The main objective of the Insolvency and Bankruptcy Code 2016 (IBC) is to maximize value for the creditors. Keeping in line with this objective, the regulator through an amendment dated 25.07.2019 added a new regulation 32A for the sale of the corporate debtor as a going concern under liquidation. As per this new liquidation regulation, if the committee of creditors or the liquidator is of the opinion that the company or its business should be sold as a going concern, then the liquidator in order to maximize the value shall first endeavour to sell the whole company or identified assets and liabilities or the business as a going concern.
One last chance
The sale of assets as a going concern under liquidation is very similar to a Resolution Plan during the insolvency and resolution process. Liquidation kicks in only when the maximum period of 330 days or any extended period as approved by the adjudicating authority expires in the corporate insolvency resolution process (CIRP). The sale of assets of the company as a going concern under liquidation is one last chance provided by the Regulator to preserve the value of the company.
For the period from 2016 till September 30, 2020, the amount realized by financial creditors for resolution plans approved under IBC is Rs 1,89,212 crore, which is 185 per cent of the liquidation value of the assets. The new regulation shall surely help to preserve the value of the assets of a company under liquidation, as value realized for assets sold under liquidation as a going concern may be closer to value realized in a resolution plan, especially in cases where the going concern status of the company is imperative like in running power plants or plants having valid PPA and/or licences, Engineering Procurement Construction (EPC) companies where the bulk of assets are under receivables which may be in arbitration, manufacturing companies employing workmen and operational in liquidation period.
As per IBBI report in its newsletter July-September 2020, since the start of insolvency in India in 2016 up to September 2020, a total number of 4008 cases have been admitted in insolvency, out of which 1025 are in liquidation comprising 26% of the total cases admitted in IBC. Further out of the 1025 cases in liquidation till 30.09.2020, only 132 cases have submitted a final report, and the remaining 893 cases are still undergoing liquidation.
Some Practical Challenges in implementing the Liquidation Regulations:
Though adjudicating authority has approved several cases as corporate debtor/ company to be sold as a going concern under liquidation, there remain few challenges in the liquidation regulations. I have taken the liberty to outline some of these challenges below:
- There is no mechanism in place to allow the liquidator to appoint new board of directors of the Investor and remove the old directors. Normally in the corporate insolvency resolution process, there is a monitoring agency that is empowered to take such decisions. However, in liquidation, there is no such structure or authority provided to the liquidator.
- Though existing shares of the corporate debtor are extinguished under Section 53 of the IBC during the distribution of process from a liquidation sale, the question is that whether the regulations allow the liquidator to issue fresh equity in favour of the new investor or transfer ownership of the corporate debtor to a new investor.
- Income Tax Act section 79 states that no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless, “Where change in the shareholding is taken place pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.” In sale as a going concern under liquidation, there is no resolution plan approved, and thereby the carry forward of losses provision may not be applicable under liquidation. This is an extremely important point as when recasting the balance sheet by an Investor after he has acquired the company, the capital gains arising out of write-offs of liabilities would need to be set off against the carry forward losses, and no carry forward of losses may make the entire investment proposition completely unviable.
Basis my experience as a liquidator and managing few cases in IBC, I have below mentioned some suggestions which I believe may help in resolving these issues –
- The regulator may consider providing an implementation period of three months post-issuance of sale certificate by the Liquidator in favour of the Investor. This implementation period may be monitored by a Liquidation Monitoring Committee similar to the monitoring committee structure available during the corporate insolvency resolution process. The role of this committee shall be to work to renew all licenses, approvals from statutory, government bodies, etc and facilitate a smooth handover of the assets of the company to the new Investor.
- The sale of the corporate debtor under liquidation process may be termed as “akin to a resolution plan under CIRP”. This would probably facilitate carry forward of losses in case of takeover of the company by an Investor.
- The powers of the liquidator may be enlarged to allow issuance of new shares in favour of the investor in the sale of the assets of the company as a going concern under liquidation, and also powers to discharge the earlier board of directors, and appoint a new board of directors of the Investor.
These changes/ amendments may go a long way to make the sale of the company as a going concern under liquidation a viable proposition for an investor and garner more interest, and thereby preserve value for the creditors.
Nitin Jain is the Senior Partner at AAA Insolvency Professionals LLP. Views expressed are the author’s own.
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