Amended liquidation regulations under IBC

ECONOMY/ GOVERNANCE

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Amended liquidation regulations under IBC

Context: The Insolvency and Bankruptcy Board of India (IBBI) has amended the regulations for liquidation under the Insolvency and Bankruptcy Code (IBC).

What are the new regulations announced by the IBBI?

• Speed up Liquidation Process: In order to ensure quick liquidation of companies which are unable to find bidders under IBC, the liquidator can “assign or transfer a not readily realisable asset” to any person.
• Consultation with Stakeholders: The said transfer or assignment of the asset must be done in consultation with the stakeholders committee.
• The definition of “a not readily realisable asset” would include any assets of the corporate debtor, which could not be sold through the available options. Any or all assets of the company under liquidation, which is facing some dispute or is involved in some fraudulent transaction, can be sold by the liquidator.
• Ease of Liquidation: The liquidator for a company would not have to wait for the entire assets of the company to be sold in one go under liquidation, and can be disposed of to different bidders as and when they come.
• Ease of Proving Default: The IBBI has also said that financial creditors can, for the purpose of furnishing a record of default, submit their own book which establishes lapse of payment of debt by the corporate debtor.
• The financial creditors can also attach a copy of any court or tribunal’s order which has, through an order, established that the company had defaulted on debt payments.
• Flexibility in IBC Process for Creditors: The insolvency regulator has also amended the regulation to allow certain creditors, who do not want to wait for the liquidation process to be over, to exit the process by assigning or transferring the debt due to them, to other creditors of the company.
• Helps Small Finance Creditors: Suppose a small financial creditor does not see value in waiting for the liquidation of the company to get completed because they do not have that risk appetite. Now, they can choose to sell these assets to a bigger player and exit the process

What are the likely challenges for the new amended regulations?

• The new regulations will have to be tested in a court of law or an appropriate forum as its definition of “a not readily realisable asset” is contentious.
• The question is, can IBBI, under a delegated legislation, by way of amending a regulation, affect anybody’s substantive rights.
• Another amended regulation that is likely to be challenged is about the IBBI allowing the liquidator to distribute the un-disposed of assets among stakeholders, with the approval of the adjudicating authority.
• This will lead to creditors, be they financial or operational, challenging the distribution of the assets, and claiming that one or the other party has been favoured by the liquidator

Conclusion

In the wake of pandemic induced slowdown, easing the liquidation process helps is quick exit of bankrupt companies and putting back the capital assets back in circulation economy.