Liquidation Process Delays: Identifying Causes and Proposing Solutions - Centrik Group

Introduction

The Insolvency and Bankruptcy Code of 2016 (IBC) was a pivotal legislation that addressed financial distress in the Indian economy. It marked a departure from the prior recovery techniques under various enactments such as Sick Industrial Companies (Special provisions), Act, 1985 to The Provincial Insolvency Act, 1920, The Presidency Towns Insolvency Act, 1909, The Code of Civil Procedure, 1908, and the SARFAESI Act, 2002 in favour of developing tools to revive, resolve and restructure ill and troubled debtors.

One of the key features of the IBC that distinguishes it from its predecessors is the 'timebound' settlement of the corporate debtor's debts. According to the Code, the procedure included in the Corporate Insolvency Resolution Procedure (CIRP) must be completed within 180 days, or an extended term of 90 days, and within 330 days, including any extensions and time spent on court activities. In summary, the resolution procedure must be completed within 330 days; otherwise, the Adjudicating Authority may initiate liquidation procedures under Chapter III of the Code.

The accomplishments of any Insolvency and Resolution Process or Liquidation Process are primarily assessed using two critical parameters, which are: Time Quotient and the Value Realised through the process.

These path-breaking moves have accelerated the value of the recovery process tremendously, addressing, multiple challenges i.e. non-cooperation from the promoters, adjudication and process delays to a great extent. For?equivalence, as of September 2024 30.09% of creditors/ ended claims were realised by the resolution plans. Concurrently, CIRP applications filed by financial creditors against 702 corporate debtor accounts have been either disposed of?by way of appeal/review/settlement or withdrawn in terms of section 12A. Also, liquidation orders have been passed in respect of 1224 corporate debtors.

It has been over eight years since the Insolvency and Bankruptcy was introduced in India in 2016, radically changing the country’s insolvency resolution landscape. But liquidation, the ultimate fallback when a resolution plan is not approved, remains fraught with challenges. These challenges not only prolong the realization of assets but also reduce their value resulting in poor recovery for the stakeholders. This article examines the hurdles and proposes actionable solutions to enhance the efficiency/ efficacy of the liquidation process under IBC.

Key Challenges faced in Liquidation Process:

1. Land Parcel Litigation: Land parcel litigation is considered to be a major reason for liquidation processes. The primary reasons include legal issues surrounding ownership, encroachment and zoning restrictions of the land, which delay the disposal of these assets and thereby delay value realization.

2. Non-Cooperation of the former Management: The previous management and personnel of the corporate debtor (CD) are usually not cooperative enough with the Resolution Professionals/Liquidators and often do not allow access to the crucial Records/documents and Book of Accounts. Further, according to Section 19(2) of the IBC, 2016 RP’s can approach to the Adjudicating Authority (AA) but the litigation process contributes to the overall delays.

3. Causes for procrastination on the COC/SCC members decisions: The Committee of Creditors (COC)/Stakeholders Consultation Committee (SCC) composed of financial and operational creditors have important roles during the CIRP and Liquidation Process. However, their action is being stalled as a result of:

?? Lack of quorum or attendance of COC/SCC members

?? Conflicts among creditors and associated legal actions

?? Extended internal sign-off processes that are typical within financial institutions

?? Contested RP/Liquidator fees and appointment

?? Replacement of Insolvency Professionals, which results in more litigation process being involved

4. Delays in Adjudication Process: The ever-increasing number of cases in the NCLT and NCLAT has led to prolonged adjudications. The reasons are:

?? Late listing of application/petitions

?? Defective filing which leads to multiple submissions

?? Delayed proceedings of the avoidance transactions

?? The special courts are taking longer time to give the outcome for punitive actions against erring stakeholders

5. Lack of awareness of the Statutory Departments: The Income Tax Department, GST authorities, and other enforcement agencies have often initiated proceedings against the RP/Liquidator in most cases and orders despite provisions of moratoriums available in IBC. These additional court procedures burden the Liquidation Process.

6. Inadequate Technology and Information Utilities: Inadequacy arise from limited availability of financial records, security details and verification of claims. Lack of integrated technology solutions exacerbates the delay at an increased cost towards value maximization for the benefit of the creditors.

7. Specific Concerns with the Liquidation Process including; Stakeholders’ claim filings being several and delayed, vaguely defined procedures to sell businesses as going concern basis, challenges disposing of ‘Not Readily Realisable Assets’ due to?regulatory constraints, preferential, Undervalued, Fraudulent and Extortionate Credit Transactions (PUFE) matters being pending before the closure of the liquidation process.

Proposed solutions: Improving the Liquidation Process:

1. Improving Interface with the Corporate Debtor’s Former Management

?? Direct and enforce auditors, creditors, and other relevant parties to provide RPs/liquidators with financial data on the entity’s management.

?? Judgment of non-cooperative management should be harsher as it could include imposition of fines and non-granting future directorship positions.

?? Restrict non cooperative management from attending CoC/SCC meetings.

2. Restricting CoC Decision Making

?? Grant bank/FI representatives’ specific rights to make decisions without recourse or pre-approval.

?? Introduce an optional Code of Conduct for CoC/SCC members which will later be turned to mandatory rules.

?? Eliminate the system of bank-specific RP panels and instead open a new selection system through the IBBI.

3. Mitigating Adjudication Backlogs

?? Treating tribunal orders with the same sense of urgency as orders from the court.

?? Shortened and standardize formats for orders in bulk duration.

?? Make provisions for mediation within the scope of IBC.

4. Strengthening Liquidator Capacity and regulatory clarity; involving compulsory trainings and certifications on a regular basis, imposing definite guidelines on the timelines for the disposal and the liquidation processes, tax set-off policies need to be adjusted for the loss mitigating companies when their businesses are sold as going concern in liquidation and creating a collaboration framework in IBC for the RERA and other regulators in specific sectors.

Conclusion:

Legal controversies, inefficiency, and procedural setbacks that are often characteristic of litigation are some of the issues IBC has to deal with. To solve this issue, there has to be regulatory changes, technology integration, and human capital development strategy to these problems. All these moves tend to depend on collaboration between numerous parties, which is crucial to augment creditor trust, facilitate asset realization, and guarantee the effectiveness of IBC as an insolvency resolution system.