In cases where the cause of action is a consequential right accompanying the right to receive certain monies, the assignee may have to continue to litigation proceedings so as to enjoy the recoveries thereof. However, since the subject matter sought to be assigned is a ‘right’, the assignee cannot be ‘obligated’ to continue with the proceedings. 

11. Is it possible to have a common pool of NRRAs that would be maintained by the Board or other Governmental body? 

Instead of accumulate waste assets, the liquidator can go for disclaimer of onerous property, or the same can be simply be designated non-recoverable. The liquidator needs to provide reasonable justification for the same, in consultation with the SCC. Once the asset is rendered non-recoverable, the CD shall be allowed to be dissolved. The regulations may appropriately provide for the same.

12. Applicability of section 29A

While the applicability of section 29A on assignments of NRAA is obvious, the proposed regulations do not deal with the cut-off date at which the eligibility of the assignee shall be determined.

In our view, the eligibility should be determined at the time the interested buyer expresses his willingness to buy the NRAA.

II. Issue 2 – Assignment of debt by creditors during liquidation

We are of the view that, on receiving intimation of assignment of debt from a creditor, there should not be any need to apply to AA for modification of list of stakeholders. The liquidator may straightway proceed to submit modified list of stakeholders to AA, as the assignment is an act of the creditor.

B. Specific Comments

Issue 1- Assignment of NRRA-

Specific comments on the Draft Regulation proposed in the DP are as follows-

Thus, the Draft Regulation may be as follows-

Reg. 38 A. Assignment of not readily realizable assets.

• Where the liquidation estate has any interest including right to property and its corresponding, inherent right of action that is conferred on the liquidator that is not readily or advantageously realizable, the liquidator may assign such interest under this regulation.

Explanation: For the purposes of this sub-regulation, interest includes sundry debts, contingent receivables, disputed receivables, sub-judice receivables, disputed assets and potential recoveries from preferential, undervalued, extortionate credit and fraudulent transactions in pursuant to section 43 to 66 of the Code. 

• The liquidator may assign such interest with or without any recompense arrangement; 

• The liquidator shall not assign such interest to a person who, at the time of expression of willingness to buy the interest, is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor:

Issue 2- Assignment of Claims/ Interests

Assignment of claim/ interest is a very common commercial transaction. Given that such assignment is already provided for in the CIRP Regulations, the same may be applied mutatis- mutandis in the Liquidation Regulations also.

Thus, the Draft Regulation may be as follows-

Reg. 30 A. Transfer of debt due to creditors

• In the event a creditor assigns or transfers the debt due to such creditor to any other person during the liquidation process, both parties shall provide the liquidator the terms of such assignment or transfer and the identity of the assignee or transferee. 

• The liquidator shall intimate to the Adjudicating Authority details about the modification in the list of stakeholders, pursuant to such inter-se assignment between the creditors.

[1] https://ibbi.gov.in/DP_26.08.2020.pdf

Our other articles on assignment-

http://vinodkothari.com/wp-content/uploads/2013/12/Law-of-Assignment-of-Receivables-Vinod-Kothari.pdf