Not Readily Realisable Assets (NRRA) in Liquidation: A Mechanism for Maximising the Value of the Assets
Arvind Sehdev
Passionate Advocate | Partner at a prestigious law firm | G20 YEA Delegate | Council member - CII Chandigarh | Past Chair Yi Chandigarh (2024) |
Abstract:?The Insolvency & Bankruptcy Code, 2016, introduced for reorganizing and restructuring entities on the verge of a collapse, provides for a time-bound liquidation process.
Introduction
The Insolvency & Bankruptcy Code, 2016 (“the Code”) was introduced for reorganizing and restructuring entities on the verge of a collapse. While efforts are made to ensure the revival and continuation of a corporate entity through a resolution process, there are occasions when an entity could suffer corporate death by liquidation under Section 33 of the Code. Upon commencement of liquidation, a liquidator is appointed who creates a liquidation estate held by him in a fiduciary capacity for the benefit of the stakeholders.
Not Readily Realisable Assets
Out of this pool of assets, some may be converted to cash quickly while for others realization may be a time taking process. Assets which are not easily convertible to cash and could take an indefinite waiting period for realisation are called ‘Not Readily Realisable Assets’ (“NRRA”). The explanation to Regulation 37A 1 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) defines NRRA as those assets in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions.
Challenges Associated with NRRA
Significantly, under Regulation 44(1) of the Liquidation Regulations, a liquidator has one year from the date of commencement of liquidation to complete the liquidation process. The concern associated with NRRA is that its indefinite realisation timeline jeopardizes the objective of a time-bound liquidation process, leaving the liquidator with one of two choices. First, to await the realisation of the NRRAs which means depreciation in asset value, and second, to leave the asset unrealised out of the liquidation pool and pay the stakeholders with the proceeds available at the time without deriving the value from the NRRA. The effect of both is detrimental to the Code’s objective of a time-bound process for facilitation of maximisation of the value of the assets.
The NRRA Mechanism
To address the issue of NRRA, the Insolvency & Bankruptcy Board of India inserted Regulation 37A of the Liquidation Regulations. Under this Regulation, a liquidator can transfer or assign a NRRA through a transparent process to such persons who would otherwise have been eligible to submit a resolution plan during the insolvency resolution process, after deliberations with the Stakeholders’ Consultation Committee (“SCC”). Thus, any person who is ineligible to be a resolution applicant under Section 29A of the Code cannot be a buyer of a NRRA.
In the case of Bhushan Power & Steel Limited, the liquidator appointed under the Insolvency and Bankruptcy Code, 2016 utilized the NRRA mechanism to transfer certain assets to a buyer through a transparent process. The assets in question included a power plant and a machinery unit that were not readily realisable through the regular liquidation process.
The liquidator issued a process memorandum inviting prospective investors for the transfer of these assets in accordance with Regulation 37A of the Liquidation Regulations. After conducting due diligence and obtaining the necessary approvals, the transfer was completed and the sale proceeds were utilized to distribute funds to the stakeholders in the liquidation process.
This use of the NRRA mechanism was a significant step towards maximizing the value of the assets in a time-bound manner, thereby achieving the objective of the Insolvency and Bankruptcy Code, 2016.
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Advantages of NRRA Mechanism
Unlike a resolution plan where a successful resolution applicant acquires the business of the corporate debtor as a going concern, acquiring an asset which is not easily realisable in liquidation process permits the buyer to hand-pick the asset best suitable to their requirements through a confidential and transparent process. This is advantageous for the buyer as without having to assume control of the corporate debtor’s business operations, an asset that is conducive to the growth and development of the buyer’s business is acquired at a price much cheaper than the market price.
Under the NRRA mechanism, the liquidator issues a process memorandum inviting prospective investors for assignment or transfer of NRRAs. Similar to an Expression of Interest issued by a resolution professional requesting bids for resolution of the corporate debtor, this process memorandum is drafted to provide interested parties with information on the asset that may be useful to them in making an offer for purchasing an asset. After passing the eligibility assessment criteria set out in the process memorandum issued for handover of NRRA in terms of Regulation 37A, the potential investor is at complete liberty to verify the accuracy and reliability of the records of the corporate debtor and obtain independent advice on the same. The potential investors, then, make their bids for assignment/transfer of the NRRA, and the most suitable bid is chosen by the liquidator in consultation with the SCC. However, in the event the route adopted for transfer/assignment of NRRA remains unsuccessful due to the peculiarity of the asset or circumstances associated with it, the liquidator, with permission of the Adjudicating Authority, may distribute such NRRAs among stakeholders.
Disadvantages of NRRA Mechanism
The concern associated with NRRA is that its indefinite realisation timeline jeopardizes the objective of a time-bound liquidation process, leaving the liquidator with one of two choices. First, to await the realisation of the NRRAs which means depreciation in asset value, and second, to leave the asset unrealised out of the liquidation pool and pay the stakeholders with the proceeds available at the time without deriving the value from the NRRA. The effect of both is detrimental to the Code’s objective of a time-bound process for facilitation of maximisation of the value of the assets.
Conclusion
A transfer of NRRA is a win-win situation for all, i.e., the buyer, the liquidator, and the stakeholders because the buyer obtains a viable asset for their business operations facilitating timely completion of the liquidation proceedings for the liquidator and allowing stakeholders to exit at an earlier stage from the liquidation process than having to wait out a long period for deriving any value from the NRRA. Hence, the NRRA mechanism is a godsend for investors looking to get their hands on tangible assets at a discounted price despite the risk of an indefinite timeline for realisation attached to it for the ultimate buyer. The buyer, however, shall have to carefully conduct their diligence to ensure that the net effect of purchasing an asset even at a reduced cost must outweigh the cost of recovery in order to get a beneficial outcome from the NRRA mechanism.
References:
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