Picture this.
A Chennai-based company which used to manufacture writing instruments was put under liquidation and an official liquidator was appointed. As per process, the liquidator put out a newspaper advertisement, seeking bids for the assets owned by the company. What the liquidator got in return was lawsuits. Close to 125 of them from workers, shareholders and other stakeholders, some of them challenging the liquidation. The liquidator had to wait for each of those lawsuits to be settled before the process of selling assets could begin.
That was in 1978.
Forty years later the process is still under way and the case remains under liquidation, a lawyer who spoke on condition of anonymity and declined to name the company told BloombergQuint.
A glance at the website of Mumbai’s official liquidator tells you that the case cited above may not be an outlier. There are 1,478 cases being liquidated under the aegis of Mumbai’s official liquidator. The oldest of them – Exchange Bank Of India & Africa Ltd. and International Building Society Ltd. Both have been pending liquidation since 1949. The experience across the other 22 official liquidators listed out by the Ministry of Corporate Affairs is not very different, said lawyers and bankers that BloombergQuint spoke to.
Once a case reaches the liquidation stage, you can’t put a timeline to it, SS Mundra, former deputy governor of the Reserve Bank of India told BloombergQuint. Domestically or internationally, liquidation takes its own time, he said.
Liquidation: A Looming Risk
The protracted process of liquidation is worth remembering as the deadline for insolvency proceedings in large stressed accounts ends. The 270-day resolution period for most of the twelve large stressed accounts referred by the RBI for resolution under the Insolvency and Bankruptcy Code (IBC) has expired. In at least four of these cases, liquidation is a real possibility.
In the case of Alok Industries Ltd, lenders chose to reject a joint bid from JM Financial Asset Reconstruction Company and Reliance Industries Ltd as the bid was below the liquidation value. The resolution deadline for the company ended on 15 April. Employees of the company are now challenging the decision to liquidate the company. Unless they prevail, liquidation proceedings will begin.
The story of Lanco Infratech Ltd is similar. The single bid on the table was unacceptable to lenders. That decision of the creditors is being challenged in court but if it prevails, the company will head into liquidation.
ABG Shipyard Ltd, too, is skirting with liquidation after a bid from Liberty House UK was rejected. On 24 May, The Financial Express reported that the company has received one fresh bid, which may be reviewed by the creditors.
The story is more complicated for Jaypee Infratech Ltd since the interests of home buyers are at stake. For now, the Supreme Court has stayed liquidation, which had become a real possibility after lenders rejected the highest bid on the table.
Apart from these high profile cases, liquidation is coming into play for other cases too. According to the February edition of Credit Suisse’s Corporate Health Tracker, 38 percent of cases admitted by the NCLT till 31 December, had gone into liquidation.
The decision to liquidate is not just limited to lenders of the company.
According to MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India, 200 companies are going under voluntary liquidation, using the IBC. Sahoo was speaking at an industry event organised by Federation of Indian Chambers of Commerce & Industry on Friday.
Liquidation Under IBC: Any Different From the Past?
Once liquidation is triggered under the IBC, the NCLT may appoint the resolution professional as the liquidator of the company. However, this is not necessary and the court can choose to open a different professional as the liquidator as well. The fee for the professional is paid out of the proceeds of liquidation.
The liquidator would create a liquidation estate, which houses all assets of the company. The sale of these assets would happen through the estate, which will hold on to the funds received. The estate would then distribute these funds to various stakeholders according to a ‘waterfall scheme’ specified under the IBC.
This process, per se, is not very different from the past.
The option of liquidation was available to bankers even in the days of the Board for Industrial and Financial Reconstruction, which had been set up under the Sick Industrial Companies Act. The route, however, involved large delays as promoters would often declare themselves sick and avail of a moratorium period over which recovery could not be initiated. During this period, promoters would often extract productive assets remaining within the company and leave lenders with very little to recover, a senior public sector banker told BloombergQuint on condition of anonymity.
Even if creditors tried to invoke liquidation under SICA, the delays would be innumerable.
Under the IBC, too, there is no timeline over which liquidation has to be completed. However, bankers and lawyers are hopeful that the process would be more efficient under the new regime.
The expectation is that since the resolution phase under the insolvency and bankruptcy code is time sensitive, the liquidation process too could be wrapped up quicker. Moreover, in the current regime, resolution professionals appointed are either from large consulting firms or have their backing. This would help these professionals manage the liquidation process better.Rajat Sethi, Partner at law firm S&R Associates
Addressing Valuation Concerns
The IBC may also reduce disputes related to valuations.
The resolution professional is expected to appoint an independent valuer whetted by the IBBI when the insolvency process begins. A liquidation value is arrived at using that process. This may provide a benchmark during the liquidation process and reduce disputes over the final value recovered through the company’s assets.
To be sure, even before the IBC came into force, a category called ‘registered valuers’ existed. However, there was no clear whetting process followed, which made valuation disputes common, said a consultant familiar with the resolution process.
Sethi also points out that the IBC permits the resolution professional to sell a company’s assets as a going concern. This may allow for greater value to be realised from an asset, he said.
Mundra remains skeptical. Realisations through liquidation are typically poor and they take long to come through, he said.
During this (liquidation) process, further deterioration also sets in for the assets that are available. Running the liquidation process also requires a cast of people. After adjusting for this kind of cost and deterioration, what ultimately comes in hand is sometimes quite negligible.SS Mundra, Former Deputy Governor, RBI
The Big Picture
There are broader issues to take into account as well. Those of jobs and the ecosystem that may have survived due to the companies going into liquidation.
Take, for instance, the four large stressed accounts where liquidation is a real risk. Among these, Alok Industries employed nearly 18,000 employees, according to its annual report. Lanco Infratech had more than 3,000 employees on its books. ABG Shipyard had 275 permanent employees and 1,200 contractual workers. Jaypee Infratech has 250 permanent employees and 3,000 contractual workers
In the event of liquidation, the cost of the liquidator and resolution professional is paid-off first. Following this, workmen of the company are paid dues up to 24 months preceding the liquidation. There is no provision for paying benefits, such as salary for a few months, that may be available to workers laid-off under normal circumstances. After paying off workmen dues, secured creditors come next in line, followed by employees other than workmen.
“There is the question of employees, the ecosystem of suppliers and ancillary firms dependent on a project. So, there is big economic cost attached to liquidation as well,” said Mundra.
(This article was first published on BloombergQuint.)
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