4,541 strained businesses have been brought to bankruptcy courts as of June this year. Insolvency procedures have been completed in 2,859 of these cases. Liquidation has accounted for nearly half of all such closures. The Insolvency and Bankruptcy Board of India seeks to enhance the procedure due to the large number of insolvencies that result in liquidation. To that purpose, the IBBI has put up a number of key liquidation proposals:
As an auction mode, the Swiss Challenge is used.
The dialogue committee of stakeholders is being empowered.
Getting to the bottom of the secured creditors' impasse.
Pre-bid criteria should be less stringent.
Agents on commission are excluded.
The IBBI has asked stakeholders if there is a sense in requiring the Swiss Challenge as a mechanism for auction under the liquidation laws, as suggested by the Delhi High Court in the Amira Pure Foods case. A Swiss Challenge works like this: a favoured bidder submits an unsolicited bid. Following approval, the auctioneer seeks counter-bids to the initial bid and selects the best choice among them. In most situations, the initial bidder is given the "right of first refusal." The project or asset is awarded to the original bidder if it agrees to match the highest offer. Otherwise, it will be sold to the highest bidder.
The regulations do not yet define an auction process. As a result, the liquidator can sell assets using English auctions, sealed-bid auctions, Dutch auctions, Swiss Challenge auctions, and other methods as long as the procedure is transparent, results in maximum realization, and serves the creditors' best interests. Concerns about transparency may arise as a result of the Swiss Challenge method—who should be the preferred bidder? To get over this stumbling block, a two-stage bidding procedure may be necessary—first to choose a preferred bidder, and then for the Swiss Challenge. This might lead to an increase in both expense and time. And so, the regulator has asked stakeholders if there's a need to specify an auction methodology under the law and if the Swiss Challenge is the best option available.
Liquidators are currently required by law to engage with the stakeholders' consultation committee. It's comparable to a creditors' committee, but its decisions aren't binding on the liquidator. According to the IBBI, this leads to inefficient involvement, knowledge asymmetry, a lack of responsibility, and even misuse of the process. As a result, it has been suggested that the liquidator communicates with the SCC on all major topics, such as the employment of specialists, their compensation, the sale of assets, and so on. Stakeholders from each class may be permitted to join the consultation committee based on their vote share.
The liquidator has access to all of the company's assets under the insolvency legislation, with the exception of those in which lenders have formed security interests and have not surrendered such interests in favour of the liquidation. Lenders have the option of selling the assets they have secured themselves or relinquishing the security interest and allowing the asset to become part of the public estate. Secured creditors must notify the liquidator of their choice within 30 days of the start of the liquidation. However, when more than one secured creditor has an equal charge on an asset, liquidation proceedings are slowed, according to the IBBI.
Some secured creditors with a lower percentage of the secured debt's value chose against relinquishing their security interests. The remaining secured creditor, who owned the majority of the secured debt, opted to give up their stake. As a result, the IBBI proposes that if secured creditors owning 60% of the value of the secured debt opt to renounce or realise their security interest, their decision will be binding on the remaining pari-passu charge holders.
Private auctions are an eligible form of asset sale during liquidation, according to the legislation. Unreasonable pre-bid qualification criteria, such as excessive earnest money deposits and non-refundable participation fees, have been enforced in a few liquidations. According to the IBBI, this has a negative influence on the degree of participation in the auction, which shows in the realization of the assets. As a result, it has recommended prohibiting the collecting of any fee or non-refundable deposit from potential bidders and limiting earnest money deposits to 10% of the asset's reserve price.
A liquidator may engage marketing specialists to create a marketing plan aimed at maximizing asset value during a sale under insolvency legislation. However, according to the IBBI, agents are frequently hired on a commission or success fee basis. And it's paid as a proportion of asset realization. This adds to the liability of the liquidation asset. To address this, the regulator has recommended expressly prohibiting the use of commission or success fee-based agents or experts to sell assets during the liquidation process. Finally, the IBBI has suggested that liquidators be compelled to explain grounds for rejecting the highest offers.
Comments