IBBI gives defaulting promoters a last chance

KR Srivats New Delhi | Updated on April 29, 2019

Proposed changes in liquidation norms allow corporate debtors to file for a ‘compromise’

Promoters — who were forced to cede control of their companies owing to trigger of IBC process — may get a window of opportunity to make a comeback at the liquidation stage, if the Insolvency and Bankruptcy Board of India’s (IBBI) proposed draft regulations on changes in ‘liquidation process’ are anything to go by.

Draft regulations allow a ‘corporate debtor’ facing liquidation to file for a ‘compromise or arrangement’ scheme under the Companies Act that would enable the debtor to continue the journey as a going concern.

Insolvency law experts have mixed views on the utility of this window for promoters to make a comeback. Some see it as an important step as it ensures that viable corporate debtors are resolved even at the liquidation stage.

There are, however, experts who feel that this window should not be seen as a route for promoters to regain control.

Saurav Kumar, Partner, IndusLaw, a law firm, said the draft regulations would potentially allow the promoters to come back into the picture at the liquidation stage. “This would be good for the ecosystem and allow for the corporate debtors to file for a compromise and get a real chance to continue as a going concern,” he said.

Saurabh Singh, Partner, Khaitan & Co, a law firm, felt this may perhaps better the situation for promoters who are required to cede control. He, however, added that in any case Section 12 A allows promoter to regain control even during corporate insolvency resolution process (CIRP). “So, this should not be a big issue. Globally, everybody including erstwhile promoters are allowed to bid for assets in insolvency,” he said.

Along with draft regulations on proposed changes, IBBI has come up with a discussion paper on corporate liquidation process that highlights various issues impacting the liquidation process of a company under the IBC.

Public views sought

Stakeholders’ and public can send in their comments latest by May 19. The aim of the proposed regulations is to help avoid closure of a viable corporate debtor (CD) or business of the CD and expedite liquidation process, both of which promote the objective of maximising the value of the assets of the CD.

The draft regulations have also introduced concepts like stakeholders’ consultation committee for advising the liquidator on sale of assets and/or business.

Singh said that formation of stakeholders committee is also step in the right direction, so that unlike in CIRP, other stakeholders like operational creditors have a say from early stage and can be consulted by liquidator before taking critical decisions which can otherwise be prone to litigation.

Stipulation of timelines in submission of claims, distribution of sale proceeds recognising priority of charge holders inter-se are also steps which can help in efficient conduct of the liquidation process and brings in the required clarity pre-emptively.


Since conciliation is a faster process than arbitration, the discussion paper has suggested that the liquidator may be empowered to provide for conciliation in case of disputes regarding the ownership of assets.

The discussion paper has also sought public comments on whether resolution professional (RP) can continue as liquidator. There are views for and against such a move. Those opposed argue that RP has a vested interest in liquidation as he would earn fee as liquidator for years, and, therefore, would not endeavour for a resolution plan. Since he failed as a RP as there was no resolution plan, he should not be the liquidator.

However, some others argue that he must be appointed as liquidator except in cases of misconduct. They argue that RP is familiar with CD and has details of the claims and assets and liabilities. It will, therefore, be easier for him/her to run the CD as a going concern and obtain good values from sale, they said.

Published on April 29, 2019

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