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Regulatory Alert: Amendment to the Insolvency and Bankruptcy Code (Liquidation Process) Regulations, 2016

31 July 2019

The Insolvency and Bankruptcy Board of India (IBBI) notified  the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 on 25 July 2019. In this regard, we bring to you a summary of the amendments with our commentary on the implications.

AMENDMENTS RELATING TO MODE OF SALE Area of Amendment Amendment Implications
1 Compromise u/s 230 of the Companies Act, 2013

A new Regulation has been brought out for dealing with cases where a compromise is proposed under Section 230 of the Companies Act.

A Timeline of 90 days is set for completion of the same which is not to be included in the liquidation period.

If sanctioned by Tribunal, the cost would be borne by the Corporate Debtor. Otherwise, the parties who propose the compromise would bear the cost. This cost shall not form part of the liquidation cost.

A slew of judicial pronouncements recommending arrangement u/s 230 of the Companies Act have paved the way for this Amendment, which allows the Corporate Debtor another opportunity to revive.

2 Going Concern Sale The Regulations now stipulate a going concern sale, before exploring other methods if:
1. The CoC has recommended the sale as such or
2. The liquidator believes a going concern sale would maximize the value
A deadline of 90 days has been set for sale as a going concern as well.

This amendment is to provide more clarity for a going concern sale (Regulation 32A)  to ensure that viable businesses get another shot at revival and would also ensure maximum realisation. Capping the timeline at 90 days is of essence here.

In a case where the Resolution Professional does not continue as the Liquidator and the CoC too has not taken a decision in this regard, the incoming liquidator might find it challenging to make an assessment for going concern sale and conclusion of the sale as a going concern within the prescribed timeline.  

3 Relinquishment of Security Interest A deadline of 30 days has been set for intimation of the secured creditor's decision regarding relinquishment or otherwise of the security interest. It is stated that the security interest shall be presumed to be part of the liquidation estate, if the decisions is not received within the timelines. It was seen that earlier there were significant delays in secured creditors decisions regarding relinquishment which led to hung situation while the value kept diminishing day by day. The liquidator was left remediless. This amendment will quicken the process and streamline the timelines.  With amendments shortening the timeline for completion of process of liquidation to ( 1 year + 90 days), this takes on more significance.
4 Sale Consideration

The Regulations have been revised to now provide a time of 90 days to the buyer to settle balance consideration, as against the 15-day timeline given earlier and has further provided for interest payments by the buyer at 12% for payments made after 30 days.

It also says that sale shall be cancelled if the consideration isn’t settled within 90 days.

A more practical timeline of 90 days is stipulated, which would probably attract more potential buyers.
5 Reduction of Reserve Price The liquidator can now in the first instance after a failed auction reduce the price upto 25% and thereafter, the reduction is capped at 10% per instance The aim of this Regulation seems to be to make sure that the stakeholders do not lose out on higher realisation due to errors in judgement or flawed price discovery. However, it is possible that investors might hold off anticipating further reductions.


1 Liquidation Cost The definition of liquidation cost has been broadened to include:

1. Costs incurred to preserve and protect all assets ( Including secured assets)
2. Costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern
3. The amount repayable to contributories under sub-regulation (3) of regulation 2A;
4. Any other cost incurred by the liquidator which is essential for completing the liquidation process:
Provided that the cost,  in relation to compromise or arrangement under section 230 of the Companies Act, 2013  shall not form part of liquidation cost.’.

With the concept of going concern sale gaining momentum and eventual recognition in the Regulations, it was essential to classify the costs incurred for the same as liquidation costs.

Further, to include the costs incurred to protect the assets and to include a general head such as "any other cost" brings within its ambit a lot more as compared to the relatively restrictive definition earlier. 

As the Liquidation costs fall first in the priority under Section 53, it is equitable that the expenses incurred on liquidation be discharged first and this definition is a step towards it.

2 Contribution to Liquidation Costs by the financial Creditors A new Regulation has been brought out for cases where the Corporate Debtor's liquid resources fall short of the estimated liquidation Costs. This Regulation empowers the liquidator to call upon the FCs to contribute the shortfall in proportion of their debt, which shall be kept in a separate account and interest shall be paid at bank rates. While the Code provides for interim finance during CIRP, it has been silent on the financing of liquidation costs, leading to various interpretations. This amendment removes the practical difficulty faced by liquidators in running the process and lenders in financing the process due to lack of an explicit provision. Consequently, the burden on NCLTs would also reduce.
3 Liquidator's Fee (Prospective amendment) The issue of fee to liquidator ( In cases where the same has not been decided by the CoC) has been split into two sections:

1. For process under Section 230 - As given to the Resolution Professional
2. For the balance period, the fee would be as per IBBI table, on terms as before. No amendments have taken place in this area.
Clarifying the fee to be paid to the liquidator for process under Section 230, in cases where the same hasn’t been decided by the CoC reduces ambiguity. However, in cases where the Resolution professional doesn’t continue to be the liquidator, the incoming Liquidator would be bound by the fee being paid to the Resolution Professional


1 Constitution of a Consultation Committee

The Regulations apart from setting a deadline of 60 days for constitution of Consultation committee, now also has come out with guidelines for constituting basis the admitted claim amount.  

This now mandates constitution of Stakeholders Committee. Capping the no of representatives to a number, brings in efficiency to the consultation and the decision making process. The prescription is as follows:

2 Claims The Regulation has been amended to provide for the creditors to now  update their claims submitted during the CIRP, as against the compulsory re-submission of claims earlier. Earlier, the Regulation mandated compulsory submission of claim during liquidation irrespective of whether the creditor submitted the claim during CIRP or not. Various judgements have also come out where it was made clear that the claim has to be considered afresh during liquidation process. This Regulation greatly reduces compliance related stress on the creditors, especially Operational creditors who might not be keeping tabs on the latest developments with the same interest as that of Financial Creditors.

Although not explicitly stated, it can be understood that, in  a case where the creditor does not update the claim as submitted during CIRP, the claim admitted during CIRP would be admitted during liquidation. However, in a situation where the RP and the Liquidator are different persons, Liquidator would still be bound by the decision taken by the RP.


1 Valuation The Regulations now provide for the liquidator to undertake fresh valuation even in cases where the same was undertaken during the CIRP, if he deems it necessary. The amendment gives an option to either use the existing valuation or go in for a fresh valuation, if the circumstances so require.
2 Revised timelines for completion of liquidation & Distribution of Proceeds

The timelines for completion of liquidation have been revised from 2 years to 1 year, which is extendible for a further period of 90 days in case of a going concern sale. The timeline for distribution too has been revised from 6 months to 90 days.

(Notwithstanding pendency of any application for avoidance of transactions)

This amendment would ensure that cases that go beyond a year come immediately under the radar of the NCLT, ensuring better monitoring mechanisms.

For cases, where the assets are in dispute, complying with the timelines may be difficult.

The IBBI has along with the amendments also released Model Timelines for the Liquidation Process and a specified Format vide Form H for filing the final report with the Adjudicating Authority, enabling better compliance.