Liquidation process can allow public auction of non-realisable assets: IBBI

Says if auction is not possible, the assignment--transferring the rights and obligation of an asset--may be done on arm's length basis by the liquidator

With most corporate insolvency cases landing up in a long-drawn liquidation process resulting in loss of value realisation, the Insolvency and Bankruptcy Board of India (IBBI) has proposed amending the liquidation regulations through assignment of not readily realisable assets for any amount the market is willing to pay through public auction to third parties. 

IBBI has said that if auction is not possible, the assignment - transferring the rights and obligation of an asset - may be done on arm’s length basis by the liquidator. 

IBBI has proposed that the amount received be distributed among the stakeholders to close the liquidation process. The liquidators can be provided the right to assign certain statutory rights of action such as avoidance transaction, contingent claims to third parties, subject to safeguards. 

 

“The proposed amendment would benefit the stakeholders involved in the liquidation process by providing them with an additional option of exit at an earlier stage,” a discussion paper by IBBI said.

The insolvency board said in a discussion paper that this would reduce the time taken for completion of the liquidation process and result in higher recovery for stakeholders.

Overall insolvency data shows that 53 per cent of CIRPs resulted in liquidation against 14 per cent which ended up with a resolution plan. Nearly half the ongoing liquidations have crossed the one year deadline.

IBBI expects that over a period of time, a market for such assets may develop, which, in turn, would lead to better price discovery and provide greater business and employment opportunities through assignees. “The proposal is also in the interest of equity as the stakeholders, having a right on the liquidation estate will get their dues,” IBBI has said.

According to experts such a market does not exist in India as of now and IBBI will have to work out many details before its launch. 

 

In the event of liquidation, creditors with low financial capacity or those in the process of cleaning their balance sheet may be interested in getting their dues instantly, even at a discounted value, rather than waiting for a longer period to receive higher pay-out. The assignment of debt by a creditor under liquidation process to a third party, with greater financial capacity may lead to improvement in allocation of resources in the economy, IBBI said.

While the initiation of corporate insolvency resolution process (CIRP) remains suspended for defaults arising from March 24 for six months, 76 new cases from previous defaults were admitted. Of the 55 cases which got closure, 24 ended up in liquidation during the quarter. 

Activity around the Insolvency and Bankruptcy Code saw a dip of over 96 per cent over last year in terms of total cases admitted during the April-June 2020 quarter. 

Insolvency and Bankruptcy Board of India has said that while the insolvency law is not a panacea to deal with the stress of all firms impacted by Covid-19, it provides a valuable breathing space while government and companies put in place a comprehensive strategy to wade the economy through the pandemic.