Pedestrians pass in front of a “Sale” sign displayed at an Hennes & Mauritz AB (H&M) clothing store in San Francisco, California, U.S. (Photographer: David Paul Morris/Bloomberg)  

Include Creditors In The Liquidation Process Also, SIPI Recommends

The Society of Insolvency Practitioners of India held a round-table last month where they deliberated the shortcomings of the Liquidation Regulations, 2016.

Participating members comprised representatives from Insolvency and Bankruptcy Board of India, senior partners from leading law firms, representatives from State Bank of India, insolvency professionals and stakeholders. The key concern, according to a research paper by the society, is the neglect of secured financial creditors in the liquidation process.

If, after undergoing the insolvency process under the Insolvency and Bankruptcy Code, no resolution plan has been accepted within the stipulated time by the committee of creditors, the insolvent company is automatically and compulsorily pushed to liquidation. The company may also be liquidated in other instances, such as if the committee agrees or if the tribunal rejects the resolution plan or orders liquidation.

Here are the key recommendations the research paper touches upon:

Role of Secured Creditors

  • Secured creditors were involved in the “winding up” of a company in the erstwhile process under the Companies Act, 1956 and 2013. These creditors were provided with relevant reports and other information (such as minutes of meetings) collated or prepared by the official liquidator and could raise concerns and objections to the same before the relevant authorities (High Court under company law). The liquidation process under the IBC departs from these settled norms and principles and minimises role of secured creditors. The requirement to provide creditors with relevant information will bring certain degree of transparency and faith in the proceedings.
  • The paper notes the liquidator doesn’t involve the secured creditors in taking control of the insolvent companies’ assets, preserving and protecting such assets or deliberating the mode and manner of their sale. The first interaction between liquidator and secured creditors is after the sale of assets to distribute the proceeds, this distribution can be made within 6 months after realization—a period considered too long.

Key Recommendations

  • For greater involvement of secured creditors, the research paper recommends that a committee of secured creditors be constituted under the Liquidation Regulation (like the one constituted under U.K. laws). Consent of such committee (by 51 percent voting share) to be required for sale of assets, valuation of assets, acceptance of sale price etc.
  • Reports required to be filed by the liquidator under Liquidation Regulations (such as preliminary report, asset memorandum and progress report) be also shared with the secured creditors.

Appointment and Removal of Liquidator

  • The secured creditors aren’t involved in the appointment of liquidators, assessing their fee or term of appointments. The continuation of the professional appointed under the insolvency process as liquidator under liquidation regulations may result in conflict of interest situations, according to the society.
  • The winding up provisions under Companies Act, 2013, contained section 276 which dealt with removal of liquidator, which ensured that liquidators would not act arbitrarily and in abuse of their powers. The provision under IBC, according to SIPI, is restrictive for removal of liquidator.

Key Recommendations

  • Creditors have a say in the appointment and removal of the liquidator under IBC.

Priority of Charge/Security Interest

  • The research paper notes the liquidation regulations isn’t clear on pre-existing and contractually agreed priorities of charge on assets of the company amongst secured creditors.

Key Recommendations

  • Clarity be introduced in the liquidation regulation regarding the multiple layers of rights and security interest amongst secured lenders.

The research paper also notes that claims from creditors are invited and verified under the Corporate Restructuring and Insolvency practice/insolvency process under the IBC and again under liquidation resolution, wasting time and effort. It recommends this requirement be amended suitably to expedite liquidation.