IBC Liquidations: The Regulatory Vacuum
IVRCL Ltd., Gujarat NRE Coke Ltd., Sterling Biotech Ltd., Pratibha Industries Ltd. have a common problem: they are all being liquidated as going concerns... in a regulatory vacuum.
All they have to go by is reliefs and concessions given or denied by courts in past cases such as Southern Online Biotechnologies Ltd., KSK Energy Ventures Ltd., PSL Ltd., Mohan Gems & Jewels Pvt. Ltd. and Topworth Pipes & Tubes Pvt. Ltd.
Liquidation as a going concern, under the Insolvency and Bankruptcy Code, was the brainchild of the Kolkata NCLT in 2018. At the time, the code allowed liquidations on a slump-sale basis, among other means.
In Gujarat NRE Coke’s case, the National Company Law Tribunal, Kolkata noted that the company had over 1,000 employees and turned an operational profit. Interpreting ‘slump sale’ to mean transfer of a company as a whole, the NCLT directed liquidation on a going-concern basis.
This was soon followed by an amendment to the Liquidation Regulations, incorporating going concern as an option for sale of assets.
Since the law was playing catch-up to a court-created solution, it has led to confusing and painful outcomes.
While allowing liquidations on a going concern basis, courts do not have the same leeway in granting regulatory concessions and reliefs to the corporate debtor as in the case of a resolution plan, Suharsh Sinha, partner at AZB & Partners, pointed out.
Regulators and the government have given exemptions when a corporate debtor is at the resolution stage but not all such concessions extend to liquidation, namely compliance with SEBI's minimum shareholding norms, Takeover Code, Delisting Regulations. Resolution plan, once approved by the NCLT, is binding on all stakeholders and the bidder gets a year to comply will all the necessary regulatory approvals. None of these reliefs are laid down in law for liquidations as a going concern.Suharsh Sinha, Partner, AZB & Partners
That has meant suppressed valuations, Piyush Mishra, partner at L&L Partners, said. Due to lack of clarity in the treatment of past liabilities like tax and non-compliances, the entity is perceived as high-risk and sans the protection available at resolution stage, bidders offer depressed value for it, Mishra added.
Bidders assume that several statutory liabilities may continue to exist and the National Company Law Tribunal may or may not give reliefs sought such as relaxation from regulatory requirements for implementation, statutory dues, etc.Piyush Mishra, Partner, L&L Partners
The Going-Concern Charm
The view of insolvency tribunals has been consistent: to endeavour liquidations on a going concern basis. It saves jobs. Piecemeal asset sales can be time consuming and costly. Liquidators don’t have to deal with multiple buyers for the assets.
But the biggest draw for some bidders is that the company’s ‘legal entity’ remains intact. Some of these companies have pre-qualifications which can simply get transferred to the new acquirer only if it’s bought as a legal entity, Sundaresh Bhat, business restructuring partner at BDO India, pointed out.
Say, there’s a small infrastructure company which wants to bid for government projects like tunnels, sewage, irrigation systems. But it has never done this before. If this entity acquires a company, which has done these projects in the past, as a legal entity, the pre-qualification criteria mandated for government projects gets fulfilled.Sundaresh Bhat, Partner, BDO India
Bidders are opting for going concern sales especially in the engineering, procurement, and construction space, Bhat added.
The Regulatory Vacuum
When Gland Celsus Bio Chemicals Pvt. sought to acquire KSK Energy in April this year, it had to approach the insolvency tribunal for a dozen regulatory exemptions. For instance, it asked and received the tribunal’s nod for:
Allotment of new shares constituting 100% of the equity capital of KSK Energy.
Delisting the company.
Exemptions under SEBI’s Issue of Capital & Disclosure Requirement Regulations, Delisting Regulations and Takeover Code.
But on the issue of relief on statutory dues, carry-forward and set-off of losses under income tax law, the Hyderabad NCLT directed the company to approach the relevant authorities. However, in Topworth Pipes, the Mumbai NCLT granted the acquirer relief from government dues.
In Sothern Bio's case, a simple sale certificate was enough to give the winning bidder Devaiah Pagidipati 100% ownership in the listed company–the tribunal order gave no specific directions on issuing new shares and extinguishing the existing ones.
There is no guarantee that you’ll get a clean asset unlike in a resolution plan or an asset-sale liquidation. On the one hand, we’ve allowed a process to evolve but on the other, we haven’t given sufficient regulatory guidance. A limited set of reliefs are being granted by NCLTs in liquidation at the instance of bidders but benches can differ in their views, approach.Piyush Mishra, Partner, L&L Partners
A similar story played out in Mohan Gems’ case.
The principal bench of the NCLT noted that the concept of liquidation as a going concern has come by way of regulations. But the Insolvency and Bankruptcy Code says that once the assets are liquidated, the company has to be dissolved.
"It may look good in the eyes to sell the company to the purchaser along with assets when it is shown as a going concern on the ground of maximisation of value, but this is not in the hands of either this authority or IBBI. What could be liquidated is the assets of the debtor company. This shall not be construed as inclusion of sale of the company." -NCLT Principal Bench in Mohan Gems case
But the appellate tribunal upheld the delegated powers of the IBBI and said where liquidation as a going concern is a possibility, dissolution is completely unnecessary.
The NCLAT's view hasn't been helpful, Sinha said.
The drive for liquidation as a going concern stems from certain NCLT orders—without statutory basis in IBC. But at a conceptual level, liquidation as a going concern is an oxymoron and has caused confusion and delays in dissolving zombie companies.Suharsh Sinha, Partner, AZB & Partners
Besides varying precedents, there’s also the issue of manipulation that has been paid little attention to.
Some of these companies are listed on a stock exchange but there’s no guidance on what happens on a number for fronts when a new acquirer steps in. For instance, the requirement of minimum public shareholding. Prompted by the Ruchi Soya experience, market regulator SEBI has mandated that post insolvency resolution, minimum 5% public shareholding has to be maintained. No such requirement has been laid down for companies acquired under liquidation on a going concern basis.
Due to lack of specific regulations, manipulation is a real risk in some of these companies. Shares can be issued at a nominal value and the stock price can be increased by a few players.Sundaresh Bhat, Partner, BDO India
All this has impacted the procedures that liquidators are being forced to follow.
Insolvency professional Mamta Binani pointed out that these liquidations happen via e-auction. The pain point is that most bidders take a view that they should not be blocking their entire amount in one go, she said.
The winning bidders tell liquidators 'let us pay you 10-20% of the bid amount. And the balance consideration will be paid only after we get a clean slate, reliefs from NCLT'. Now, the practice that has emerged is that the process documents itself say that bidders will pay only a certain amount and rest will be paid after concessions are granted by the NCLT.Mamta Binani, Insolvency Professional
Consequently, a liquidation process that is supposed to get done quickly is taking months. There is no system of a resolution plan but this whole process takes place as if it were one. "Imagine the deterioration it causes to already-stressed assets," Binani said.