[Sikha Bansal is Partner at Vinod Kothari & Company and can be reached at [email protected]]
The Insolvency and Bankruptcy Board of India (‘IBBI’) recently came up with IBBI (Liquidation process) (Second Amendment) Regulations, 2021 (‘Amendment Regulations’) making certain important changes in the provisions pertaining to the liquidation process under Insolvency and Bankruptcy Code, 2016 (‘IBC’). One important amendment pertains to the ‘Stakeholders Consultation Committee’ (‘SCC’) covered under regulation 31A of the IBBI (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’).
The provisions relating to SCC were inserted by way of the IBBI (Liquidation Process) (Amendment) Regulations, 2019 (‘2019 Amendments’), read with Circular dated 26th August, 2019 (’IBBI Circular’). It required that the liquidator shall constitute an SCC (consisting of representatives of stakeholders entitled to distribution under section 53) within 60 days of the liquidation commencement, to advise the liquidator on the matters relating to sale under regulation 32.
While the obligation of the liquidator to constitute the SCC within 60 days still remains the same, the Amendment Regulations have enlarged the role of the SCC, as discussed below.
Enlarging the Boundaries of the SCC
From the Liquidations Regulations specifying that the role of SCC is to advise on matters pertaining to “sale under reg. 32”, the Amendment Regulations now specify that SCC is to advise on matters relating to:
- appointment of professionals including their remuneration, and
- “sale under regulation 32, including manner of sale, pre-bid qualifications, reserve price, amount of earnest money deposit, and marketing strategy”.
Thus, the Liquidation Regulations now become more prescriptive (and specific) as regards the areas concerning sale of assets and they have also become wider as regards the “appointment of professionals including their remuneration”. Other amendments pertaining to the SCC include “class voting” for the purpose of nomination of the representative if the stakeholders of a particular class fail to nominate their representatives. In that case, representatives shall be selected by a majority of voting share of the class, present and voting.
The author attempts to analyse the amendments as follows.
The Amendment Regulations are clear that these come into immediate effect (that is, from 30 September 2021); however, there is not sufficient clarity on whether the amendments would apply retrospectively, that is, to liquidations which ‘commenced’ prior to 30 September 2021 (or even those which commenced prior to 25 July 2019).
As one can recall, a similar situation arose when IBBI notified the original regulation 31A through the 2019 Amendments. The IBBI Circular then clarified that “the provisions of the Amendment Regulations are not applicable to the liquidation processes, which had commenced before coming into force of the said Amendment Regulations and that they are applicable only to liquidation processes, which commenced on or after 25th July, 2019”. Note that the IBBI Circular was admittedly issued because “stakeholders have expressed a difficulty in applying the Amendment Regulations to a liquidation process, which commenced before 25th July 2019”. Hence, it was settled that those amendments were only prospective in nature, and liquidations which commenced prior to 25 July 2019 would not need to have an SCC. In one of our articles dealing with the 2019 Amendments, we expressed the view that the then amendments would impact ongoing liquidations, except in cases where specific carve-out has been given or in cases where it is impractical to apply the amendment. Also, the National Company Law Appellate Tribunal (‘NCLAT’) in its ruling as recently as 20 September 2021 in the matter of Sundaresh Bhat, Liquidator of ABG Shipyard Limited (‘NCLAT Ruling’) has ruled that the 2019 Amendments could be applied to liquidation processes which were then pending, “considering stage of the process”.
In case of Amendment Regulations too, questions may arise as to whether these apply to liquidations which commenced before 30 September 2021 and those liquidations which commenced before 25 July 2021. The amendments seem to be substantive, and thus may need further clarification as to applicability thereof.
Basis of Amendments
The Amendment Regulations arise from the IBBI Discussion paper dated 27 August 2021, where IBBI raised concerns that, in liquidation “…the accountability mechanisms are not as robust. It leads to ineffective participation and dissatisfaction amongst stakeholders, information asymmetry and sometimes even abuse of the process.” According to IBBI, “the expanded and enriched role of the SCC in terms of mandatory consultation regarding appointment of professionals, sale of assets including fixation of reserve price, etc., is felt necessitated for enhancing accountability of liquidator, stakeholders’ confidence and participation in the process, effective supervision and monitoring, and improved outcomes of the process. Further, the appropriate checks and balances in the appointment of professionals, without curtailing the flexibility of liquidators in such appointments, is apposite to ensure more process transparency and safeguard the interest of the stakeholders.”
Possible Effect of the Amendments
It appears that the Amendment Regulations try to strike a balance between ‘mandatory consultation’ and ‘flexibility of liquidators’. However, such pervasive provisions may not be entirely in line with the Bankruptcy Law Reform Committee’s (‘BLRC’) idea of ‘shift of control’ from shareholders to creditors to courts. The BLRC Report, states: “The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say.” Hence, at the resolution stage, the IBC allows a committee of creditors to prevail over equity owners. However, when resolution fails, in case of liquidation, as BLRC states: “Creditors have no direct interest in the realisation or distribution of liquidation. They can only charge the liquidator to carry out her statutory duties.”
That is the main difference between resolution and liquidation: a resolution is a revival-oriented process; and a liquidation is a terminal process. The role of creditors in liquidation is thus minimal in juxtaposition to resolution. The principle is reflected in section 35(2): this provision “empowers” the liquidator to consult “any” of the stakeholders entitled to distribution with such consultation “not being binding” on the liquidator. Unlike a resolution professional who acts as a facilitator of the resolution process, a liquidator performs quasi-judicial functions in liquidation (see Swiss Ribbons Private Limited v. Union of India at para 61). A liquidator is not merely a convenor of the show but a stage-actor. A liquidator’s actions are subject to directions of the adjudicating authority and can be challenged by stakeholders if he fails to perform his statutory duties.
Also, while the consultations may lead to healthy discussions and results, concerns may arise where, owing to the heterogeneity of the SCC and the divergent views involved, there may be a delay in its decisions. While it is quite possible for the liquidator to form a view where the creditors’ body has either reached a decision or has remained indecisive, complications would arise where decision-making is delayed. In such a case, the liquidator would actually be left in a dilemma. Experience with resolution cases has shown that a substantial part of delays can be ascribed to delays in decision-making. According to the last available data, approximately 31% of the ongoing liquidations have aged beyond two years, and 35% are aged beyond one year. In such a scenario and with the amendments coming in, the regulatory prescription of one year (for completion of liquidation) may not sound realistic.
Hence, while consultation is an inherent aspect of the liquidation process, yet topic-specific prescriptions for consultations might raise potential concerns as regards liquidator’s role and powers under the IBC and as regards delays in decision-making. However, given that the provisions are new, only experience will decide if, with such prescriptive consultation process in place, the liquidation processes would become more efficient.
– Sikha Bansal