Insolvency board moves to limit liquidators’ discretion

The Insolvency and Bankruptcy Board of India (IBBI) has sought to limit the discretion of officials authorized to liquidate insolvent companies and has said they must consult creditors compulsorily when rejecting the highest bids.

In a proposal released for public feedback on Tuesday, the IBBI also said liquidators must verify the highest bidder for the assets of the company getting dissolved within three days of declaring the auction results in an effort to speed up the liquidation process.

The bankruptcy rule maker also proposed that voluntary liquidation initiated by the shareholders may be allowed even if there is still some uncalled capital—the unpaid part of the share capital.

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The IBBI stated that existing norms protect the rights of secured creditors, and any uncalled capital realized by the liquidator is subject to the rights of those who have a lien on the assets. That is, even if there is uncalled capital, creditors with legal claims on the company’s assets are prioritized and their interests are protected before any distribution to shareholders. Also, for shareholders to initiate voluntary liquidation of the company, two-thirds of the creditors have to give their consent. This, the IBBI said, provides a safeguard to creditors’ interests.

“By permitting the liquidation process to be completed even with some uncalled capital, the amendment would prevent unnecessary delays in the liquidation process,” the IBBI said in the discussion paper. 

The IBBI will accept feedback on the proposals to amend its liquidation regulations till 9 December.

The regulator suggested that the current norms warrant changes to make the liquidation of businesses efficient. As a result of existing norms, liquidators spend a significant amount of time verifying the eligibility of all bidders. The law disallows wilful defaulters and undischarged insolvents from putting in a bid. Also, there is a possibility of collusion between liquidators and bidders, the regulator noted in the discussion paper. 

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Current norms also lead to the liquidator exercising discretion in rejecting the highest bidder even when the bid is above the reserve price, rather than the collective wisdom of stakeholders who are the real beneficiaries of liquidation proceeds getting to decide on the matter, the IBBI said. 

The regulator proposed that bidders have to give undertaking that they are not barred by the disqualification of a defaulting shareholder and that they will lose their earnest money deposit if found to be ineligible. 

Also, the liquidator has to verify the bidder's eligibility within three days of announcing auction results and inform the stakeholders. “In case the highest bid above the reserve price is not acceptable for any reason to the liquidator, consultation with stakeholder consultation committee shall be mandatory,” the IBBI said. 

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The proposed amendments will have far-reaching impact on the way liquidation, including voluntary liquidation, is handled, said Jyoti Prakash Gadia, managing director at Resurgent India Ltd, a financial institution offering investment and merchant banking services. 

“The chief criticism of the Insolvency and Bankruptcy Code mechanism primarily underscores the undue delays and the excessive haircuts involved in the resolution process. These are partly proposed to be addressed through these amendments,” said Gadia.

Greater transparency and oversight of regulatory compliance are expected as a result of the proposed changes, while liquidation processes will become more seamless and smooth, said Gadia.