IBBI Proposes Solutions For Creditors' Stalemate, Auction Process During Liquidation
Board recommends several changes to increase accountability of liquidator towards stakeholders and transparency in asset sales.
As of June this year, 4,541 stressed companies have been taken to bankruptcy courts. Of this, 2,859 have seen insolvency proceedings culminate. Nearly 47% of such closures have been via the liquidation route.
Given the high number of insolvencies that are ending in liquidation, the Insolvency and Bankruptcy Board of India wants to further strengthen the process. To that end, the IBBI has floated several important proposals for the liquidation process:
Swiss Challenge as a mode of auction.
Empowering stakeholders’ consultation committee.
Tackling stalemate between secured creditors.
Making pre-bid qualifications less harsh.
Barring commission agents.
Is Swiss Challenge The Best Option?
Prompted by Delhi High Court's suggestion in Amira Pure Foods case, the IBBI has asked stakeholders if there's merit in mandating Swiss Challenge as a method for auction under the liquidation regulations.
Here's how a Swiss Challenge works—a preferred bidder makes an unsolicited bid. Once approved, the auctioneer seeks counter proposals against the original bid and chooses the best among all options. The original bidder in most cases is granted the “right to first refusal”. If the original bidder agrees to match the highest offer, the project or asset is awarded to it. Else, it goes to the highest bidder.
Currently, the regulations don't specify an auction method. And so the liquidator can sell assets via English auction, Sealed-bid auction, Dutch auction, Swiss Challenge etc. as long as the process is transparent, leads to maximum realisation and promotes the interests of the creditors.
The Swiss Challenge method may lead to concerns regarding transparency—who should be the preferred bid? To overcome this hurdle, a two-stage bidding process may be required—first to arrive at a preferred bidder; and second, for the Swiss Challenge. This may result in increased cost and time.
And so, the regulator has asked stakeholders if there's a need to specify an auction methodology under the law and if Swiss Challenge is the best option available.
Empowering Stakeholders’ Consultation Committee
Currently, the law requires liquidators to consult with the stakeholders’ consultation committee. It's similar to a creditors' committee that's formed during insolvency but its recommendations aren't binding on the liquidator.
This leads to ineffective participation, information asymmetry, lack of accountability and sometimes even abuse of the process, the IBBI has pointed out.
And so, it has proposed mandatory consultation by the liquidator with the SCC on all significant matters, including appointment of professionals, their remuneration, sale of assets etc. Based on vote share, stakeholders of each class may be allowed to be part of the consultation committee.
Tackling Stalemate Situations
Under the insolvency code, the liquidator has at its disposal all assets of the company, barring those in which lenders have created security interest and haven't relinquished such interest in favour of the liquidator.
Lenders may either sell the assets secured to them on their own or relinquish the security interest and allow the asset to form part of the general estate. Secured creditors have to convey this decision within 30 days from the when the liquidation starts.
But where more than one secured creditor has equal charge on an asset, liquidation processes are getting held up, the IBBI has noted.
Some secured creditors with relatively smaller share in the value of the secured debt decided not to relinquish the security interest. While the remaining secured creditor having majority of the share in secured debt decided to relinquish their interest.
"The liquidators in such stalemate situations were unable to proceed with the sale of such encumbered assets for a considerable period, leading to depletion in value of assets and delay in completion of liquidation process."
And so, the IBBI has proposed if secured creditors having 60% of the value in the secured debt decide to relinquish or realise the security interest, such decision shall be binding on the other pari-passu charge holders.
Less Harsh Pre-Bid Qualifications
The law allows private auctions as an eligible mode of sale of assets during liquidation.
In a few liquidations, unreasonable pre-bid qualification conditions such as exorbitant earnest money deposit, non-refundable participation fee, among others, have been imposed. These adversely impact the extent of participation in the auction, which reflects in the realisation of the assets, the IBBI has said.
And so, it has proposed to prohibit collection of any fee or non-refundable deposit from potential bidders and provide that only up to 10% of reserve price of the asset can be fixed as earnest money deposit.
No To Commission Agents
The insolvency law permits a liquidator to appoint marketing professionals to devise marketing strategy towards maximisation of asset value during sale.
But, according to IBBI, often agents are engaged on commission or success fee basis. And paid as a percentage of realisation from assets. This creates an additional burden on the liquidation asset.
To rectify this, the regulator has proposed to explicitly prohibit the appointment of agents or professionals for sale of assets during the liquidation process, on commission or success fee basis.
Finally, to address the issue of arbitrary rejection of highest bids, the IBBI has proposed that liquidators be required to provide reasons for it.