BackCentre notifies liquidation norms under new bankruptcy code
The liquidation norms under the Insolvency and Bankruptcy Code come into force with immediate effect
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New Delhi: The government on Friday notified the rules by which companies can go through liquidation under the Insolvency and Bankruptcy Code (IBC), 2016.
The regulations for the liquidation process are part of the rules being notified by the Insolvency and Bankruptcy Board of India (IBBI) to implement the code and, in the process, improve the ease of doing business in India.
The government earlier notified rules empowering the National Company Law Tribunal (NCLT) to be the appropriate adjudicating authority to handle corporate insolvency matters under the code.
Together with the registration of insolvency professionals (IP), IP agencies and notification of regulations under the code, IBBI now has the required infrastructure in place to address bankruptcy matters under the code.
Parliament passed the bankruptcy code in May. It aims to improve the ease of doing business in the country by facilitating smoother and time-bound settlement of insolvency and faster turnaround of businesses, along with creating a database of serial defaulters.
The regulations for the liquidation process issued by IBBI provide details of actions to be taken during the process of liquidation or dissolution of companies under the code. These regulations come into force with immediate effect.
The rules require an insolvency professional to be independent of the corporate debtor in order to act as a liquidator for the company. They prohibit “partners or directors of an insolvency professional entity of which the insolvency professional is a partner or director from representing other stakeholders in the same liquidation process".
They also mandate disclosure of any existing relationship of the liquidator with any of the stakeholders entitled to distribution of assets.
The rules require the liquidator to prepare and submit a preliminary report, asset memorandum, sale report, progress report, and final report prior to liquidation to the adjudicating authority, which is the NCLT.
The regulations specify the manner and contents of public announcements, receipt and verification of claims of stakeholders/creditors, the manner of realization of assets and security interest, and distribution of proceeds to stakeholders. They also specify the process of remuneration of a liquidator under the code.
According to the rules, the liquidator should ordinarily sell the assets through auctions, unless the asset is perishable in nature or is likely to deteriorate in value significantly if not sold immediately.
The government made IBBI operational from 1 December. Chaired by M.S. Sahoo, the board will act as the regulator of an ecosystem including insolvency professionals, agencies and information utilities. The 10-member board, which at present has four ex officio members other than the chairman, will soon have five more members, of which three will be full-time.
However, experts point out certain challenges that lie ahead after implementation of the insolvency code.
According to Sumant Batra, chairman of a New Delhi-based law firm Kesar Dass B. & Associates, there are three key challenges which are likely to arise. “The first challenge is attracting high quality insolvency professionals to setup the institution, build the standards and best practices and in the process assist the board for effective implementation of the bankruptcy code. The IBBI has registered three government bodies to function as insolvency professional agencies, not giving the time and space for the market to come forward and participate, which is a big challenge."
“The second challenge will come for the judges and professionals to honour the timeline of 180 days for implementation of the code as ambiguities may arise in the process. And the third challenge that may arise in the future is the issue of government over-driving this process. As a result, the government may end up controlling and monitoring the entire system, making private players uncomfortable," Batra added.
What remain unaddressed are the provisions of the insolvency code pertaining to individual insolvency resolution, which will be under the jurisdiction of debt recovery tribunals. The government is yet to notify regulations related to personal insolvency.
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