LIQUIDATON ESTATE AND REALISATION OF ASSETS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

After his appointment, the Liquidator has to form a Liquidation Estate under Section 36, which comprises of the all the assets of the Corporate Debtor. The Liquidator holds the Liquidation Estate as a fiduciary for the benefit of all the creditors.

Liquidation Estate comprises of all assets of Corporate Debtor which includes the following:

• Any assets over which the Corporate Debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the Corporate Debtor or an information utility or record in the registry or any depository recording securities of the Corporate Debtor or by any other means as may be specified by IBBI, including shares held in any subsidiary of the Corporate Debtor.
• Assets that may or may not be in possession of the Corporate Debtor including but not limited to encumbered assets.
• Tangible assets, whether movable or immovable
• Intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the Corporate Debtor) and financial instruments, insurance policies, contractual rights
• Assets subject to the determination of ownership by the court or authority
• Any assets or their value recovered through proceedings for avoidance of transactions in accordance with this chapter
• Any asset of the Corporate Debtor in respect of which a Secured Creditor has relinquished security interest
• Any other property belonging to or vested in the Corporate Debtor at the insolvency commencement date
• All proceeding of Liquidation as and when realised

ASSETS NOT PART OF LIQUIDATION ESTATE

The following assets are not included in the Liquidation Estate and cannot be used for recovery in the liquidation:

• Assets owned by third party which are in possession of the Corporate Debtor, including assets held in trust for any third party, bailment contracts, all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund, other contractual arrangements which do not stipulate transfer of title but only use of the assets, such other assets as may be notified by the Central Government in consultation with any Financial Sector Regulator.
• Assets in security collateral held by financial services providers and are subject to netting and set off in multi-lateral trading and clearing transactions
• Personal assets of any shareholder or partner of a Corporate Debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this chapter
• Assets of any Indian or foreign subsidiary of the Corporate Debtor
• any other assets as may be specified by IBBI, including assets which could be subject to set off on account of mutual dealings between the Corporate Debtor and any creditor.

SALE OF ASSETS 

A Liquidator may sell an asset on a standalone basis or a set of assets collectively, or assets in parcels, or the whole Corporate Debtor as going concern or business(s) of the Corporate Debtor as going concern.

In cases, where an asset is subject to security interest, such assets cannot be sold unless the security interest therein has been relinquished to the Liquidation Estate.

MODE OF SALE  

Sell off assets of the Corporate Debtor by auction is the rule and sell of assets by private sale an exception. Only in certain specific circumstances, assets of the Corporate Debtor can be sold by private sale.

(a) Auction

Subject to provisions of Liquidation Regulation  2B, the Liquidator has to issue a public notice of an auction for sale under Liquidation Regulation 32 within forty-five days from the liquidation commencement date unless the Consultation Committee advises to extend the timeline. The Liquidator has to issue public notice for the next auction, in case of failure of the auction, within fifteen days from the last failed auction unless the Consultation Committee advises to deviate from the specified time period.

The Liquidator shall complete an auction process within thirty-five days from the issue of public notice for auction.

The Liquidator has to provide at least fourteen days from issue of public notice for submission of eligibility documents by prospective bidder. The Liquidator has to provide to qualified bidder at least seven days, for inspection or due diligence of assets under auction, from the date of declaration of qualified bidder.

A prospective bidder in an auction process  has to deposit earnest money deposit at least up to two days before the date of auction.

The Liquidator has to prepare marketing strategy, with the help of marketing professionals for sale of assets. The strategy may include releasing advertisements, preparing information sheets for the asset, preparing a notice of sale or laisoning with agents.

The Liquidator has to prepare terms and condition of sale, including reserve price, earnest money deposit as well as pre bid qualification, if any.  Liquidator cannot require payment of any non-refundable deposit or fee for participation in an auction under the Liquidation Process. Earnest money deposit cannot exceed 10 percent of the reserve price.  The reserve price has to be in accordance with Liquidation Regulation 35.

In cases where the auction fails at the reserve price, the Liquidator may reduce the reserve price by up to twenty-five percent of such value to conduct subsequent auctions. If the auction fails at reduced price, the reserve price may further be reduced by not more than 10 percent at a time.

The Liquidator has to issue a public notice of an auction in the manner specified in Liquidation Regulation 12 (3) specified for public announcement. The Liquidator may apply to the Adjudicating Authority to dispense with the requirement of Regulation 12 (3) keeping in view the value of asset intended to be sold by auction.

The Liquidator has to provide all the assistance necessary for the conduct of due diligence by the interested buyers.

From a date to be notified through circular by the Board, the liquidator has to sell the assets only through an electronic auction platform empaneled by the Board.

If the Liquidator is of the opinion that a physical auction is likely to maximise the realisation from the sale of assets and is in the best interests of the creditors, he may sell assets through a physical auction after obtaining the permission of the Adjudicating Authority. The Liquidator may engage the services of qualified professional auctioneering   specialising in auctioning such assets for this purpose.

An auction has to be transparent and the highest bid at any given moment has to be visible to other bidders. If the Liquidator is of the opinion that an auction, where bid amount is not visible, is likely to maximise realisations from the sale of assets and is in the best interest of the creditors, he may apply, in writing, to the Adjudicating Authority for its permission to conduct an auction in such manner.

If required the Liquidator may conduct multiple rounds of auctions to maximise the realisation from the sale of assets and to promote the best interest of the creditors.

Where the Liquidator rejects the highest bid in the auction process, he has to intimate the reasons for such rejection to the highest bidder and mention it in the next progress report. On the close of the auction, the highest bidder has to be invited to provide balance sale consideration within 90 days of the date of such demand. Payment made after thirty days will incur interest at the rate of 12%. The sale has to be cancelled if the payment is not received within ninety days.

On payment of full payment, the sale shall stand completed.  The Liquidator has to execute certificate of sale or sale deed to transfer such assets and the assets has to be delivered to him in the manner specified in terms of sale.

The time period of ninety days for payment of balance sale consideration had been inserted vide IBBI Notification dated 25^th July, 2019. Before the said notification, the time period to pay the balance consideration amount was fifteen days. IBBI has issued a circular dated 26.08.2019 wherein it has been provided that notification will be applicable to those Liquidation Proceedings which have been initiated after 25^th July, 2019.  In the matter of   Sundresh Bhatt, the Liquidator of ABG Shipyard Ltd.¹, the issue before the NCLAT was whether the bidder can take benefit of payment within 90 days in cases where Liquidation Proceedings have been initiated before 25^th July, 2019. NCLAT held that such benefit can be availed by the bidder. The relevant para is as under:

13. Perusing the Liquidation Regulations and Clause 12 of Schedule I as was subsequently introduced on 25.07.2019, the substituted Regulation which has been brought by way of amendment does not show that the Regulation is to be applied only prospectively. It is open ended provision relating to procedural law which in no way states that it will not apply to pending liquidation processes on the date of substitution. In our view, the Circular dated 26.08.2019 could not interpret the Regulations in the manner it is done. Power of Board under Section 196(1) (p) or (t) to issue guidelines cannot be expanded to interpreting provisions made. That is job of Courts to interpret and apply law. Reading the Regulation as amended we find it must be held to be applicable to liquidation process which are pending, and the provision can be applied considering stage of the process, irrespective of the date whether the liquidation process started before 25.07.2019 or on or after 25.07.2019 when Clause 12 Schedule I of the Regulations was substituted. This is not to say that sales already cancelled before 25.07.2019 for default of payment under earlier existing clause 12 can be reopened. Liquidators can rely on the amendment at the time of issue of Auction Notice being issued, irrespective of date of Liquidation Order of Adjudicating Authority. The Circular dated 26.08.2019, we hold is not legally enforceable to interpret applicability. Such Circular cannot be in the nature of substituting existing Regulation in the name of guidelines. The guidelines which are inconsistent with the subordinate legislation would not be enforceable. If provision is clear, external aid, that too inconsistent, cannot be applied. The provision has to be enforced by Tribunal as it is.

In Potens Transmission & Power Ltd.², NCLAT has held that ninety days period prescribed for payment in case of auction sale is mandatory and if payment is not made within ninety days, the sale can be cancelled. Relevant Para is as under:

8. When we look into the above regulation, it is clear that 90 days’ period provided for making the deposit is the maximum period under which the Auction Purchaser had to make the deposit. 2nd Proviso of the Item 12 of the Schedule I provided that sale shall be cancelled if the payment is not received within 90 days. When the Consequence of non-compliance of the provision is provided in the statute itself, the provision is necessary to be held to be mandatory. Item 12provides that payment is to be made within 90 days and with interest after 30 days at the rate of 12 percent. Non-compliance of 2nd Proviso, sale shall be cancelled if the payment is not received within 90 days. The Adjudicating Authority has rightly observed that in view of the Appellant having not made payment in 90 days, Adjudicating Authority has no option except to allow the Application filed by the Liquidator for cancellation of the sale. The action taken by the Adjudicating Authority is in accordance with the statutory provisions. We do not find any merit in the submissions of Learned Counsel for the Appellant as noticed above. Prayer ‘a’ in the Application which was filed through I.A. No. 3153 of 2021, itself is indicative that Appellant was never interesting in making the payment and he by different prayers wanted to prolong the proceedings.

In M/s Visisth Services Ltd³ the NCLAT has held that the bidder cannot wriggle out of the contractual obligations arising out of acceptance of his bid. Relevant para is as under:

18. Keeping in view the ration laid down by Hon’ble  Supreme Court of India in a catena of Judgments that the Bidder cannot not wriggle out of the contractual obligations arising out of acceptance of his bid  and also having regard to Regulations 32A and the scope and objective of the Code together with the Principle laid down by this Tribunal in ‘Mohan Gems and Jewels’ (Supra) we are of the opinion that the Appellant cannot be entitled to the EMD amount and the amount paid towards the Bid Purchase document, if he does not comply with the terms of the contract.

(b) Private Sale  

The Liquidator may sell the assets of the Corporate Debtor by means of private sale, if assets are perishable or the asset is likely to deteriorate in value significantly if not sold immediately or the asset is sold at a price higher than the reserve price of a failed auction or prior permission has been taken from the Adjudicating Authority for private sale. 

The Liquidator cannot sell assets, without prior permission of the Adjudicating Authority by way of private sale to a Related Party to the Corporate Debtor, his Related Party or any professionals appointed by him.

The Liquidator has to prepare a strategy to approach interested buyers for assets to be sold by private sale. Private sale may be conducted through directly liaising with potential buyers or their agents, through retail shops or through any other means that is likely to maximise the realisations from the sale of assets. The sale has to be completed in accordance with terms of sale.

The assets have to be delivered to the purchaser on receipt of full consideration for the assets in the manner specified in terms of sale.

The Liquidator cannot proceed with the sale of an asset if he has reason to believe that there is any collusion between the buyers, or the Corporate Debtor’s   related parties and buyers, or the creditors and the buyers, and has to submit a report to the Adjudicating Authority in this regard, seeking appropriate orders against the colluding parties.

ASSET MEMORANDUM

On forming Liquidation Estate under Liquidator Regulation 34 the Liquidator has to prepare an Asset Memorandum. If valuation has been done under CIRP Regulation 35 or FTIRP Regulation 34, the Liquidator will prepare Asset Memorandum within thirty days of liquidation commencement date based on Information Memorandum prepared under Section 29 with suitable modifications.

In other cases the Liquidator has to prepare Asset Memorandum within seventy-five days from the liquidation commencement date.  The Asset memorandum has to provide following details in respect of assets which are intended to be realised by way of sale

• Value of asset valued in accordance with Regulation 35
• Value of assets or business(s) under clause (b) to (f) of Regulation 32 valued in accordance with Regulation 35 if intended to be sold under those clauses
• Intended manner of sale in accordance with Regulation 32 and reasons for the same
• The intended mode of sale and reasons for the same in accordance with Regulation 33
• Expected amount of realisation from sale
• Any other information which may be relevant for the sale of asset

For other assets, the Asset Memorandum has to provide details about value of the asset, intended manner or mode of realisation, reasons for the same and expected amount of realisation.

The Liquidator has to file the Asset Memorandum along with the Preliminary Report to the Adjudicating Authority.

The Liquidator has to share the Asset Memorandum with the Board and members of the Consultation Committee having voting rights after receiving an undertaking from each member that such member shall maintain confidentiality of the information and shall not use such information to cause an undue gain or undue loss to itself or any other person.

VALUATION OF ASSETS INTENDED TO BE SOLD

Where valuation of assets has been conducted under CIRP Regulation 35 during Corporate Insolvency Resolution Process or Regulation 34 of Fast Track Corporate Insolvency Resolution Process, the Liquidator has to consider the average of the estimate of the values arrived under those provisions for the purpose of valuation for purpose of Liquidation Regulations.

In cases where assets are not covered under aforesaid regulations or where the Liquidator is of the opinion that a fresh valuation is required under the circumstances, the Liquidator has to within seven days of Liquidation Commencement Date, appoint two registered valuers to determine the realisable value of the assets or businesses under Section 32 (a) to (f) of Regulation 32 of the Corporate Debtor.

A relative of the Liquidator; a Related Party to the Corporate Debtor; an auditor of the Corporate Debtor at any time during the five years preceding Liquidation Commencement Date; and a partner or director of Insolvency Professional Entity of which a Liquidator is a member cannot be appointed as a registered valuer.

Registered valuers have to independently submit report to the Liquidator the estimates of realisable value of the assets of businesses computed in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017 after physical verification of the assets of the Corporate Debtor.

ASSET SALE REPORT

On sale of asset, the Liquidator has to prepare an Asset Sale Report under Liquidation Regulation 36, which has to be enclosed with progress reports containing realised value; cost of realization; the manner or mode of sale; if the value realised is less than the value of in the Asset Memorandum the reasons for the same; and the person to whom the sale is made and any other details of the sale.

ASSIGNMENT OF NOT READILY REALISABLE ASSETS

A Liquidator may assign or transfer not readily realisable assets through a transparent process, in consultation with the Stakeholders’ Consultation Committee in accordance with regulation 31A, for a consideration to any person, who is eligible to submit a Resolution Plan for insolvency resolution of the Corporate Debtor. Not readily realisable asset means assets included 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 referred to in Section   43 to 51 and Section 66 of the Code.

DISTRIBUTION OF UNSOLD ASSETS

The Liquidator may with permission of the Adjudicating Authority, distribute among the stakeholder an asset that could not be sold, assigned or transferred due to its peculiar nature or other special circumstances.

The application seeking permission of the Adjudicating Authority has to identify the asset, provide a value of the asset, detail the efforts made to sell the asset and provide reasons for such distribution.

RECOVERY OF MONIES DUE

The Liquidator has to endeavour to recover and realise all assets of and dues to the Corporate Debtor in a time bound manner for maximisation of value for the stakeholders.

LIQUIDATOR TO REALIZE UNCALLED CAPITAL OR UNPAID CAPITAL CONTRIBUTION

The Liquidator has to realise any amount due from any contributory to the Corporate Debtor.  Notwithstanding any charge or encumbrance on the uncalled capital of the Corporate Debtor, the Liquidator will be entitled to call and realise the uncalled capital of the Corporate Debtor. The Liquidator will also be entitled to collect the arrears, if any, due to calls made prior to the Liquidation. For such realisation, the Liquidator has to send notice to the contributory to make payments within fifteen days from receipt of notice. The Liquidator has to hold money so realised subject to the rights, if any, of the holder of any such charge or encumbrance.

No distribution will be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required in the constitution documents of the Corporate Debtor.

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1. Sundresh Bhatt, the Liquidator of ABG Shipyard Ltd.; Company Appeal (AT) (Insolvency) 398 of 2021

2. Potens Transmission & Power Ltd. Vs. Gian Chand Narang ; Company Appeal (AT) (Insolvency) No. 532 of 2022

3. M/s Visisth Services Ltd vs S. V. Ramani; Company Appeal (AT) (Insolvency) No. 896 of 2020