Resolution Strategies – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Global Finance Bank Ltd. has extended ₹ 100 crore to GEO Ltd. against mortgage of 50 acres of landed property with building. GEO Ltd. is being liquidated. Global Finance Bank Ltd. seeks to realize the mortgaged property given as security. Advise Global Finance Bank Ltd. about realizing its security.
Part II of the Insolvency and Bankruptcy Code, 2016 lays down the law relating to liquidation process for corporate persons.
Firstly, an attempt is made to resolve the insolvency of the Corporate Debtor through the Corporate Insolvency Resolution Process. The Liquidation provisions come into effect if the attempts to resolve corporate insolvency fail. The IBBI (Liquidation Process) Regulations, 2016 deals with realization of security interest by a secured creditor.
In the given case, Global Finance Bank Ltd. (secured creditor) shall fulfil the following obligations for recovery of the loan amount:
1. Global Finance Bank Ltd. who seeks to realize its security interest shall intimate the liquidator of the price at which he proposes to realize its secured asset.
2. The liquidator shall inform the Global Finance Bank Ltd. within 21 days of receipt of the intimation, if a person is willing to buy the secured asset before the expiry of 30 days from the date of intimation at a price higher than the price intimated.
3. Where the liquidator informs the Global Finance Bank Ltd. of a person willing to buy the secured asset, Global Finance Bank Ltd. shall sell the asset to such person.
4. If the liquidator does not inform Global Finance Bank Ltd. or the person does not buy the secured asset, Global Finance Bank Ltd. may realize the secured asset in the manner it deems fit, but at least at the price intimated.
5. Where the secured asset is realized under (in) above, Global Fi-nance Bank Ltd. shall bear the cost of identification of the buyer.
6. Where the secured asset is realized under (iv) above, the liquidator shall bear the cost incurred to identify the buyer.
7. The above provisions shall not apply if Global Finance Bank Ltd. enforces its security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993.
The liquidator shall ordinarily sell the assets of the corporate debtor through auction method. Opine whether the liquidator can sell assets by a route other than auction method.
Generally, the liquidator shall ordinarily sell the assets of the Corporate Debtor through an auction in the specified manner. Further, the liquidator may sell the assets of the corporate debtor by means of private sale where
(a) the asset is perishable;
(b) the asset is likely to deteriorate in value significantly if not sold im-mediately;
(c) the asset is sold at a price higher than the reserve price of a failed auction; or
(d) the prior permission of the Adjudicating Authority has been obtained for such sale
However, the liquidator shall not sell the assets, without prior permission of the Adjudicating Authority, by way of private sale to:
(a) a related party of the corporate debtor;
(b) his related party; or
(c) any professional appointed by him.
Debt for Equity swaps can be used as a tool not only for Sections 230-231 of the Companies Act, 2013 but for resolution plans formulated under Insolvency and Bankruptcy Code, 2016 – Present your views briefly.
- In case of Corporate Insolvency Resolution Process (CIRP), one of the resolution strategies is financial restructuring, where there is reorganizing the equity capital and debt capital.
- Financial restructuring is undertaken either to recover from financial distress or as part of company’s general financial strategy u/s 230 of the Companies Act, 2013.
- Regulation 37 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that a resolution plan shall provide for the measures for maximization of value of assets.
- One of the best methods of corporate debt restructuring is debt-equity swap where specified shareholders shall have right to exchange stock for a pre-determined amount of debt in the same company.
- In debt-equity swap debt/bonds are exchanged with shares of the company.
- However, the resolution plan needs to be placed before Committee of Creditors for approval before the same is placed for sanction by the NCLT.