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The past few weeks have seen debates surrounding the Parliamentary Standing Committee’s call for an overhaul of the Insolvency and Bankruptcy Code owing to low recovery rates and delays in resolution process.
Citing a high rate of pendency and incidences of liquidation, the report laments colossal haircuts taken by creditors. Amongst other things, the report has suggested that Regulation 32(e) of the Liquidation Regulations, which provides for sale of the corporate debtor as a going concern, be deleted.
Placing reliance upon a decision which is pending adjudication before the National Company Law Appellate Tribunal, the report states that Regulation 32(e) falls foul of the provisions of the Code since liquidation mandates dissolution but the regulations permit sale of the corporate debtor which renders the provision repugnant to the parent legislation.
However, such a narrow reading of the provision yields no benefit to either the mandate of the Code or the populace.
It instead has the effect of negating the larger objective of the Code i.e. realising the full potential of the Corporate Debtor and accruing value maximisation to the economy. The Regulations were amended pursuant to M/s Gujarat NRE Coke Limited’s decision, wherein the Kolkata bench of the National Company Law Tribunal, in the absence of any enabling provision, ordered the liquidator to dispose off the corporate debtor as a going concern.
The decision led the Insolvency and Bankruptcy Board of India to introduce Regulation 32A which specified the process governing the sale of a company under liquidation on a going concern basis. The provisions state that the Liquidator shall first endeavour to sell the Corporate Debtor as a going concern to maximize its value before deciding to liquidate it.
The Indian Bankruptcy and Insolvency regime, during its genesis, did not prima facie conceive the idea of sale of a corporate debtor on a going concern basis in liquidation. However, Section 5(26) of the Code which defines Resolution Plan, recognises the concept of ‘going concern’ in categoric terms which lends credence to the fact that the legislature did not rule out such a possibility arising in liquidation proceedings.
Covering a broad spectrum of stakeholders, liquidation of a company as a going concern has a multitude of advantages – workers rehabilitation and productivity restoration being the foremost. The insolvency regime in the United Kingdom allows a liquidator to sell a firm as a going concern, wherein receivers are appointed by creditors who have the authority to raise funds to keep the firm afloat through new borrowings which are junior to existing loans.
The United States allows for reorganisation under Chapter 11 of its Code in which a plan of reorganisation is negotiated with the creditors while the management is allowed to stay in charge, The primary rationale is to ensure that the firm is maintained as a going concern.
The German Code also allows initiation of insolvency proceedings on the basis of illiquidity or over-indebtedness wherein the illiquidity of a firm is premised on the ‘going concern’ test.
Instead of deleting the provision, the legislature should provide more clarity to facilitate smooth transition of such sales. Since the introduction of Regulation 32A, there has been a proliferation in the number of companies being sold under the said clause.
Serious issues are faced by liquidators and successful bidders since for every relief sought, an application has to be filed with the NCLT. This delays the entire process which essentially could be completed within the designated timelines. The model timeline in the liquidation regulations state that the process should ideally be completed within one year.
However, given the pendency in the number of cases before the tribunals, the matter exceeds the model time frame leading to avoidable delays. Another glaring issue which is faced by the companies being sold as going concerns, is income tax relief. Proviso to Section 79 of the Income Tax Act permits carry forward and set off of losses to a company where a change in shareholding takes place pursuant to a resolution plan approved under the Code.
Despite liquidation of a company as a going concern being akin to a resolution plan, the proviso does not state the term ‘liquidation as a going concern’ categorically, making it difficult and time-consuming for a successful bidder to seek such relief.
A growing number of reports have indicated that lenders themselves are identifying the concept of liquidation as a going concern preferable to opting for resolution plans since they fetch better recovery. If reliefs necessary to the running of a firm are not granted, not only do they deter potential bidders but also make the entire investment proposition completely unviable. As a commensurate measure, the liquidator’s powers should be enlarged to include within his ambit the power to grant basic reliefs which ensure that the successful bidders begin operations of the firm on a clean slate.
This shall make the entire process investor friendly and minimise filing of cases before the NCLT.
Criticism of the existing code is centred on premature liquidation of the corporate debtors which arises from the ability of creditors to precipitate the closure of the firm.
Data by the Insolvency and Bankruptcy Board of India highlighted that in 2020 the number of companies liquidated under the Code outnumbered companies which could be revived. In Y. Shivram Prasad v. S. Dhanapal & Ors. Case, the appellate authority laid down the steps which need to be taken to protect the corporate debtor. It delineating them as compromise or arrangement followed by selling the business as a going concern, emphasising that the last stage should be the death of the corporate debtor by liquidation, which must be avoided.
The Supreme Court has itself stated that liquidation of the corporate debtor should be a matter of last resort.
The Code is ever-evolving and provisions such as Regulation 32(e) only aid in debt recovery and economic development. The legislature should aim at broadening the underlying intent of the Code which is maximisation of the value of the assets instead of deleting such enabling provisions.
Ekakshra Mahajan Mandhar is a dual-licensed advocate and the managing partner of Mandhar Associates.