Rotten Apples in the Barrel: Not Readily Realisable Assets – By Ms. Prachi Bhatia

Rotten Apples in the Barrel: Not Readily Realisable Assets

-By Prachi Bhatia,
a third-year LL.B. student at the ILS Law College

One of the objects of the Insolvency and Bankruptcy Code, 2016 is to expedite the process of resolution or liquidation to facilitate the maximisation of the value of the assets. The rationale behind the imposition of a fixed time limit is to preserve the value of assets from getting eroded by the efflux of time. In process of resolution, all the assets of the Corporate Debtor are acquired by the successful resolution applicant. While in liquidation, assets of the Corporate Debtor are sold in the market. A liquidator creates a create a pool of all the assets of the CD called liquidation estate and use the proceeds from the sale to satiate the debts. In certain circumstances, the estate could consist of assets that cannot be realised within the requisite time limit. These assets due to lack of liquidity are called Not Readily Realisable Assets (NRRAs). Some examples of NRRAs are- disputed receivables, disputed assets, refund from the government, reclamation of assets in avoidance transaction etc., which may accrue to a CD based on an occurrence of uncertain future events. The time taken and financial resources required to carry out the legal proceedings stand in antithesis to the purpose of Code- time-bound closure and maximisation of asset value. The only viable option in the periphery of the liquidator is the assignment of these NRRAs to the third party having expertise and economies of scale.

Brief Breakdown of Discussion Paper on Corporate Liquidation Process, 2020

The assignment of NRRAs was first introduced in the discussion paper on Corporate Liquidation Process released by the IBBI on 26th August 2020. The discussion paper envisages two ways in which the assignment can be done- absolute assignment and assignment with recompense facility. The former provides for an absolute transfer of all legal rights, remedies and power to bring an action without any interference from the liquidator (assignor); the latter provides for assignment of the right of action on condition for the share in the amount of successful recovery by the assignee. The amount received from the assignment can be distributed among the creditors. The paper laid down principles to be followed by the liquidator before assigning these assets-

  1. Acting in the best interest of liquidation estate;
  2. Seeking maximum consideration for the assignment;
  3. Consulting the SCC;
  4. Assignment through an auction or if an auction is not possible, on an arm’s length basis;
  5. Assignment shall be subject to section 29A of the Code;
  6. Liquidator to be reasonable, fair and should act in good faith.

The paper further recommended amendments to Liquidation Regulations to pave way for the assignment of NRRAs.

Amendment to Liquidation Regulations, 2016

Prior to the amendment, Regulation 38(1) provided that the liquidator with the approval Adjudicating Authority can distribute NRRAs amongst the stakeholders. The amendment introduced Regulation 37A- assignment of NRRAs to a third party.[1] The regulation defines NRRA as any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions. The liquidator can assign or transfer an NRRA for consideration to any person through a transparent process in consultation with the stakeholders’ consultation committee.[2] The “transparent process” is not elaborated in the regulation. It can be presumed that the same modes of sale i.e. Auction and Private Sale which is for other assets will be applicable for NRRAs. The NRRA cannot be assigned to any person ineligible under sec 29A. Though provision for terms of assignment (absolute or recompense) is not discernible in 37A. It can be concluded that independence is given to the liquidator in deciding the terms of the assignment. 

Champerty and Maintenance

Champerty is when an unrelated third party supports the litigation in exchange for a share in proceeds from litigation. Maintenance is a broader concept than Champerty- in this, the unrelated third party supports the litigation without any contingent on the outcome of the case. Erstwhile, the funding by the third party was considered against the public policy. It was perceived as meddling with the purity of justice. Many jurisdictions have relaxed the rules against them subject to certain exceptions. In India, the Privy Council in Ram Coomar Coondoo and another Plaintiffs; and Chunder Canto Mukherjee[3] held that English laws of champerty and maintenance are not of force as specific laws in India. Further, the Hon’ble Supreme Court in Bar Council of India v. A.K. Balaji & Ors[4] held that there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. 

It is rational for the litigation funders to expect compensation for the risk undertaken by them to pursue CD’s litigation. The funding encourages liquidators to pursue meritorious claims which in turn benefits creditors.

Bird’s Eye View of Various Jurisdictions

1. United Kingdom

The Insolvency Act, 1986 empowers the liquidators to sell the property of the company. The definition of property includes “things in action” and “every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property”. In Ruttle Plant Limited v Secretary of State for Environment Food and Rural Affairs (“Ruttle Plant”)[5] it was observed that:

“in the case of a liquidator, the fruits of the action form part of the assets of the company which the liquidator must realise and he may do so by using his power of sale of the property of the company under the Insolvency Act 1986.”

The LF2 Ltd v Supperstone and Anor (Administrators of Pennyfeathers Ltd)[6] guides the liquidators on how to conduct assignment of cause of action. Some of the following points are-

  • An administrator’s power to assign a cause of action is conferred by paragraph 2 of Schedule 1 to the 1986 Act, as a cause of action is “property” within that paragraph.
  • The administrator ought to be ready to investigate whether a viable claim (asset) should be preserved and pursued.
  • If the administrator has no funds to investigate a possible claim against a third party and he receives an offer from a potential assignee of The claim to pay for an assignment, that offer will potentially constitute an asset of The company. 
  • If it is clear to the administrator that the claim would be hopeless and that the potential assignee is bent on pursuing a hopeless claim to harass the third party, then the administrator should normally decline to assign the hopeless claim. 
  • Where the administrator does not have a clear view that the proposed claim would be vexatious and he is offered a sum of money for the assignment of The claim. In such a case, the administrator should be prepared to obtain proper payment for the assignment. If it is not clear that the offer reflects the true value of The cause of action, then the administrator may well be advised to conduct some process of inviting rival bids or to hold an auction of The cause of action. 

The UK has long-standing position against Champerty and Maintenance. However, the courts have recognised the problem of liquidators without adequate resources to pursue the cause of actions. They have been placed in a privileged position due to their statutory powers.

2. Singapore

Before Insolvency, Restructuring and Dissolution Act, 2018 (“IRDA”) which came into effect in July 2020 the position pertaining to assignment of cause of action was settled in Re Vanguard Energy Pte Ltd.[7] The HC of Singapore held that:

an assignment of a bare cause of action (or the fruits of such actions) will not be struck down if:

(a) it is incidental to a transfer of property; or

(b) the assignee has a legitimate interest in the outcome of the litigation; or

(c) there is no realistic possibility that the administration of justice may suffer as a result of

the assignment. In this regard, the following should be considered:

(i) whether the assignment conflicts with existing public policy that is directed to protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and

(ii) the policy in favour of ensuring access to justice.

The assignment or funding agreement would not run foul of the doctrine of champerty and maintenance.”

Sec 144 (1)(g) of IRDA empowers Liquidator to assign the proceeds of an action arising from avoidance transactions. The new Act also allows the liquidator to enter into third-party funding agreements. 

3. Australia

Liquidators are empowered under section 477(2)(c) of Corporations Act, 2001 to assign fruits of right to sue to the third party. Sec 100-5 extends the power to assign the right to sue bestowed on the liquidator to sue in their name under the Act for eg- preferential transactions and voidable transactions. In the recent case of Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd.[8] the Supreme Court of Victoria held that the statutory rights of action to seek damages for unconscionable conduct or misleading or deceptive conduct sit within a class of right considered “personal causes of action”. They are available only to the person who has suffered loss or damage because of that conduct and so cannot be assigned. 


NRRAs, the rotten apples can make it difficult for liquidators to achieve the task of completing the liquidation in the time-bound manner and spoil the pool of assets. It is prudent to give these rotten apples to someone who has the resources to churn out the juice from them. In other jurisdictions, the right to transfer cause of action is covered under the definition of “property”, interestingly the definition of “property” in IBC includes actionable claims. However, the ambit of actionable claim is limited to unsecured debts and beneficial interest in movable property not in possession. The introduction of the assignment of NRRAs had widened the scope of the cause of action that can be transferred. It includes the transfer of contingent or disputed properties and properties underlying avoidance transactions irrespective of the nature of the property. In certain transactions, the liquidator has to be cautious in transferring actions that are personal cause of action example- suit advanced for claiming damages in tort. As observed in Australia, these personal cause of action cannot be transferred as they are only available to the person who has suffered any loss or damage. 



[2] Unlike decision of Committee of Creditors, decision of Stakeholders’ Committee is not binding on the liquidator.

[3] MANU/PR/0039/1878

[4] MANU/SC/0239/2018

[5] [2008] EWHC 238 (TCC); MANU/UKWA/0345/2009

[6] [2018] EWHC 1776 (Ch); MANU/UKHC/0195/2018

[7] [2015] SGHC 156

[8] [2018] VSC 633

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