Since inception, the Insolvency and Bankruptcy Code, 2016 (‘Code’), has made great strides. As per the Financial Stability Report of the RBI, this Code that came into existence only in December, 2016, had around 4300 applications registered with the National Company Law Tribunal (‘NCLT’) by November, 2017. It has proved to be a game-changer for corporate India and has witnessed several key amendments sparked by inputs received from and difficulties faced by various market participants and the industry. Being a new enactment, ambiguities and loopholes are bound to exist, but the same are in the process of being plugged closing the loop on corporate revival or liquidation.
One of the fundamental feature of the Code is to resolve disputes in a timely manner, with a window of 180 days being given to the Insolvency Professional to help the Company revive, otherwise triggering mandatory liquidation. An Insolvency Professional may also seek a one-time extension of 90 days from the NCLT as per section 12 of the Code.
Now, that it has already been more than one and a half year since the enforcement of this Code, the applications which were filed with the NCLT just when the Code came into picture are or must be in its fag-end as the total period of 180/270 days period has expired or is about to expire. Although there are two situations after the completion of the Corporate Insolvency Resolution Process (‘CIRP’):
- The Resolution Plan is approved by the COC and the Corporate Debtor (‘CD’) is given a second chance to revive, or
- The Resolution Plan is not approved by the COC and the CD is going to go for a compulsory liquidation.
The context of this article is to bring forward the implications of the situation that if the resolution plan is not approved by the COC and the CD is going for a compulsory liquidation.
Hurdles faced by a Corporate Debtor in case it falls into liquidation
To begin with, the promoters are already aware of letting someone else run the show i.e., Interim Resolution Professional (‘IRP’) or Resolution Professional (‘RP’). However, even though when the IRP/RP was handling the business of the CD there was a ray of hope with the management of the CD that it will be able to revive. But after the order for liquidation of the CD is pronounced, the management knows that the CD is not going to revive again and the existence of the CD will be coming to an end.
Presently, one of the major cable manufacturing company, Nicco Corporation Limited has come into liquidation vide Order of the NCLT, Kolkata bench dated 17.10.2017, for a fact it is to be noted that there is a lot more to it after the Company comes into liquidation. Apparently, the following are the major hurdles faced by the Liquidator or the Liquidator’s Associates:
1. Public announcement for submission of claims by the Creditors of the CD
The Liquidator has to make a public announcement for submission of claims by the creditors of the Company. Considering the fact that the Code itself is new and not all are well versed with the provisions of law, therefore, it may so happen that a few of the creditors may take this public announcement as a repetitive attempt and therefore may not submit their claim. There is also an additional cost on the creditors of the company in order to submit their claims i.e., of stamp paper, notary, etc. The workers seem to be most affected with this re-submission of claim process as because while a company is going through CIRP, there is no time limit for submission of claim by the creditors till the resolution plan is approved. However, in the liquidation process there is a time limit of 30 days from the liquidation commencement date for submission of claims by the creditors of the company. This leads to either no submission of claim by the creditor or late submission, however, in both the cases the Liquidator is not in a position to accept the claim submitted by the creditor beyond the time period prescribed.
2. Protection of the assets of the company during liquidation
While the Company is under CIRP, the Insolvency Professional has to keep the business of the CD as a going-concern unlike in liquidation and hence it becomes all the more important to protect the assets of the company. As when the plants, factories, guest house, offices, etc. are empty and there is no activity happening in the asset, probability of theft is higher. Infact, it is not important that any outsider would be involved in this theft even the workers/employees/officers of the CD could also be involved as one may lose hope of getting his/her claim from the CD now that it is in liquidation. Appreciably, the assets are one of the major portion of the asset through which the CD may be able to derive cash and pay off its debt. Therefore, security of the assets of the CD becomes top most priority for the liquidator.
3. Retention of erstwhile employees of the CD
One of the other major decision that is required to be taken care of by the liquidator is the decision of retention of a few erstwhile employees of the company. It is always important to understand that which employees of the CD the liquidator would want to retain in order to understand the business of the CD and hence be able to liquidate the same. It is pertinent to note that in any case the cash flow in the Company is either very less or nil and therefore, any expense by the liquidator shall be reasonable and accounted for. Therefore, the liquidator may have to try to negotiate the remuneration of the employees prior to retaining them. Also, without the erstwhile employee of the CD it becomes almost impossible to understand the business of a company. Further, it is also to be noted that there in an ambiguity with respect to discharge of the officers, employees and workmen of the CD. The Code under section 33(7) states as follows:
(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.
Since the Code states that the order of liquidation is a notice of discharge therefore, this may seed a question in one’s mind that if there is a period of notice of discharge or is it an immediate discharge.
4. Meetings with the stakeholders
Pursuant to section 35(2) of the Code read with Regulation 8 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’), the Liquidator may constitute a stakeholders committee and accordingly may be guided by the members of such committee. However, there may be clash amongst the creditors as to who shall be in the committee. Notably, it is not possible to constitute this committee by including all the members of the creditors of the CD, so, a wise decision of the liquidator with respect to the constitution of such committee is required.
5. Distribution of funds by the liquidator
It is a much known fact that one of the most difficult task in this world is to keep everyone happy at the same time. During the liquidation period while the reins are in the hands of the liquidator, majority of the creditors are themselves very frustrated because certainly they’ve not been paid a single penny since the CD came into CIRP. Now that the management of the CD has been changed again from the hands of the IRP/RP to the liquidator, one may ponder that this again will be a long drawn process and thus leading to their non-cooperation with the liquidator. It is just not possible for the liquidator to dispose of all the assets of the CD in one go and accordingly disburse the amount pending to the creditors of the Company as per section 53 of the Code.
One of the way out that the liquidator has is to sell the assets one by one and distribute the realisation amongst the creditors of the company in instalments as and when the realisation money is credited in the account of the CD. However, there may be disagreements amongst the creditors with respect to the realisation distributed by the liquidators.
6. Other issues
Although the hurdles faced by the stakeholders and the insolvency professional or the liquidator are large in numbers, however, certain issues apart from the aforesaid hurdles includes:
a. Opening of a separate bank account with as required pursuant to Regulation 41 of the Liquidation Regulations whereby the words “in liquidation” has to be added after the name of the company. This becomes an issue because of the fact that there are certain arrangements which the CD may have with other companies or government companies and there is a receivable amount from such government company to the CD. Now change in the bank account and name will lead to series of procedure which needs to be followed by such government company.
b. Understanding the age-old cases pending for hearing before statutory authorities including Income tax Department, Sales Tax Department, etc.
c. Understanding and taking charge of the on-going projects of the company.
d. To handle any protest, at the factory, plant, office or any other premise of the CD, by the workers or employees of the CD.
Taking all the aforesaid hurdles in mind, the liquidator has to take charge of the CD. It is never an easy task to understand the business by any person in such a short span of time and at the same follow series of regulatory provisions and fulfil the requirements. Therefore, co-operation from the CD and its associates is a must for the liquidator to carry out the liquidation proceedings of a company smoothly.
At present, two major companies that has been ordered for liquidation are:
1. Nicco Corporation Limited (‘NCL’) vide order of the NCLT Kolkata Bench dated 17.10.2017, and
2. Gujarat NRE Coke Limited video the order of the NCLT Kolkata Bench dated 11.01.2018.
Both the Companies has large number of workers employed with them and therefore, every step that the liquidator has taken till date or will take will have an impact on the workers or employees. So, this being a new Code altogether and therefore, it is important for the insolvency professionals to keep themselves updated with respect to the liquidation proceedings of other companies.
In the aforesaid matter of NCL, the Liquidator had made an application before the NCLT to get directions from the NCLT in certain matters like retention of employees, notice of discharge, etc. However, the NCLT vide order dated 24.11.2017 ordered for the constitution of a monitoring committee and in case of any dispute he shall be guided by such monitoring committee comprising of financial creditors of the CD only. Now this puts aside the right of workers to take part in the decision being taken in the meetings of such Monitoring Committee.
In case of ambiguities the insolvency professional or CD will not have any other option but to go before NCLT or National Company Law Appellate Tribunal (‘NCLAT’), as the case maybe, and therefore, insolvency matters are regularly listed on almost all the benches of the NCLT and NCLAT. At this point in time, it is more than important to track such orders of the statutory authorities, for these orders will be the ones on whom reliance will be placed by the insolvency professionals who would be appointed in the upcoming matters as the IRP/RP or Liquidator.