ANALYSIS OF SALE OF ASSETS OF CORPORATE DEBTOR UNDER SECTION 36B(6A) OF THE CIRP REGULATIONS OF IBC

Summary

This article analyses an amendment to the Insolvency and Bankruptcy Code which could positively impact the Corporate Insolvency Resolution Process and has offered a method of implementation by referring to American jurisprudence. It calls for a judicious application of the same to balance the rights of all the stakeholders.

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Introduction

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 for the resolution of corporate persons, firms and individuals to increase the profitability of assets, to ensure the availability of credit while balancing the varied interests of stakeholders. A key component is the Corporate Insolvency Resolution Process (CIRP), which serves as a recovery mechanism for creditors.

On 16th September 2022, the amendment to Regulation 36B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 on the sale of multiple assets of the CD was released. Before the notification, there was only one resolution plan made by a single applicant as part of the CIRP.

Regulation 37(m) of the CIRP Regulations allows for the sale of an individual or multiple assets of a CD to one or more successful RAs and provides for the manner of the sale of assets. Unfortunately, there is no clarity on the term "manner" of the sale of assets presently.

The assumption that can be made is that “manner” refers to the sale of assets as mentioned in Regulation 32 of the CIRP Regulations which states that the liquidator can sell an asset on a standalone basis, in a slump sale; as a set collectively; or in parcels; or the corporate debtor as a going concern; or the business(s) of the corporate debtor as a going concern.

Important Considerations

It is unclear whether the Committee of Creditors (CoC) holding 51% or 66% of the voting share would be sufficient for the issue of the Request for Resolution Plan (RFRP). Ordinarily, 51% would suffice, but 66% is required for the sale of unencumbered assets and approval of resolution plans. Furthermore, the prospective resolution applicants (PRAs) may formulate a plan only for the unencumbered assets. Logically, the remaining assets for which no plan has been submitted should be liquidated, but the Insolvency and Bankruptcy Code (IBC) does not provide for partial liquidation and resolution of assets. Clarity on this particular issue will be provided only after judicial pronouncements.

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An Alternative Application: Auction Of Selected Assets

I opine that due to the lack of jurisprudence on this aspect of insolvency, Section 363 of the Bankruptcy Code (BC) of the United States of America (USA) can be utilized as a model to provide for the partial resolution of assets. It provides for the sale of assets through a Court-supervised auction for a debtor that has filed for bankruptcy under Chapter 11 of the BC. This section envisages the sale of the most valuable assets or operations of the debtor whilst the remaining assets and liabilities unassumed by the creditor remain in the bankruptcy proceedings. The BC provides a general process governing sales under section 363 but the specifics of each transaction will vary.

A standard sale under this section commences with a decision that a sale via an auction would be the best method to repay the various creditors. After the assent of the court is obtained, the debtor identifies a “stalking horse” acquirer with whom a purchase agreement is agreed upon. A stalking horse does the due diligence of the debtor and offers the opening bid in a public auction. If the bids from the remaining buyers are lower than that of the "stalking horse", the "stalking horse" is said to have won the auction.

The court is obliged to determine that the sale is in the interests of the debtor and its creditors, it has a valid justification, it was negotiated in good faith and satisfies various conditions. The proceeds from the auction are transferred to the bankruptcy estate to satisfy the numerous obligations of the debtors.

Sales under Section 363 are considered to be advantageous as the assets are generally free of any lien, claim or debt on them. Furthermore, at any hearing about this section, the creditor and the debtor will seek a statement from a court that the sale was negotiated in good faith, preventing further appeal on the close of the sale.

A significant advantage is the speed of the bankruptcy proceedings as the sale of assets under this section can be completed within 30 days. It is to be noted that the filing of an application under Section 363 and Chapter 11 of the BC is significantly cheaper compared to an expensive filing under Chapter 11 alone.

A popular example of a sale under Section 363 is the sale of Chrysler LLC in the year 2009, approved by the bankruptcy judge Arthur J. Gonzalez for the sum of 2 billion. It was ruled that torts claims (environmental damage or asbestos) were extinguished on the application of Section 363.

Conclusion

This amendment will benefit the creditors as they would be entitled to choose the beneficial aspects of the CD’s business without the necessity of controlling the entire company. The system laid down under Section 363 of the BC can be modified to suit the Indian conditions, however, regulations need to be meticulously drafted to protect the rights of both the CD and the creditors in the CIRP. The flexibility in law cannot be utilized by the bidder to selectively choose the most profitable assets. leaving the CD in a potentially precarious position of having worthless assets and liabilities, with no means of reviving the corporate entity.

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By- Ishita Ayala

Ishita Ayala is a 3rd-year law student at the National Law University Odisha. Her interests lie in commercial laws.