IBBI proposes stringent rules for more transparent liquidation process

Board says this will improve stakeholders' confidence and participation in the process, lead to effective supervision and monitoring, and improve outcomes of the process

In order to bring more transparency to the liquidation process, the Insolvency and Bankruptcy Board of India (IBBI) has proposed that all significant matters concerning liquidation be discussed with the stakeholders consultation committee.

The proposed amendments to the Liquidation regulations have been made as the need was felt to enhance the accountability of the liquidator by making consultations with the stakeholders committee mandatory to cover a range of issues. Some of these include appointment of professionals, and sale of assets including fixation of reserve price. IBBI said this would improve stakeholders’ confidence and participation in the process, lead to effective supervision and monitoring, and improve outcomes of the process.

IBBI has also proposed that the liquidator should facilitate the stakeholders of each class to nominate their representative while adhering to the voting principle of majority value of claims of those present and voting, for inclusion in the consultation committee.

“The proposed changes regarding the constitution of SCC are only to ensure fair representation of the stakeholders in the process. It also saves time from legal challenges on the grounds of bias and arbitrariness,” Raj Bhalla, Partner at law firm MV Kini said.

It is also proposed that the liquidator shall not engage a professional or an agent for sale of assets on commission or success fee basis. The liquidator would have to prepare a marketing strategy for sale of assets  in consultation with the stakeholders consultation committee. “The appointment of commission agent to perform this duty of the liquidator is against the legislative intent,” IBBI said.

The insolvency regulator also said that in a few liquidations, it had been noticed that the liquidators have imposed unreasonable pre-bid qualification conditions such as exorbitant earnest money deposit (EMD). In some cases even stipulated the non-refundable participation fee, for participation in the auction.

In order to address this, IBBI has proposed to amend the regulations by inserting the clause that liquidator shall not require payment of any fee or non-refundable deposit from potential bidders and not prescribe earnest money deposit in excess of 10 per cent of reserve price of the asset.

IBBI has also tried to address the issue of arbitrary rejection of highest bid by some liquidators. It has said that the liquidator would have to provide the reason for rejection of the highest bid to the highest bidder and record the same in the quarterly progress report.

It is also proposed that  if the secured creditors having 60 per cent of the value in the secured debt decide to relinquish or realize the security interest, such a decision shall be binding on the other charge holders of equal footing.

“For a long time most of the professionals and the Adjudicating Authority had observed that the basic principle of the Code ‘maximization of value of assets of the Corporate Debtor’, has been missed out from the Liquidation Process,” Bhalla added.