Challenges Faced by Liquidators in Realizing Assets and Distributing Proceeds
Table of Contents
Under the Insolvency and Bankruptcy Code, 2016 (IBC), the liquidator has an important role in realising and distributing a corporate debtor’s assets. While the IBC offers a structured framework for this process, liquidators frequently encounter significant practical, legal and operational hurdles that complicate their mandate. These Challenges Faced by Liquidators, which include issues like disputes over asset titles, ongoing litigation, and difficulty in finding buyers, can lead to substantial delays in closing the liquidation, diminish the final recovery value for creditors, and ultimately undermine stakeholder confidence in the efficacy of the IBC framework.
Role and Responsibilities of the Liquidator
The liquidator, appointed under section 34 of the IBC, assumes all powers of the corporate debtor’s Board of Directors, key managerial personnel, and partners upon liquidation order under section 33. The liquidator is accountable to the Adjudicating Authority, the National Company Law Tribunal (NCLT), which oversees the process, and must submit reports such as preliminary, progress, and final reports, while also ensuring transparency and fairness in asset disposal and claim distribution. While the liquidator manages the company’s affairs, their decision can be appealed by creditors, and they are subject to replacement by the NCLT under specific grounds, ensuring checks on their authority. Their key duties include:
- Taking control and custody of assets.
- Conducting valuation and sale of assets.
- Verification and settlement of claims.
- Distribution of proceeds in accordance with Section 53 waterfall mechanism.
Difficulties in Asset Identification and Possession
A lack of cooperation from promoters or management significantly worsens the Challenges Faced by Liquidators, transforming an already complex situation into a prolonged legal proceedings. This non-cooperation often leads to incomplete or deliberately disputed records, making it difficult to establish clear ownership or valuation of assets. The problem is further compounded when assets are strategically scattered across multiple national or international jurisdictions, requiring the navigation of diverse legal systems and coordination of cross-border tracing efforts. When these assets are also encumbered by pre-existing liens or attached by other regulatory authorities, the tracing process becomes a tangle of competing claims, where the uncooperative management can leverage legal ambiguities to stall or entirely obstruct the authorities from taking rightful possession.
Read more : Fourth amendment to IBBI CIRP Regulations, 2016
Valuation and Marketability Challenges Faced by Liquidators
Registered valuers play a crucial role in assessing the fair and accurate value of assets which is vital for financial reports, taxation, and the liquidation process. However, valuation disputes frequently arise due to inherent Challenges Faced by Liquidators and conflicting perspectives. Further, issues like rapid depreciation of assets and the poor condition or obsolescence of specialised industrial units make objective valuation difficult, as market comparisons are often scarce and conditions vary widely. Furthermore, limited buyer interest in highly specialized assets can lead to significant discrepancies between the professional valuation and the actual realisable market price. These Challenges Faced by Liquidators are often exacerbated in situations involving delaying auctions and low bid participation, which typically reduce the final value an asset can fetch, fueling further disagreements over the initial valuation.
Legal Disputes and Pending Litigations
Multiple, overlapping litigations pose significant hurdles to asset realisation in legal frameworks, like the IBC. Disputes related to asset title and ownership often fall under the jurisdiction of civil courts or High Courts, while avoidance transactions are handled by the NCLT. At the same time, the Debt Recovery Tribunal handles cases involving the enforcement of security interests. The existence of these parallel legal proceedings results in jurisdictional conflicts and delays, as clarification is sought from the Supreme Court on the appropriate forum. This fragmented legal landscape stalls the process, preventing timely orders for the approval of asset sales of the distribution of proceedings, thereby undermining the efficiency of the insolvency resolution.
Issues in Distribution of Proceeds
Delayed adjudication of claims extends the overall timeline of the liquidation process by preventing the timely finalization of the estate’s liabilities. Until all claims are processed and their validity determined, the liquidator cannot disturbed remaining assets or formally closes the liquidation. The practical challenges in applying the Section 53 waterfall:
- Verification of competing claims between financial and operational creditors.
- Disputes over workmen’s dues and government claims.
- Absence of clear data on secured versus unsecured debt.
Regulatory and Procedural Constraints
Delays in approvals from the NCLT and the Registrar of Companies significantly hamper the efficiency of the insolvency and liquidation processes. These bureaucratic bottlenecks are further compounded by a lack of seamless digital integration between the Insolvency and Bankruptcy Board of India (IBBI), the NCLT, and various asset marketplaces, thus leading to information asymmetry and operational friction. The current regulatory framework provides limited specific guidance for the timely valuation and disposal of niche assets, such as those that are perishable or of low intrinsic value, often riesling in avoidable asset value erosion. Addressing these systematic inefficiencies necessitates the implementation of standardized liquidation processes and greater clarity within the IBC and IBBI regulations to ensure predictable and swift outcomes.
Measures to Enhance Efficiency and Transparency
While delays and resource shortages remain challenges for the NCLT, the established legal framework and judicial push for efficiency have led to faster, more predictable outcomes compared to the previous insolvency regime, introducing certain measures such as:
- Strengthening digital asset registries and inter-agency coordination.
- Encouraging online auction platforms and wider bidder participation.
- Enhancing training and certification for liquidators.
- Streamlining approval processes via case management systems.
Conclusion
Liquidators are central to achieving IBC’s objective of maximizing asset value and ensuring equitable distribution among stakeholders. Their role in managing and selling assets of a corporate debtor during the liquidation process directly impacts the outcome for creditors and the overall health of the insolvency ecosystem. In addition to this, resolving operational bottlenecks, improving coordination, and supporting liquidators through policy and technology will enhance efficiency and stakeholder trust in the insolvency ecosystem.
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