Money & Banking

Insolvency: Institutional creditors may have to fork out liquidation costs upfront

KR Srivats New Delhi | Updated on May 12, 2019 Published on May 12, 2019

Upfront costs must be paid if the debtor firm has no liquid assets available, said the IBBI   -  istock.com/designer491

The IBBI felt that this may prove to be burdensome for the retail individual creditors

Secured institutional financial creditors may have to bear liquidation expenses upfront, according to the Insolvency and Bankruptcy Board of India’s (IBBI) latest proposal.

The proposal states that upfront expenses should be paid if the debtor company has no liquid assets available to defray the costs.

By coming up with this proposal, the IBBI has rejected the suggestion of stakeholders that the cost of liquidation may be borne by all the financial creditors upfront, and the same may be recovered from sale of assets.

The IBBI felt that this may prove to be burdensome for the retail individual creditors.

It preferred that the liquidation costs be borne by the secured institutional financial creditor and recovered from sale of assets.

The IBBI may in the coming days mandate that the Committee of Creditors (CoC) consider an agenda item, while rejecting a resolution plan or deciding to liquidate the corporate debtor, providing for liquidation expenses.

Estimating cost

The CoC must consider the estimated amount of liquidated costs, the availability of liquid assets, and the balance amount for meeting the liquidation costs.

The secured institutional financial creditors will have put in upfront the balance, in an escrow account with a scheduled bank. This must be done within seven days of the liquidation order.

The money brought in by the secured institutional financial creditors — along with the interest at the bank rate thereon — would then have to be included in the liquidation cost, the IBBI has said.

Meanwhile, the IBBI also proposed increasing the upper age limit to 75 years for independent directors of the Insolvency Professional Agency (IPA) and Information Utilities (IUs).

The current regulations provide that an individual may serve as an independent director for a maximum of two terms of three years each, or up to the age of 70 years, whichever is earlier.

The main objective to relax the upper age limit is to provide a little leeway, given that the IPAs need experienced individuals as independent directors, sources said.

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Published on May 12, 2019
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