[Rohit Sharma is a Partner at Mamta Binani & Associates, Mumbai]
By way of a notification dated 13 November 2020, the Insolvency and Bankruptcy Board of India (‘IBBI’) inserted regulation 37A to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Liquidation Process Regulations’), which states as follows:
“37A. Assignment of not readily realisable assets.
- A liquidator may assign or transfer a not readily realisable asset through a transparent process, in consultation with the stakeholders’ consultation committee in accordance with regulation 31A, for a consideration to any person, who is eligible to submit a resolution plan for insolvency resolution of the corporate debtor.
Explanation. — For the purposes of this sub-regulation, “not readily realisable asset” means any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions referred to in sections 43 to 51 and section 66 of the Code.”
Pursuant to the aforesaid amendment, the liquidator can choose to assign a not readily realizable asset (‘NRRA’) to any person who is not ineligible under section 29A of the Insolvency and Bankruptcy Code, 2016 (‘Code’). One of the purposes of the said amendment is the fact that the monumental time taken by the liquidator to dissolve a corporate debtor owing to the pendency of any litigation in a corporate debtor can be reduced. According to the report of the CARE Ratings dated 20 February 2023 (as on December, 2022), 1,901 matters have ended in liquidation, out of which around 50% of the cases (950 cases) are pending for more than two years, while 25% of the cases (475 cases) are pending for more than a year.
In many cases, assets of a corporate debtor are disposed of by the liquidator or there is no asset and the liquidator is in a position to distribute the proceeds from liquidating the assets pursuant to section 53 of the Code. However, owing to any pending litigation in the matter of a corporate debtor, the liquidator is unable to file an application for dissolution before the adjudicating authority which ultimately leads to wastage of time while waiting for that specific litigation to be resolved. One example of such litigation could be applications filed under sections 43 or 66 of the Code for preferential or fraudulent transactions conducted by the erstwhile director or promoter of the corporate debtor, as these applications generally take a lot of time for their adjudication, before which the liquidator cannot proceed with filing the dissolution application.
With the said amendment, the liquidator may, with the consultation of the stakeholder’s consultation committee (‘SCC’), call for a bid from the public at large for assigning the said asset (including any litigation associated with it) to a third person and straight away file for dissolution of the corporate debtor if all the compliances pursuant to the Code are dealt with. Needless to say, the said assignment brings along with it several challenges that the liquidator faces. The first relates to obtaining the approval of the SCC for assignment of NRRA, and the second to laying down a procedure for the progress of the said assignment after the dissolution of the corporate debtor. The author attempts to deliberate on the prima facie issues with such assignment of NRRA, along with its impact.
Challenges under the Methodology of NRRA
The following challenges arise at the time of the planning stage to assign a debt through NRRA.
Voting on the highest bidder for NRRA
One important aspect of the assignment of NRRA is that the liquidator is required to invite bids for assignment of debt. In general practice and during the corporate insolvency resolution process (‘CIRP’) also, the mode of rating the prospective bidders is assigned already, viz. the evaluation matrix. The bidders put in their bids based on the said document which in turn aids them in planning their preparation of the resolution plan, both in technical terms and in financial terms. However, in the case of assignment of NRRA, analyzing a bid is a challenging task for the reason that can be understood with the below mentioned example.
A company named ABC Ltd. is under liquidation. ABC Ltd. has the following debts which can be assigned under NRRA pursuant to regulation 37A of the Liquidation Process Regulations:
- 100 debtors having average outstanding of Rs. 100 each, aggregating to Rs. 10,000.
- 500 cars having average value to Rs. 100 each, aggregating to Rs. 50,000.
However, the issue is such that all 500 cars are dispersed in different parts of the country and the liquidator does not possess knowledge of the exact location of the cars, as there has been non-cooperation from the erstwhile director of the corporate debtor and the bare minimum aforesaid details were also collated by the liquidator on the basis of the books of accounts and some employees of ABC Ltd. As for the cars that are in the possession of the liquidator, he is unable to sell them due to obligations with the regional transport office (‘RTO’) who refuses to transfer the name of the vehicle to a new owner owing to the car being registered in the name of the erstwhile promoter or director of the company. The same requires liaising and/or litigation, hence constituting a time consuming process. The liquidator in consultation with the SCC decides to assign the cars and debtors to a third person according to the provisions of regulation 37A of the Liquidation Process Regulations.
Digressing for a moment, the total asset looks to be in the range of Rs. 60,000; however, it is to be borne in mind that against the total number of debtors the claim against a few debtors may have been hit by limitation and/or a few debtors are undergoing CIRP or winding up themselves, for which reason the chance of recovery is very less or negligible. However, in case of the cars, the value would have been further depreciated since the time of the aforesaid valuation, as with the lapse of time the condition of the cars would have deteriorated. Hence, while expecting that the appropriate bid from a bidder would be Rs. 60,000, as the value of the asset is also Rs. 60,000, but the same may not be economically viable for the bidder.
Coming back to the case, the liquidator issues notice under regulation 37A for assignment of debt and receives two offers, from Mr. X and Ms. Y. The details of their offers are as follows:
Offer of Mr. X
Offer of Ms. Y
Rs. 10,000/- upfront
Rs. 0 as upfront
10% of the realizable value
75% of the realizable
In the aforesaid case, it is very difficult to ascertain which bidder is giving a better offer as Mr. X’s upfront payment is Rs. 10,000/- plus 10% would be paid upon realization from sale of cars and recovery from the debtors, while Ms. Y’s upfront payment is nil albeit, upon realization Ms. Y agrees to pay 75%.
Consequently, in such a peculiar situation, it would be difficult for the SCC and the liquidator to evaluate the bidder, but one may argue that Mr. X’s offer looks better considering that there is a component of upfront payment also. However, it may be noted that Ms. Y is offering 75% upon realization, and considering the best-case scenario that out of the total debt being assigned (Rs. 60,000), the entire amount is recovered, in that scenario 75% of Rs. 60,000 = Rs. 45,000 would go to the SCC, whilst Mr. X’s total cash outflow would be Rs. 10,000 towards upfront payment and 10% of Rs. 60,000 = Rs 6,000, aggregating to Rs. 16,000. Not to forget that the realizable value may be much lesser than Rs. 60,000.
Therefore, it would be difficult to determine in whose favour the SCC should vote or who shall be declared as the successful bidder. In such a scenario, the author suggests that the notice should be published and bids shall be invited. Generally, due diligence is already carried out by the liquidator and a tentative recovery value is already known to the SCC or the liquidator. A bidder who puts in a bid near the tentative recoverable amount can have the bid approved; on the contrary, the liquidator or the SCC can always exercise its sole discretion in rejecting or accepting the offer of the bidder. But looking from another angle, the liquidator has only two options in such a situation, that is either to continue pursuing those matters, which of course is at the expense of the timing of liquidation or to try publishing a notice for NRRA and avail an opportunity to resolve the issue by assigning the same to a third party.
Variation in the realizable amount from the assets offered under NRRA
Generally, the nature of the assets which are kept under NRRA varies drastically. For instance, going back to the example given aforesaid, with the passage of time the cars will stop functioning and the use of car will be diminished, leading to drastic depreciation in its value. Hence, a notice issued today will invite value X from the bidders, whereas a notice issued one year thence will invite value X-1 from the bidders. The same also leads to a situation that one bidder may see a value in putting up a better upfront offer and keep a miniscule offering towards realization value; on the contrary, another bidder may see a totally opposite view of offering no upfront payment and only paying certain percentage upon realization from the asset.
Further, there also arises a challenge whereby the bidder wants to settle with any debtor for an amount less than the claim amount, and the bidder will be under an obligation to recover the entire amount as the said recovery will be bifurcated between the bidder and the stakeholders. Hence, the stakeholder may not be ready to take a haircut on such settlements. In search of the effort to recover the entire amount from the said debtor, the recoverable amount (after haircut) may also be lost. Therefore, a liberty to take the best possible call has to be given to the bidder as the bidder will also be partaking in the distribution of the said recovery.
Who will monitor the assignment of NRRA?
The biggest challenge that surfaces in the case of NRRA is as to who will be responsible for smooth functioning of the litigation associated with the NRRA or proper management or arrangement owing to the recovery process from the NRRA after the corporate debtor is dissolved. Going back to the example aforesaid, the bidder may have to initiate legal action against the debtors of the corporate debtor which may prolong for quite a few years. In the meantime, the question arises as who will keep the track of the said litigation being pursued by the bidders, as in the case of both the bidders there is an amount payable on the realization.
Unlike the case of CIRP, in the case of NRRA there is no concept of a monitoring committee which is formed with the purpose of monitoring the smooth and proper implementation of the resolution plan by the resolution applicant. Generally, the resolution professional is also a member of the said monitoring committee.
In case the debts are assigned and the liquidator files an application for dissolution of the corporate debtor, a question remains to be answered as to who will look after the progress of the NRRA or who the bidder will apprise regarding the progress in the assigned litigations or consult with regarding the litigation or for settling at a lower amount than the claim amount.
Hence, prima facie in such a situation it would be prudent to have a committee, which may include a member of the lead bank or members from the SCC, to whom the bidder shall give a quarterly or bi-monthly progress about the matter or do consultation with.
Judgement Related to NRRA
In ICICI Bank Limited v. S R Foils and Tissues Limited, liquidation was initiated against the corporate debtor on 4 March 2020. There was a pending dispute between S R Foils and Tissues Limited (‘S R Foils’) and Rajasthan State Industrial Development and Investment Corporation Limited (‘RIICO’) for approximately Rs. 53 lakhs which became pending towards the land belonging to S R Foils. The liquidator has not been able to sell the land owing to the dispute on the land and the litigation having been initiated by RIICO for the said amount.
The liquidator attempted twice to sell the corporate debtor as a going concern twice. Both the attempts failed, and the Liquidator subsequently put up a proposal before the SCC of S R Foils to transfer or assign the said land (along with the litigation associated with it) as NRRA in accordance with the provisions of regulation 37A of the Liquidation Process Regulations. The SCC gave their confirmation and the liquidator proceeded with issuing notice for the said assignment. Fortunately, the liquidator was able to procure three bids for the said assignment of NRRA and the bid of Kalptaru Resolution Private Limited for an amount of approximately Rs. 21 crores emerged as the highest bid, which was approved by the SCC as well as the National Company Law Tribunal, Delhi Bench by way of its order dated 2 March 2023.
Assignment of NRRA is a win-win situation for all the stakeholders as well as for the liquidator, as the same aids in meeting the objective of the Code of maximization of value and abides by the time bound process as delineated in the Code. There have been numerous matters in which the liquidators have come out with notice regarding assignment of NRRA. For instance, in the matter of Shilpi Cables Technologies Limited (in Liquidation), the liquidator invited bids for assignment of NRRA around Rs. 1500 crores. In the matter of Alupan Composite Panels Private Limited (in Liquidation), the liquidator invited bids for NRRA of approximately Rs. 25 crores. In the matter of FE (India) Limited (in Liquidation), the liquidator invited bids for NRRA of approximately Rs. 277 crores. The list goes on.
However, not only is the bidder required to put in a bid very carefully, that is after thorough due diligence, but even the liquidator and the SCC shall exercise precaution while drafting the agreement for the progress of the matter after the dissolution of the corporate debtor. Alternatively, it also seems that there is a loophole in the Liquidation Process Regulations relating to the situation wherein the fate of the progress of litigation or recovery proceedings, after the dissolution of the corporate debtor, has not been dealt with appropriately.
With passage of time and comfort of the stakeholders in getting accustomed to the nuances of the assignment of debt under the provisions of regulation 37A of the Liquidation Process Regulations, such assignments will flourish, with the loopholes that come in the way getting plugged by supporting the objective of the Code.
– Rohit Sharma