How the liquidator may sell, the reserve price, eligibility of buyers, the secured creditor's options and how a sale can be challenged.
In a liquidation, a creditor's recovery depends on what the company's assets fetch. The Insolvency and Bankruptcy Code, 2016 and the regulations made under it prescribe how the liquidator may sell them, and the rules are designed to produce the highest price at an open sale. A creditor who understands them can follow the process, protect its position as a secured creditor and, if it chooses, take part as a buyer. This note describes the sale process in outline. It is general information, not advice on a particular liquidation.
The liquidator's powers
Section 35 empowers the liquidator to carry on the business of the company for its beneficial liquidation, to sell the immovable and movable property and actionable claims of the company by public auction or private contract, to transfer the whole or part of it to a person or body corporate, and to take such measures as are necessary to protect and preserve its assets. The sale is made from the liquidation estate described in Section 36, which excludes assets owned by third parties, assets in a trust for specified purposes, and the assets of a subsidiary.
Modes of sale
The Liquidation Process Regulations, 2016 allow the liquidator to sell:
- the assets of the company in parcels, or individually;
- the assets as a whole, in a slump sale;
- the company as a going concern, with its business; or
- the business of the company as a going concern.
The liquidator is expected to consider whether a going-concern sale is likely to yield a better price than a piecemeal sale. A going-concern sale preserves employment and the value of the business, and where the creditors have rejected a plan that paid less, the same assets may still find a buyer in the liquidation.
Valuation and the reserve price
The liquidator relies on valuations by registered valuers, and the reserve price is set by reference to the liquidation value as the regulations provide. If an auction fails, the liquidator may reduce the reserve price, within the limit the regulations allow, and sell again. Sales are ordinarily by public auction on an electronic platform, with the terms of sale published in advance and an earnest money deposit required of bidders.
Secured creditors
A secured creditor who has chosen under Section 52 to realise its security outside the liquidation takes its own steps to enforce, and may sell the asset itself, subject to the law governing the security. If the creditor has relinquished the security, the liquidator sells it and the proceeds enter the waterfall. A secured creditor should consider early whether to enforce itself or to leave the sale to the liquidator, comparing the speed, the cost and the price that each route is likely to yield.
Who may buy
The regulations restrict persons who would be ineligible as resolution applicants under Section 29A from buying the assets in a liquidation, in order to prevent the promoters of a failed company from recovering its assets at a discount. A bidder is required to declare its eligibility. A person connected with the company, such as a related party, who is not otherwise ineligible should expect closer scrutiny.
Challenging a sale
An aggrieved person, such as a creditor who believes the process was irregular or that the price was too low, may apply to the Adjudicating Authority under Section 60(5), or may appeal against the liquidator's decisions under Section 42. A challenge is more likely to succeed if it is made promptly and if it identifies a specific irregularity: for example, a defective valuation, an unfair condition of sale or a failure to publicise.
Steps for a creditor
- Read the liquidator's report and the valuation reports when they are filed.
- Decide whether to realise the security or relinquish it, and tell the liquidator in time.
- Attend or monitor the auction, and note the terms of sale.
- Keep an eye on the distribution, which follows the waterfall once the assets are sold.
This note is general information on the law at the date of publication. It is not legal advice, and it should not be relied on without advice on the facts of a particular matter.
