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Liquidation under insolvency and bankruptcy code a long and tedious journey

Maulik Vyas
Attachments of assets by various probe agencies for past investigations is a key issue for delays in liquidation

When Santanu T. Ray, a resolution professional, learnt that Conros Steel Pvt. Ltd will have to be liquidated, the first thing he did was to approach the committee of creditors (CoC) and requested all lenders to relinquish control over the company's assets, pledged as collateral for loans.

This control, or charge, as it is commonly called, is the lenders' right to sell the underlying asset, if the borrower fails to repay the loan. The requirement to get lenders to sign a letter and give up their claim is just one of the several problems being faced by liquidators appointed under the Insolvency and Bankruptcy Code (IBC).

With a large number of cases headed for liquidation, resolution professionals are still trying to make sense of the new regulations. Data from Insolvency and Bankruptcy Board of India (IBBI) showed that till 30 June, 136 firms were ordered to be liquidated. In the quarter to September, another 75 firms faced liquidation, taking the total number of resolution process ending in liquidation to 212 since the commencement of IBC.

According to Ray, partner of AAA Insolvency Professionals, one major issue for delays in liquidation is the attachment of assets by the enforcement directorate (ED), service tax, income tax agency or other probe agencies and statutory authorities for past investigations.

“The liquidator has to file an application in the National Company Law Tribunal (NCLT) to get the necessary direction to the agencies to release the assets so that the liquidator can carry on with liquidation,” said Ray, adding that until the asset is not ‘clean', buyers will not come forward, be it at the resolution or at the liquidation stage.

Ray is the liquidator for Mumbai-based Conros Steel, which owed around ₹784 crore to a consortium of banks and asset reconstruction companies (ARCs) led by the Central Bank of India. Public sector lender Punjab National Bank (PNB), the financial creditor, had filed the plea in the Mumbai bench of the NCLT against the defaulter. On 21 August, the tribunal had admitted the liquidation application since the CoC did not receive any viable resolution plan, despite publishing the invitation to submit resolution plans twice.

Besides, liquidation of large companies that failed to attract resolution plans are also underway. In June 2017, the resolution process for 12 large accounts was initiated by banks after a nudge from the Reserve Bank of India (RBI). Together, they had an outstanding claim of ₹3.45 trillion against the ₹73,220.23 crore liquidation value. 

Against Monnet Ispat and Energy Ltd's liquidation value of ₹2,365 crore, the claimants realized ₹2,917.12 crore in resolution, and for Amtek Auto Ltd, they realized ₹4,385.30 crore through resolution against the liquidation value of ₹4,129 crore. 

Of the 12 large accounts, Jyoti Structures Ltd and Lanco Infratech Ltd have been ordered to be liquidated.

Lawyers said as the law on liquidation is at a nascent stage, procedures need to be smoothened further. Almost two years since IBC came into force, the first firms that faced liquidation such as UB Engineering and Innoventive Industries have not been dissolved. 

Some believe that as the liquidator is allowed two years to liquidate the firm, some progress will be seen in the latter half of 2019. If it stretches beyond two years, the liquidator has to seek permission of NCLT, citing reasons for the delay.  

Experts also said no one has enough facts on liquidation to judge its success. Ashish Chhawchharia, partner and head of Grant Thornton India's restructuring practice, said as liquidation orders under IBC are around four-to-six-months old, at least for sizeable cases, the process is still evolving.

The challenges of a liquidator, he added, include wading through complicated land ownership patterns of the corporate debtor.

“For instance, in some cases, while the compound of the factory and plant and equipment belongs to the company, a chunky parcel of land inside the premises belongs to the promoter or his family members and therefore cannot be attached under IBC, making the whole asset less attractive to the buyer who wants the entire premises,” said Chhawchharia. 

Ashish Pyasi, an advocate with law firm Dhir and Dhir Associates, explained that recovery of dues by the liquidator from receivables, especially in cases where the parties are litigating, makes it difficult to even realize those assets. “Further, the initiation of proceedings by the company under liquidation can be done only with the prior approval of the adjudication authority, which means that additional compliance is required before proceedings can even be initiated by the company.”

Pyasi added that there have been cases where funds were not available and the assets were very less and the corporate insolvency resolution process cost and liquidation cost was higher than the available assets.