Discussion Paper on Corporate Liquidation Process

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  1. Feedback on IBBI’s proposed norms on Corporate Liquidation Process

    The proposed guidelines seem to be creating disincentives for the secured creditor from making any effort towards realizing its security once a stressed asset is put up for liquidation. For being able to do that, according to Para 13 of the guidelines, the secured creditor would need to
     contribute its dues within 90 days of the liquidation commencement date
     pay the excess of the realizable value (as estimated by a registered valuer) within 180 days of the liquidation commencement date, even if the security interest has not been realized
     transfer the asset back to the Liquidation Estate if creditor is unable contribute to the Liquidation Estate within 90 days or 180 days as the case may be
    Such conditions are a hindrance in the way of free trade and commerce and are more likely to yield sub-optimal results.

    First, while the other creditors are willing to allow liquidation take its own course, one secured creditor is taking some initiative to realize its security. The idea is to realize maximum possible value for the asset because any liquidation-related delay can possibly lead to value erosion. Thus, imposing conditions for this enterprising creditor to make his contribution within 90 days of liquidation commencement date is both arbitrary and unfair. There is no guarantee that the creditor would be able to find a buyer. Even if a buyer is found, there is no guarantee that the buyer will make the full payment at one go. The payment may be a staggered one over a period of 6-12 months. In such a case, the secured creditor will face pressure of making his full contribution within a 90-day deadline when he has not been able to realize the full sale value. For the other creditors, their contribution would be made only when they have received their dues post-liquidation. Different time-frames for contributions by creditors, depending on whether they are within or outside the liquidation process, actually makes it an uneven playing field. Therefore, ideally, there should be no demarcation among creditors in terms of the timeline for making their contributions. If other creditors are making their contribution at the end of the liquidation process, the secured creditor who is trying to realize his security on his own, should not be hurried. Based on the staggered payments he receives from the buyer, he may also be allowed to make contributions in parts.

    Second, whatever may be the estimated value of the asset (as done by a registered valuer), there is no guarantee that the eventual sale will happen at a price above the estimated value. The realizable value will depend on market conditions and many other factors. There is no scope for ‘notional gains’ if the sale value is less than the estimated value, and thus the secured creditor would then have no obligation as such to transfer any surplus. Only when realizable value exceeds registered value, would the creditor need to transfer the surplus. To ensure that it happens transparently, there should be a mechanism of proper disclosure and certification by some external agency so that there is no scope for under-reporting of the sale price on part of the secured creditor.

    Third, as mentioned before, the sale can be a staggered one. For example, if the security is a piece of land, the buyer for that asset, instead of making a payment for the land piece, may enter into an agreement with the secured bidder to form a JV where the secured creditor becomes a stakeholder in some project up on that land. Such an arrangement increases the possibility of realizing a value much higher than the estimated value (as arrived by a registered valuer), but realizing that value involves more time, maybe a few years. Therefore, the secured depositor is not in a position to make his contribution within the deadline. In such a case, if the security is transferred to the Liquidation Estate, the actual realized value will be much lower than what it would have been through the JV route. The guidelines would need to take into consideration this possibility. A final call would need to be taken on whether the objective is to maximize the realizable value from the security even if it involves more time, or settle for a distress sale in the short term although it would surely yield a much lesser value.

    Feedback to the questions posed under Para 26 under Applicability of Sec 29A of the Code to Compromise & Arrangement:
    (a) NO, because that would result in distorting a level playing field (logic already explained above under ‘First’)
    (b) Time-frame for realization of security should ideally be co-terminus with time required for liquidation. However, in case the security value is realized over a relatively longer period of time and is considerably higher than estimated value (as explained in the example of a JV project), a suitable mechanism may be evolved to decide where the time-frame for such realization can be extended in exceptional cases, and if yes, by how much and on the basis of what conditions (like, maybe the secured creditor may have to contribute at least a percentage of the promised value within the time-frame for liquidation)
    (c) Explained in (b)
    (d) NO, there cannot be any notional gain if sale price falls below estimated value (logic already explained above under ‘Second’)
    (e) NO, this will impact free trade and commerce and create disincentives for secured creditors to explore avenues for realization of security outside the liquidation process (logic already explained above under ‘Third’)
    (f) Time period for presenting offers should be fixed for all parties. However, adhering to the spirit of the IBC code, entities who are ineligible to be a resolution applicant under Sec. 29A of IBC, should not be allowed to become a party in compromise or arrangements
    (g) No need for that – NCLAT has laid down a fine balance. Applicability of Sec. 230 of Companies Act can be done even before liquidation proceedings

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