IBBI proposes market for illiquid assets

According to the statistics by the Insolvency and Bankruptcy Board of India (IBBI), one in 18 companies undergoing liquidation have been fully dissolved under the process. And more than one-third of the 914 such companies breach the statutory timeline of one year for dissolution under the Insolvency and Bankruptcy Code.

In order to address the issue of delays in liquidation that tend to reduce the realisable value of such assets, the IBBI has proposed that liquidators must be allowed to assign the beneficial interest in these assets to third parties. It has also suggested that creditors must be allowed to transfer their debts during liquidation and move on without awaiting the final sale. These proposals will ensure that a new market is created for the company’s assets after liquidation.

As per law, the liquidation process must be completed within one year and the resulting proceeds distributed as per the waterfall mechanism. However in reality, the process takes a long time and creditors have to wait for years to get their claim amounts. And while creditors are permitted to
assign their claims or interests in favour of third parties at the resolution stage, such assignment under the liquidation regulations is currently not permissible. The bankruptcy regulator has therefore recommended a course correction.

The IBBI has recommended assignment of illiquid assets like sundry debts, contingent, awaited or sub-judice receivables, which could take an indefinite amount of time to be converted into cash. A liquidator may not have the required resources to pursue recovery of such not-readily realisable assets.

Since such assets have the tendency to extend the liquidation timeline, remain unsold, reduce the realisable value and deprive the creditors of their recoverable amounts, the IBBI has suggested that

• Liquidators would be allowed to assign or transfer beneficial interest in illiquid assets in favour of any third party. For instance, a company under liquidation is involved in a property dispute that can fetch it a large sum in the future. But, as the case may remain pending for years, a liquidator can transfer the recoverable interest in such property to any person except those who are debarred from submitting a resolution plan under the IBC.

• If there is a probability of recovery and the liquidator wishes to retain a partial interest in the transferred asset, he may enter into an agreement which would give him a share of the proceeds, which is also known as a recompense arrangement.

• Creditors can assign the debts due from the company in favour of a third party, so that it can quickly monetise its assets. Any assignee who receives such interest will replace the creditor in the NCLT’s records.

According to experts, the IBBI’s proposals will help create a niche market for actionable claims which emanate from liquidation proceedings.