Trends in Liquidation in India by Bobbala Jyothirmai

The landscape of corporate liquidation in India has been evolving rapidly, influenced by regulatory changes, economic pressures, and market dynamics. Keeping this in view, the current article primarily aims at understanding the current state of liquidation in India. This read aims to give a thorough examination of the ongoing changes to the law and relevant statistics, with a focus on understanding the need for sector-specific amendments to IBC.

Regulatory Landscape and Amendments

Since its enactment, the Insolvency and Bankruptcy Code, 2016^[1] (hereinafter, the IBC) has brought about a significant shift in the corporate insolvency and liquidation related legal framework in India. It was elemental in providing an organized framework for handling insolvency cases, thus changing the overall restructuring space. IBC entered on the heels of a long list of prior legislations aimed at rescuing insolvent firms which were inefficient as they were spread across a range of legislations, including the Companies Act, 2013^[2], Sick Industrial Companies (Special Provisions) Act, 1985^[3], Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002^[4] among others.

The IBC has been subject to amendments ever since its enforcement to ensure that it is in line to achieve the goal of expediting and simplifying the insolvency and bankruptcy proceedings in India. To further streamline and strengthen the liquidation process, the most recent changes include the amendments to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016^[5] (hereinafter, the Regulations).

Some of these changes include allowing the reduction of the reserve price of assets under certain conditions and fostering more flexible liquidation sales. For example, if the nature of the asset is that it is valued based on CIRP valuation, then the liquidator can decrease the reserve and auction price by 25% with the consent of the SCC. This change intends to provide flexibility and competitiveness to the market sale of assets. For fresh valuations, a 10% reduction is allowed in subsequent auctions. Some other amendments include the requirement of prior SCC consultation for private sales, and that the liquidators must convene SCC meetings at least quarterly.

Now what is liquidation as a going concern that we are getting to see these days, such as in the case of the recent Future Retail Liquidation?

Typically, liquidation entails the disposal of assets, distribution of funds resulting from the sale of assets, or realization of claims against the corporate debtor or their provision for necessary corporate dissolution. However, an amendment^[6] to the Regulations now provides for selling a company under liquidation on a going-concern basis. This amendment offers another chance to get a handle on the business as an entire entity instead of simply liquidating its properties.

Rulings have further clarified that liquidation as a going concern is tantamount to a CIRP and have provided the reliefs generally available in the cases of CIRP to these going concern sales. For example, in the case of Perfect Day Inc.^[7] where the NCLT approved the transfer of Sterling Biotech through a liquidation process as a going concern, reliefs such as the deletion of the share capital and the purchase of the corporate debtor without assuming the earlier liabilities i.e., on a clean slate basis, make it seem akin to a CIRP. Thereafter, Sterling Biotech was acquired by a US-based food technology startup Perfect Day, which was approved by the NCLT.

Similarly, in the matters of Divine Vidyut Ltd.^[8] and Kohinoor Pulp & Paper Limited^[9], the NCLT held that the sale of a corporate debtor through liquidation as a going concern is akin to a de facto CIRP. These decisions underscore the accommodative nature of the IBC framework when it comes to promoting business sustainability and optimizing value in the corporate winding-up process.

Trends in Liquidation In India: A Statistical Perspective

The Economic Survey of India^[10] (2023-24) noted that till March 2024, the total CIRPs ending in liquidation were 2,476. While detailed information for the year 2023-24 is awaited from the IBBI, a perusal of the data^[11] from 2017-23 reveals that around 2120 (which amounts to around 31% of the total cases admitted) companies have gone into liquidation since the enforcement of IBC. These companies are spread across various industrial sectors, which showcases a diverse landscape.

Approximately 40% of the companies fall within the manufacturing sector, which includes textiles, electronics, steel, automotive, chemicals, and ceramics. The infrastructure and real estate sector accounts for about 10%, while IT and services also represent 10%, encompassing IT services, consultancy, and e-learning. The energy and power sector comprises around 5%, focusing on energy production and renewable resources. Shipping and logistics contribute another 5%, with companies engaged in logistics and freight services. The hospitality sector accounts for 5%, while agri-business represents another 5%, involving companies in agriculture and food production. Finally, the remaining 20% includes a variety of diversified companies spanning sectors such as retail, fasteners, and exports.

Some of the significant reasons the manufacturing and real estate sectors top the list could be the intense competition they face, changing consumer behaviors, and economic downturns. Companies such as Bhupen Electronic, Hind Motors, and Gujarat Oleo Chem Limited are stark examples of entities going down due to their inability to sustain amidst the rising competition in their respective sectors. This leads to efforts to avoid liquidation through asset sales or business unit divestitures. However, these efforts often encounter challenges like valuation disputes, regulatory hurdles, and adverse market conditions.

Over the years, the role of creditors has also evolved, with creditors, both operational and financial, becoming more proactive in initiating insolvency proceedings. The IBC empowers creditors especially financial, giving them a central role in driving the resolution process and ensuring their interests are better protected. From the data referred to above, another significant categorization to pay heed to is who triggers the proceedings. Around 65 % of the proceedings are initiated by the Operational Creditors, followed by Financial Creditors, initiating 19%, and the remaining by the Corporate Debtors who declare themself insolvent. To understand the reasons behind operational creditors taking up such a major chunk of initiations, it is important to realize that a significant portion of these operational creditors are small vendors and suppliers who, by any means, hope to recover dues from the companies.

Many of these suppliers or service providers face financial distress when their corporate debtors fail to pay or even delay their obligations, thus resulting in legal proceedings that involve filing for bankruptcy. Despite such filings being contrary to the very spirit of the IBC, whose underlying premise is the revival and sustainable continuation of a Corporate Debtor, they do not raise eyebrows primarily given the increased propensity for Corporate Debtors to pay back their dues to settle the matters. This is supported by the data^[12] from the IBBI, where it was noted that out of a total of 2262 rescued companies that were admitted to the CIRP till June 2023, around 1005 ended in appeal, review, or settlement, and 897 applications to initiate the proceedings were withdrawn.

Further, operational creditors typically have fewer avenues for recovering debts than financial creditors. As a result, they may resort to filing for bankruptcy even though there is a chance they may not be allotted anything in the resolution plan, in the hope of the possibility of recovering at least a portion of their dues. There is also an emerging awareness among operational creditors over their rights and the opportunities of filing for insolvency to ensure that the cases are filed to secure their interest. Aggregately, all these factors have contributed to an increased number of operational creditors filing cases in bankruptcy courts due to their struggles to cope with defaults from corporate debtors.

Future Outlook

Liquidations in India are expected to continue due to vigorous economic competition and business turbulence. The IBC is continually undergoing revision with changes meant to enhance effectiveness and spade over existing legal provisions. The changes that have been made here focus on making processes less complex, more clearer and making the final outcomes fair for all the parties involved. The efforts of the IBBI to this end are clear through its constant initiatives to better the processes under the IBC.

The most recent example is the IBBI’s proposal to standardize the format of the progress reports, which are mandated to be submitted by the liquidator under Regulation 15 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016^[13]. It intends to streamline the process for a liquidator and ensure uniformity in reports.

The IBC is also being amended to attend to sector-specific needs such as real estate for example. It recently notified the public of its proposed plan to implement the recommendations of Amitabh Kant's Committee Report on Real-Estate Projects^[14], which noted that “the IBC needs to be reformed to better accommodate the complexities of the real estate sector.” This is fairly in line with the report of the Colloquium on Functioning and Strengthening of the IBC Ecosystem, which pointed out that a large number of real estate cases have remained unresolved for a long period of time as the current framework of CIRP is not conducive to address the issues specific to this sector.

To this end, some of the proposed changes included:

1. To mandate the Insolvency Resolution Professional (hereinafter, IRP)/ Resolution Professional (hereinafter, RP) to register all real estate projects under the Real Estate (Regulation and Development) Act, 2016^[15] (hereinafter, the RERA) or to extend the registration of the real estate project under RERA, wherein the registration is expired or about to expire.
2. To mandate the IRP/ RP to operate a separate bank account for each project undergoing CIRP, in line with the RERA provision for maintaining separate accounts for each project and to ensure transparency in the process.
3. To allow RP to hand over the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process, with the approval of the Committee of Creditors, to facilitate the smooth handover of occupied units or where possession has been transferred to home buyers.

While the above amendments are yet to materialize under the existing insolvency law, changes such as the exclusion of flats whose possession has been granted but conveyance deeds have not been executed or registered from the liquidation estate [under Regulation 46A introduced in the IBBI (Liquidation Process) Regulations, 2016^[16]], have already been implemented. It is only a matter of time before we see further amendments to the effect of making liquidation processes easier not only in the real-estate landscape but in other sectors as well.

Conclusion

An increase in liquidation cases, as observed through regulatory changes and worsening economic conditions, shows a transition to more rigorous and systematic insolvency proceedings. With India still making changes and experimenting with the insolvency environment and its policies and with the global and domestic economic system in a state of flux, the sphere of corporate liquidation is rapidly expanding and holding immense prospects for corporate players, creditors, and the economy in general. Further, embodying the imperatives of the IBC and its amendments coupled by landmark case laws and potential augmentations such as new NCLT benches and reforms in specific procedures of sectors under consideration augment the steadiness in this area and afford the country a stronger structural devise for managing insolvency and liquidation.

Authored by: Bobbala Jyothirmai |Advocate, High Court & District Courts in the State of Telangana

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^[1] The Insolvency & Bankruptcy Code, 2016.

^[2] The Companies Act, 2013.

^[3] The Sick Industrial Companies (Special Provisions) Act, 1985.

^[4] The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

^[5] The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

^[6] Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2016 (published on June 6, 2018).

^[7] 2022 SCC OnLine NCLT 283.

^[8] 2021 SCC OnLine NCLT 23451.

^[9] 2024 SCC OnLine NCLT 235.

^[10] Monetary Management and Financial Intermediation, the Economic Survey of India 2023-24.

^[11] IBBI Report on CIRPs ending with order of liquidation (2017-23).

^[12] The Quarterly Newsletter of the IBBI (April-June 2023), Vol. 27.

^[13] Regulation 15, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

^[14] Report of the Committee to examine the issues related to Legacy Stalled Real Estate Projects, July 2023.

^[15] The Real Estate (Regulation and Development) Act, 2016.

^[16] Regulation 46A, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

https://en.wikipedia.org/wiki/Insolvency_and_Bankruptcy_Code,_2016