Introduction: The Insolvency and Bankruptcy Board of India (IBBI) recently made a significant policy recommendation that could change the dynamics of the Corporate Insolvency Resolution Process (CIRP) and liquidation procedures in India. Dated July 18, 2023, the recommendation, addressed to the Secretary of the National Company Law Tribunal (NCLT), details a shift in appointing liquidators under Section 34(4)(h) of the Insolvency and Bankruptcy Code (IBC), 2016. This article aims to dissect the implications of this policy update.
Detailed Analysis:
The Previous Norm: Earlier, as per Section 34 of the IBC, the Resolution Professional (RP) appointed for CIRP would automatically serve as the liquidator, unless replaced by the Adjudicating Authority (AA) under three specific circumstances.
Why Change? The need for a fresh perspective arises from the fact that the current processes yield a meager 4% average realisation against admitted claims during liquidation, compared to 32% during CIRP.
Key Reasons for the Change:
- Focus on Resolution: One of the main goals of IBC is to revive distressed but viable Corporate Debtors (CDs). The existing Resolution Professional (RP) might not be the best choice for a liquidator if they couldn’t successfully resolve the CD’s issues.
- Value Maximization: A delayed resolution process erodes the asset value over time. Introducing an independent Insolvency Professional (IP) can lead to value maximization, ensuring transparency and independence in the two separate roles of RP and liquidator.
- Checks and Balances: The IBC aims to have separate roles for CIRP and liquidation. The dual role of an IP as an RP and a liquidator in the same case could compromise the system’s checks and balances and may induce perverse incentives.
Recommendations: The IBBI recommends that a new IP should be appointed as the liquidator in cases where a liquidation order has to be passed. The new IP can be appointed from a panel list maintained by IBBI.
Conclusion: The IBBI’s latest recommendation is an attempt to improve the efficiency of India’s insolvency and liquidation processes. By advocating for a fresh perspective and introducing a new IP, the Board aims to increase asset value realizations and maintain integrity in the system. While the recommendation brings in fresh air, only time will tell if it will serve its intended purpose of improving the insolvency proceedings in India.
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Insolvency and Bankruptcy Board of India
7th Floor, Mayur Bhawan, Connaught Place, New DeIni-110001.
Telephone : +91 11 23462900, +91 11 23462800
Fax +91 11 23462902, Web : www.ibbi.gov.in
Liq-12011/214/2023-IBBI/840 Dated: 18th July 2023
To
Secretary,
National Company Law Tribunal
Principal Bench
New Delhi
Subject: Recommendation for appointment of liquidator other than IRP/RP under section 34(4)(h) of the IBC, 2016 – regarding
The Code envisages time bound resolution of the Corporate Debtor (CD) to maximise the value of the assets. In cases where the CD has not been resolved successfully. Adjudicating Authority (AA) orders for initiation of the liquidation process of the CD and appoints a liquidator. In this regard, Section 34 of the Code provides that where AA passes an order for liquidation of the CD. the resolution professional (RP) appointed for the CIRP shall act as the liquidator unless replaced by the AA under the following three circumstances:
(i) the resolution plan submitted by the RP under section 30 was rejected for failure to meet the requirements mentioned in sub-section (2) of section 30; or
(ii) the Board recommends the replacement of a RP to the AA for reasons to he recorded in writing: or
(iii) the RP fails to submit written consent.
2. Section 34(4)(b) inter-alia provides that the AA shall replace the RP if the Board recommends the replacement for reasons to be recorded. During the review of performance of processes under the Code, it has been found that there is a meagre 4% average realisation against the admitted claims during the liquidation process whereas in Corporate Insolvenc) Resolution Process (CIRP) the average realisation is 32% against the admitted claims during CIRP. This necessitated for fresh perspective in the liquidation process and replacement of RP to act as liquidator. This subject has been considered by the Board and it is considered that AA may appoint a new IP as liquidator due to the following reasons:
(i) The IBC has been introduced with larger economic goals to revive the distressed viable CDs to convert non-performing assets as performing promote employment, entrepreneurship. and credit by valuing capital invested in the project rather than selling in bits and pieces or recovery mechanism. The prime objective of the Code is resolution. Accordingly. in cases where the CD has not been successfully resolved or resolution plan has been failed, IP who has been assigned to conduct the resolution process of the CD. may not be recommended to continue to act as liquidator.
(ii) The Code creates an ecosystem for maximisation of the value of assets of a Non-revival of the CD through CIRP adversely impacts on its value. Value is usually dependent on the time taken to resolve the insolvency since it erodes over time and rapidly once the insolvency proceedings commence. Therefore. any delay in the insolvency resolution process may make reorganisation of the CD difficult and would induce liquidation. thereby destruction of value for the stakeholders. Thus, an independent IP needs to be entrusted to conduct the Liquidation process of the CL) for valise maximisation while also ensuring the transparency and complete independence in two separate assignments.
(iii) The Code envisages CIRP and liquidation as two distinct processes with distinct roles and responsibilities. Thus. an IP undertakes the two different assignments as RP and Liquidator, separately. Segregating the dual role of an IP in the same CD as RP and liquidator will Foster an inbuilt system of check and balance in the process. thereby enhancing the accountability of each job and strengthening stakeholder’s trust in the processes under the Code. Further. it would eliminate any perverse incentives, whatsoever, available with RP in deliberately pushing the CD towards liquidation and secure next assignment on ex-ante basis.
3. In view of above justification, the Board in exercise of its powers conferred under section 34(4)(b). recommends that an IP other than the RP/IRP may be appointed as liquidator in all the cases where liquidator order is to be passed henceforth. The liquidator can be appointed from the panel list of IBBI.
(Rajesh Tiwari)
General Manager
