IBBI amends rules, creditors may get power to remove liquidator under IBC

IBBI wants liquidation timeline reduced

The Insolvency and Bankruptcy Board of India (IBBI) has proposed a slew of changes to the liquidation regulations to iron out the inconsistencies and make the liquidator more accountable under the Insolvency and Bankruptcy Code (IBC).

Under the proposed changes, a committee of creditors (CoC) may act as a stakeholders’ consultation committee (SCC), which is typically set up within 60 days from the date of commencement of liquidation, to monitor the process from the beginning. It is also proposed that creditors can now replace the liquidator, by a majority vote, in case his conduct is not satisfactory.

The SCC works as a monitoring mechanism for liquidation, similar to the CoC in corporate insolvency.

The IBBI is of the view that the liquidator takes significant decisions related to the appointment (including that of valuers) and sale of assets in the first 60 days (before the constitution of the SCC), and mandating such decisions and placing before the SCC (on ex-post basis) weakens the accountability of the liquidator, it said in a discussion paper issued on Tuesday.

The proposed amendments to the liquidation regulations have been made because the need was felt to enhance the accountability of the liquidator, like in the case of the resolution professional. 

“To empower the stakeholders during the liquidation process, it is proposed that the SCC may, by a majority vote of not less 66 per cent, can propose the replacement of the liquidator and it shall file an application before the adjudicating authority for the appointment of the proposed liquidator,” the IBBI said.

While the law requires the liquidation of a corporate debtor to be completed within one year (reduced from two years) of the liquidation commencement date, the regulator observed that the deadline was rarely met. It proposed to reduce the timeline to 30 days for promoters and other stakeholders after the commencement of proceedings to retake control through an agreement with creditors. Currently, they have to do it in 90 days.

As of May 31, only eight liquidation processes were closed by way of compromise or arrangement, which took an average 466 days for completion, and the liquidator realised only 87 per cent of the liquidation value in these cases, it highlighted.

“The proposals made by the IBBI is a step in the right direction as it would provide orderly and time-bound disposal of assets and completion of the liquidation process so as to release idle resources and maximise value creation,” said Vishwas Panjiar, partner, Nangia Andersen LLP.

Besides, the liquidator is required to file written reasons with the adjudicating authority and the IBBI if it takes a decision contrary to the advice of the SCC on matters such as the remuneration of professionals, manner of sale, pre-bid qualifications, reserve price, amount of earnest money deposit, and marketing strategy, need for fresh valuation, etc. Further, the liquidator is also required to submit regular progress reports along with minutes of meetings of the SCC to the IBBI.

“The changes suggested by the insolvency board are progressive and would enhance accountability of the liquidator and efficiency of the liquidation process, if implemented. The proposal tries to plug the gaps in the liquidation regulations by empowering creditors. The proposed regulations would also ensure better decision-making in the stakeholders’ committee,” Manmeet Singh, partner, Saraf & Partners.

The IBBI has sought public feedback on the proposals by July 5. 

Draft on  insolvency professionals

The IBBI also released a discussion paper on enabling entities to become insolvency professionals. It proposed that institutions that have expertise in IBC matters would be allowed to run bankrupt firms in place of a single individual appointed by lenders. 

Ensuring continued business operations of a stressed company is a onerous job and it may not be possible for a single professional to take on the multi-task activities of the board of directors, along with other important insolvency resolution process functions, that too in a time-bound manner, the IBBI said in the draft paper. 

After considering several aspects, “a need is felt to revisit the policy of allowing only individuals to be registered as insolvency professional”, it said.

The institution of insolvency professional can be strengthened by widening the eligible category of persons to include other juristic persons as well. 

Tightening the process

• Creditors may act as monitoring mechanism for liquidation process until stakeholders’ committee comes into effect 

• IBBI proposes the completion of liquidation process in 30 days from the current 90 days in select cases 

• Liquidator to give reasons if decision is taken contrary to the stakeholders’ panel view