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Is The Liquidation Process Under The IBC Yet Another Pandora’s Box?

Reid & Taylor Ltd., the company that claimed to have been styling the elite since the 1970s, will be liquidated following the orders of the National Company Law Tribunal. The order came after multiple attempts by the tribunal to allow new entities to bid for the company, even beyond the 270-day deadline for resolution mandated under the Insolvency and Bankruptcy Code.

In the end, the bench said:

We request the creditors and the RP (resolution professional) to somehow see that the Company is sold as a going concern and the interest of workers/ employees be protected to their level best.
Reid & Taylor Order, NCLT

Two other companies met with a similar fate in the recent past: Bharati Defence and Gujarat NRE Coke. One in every two companies facing insolvency under the IBC have been closed for liquidation against one in 10 companies that faced resolution, according to Insolvency and Bankruptcy Board of India.

Liquidation is the last resort under the IBC. It can be initiated if:

  • The tribunal doesn't receive a resolution plan that has been approved by 2/3rd members in the committee of creditors.
  • Tribunal rejects the resolution plan that has been approved by the committee of creditors.
  • The committee decides to commence liquidation, irrespective of whether resolution plans have been received or not.
  • If the terms of resolution plan approved by the tribunal are breached.

An order directing liquidation as a going-concern—like the one passed in Reid & Taylor, Bharati Defence and Gujarat NRE Coke cases—can become difficult to implement, Dhaivat Anjaria, who is a resolution expert, told BloombergQuint.

There are several challenges in liquidating companies, depending on the nature and quality of asset, and nature of industry. Hence, specific directions to the liquidator to endeavour a going concern sale could restrict options in finding buyers, risking additional time and possible depletion in the value of assets.
Dhaivat Anjaria, Resolution Expert

Besides restrictive orders by the NCLT, experts pointed to three key challenges in on-going liquidation cases:

  • Creditors’ disputed role or lack thereof in the liquidation process.
  • Accuracy of "liquidation value”.
  • Inadequate infrastructure and lack of seasoned experts.

Creditors Feeling Left Out?

Experts pointed out two key concerns of creditors—lack of oversight over the liquidator and fate of secured lenders.

Lack Of Oversight Over Liquidator

The insolvency code is designed to give the committee of creditors control over the resolution process. But once the insolvent company reaches the liquidation stage, the decision-making power shifts to the liquidator. Rajkumar Bansal, managing director and chief executive officer of Edelweiss ARC, pointed out that lenders are dependent entirely on the liquidator to receive information and progress on sale of asset and the interest received.

This is in contrast to the process which was followed for winding up a company which applied before IBC was enacted, under which an ‘asset sale committee’ was typically constituted which comprised representatives of the lenders and ensured there were channels of communicating and sharing information between various stakeholders. 
Rajkumar Bansal, MD & CEO, Edelweiss ARC

This is crucial since a large sum of lenders’ capital is tied in such assets, Bansal added.

Lack Of Clarity In Relinquishing Or Realising Security Interest

The second challenge relates to secured lenders in whose favour assets of the company have been charged as a security for the loan extended. The insolvency code gives secured lenders two options regarding their secured interest:

  • Relinquish the interest so that the asset forms part of the ‘liquidation estate’ which the liquidator can then sell, or
  • Retain the security interest and realise it by selling the asset itself.

A lack of procedural clarity is making both these options challenging.

Bansal pointed to a recent case where the liquidator took a view that once a creditor has filed claim before the liquidator, it automatically implies that the creditor has tendered its assets to the liquidation estate. This view is detrimental to secured creditors’ interests and has made them vary of the process. And until the NCLT clarifies the position, it will be difficult for creditors to take a call, Bansal said.

Sumit Binani, liquidator for Gujarat NRE Coke, agreed that neither the relinquishment nor release of security interest comes easy. The law mandates that a liquidator cannot sell assets without all secured creditors relinquishing their security interest but the secured creditors don't want to surrender until they are assured of receiving distribution from sale proceeds, he said. Providing any such guarantee is, of course, impossible, Binani added.

"The creditors need to understand that relinquishment isn't in the favour of the liquidator but in the benefit of the creditors,” Binani explained. “Unfortunately, this uncertainty results in significant delays in the liquidation process.”

But one expert pointed out that the minimal role of creditors at the liquidation stage of the insolvency code is deliberate. While the insolvency process focuses on resolution—bringing the company back on its feet, which requires debt-restructuring and therefore, consensus among lenders—the liquidation stage is only concerned with maximising returns from assets rather than resurrecting the asset and creditors may not have any role to play, Sunil Pant, chief executive officer of Indian Institute of Insolvency Professionals of Institute of Chartered Accountants of India and a retired senior official of State Bank of India, said.

The lack of creditors’ say at the liquidation stage and its consequences are already being agitated before the Mumbai bench of the NCLT in Abhijeet MADC Energy’s case. Edelweiss ARC, who was part of the company’s committee of creditors, is now arguing that the liquidator didn’t conduct the liquidation process in a fair and transparent manner.

Varying Valuation

Experts were united in their worries about the accuracy of liquidation value.

A strong deterrent for bidders is the lack of clarity on the actual value of the company and its assets, Nitika Agarwal, partner at distressed advisory company Successroute, told Bloomberg Quint. She explained that the price-discovery process under IBC has its challenges. For instance, valuations of assets, especially of land, are often suspect and need to be taken with a pinch of salt.

But valuation is not a strict maths—it applies scientific methods and varies with perception as well as evidence, Rajeev Shah, managing director and chief executive officer of RBSA Advisors, the valuation firm that valued 10 of the “dirty dozen” companies, told Bloomberg Quint.

Shah explained the practical issues he faced while valuing top IBC assets. In a large textile company, he said, advances and receivables worth Rs 20,000 crore had been pending for years, some of which were understood to be fictitious. The law mandates that valuers verify each entry and aspect of the balance sheet physically, but what are the means to verify something that doesn’t exist, he questioned.

We reached out to the counter-parties and promoters for confirmation but in 90 percent of the cases, we receive no response or data. Receivables are depicted as assets in the balance sheet and as a valuer, one must make judgment calls to determine whether a receivable is fictitious and would never really be realised by the company.
Rajeev Shah, MD & CEO, RBSA Advisors

Similarly, he pointed out, there are many inter-company or group company transactions where money has been given to or taken from various related companies or sister concerns. Many of these companies aren't traceable or the promoters aren't cooperative and valuers are left to decode a web of transactions to ascertain their legitimacy and evaluate if these indeed are “assets” as depicted in the book of accounts, he explained.

Advisors, valuers and even the resolution professional often don't have access to relevant information such as balance sheets of these companies, Shah said.

Another issue surrounding valuation experts pointed out was the contentious transactions which are in the midst of litigation or arbitration. It's impossible to ascertain what a court or tribunal decides and so, it is up to the valuer’s judgment to decide how to account for it while arriving at the liquidation value, but the buyer will most certainly discount it, they said.

Assets like Essar, Bhushan and Binani are few and far between where there is competition to acquire them because they are prized assets. The rest 99.9 percent attract few bidders—maybe 1 or 2, if at all. Buyer has the upper hand and will be in the position to bid close to or sometimes below the liquidation value because he knows that he would still be the last option.
Rajeev Shah, MD & CEO, RBSA Advisors

The subjectivity around valuation can be attributed to lack of uniform standards, Samir Nath, chief executive officer of Institute of Chartered Accountants of India, told Bloomberg Quint. ICAI has been designated as a registered valuer organisation by the IBBI. “IBBI is keen to regulate and monitor valuers and fix a common standard which will lead to higher accuracy in valuations and better standards for professionals,” he pointed out.

Inadequate Infrastructure

All the experts BloombergQuint spoke with agreed that the liquidation process critically lacks appropriate infrastructure–a platform for sellers and buyers to engage. At present the market is informal and lacks adequate framework for sharing information. As a result, buyers are skeptical and sellers don’t receive competitive offers.

Experts suggest consolidation of information, educating businesses and taking the process online as potential solutions.

Enhancing the marketplace for stressed assets is crucial, Anjaria said. This will help with better price discovery at the liquidation stage, expedite the process and bring clarity for bidders and creditors, he said.

Agarwal suggested educating buyers, particularly medium and small businesses, with the assistance of industry bodies like Federation of Indian Chambers of Commerce & Industry and SME associations to increase participation at the liquidation stage. Collating information on assets under liquidation is also crucial, she added.

Banks, when they seize assets pursuant to security enforcement, invite bids for such assets on various portals. This practice should be considered for liquidation as well, Spandan Biswal, partner at Cyril Amarchand Mangaldas, said.

Lack of expertise is also a challenge.

The professionals involved in the resolution and liquidation process are adapting to their relatively new roles. Bansal explained that until now liquidation was done with the help of an official liquidator, who was an officer of the court. This is a first time in the country where the private sector is involved in resolving or getting rid of bad assets.

There is a need for strong insolvency experts to emerge. A team of professionals which include investment bankers, liquidators, resolution professionals and other advisors that are adept at handling specific issues that arise from resolving a bad asset or productively eliminating it.
Rajkumar Bansal, MD & CEO, Edelweiss ARC

Pant expects a significant growth and maturity in the insolvency professionals and advisors as the industry seasons.

The code requires "turnaround artists" who are adept at handling resolutions of stressed or financially sick companies. As the industry matures, so will the professionals and advisers, he concluded.