Liquidation Challenges in India under IBC Ground Realities & Case Studies
Table of Contents
A notable shift has occurred in the application of the Insolvency and Bankruptcy Code, 2016 (IBC), moving the primary focus from resolution of distressed companies toward their eventual Liquidation Challenges in India. This is demonstrated by the growing body of statistics that highlight a significant rise in liquidation outcomes compared to successful resolutions, indicating a widening gap between the legislative intent of the IBC and its ground-level execution. The purpose of this article is to examine these real-world liquidation challenges through an analysis of relevant information and supporting case studies.
Legal Framework Governing Liquidation Under IBC
Liquidation is triggered by one of the vents specified in section 33 of the IBC, such as when the corporate insolvency resolution process (CIRP) fails to produce a viable resolution plan. It includes the Adjudicating Authority, the National Company Law Tribunal (NCLT), rejecting a resolution plan, the resolution professional (RP) indicating the need for liquidation, or the Committee of Creditors (CoC) deciding to liquidate during the CIRP period. Once initiated, the appointed liquidator assumes control of the corporate debtor’s assets, and their role and powers involve significant responsibilities listed under section 35 of the IBC, such as taking custody and control of all assets, verifying creditor claims, selling the assets in a transparent manner, and ultimately distributing the proceeds according to the priority waterfall mechanism specified in section 53 of the IBC.
Ground Realities in IBC Liquidations
- Delay in Taking Control of Assets: Liquidators frequently face physical possession challenges due to the active resistance from promoters, employees, and third parties. Overcoming these hurdles often necessitates repeated and time-bound consuming interventions and orders from the NCLT.
- Incomplete or Defective Asset Records: A significant challenge is the absence of crucial documentation like title deeds, asset registers, and complete books of accounts upon the liquidator taking charge. These discrepancies and missing records severely impact the accurate valuation of assets and hinder their timely sale during the liquidation process.
- Asset Deterioration and Value Erosion: Delays in the liquidation process can lead to the physical decay of machinery, the obsolescence of inventory, and overall asset deterioration. Idle plants lose market relevance, which creates an imbalance between the costs incurred in maintaining the assets and the eventual recovery value from their sale.
Valuation and Sale Challenges
- Inconsistent Valuation Reports: Divergent estimates provided by different registered valuers often lead to significant discrepancies in asset worth. This inconsistently erodes the confidence of potential buyers and other stakeholders in the reliability of the stated value. Further, these valuation disputes frequently become a major source of protracted litigation within the process.
- Difficulty in Finding Buyers: Certain sectors may be fundamentally unattractive due to market conditions or inherent business model flaws, deterring investor interest. Potential buyers are often wary of assuming environmental and statutory liabilities associated with distressed assets, which can involve significant unknown costs. This combination of factors results in a limited investor appetite for distressed assets, making successful sales challenging.
- Multiple Failed Auctions: Repeated e-auctions are often conducted with continuously reduced reserve prices in an attempt to attract bids. This cycle of failed assets impacts the overall recovery amount for creditors, as the asset’s perceived value diminishes with each auction. The extended timeline caused by these repeated attempts further delays the resolution process and increased administrative costs.
Distribution and Stakeholder Conflicts
The liquidation process frequently faces disputes over the appropriate method for distributing proceeds among various stakeholders, often leading to further litigation. Challenges may arise from conflicts between different classes of creditors regarding the fairness and legality of the proposed distribution plan, also including:
- Workmen and Employee Claims: Verifying the validity and amount of claims submitted by a large number of employees can be an intricate and time-consuming administrative task. Disputes over the precise amount owed and the priority these claims hold in the payment hierarchy often lead to significant litigation during the resolution process.
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Secured vs. Unsecured Creditors: Secured creditors often exercise their right to enforce their security interests independently under section 52 or through the collective insolvency process, leading to strategic conflicts. Disputes arise between these two groups regarding the appropriate distribution of proceeds from the sale of charged assets.
- Government Dues and Statutory Claims: Government authorities frequently submit competing claims for outstanding taxes, challenging the claims of other creditors during the liquidation process.
Procedural and Regulatory Hurdles
- Limited Cooperation from Ex-Management: Non-compliance with section 19 of the IBC, which mandates the corporate debtor’s management to cooperate with the interim resolution professional, often hinders the smooth functioning of the proceedings. Such non-cooperation can lead to significant delays, as critical information needed for due diligence and asset valuation is intentionally withheld.
- Frequent Litigation and Appeals: The liquidation process often faces numerous challenges to the auction process and distribution lists, leading to several challenges in the practical application of the law. These constant legal challenges and subsequent appeals to the National Company Law Appellate Tribunal (NCLAT) significantly prolong the timeline beyond the intended statutory limits.
- Capacity Constraints of Liquidators: Liquidators frequently manage multiple assignments simultaneously, which can straint their ability to give each case the focused attention it requires. Further, a lack of specific sectoral expertise for complex industries and persistent cost pressures can compromise the efficiency and effectiveness of the liquidation proceedings.
Case Studies Highlighting Liquidation Challenges
Case Study 1 – Asset Recovery Delays
In one instance, a liquidator faced resistance from respondents who claimed possession based on a better offer from the corporate debtor, which the Adjudicating Authority ruled invalid, leading to a court order for vacating the flats and transferring possession. Such legal battles significantly extend timelines, as the liquidation process cannot proceed without securing assets, and can increase costs due to prolonged litigation and enforcement actions. The delay in recovery of critical assets like machinery or real estate undermines the liquidation estate’s value and reduces recoveries for creditors. These challenges are compounded by promoter resistance, where former management withholds information or delays asset handover, further obstructing the process.
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Case Study 2 – Failed Auctions and Value Erosion
The Jet Airways case exemplifies liquidation challenges where despite being declared a successful resolution applicant in 2021, the Jalan Kalrock Consortium (JKC) failed to meet critical conditions like Air Operator Certificate (AOC) validation and slot allocations, leading to the airline’s liquidation on November, 2024. Repeated auction failures and delays in the resolution process, which resulted in significant value erosion, with the average time for insolvency completion reaching 683 days. This contributed to the prolonged pendency and diminished asset value. The sharp reduction in recovery percentages under the IBC is evident, with overall recovery rates standing at around 45% and final creditors recovering only 32% of their claims, while operational creditors fare better despite being considered disadvantaged. Furthermore, the practice of reducing the reserve price by the maximum permissible 25% in a single step at the first auction failure undermines value maximization, compromising the objective of achieving optimal recovery.
Judicial Interventions Shaping Liquidation Practice
Judicial interventions have shaped liquidation practices by enabling courts to issue orders that facilitate the smooth takeover and control of corporate assets and documentation, ensuring an efficient liquidation process. These interventions often provide crucial guidance on asset realisation, such as issuing directions regarding the appropriate reduction of reserve prices in asset sales to attract buyers and ensure maximum value. Further, it plays an important role in the distribution phase, particularly in clarifying the application and priority of claims under section 53’s waterfall mechanism of the IBC, thereby establishing essential precedents for the equitable distribution of proceeds among stakeholders.
Conclusion
Liquidation under the IBC faces structural and practical hurdles, with delays in finalising reports and completing processes. This is seen in data showing only 346 out of 1666 liquidation cases had final reports by May 2022, and over 79% of ongoing cases exceeding two years. Case studies such as Bhushan Power & Steel Limited, highlight the need for better execution mechanism, where the Supreme Court initially set aside an approved resolution plan due to procedural lapses. Hence, bridging the gap between law and practice is essential to preserve asset value and maintain creditor confidence, requiring stronger oversight, strict adherence to timelines, and institutional continuity post-approval.
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