[By Arushi Gupta]
The author is a student at the National Law University, Odisha.
The Insolvency and Bankruptcy Board of India (hereinafter ‘IBBI’) in a press release dated November 13, 2020, has notified the Insolvency and Bankruptcy Board of India (Liquidation Process)(Fourth Amendment) Regulations, 2020 (hereinafter ‘the Amendment’). The amendment enables the liquidator to assign or transfer a ‘not readily realizable asset’ (hereinafter referred to as ‘NRRA’) to any person after due consultation with the stakeholders’ consultation committee.The article aims to discuss the backdrop and possible implications of the amendment.
The amendment has been introduced to address the concerns with respect to the increasing delays in the liquidation process due to the non-realization of certain assets that are uncertain in nature and the realization of which takes time longer than the usual time frame for the realization of other assets.
These concerns were first highlighted by the report of the Bankruptcy Law Reforms Committee which while contemplating upon the “Rules to close the liquidation” for the code, discussed the issues regarding the probability of recoveries of certain assets forming part of the liquidation estate in the future (i.e after the end of the liquidation). The committee was of the view that the liquidator must close down the case with the permission of the adjudicating authority and create a trust wherein the recoveries would be deposited.
Subsequently, due to the rising number of corporate insolvency cases with a long-drawn liquidation process leading to a reduction in the realizable value of such assets, a discussion paper on the Corporate Liquidation Process was floated by the IBBI to address the aforementioned issue. The discussion paper discusses in detail the need for the amendment and the framework for the same. The discussion has also been substantiated with the examples of various International Practices and statutory provisions in the Indian realm, wherein assignment of a cause of action to a third party is allowed.
The code basically envisages the timely completion of the liquidation process so as to ensure that the assets of the Corporate Debtor can be put to use for alternate purposes. As per regulation 44(1) of the IBBI (Liquidation Process) Regulations, 2016, the liquidator is required to liquidate the corporate debtor within a period of one year from the date of commencement of the liquidation. However, the presence of NRRA in the liquidation estate leads to delays due to the uncertain nature of the asset and the indefinite period involved for the conversion of such assets into cash. An NRRA has been defined as any asset which is included in the liquidation asset and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit, and fraudulent transactions.
Before the amendment came into the picture, two scenarios could be envisaged:
- In case of dissolution of the Corporate debtor without realization of the NRRA, the assets would be left unrealized and in an undistributed state. Furthermore, the stakeholders would be deprived of their due recovery leading to the interests of such stakeholders being compromised; or
- In case the dissolution is kept pending for the purposes of realization of the value of NRRA, it would lead to mounting expenses of the liquidation process and also lead to depreciation of the value of an asset over the pending time period. Furthermore, the liquidator would have to arrange for monetary resources (i.e. funds) to suffice for the costs associated with legal proceedings. Additionally, considering the delay involved in the litigation, the liquidation process might extend beyond the timelines and hence defeat the entire object of timely completion of the liquidation process.
In order to address the above-mentioned concerns, the amendment has been introduced. The amendment essentially aims at enabling the liquidator to assign or transfer an NRRA to any person in consultation with the stakeholders’ consultation committee. It is to be noted here that the liquidator must first attempt to sell the assets. In case of failure to sell, the asset may be assigned or transferred to any person after consultation. In a scenario where both the remedies fail, the undisposed assets would be distributed amongst the stakeholders with approval from the Adjudicating Authority.
The discussion paper while contemplating upon the amendment discusses in detail the concept of assignment of rights and cause of action. With respect to assignment, in the case of ICICI bank Ltd. v Official Liquidator of APS Star India Ltd., the Supreme Court held that “rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties”. Hence assignment may be denied on the grounds of (a) a provision in the respective law barring the assignment, or (b) an agreement between the parties placing a restriction on assignment. It is to be noted that the entire discussion upon the assignment and the framework proposed by IBBI does not deal with the consequences or possible alternatives in a case where the agreement between the parties places a bar on assignment. Furthermore, another point of consideration that arises is that there is no express provision in the Code that bars or allows such assignment in the liquidation process. While the code does allow the creditors to assign their claims or interest in favor of the third parties at the resolution stage, there is no such right that has explicitly provided at the liquidation stage.
Considering the fact that time is the essence in the liquidation processes, the amendment would serve a dual purpose of ensuring the maximum realization of the NRRA and the closure of the liquidation process within the specified timelines. Furthermore, this move would also lead to the creation of a new market for these assets and consequently better utilization of such assets.
 Practices of UK, Australia, Hongkong and Singapore
 Transfer of Property Act, Section 132; Code of Civil Procedure, Order XXV
 IBBI(Liquidation Process) Regulations, 2016, Regulation 44(1)
 Civil Appeal No. 8393 of 2010