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The liquidation of a company and sale of stressed assets on a piecemeal manner may not be the best way as valuations could further dip and may be detrimental to the interest of various stakeholders as also lenders.
The Insolvency and Bankruptcy Code, seeking to facilitate resolution plans guided by the National Company Law Tribunals, ultimately paves way for liquidation of a company if there is no resolution plan during the 270-day resolution phase.
In the liquidation process, a company ceases to be a going concern and its legal identity gets extinguished. The role of the liquidator appointed by NCLT is not to run the entity but to carry out all deeds necessary for liquidating the entity. He holds the liquidation estate as a fiduciary for the benefit of all creditors.
Significantly, no suit can be instituted against such an entity but the liquidator may file a suit for recovery of dues.
Power sector
Lokesh Vasudevan, Partner in a leading audit firm Brahmayya & Co, told BusinessLine , “The power sector had been facing problems from all fronts. Stress contributors are many. Unless those issues are resolved, achieving a successful resolution is difficult. Once an entity is driven to liquidation, valuations would further drop with much deeper haircuts to banks.”
Some of the recent cases throw up interesting patterns. The NCLT, Kolkata Bench, in Gujarat NRE Coke Ltd, laid down a whole new path by directing the liquidator to attempt to sell the insolvent entity as a going concern to ensure that the entity is provided a respite in relation to preserving the going concern. However, in a later order, after the Code was amended to provide legal backing to the methodology envisioned which specifies that the liquidator may sell as asset on standalone basis or by way of slump sale or sell the entity as a going concern.
Significantly, the process of liquidation of company or a firm has a deleterious impact on several stakeholders, promoters, shareholders, lenders among others. The prime sufferer in case of liquidation process are employees and workmen who lose their livelihood, immediately.
Going concern
If the notion of a going concern is lost, the sale of asset on piecemeal basis may only fetch the distress sale value and thereby the recovery for the lenders will be lower. The recovery of dues for operational creditors is a far fetched dream as liquidation is expected to lead to loss of revenue to the Government by way of lower recovery, including taxes.
Therefore, experts believe that the liquidator could be called upon to consider liquidation as a going concern in the interest of stakeholders.
The whole process of insolvency cases taken up in the NCLTs as per the insolvency Code has to be tested and seen if this works out in the interest of recovery for the lenders.
The fiscal gone by has seen huge debt pile-up transcend into losses and banks have already taken a hit and made massive provisions.
As the process to resolve cases continues in the National Company Law Tribunals, it is to be seen whether this model ensures best possible returns without harming a going concern when resolution process fails.
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