India: IBBI (Liquidation Process) (Amendment) Regulations, 2024 - A Greater Role For The Stakeholders' Consultation Committee

BACKGROUND

The Insolvency and Bankruptcy Board of India recently notified certain critical amendments to the IBBI (Liquidation Process) Regulations, 2016, which clarify the role of the stakeholders' consultation committee ("SCC") and aim to streamline and bring about greater transparency in the liquidation process. The IBBI (Liquidation Process) (Amendment) Regulations, 2024 ("Amendment"), which came into effect on February 12, 2024, provide, among other things, that the liquidator must consult the SCC before taking specified actions and that units in the possession of allottees of a real estate project are to be excluded from the liquidation estate. This Update analyses some of the key changes brought about by the Amendment.

KEY HIGHLIGHTS OF THE AMENDMENT

a. Consultation with the SCC:

The Amendment mandates that the liquidator must necessarily consult with the SCC prior to taking the following actions:

• The liquidator must consult the SCC and obtain its consent before filing an application for early dissolution of the corporate debtor under Regulation 14. Further, a detailed report incorporating the views of the SCC is also required to be submitted to the Adjudicating Authority along with the application for dissolution.
• Pursuant to a new sub-regulation introduced to Regulation 31-A, namely sub-regulation 6A, liquidators are now required to present the economic rationale and seek advice from the SCC before initiating or continuing any legal proceedings. Another newly introduced sub-regulation to Regulation 31-A, namely sub-regulation 6B, mandates liquidators to provide regular updates to the SCC on the following: (i) actual liquidation costs, with explanations for exceeding previously approved costs, (ii) the consolidated status of all legal proceedings, and (iii) the progress made in the process.
• The Amendment has inserted a proviso to sub-regulation 6 of Regulation 31-A, stipulating that the liquidator must now convene SCC meetings within 30 days of the previous meeting unless the SCC has extended the period between such meetings. However, at least one meeting per quarter must be conducted.
• As per Regulation 33, the liquidator is required to consult the SCC prior to selling the assets of the corporate debtor through a private sale.

The above amendments have been made to bring about greater transparency and accountability to the liquidation process by ensuring that the liquidator consults with the SCC before taking important decisions and calls regular meetings of the SCC. It also ensures that the SCC is kept appraised of liquidation costs and has an opportunity to provide its inputs on the strategy that the liquidator adopts to maximise the value of the liquidation estate. As many of the strategies adopted by the liquidator, such as the decision to institute legal proceedings or sell the assets through a private sale, involve various degrees of subjective judgments, these amendments would also ensure that the liquidator gets the benefit of the SCC's perspectives before taking these actions. Going forward, the liquidator would need to ensure that detailed minutes of SCC meetings are maintained to evidence that the liquidator has indeed consulted with the SCC on these critical decisions.

b. Compromise or Arrangement:

The IBBI has introduced a proviso to Regulation 2B that permits the liquidator to submit a proposal for compromise or arrangement only if the Committee of Creditors ("COC") has made such a recommendation during the resolution process under Regulation 39BA of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"). Further, such a proposal cannot be filed once 30 days have lapsed from the liquidation commencement date.

While the earlier provision allowed for the filing of a proposal for compromise or arrangement on the recommendation of the COC within 30 days of the liquidation commencement date, the amended provision specifically prohibits the liquidator from filing such a proposal after a lapse of 30 days. This is likely to streamline the process and ensure that the commencement of liquidation is not delayed on the ground that the liquidator is considering filing an application for compromise or arrangement.

c. Withdrawals from the Corporate Liquidation Account:

As per the amendment to Regulation 46, if a stakeholder claims entitlement to any amount from the corporate liquidation account prior to the dissolution of the corporate person, an application must be filed with the liquidator. Upon receipt of such an application, the liquidator is required to verify the claim and then request the IBBI to release the amount. Conversely, if the application is filed after the dissolution of the corporate person, the stakeholder must apply directly to the IBBI.

Prior to the Amendment, any request for entitlements from the corporate liquidation account could be filed only before the IBBI. There was also a time lag between the final report submission and closure of liquidation, during which there was no provision enabling a stakeholder to seek withdrawal of amounts from the corporate liquidation account. This amendment allows stakeholders to directly request withdrawal from the liquidator before the corporate entity is dissolved rather than having to approach the IBBI. This is likely to enable methodical and verified distribution of amounts from the corporate liquidation account to the stakeholder/claimant without significant delays.

d. Exclusion of certain assets from the liquidation estate:

In what is perhaps the most high-profile amendment, the IBBI has introduced a new Regulation 46-A, which provides that if an allottee in a real estate project has obtained possession of his/her property or unit from the corporate debtor, then such asset will be excluded from the liquidation estate.

The purpose of this amendment is well-intentioned, with the goal of ensuring that allottees of real estate projects do not risk losing their homes after they have obtained possession. The amendment is also consistent with other recent amendments that take homebuyer interests into account, including the amendments to CIRP Regulations in February 2024, which explicitly permit the resolution professional to call for resolution plans for individual projects of a real estate developer and require separate bank accounts to be maintained for each project. However, the language of new Regulation 46-A is likely to lead to ambiguities as the amendment only requires possession and does not necessarily require that the title of the unit should have passed to the allottee through a registered sale deed. The term "possession" is also not defined in the IBC or the Real Estate (Regulation and Development) Act, 2016 (though there is much case law on the concept), which may lead to concerns on how evidence of possession is to be proved in the absence of title to the unit.

e. Mode of Sale:

As per the amendment to Schedule I of the regulations, in the event of an auction failing at the reserve price, the reserve price at the subsequent auction can be reduced by up to 10% at a time. The one exception to such a staggered reduction in the reserve price is when the reserve price was fixed in terms of the valuation under Regulation 35(1), i.e. by considering the average of estimates arrived under the CIRP Regulations, in which case the liquidator, upon the advice of the SCC, is permitted to decrease the reserve price by up to 25%.

This amendment contemplates a staggered reduction of the reserve price as opposed to the pre-amendment provision, which permitted the liquidator to reduce the reserve price straightaway by up to 25%.

f. Amendments to Forms A and H under Schedule II:

In line with greater transparency and an emphasis on the process, the Amendment also makes changes to the information to be included when reporting on stakeholder consultations and changes to the compliance certificate required to be submitted by the liquidator to the adjudicating authority.

ANALYSIS

In contrast to resolution professionals during the corporate insolvency resolution process, the liquidation process under the IBC provided significant discretion to liquidators on matters relating to the SCC. By being more prescriptive on when the liquidator must necessarily seek inputs from the SCC, the SCC now has the authority to take part in several matters, including the decision for early dissolution, initiation of legal proceedings, reserve price setting, asset sales (including the mode, manner, and procedure of asset sales), and other matters. The broad contours of the Amendment touch on vital aspects of stakeholder participation, transparency and fairness in the process, and effective realisation for stakeholders, all of which are aimed at paving the way for better outcomes in the liquidation process.

The other key change from the Amendment involves excluding properties to which an allottee has been given possession from the liquidation estate. While this amendment is clearly intended to ensure that allottees do not risk losing possession of their homes in liquidation, how this will be implemented in practice remains to be seen.

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