• RFMLR RGNUL

TO EXTEND OR TO EXCLUDE? - LIQUIDATION TIMELINE’S INTERPLAY WITH STAY ON ALIENATION OF ASSETS

Updated: Nov 21

This post is authored by Samarth Luthra, fifth-year student of B.B. A. LL.B. (Hons.), at University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University, New Delhi.


Introduction

The Insolvency and Bankruptcy Code, 2016 (hereinafter, IBC) and all the rules and regulations made thereunder are framed with a view to resolve the insolvency of a going concern and cater to the interests of its stakeholders in a time-bound manner. In fact, most amendments made to the Code and its subordinate legislations have been directed towards easing out the process and/or providing expeditious results to those involved. One of the many examples is Regulation 44(1) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 which was amended by a notification in 2019, and now provides that the liquidator shall complete the liquidation process of the corporate debtor within one year of its commencement instead of the two year period initially set out in 2016.


The one-year time period for completion of the liquidation process may be extended by the adjudicating authority (hereinafter also, National Company Law Tribunal or NCLT) if the liquidator moves an application under Section 60(5) to this effect read with Regulation 44(2). In such an application, the liquidator will be required to report the reasons why the process could not be completed in one year and specify the additional time required. Hereunder, the liquidators move an application for continuing their tenure which primarily contains two different kinds of prayers: (i) exclusion of a certain period of time for the purpose of computing the one-year stipulation, and/or (ii) extension of a determined period of time which the liquidator needs to finish off the liquidation process which in most cases is already underway. Though these prayers may seem interchangeable and sometimes may even be efficacious when granted interchangeably for e.g., in situations where the stay is timely lifted, the ramifications of granting an extension can result in loss of time and costs of litigation and completely devastate the ambitions of the IBC.


The extend-exclude dynamic also plays a major role in determining the liquidator’s fee specified under Regulation 4 of the Liquidation Process Regulations because if the time is excluded, then the fee will be calculated as per the more beneficial brackets - amount realized and distributed in (i) the first 6 months and (ii) the next 6 months, but if the time for liquidation completion is extended, then the fee will be computed as per the lesser percentage prescribed in the amount realized and distributed in the ‘thereafter’ bracket. For example, let us assume that the total assets to be realized are worth Rs. 1 crore but there was a stay that disabled the liquidator from realizing this value for 12 months. Now, if the liquidator realizes the assets in the 13th month, they may either be entitled to Rs. 5 lakh, if the exclusion of the stay period is granted, or Rs 1 lakh 88 thousand, if only an extension is granted. The readers are requested to apprise themselves of the dynamic fee table under Regulation 4.


NCLT’s woeful divergent approach


Reducing the period for liquidation from 2 years to 1 year clearly adduced evidence of the eager intent of the law making authorities to speed up the liquidation process, but the same has not met equivalent fervor from the NCLT which has failed to assert its discretion wisely when dealing with liquidator’s plea stemming from Regulation 44(2) especially when the extension or exclusion of a certain period is due to a stay on the alienation of the corporate debtor’s assets.

In IBC practice, it is not unheard of for the tribunals to allow a corporate debtor’s application for a stay on alienation of property even after a public announcement for liquidation has been made by the duly appointed liquidator as long as it is any time before the sale/transfer/distribution of assets. A stay or a status-quo order may be granted in situations where there is a prima facie possibility that the liquidator has wrongly rejected the claims of a creditor, or where the proposed method and manner of liquidation is not commercially viable. In these cases, the liquidator gets appointed, starts exercising their secondary powers, and takes charge of their duties but they are not able to complete the crux of the process, i.e., selling off the corporate debtor as a going concern or sell its assets, distributing the proceeds for repayment of debt et cetera within the one-year period laid out in Regulation 44(1).


Once the one-year period is over, the liquidator is bound by the wording of Regulation 44(2) to state the reasons for the non-completion of the process and ask for an extension to finish off the process. The problem arises when the tribunal extends the liquidation period even though the inability to liquidate is owed to an active stay on the alienation of property. Such a situation can only be described as an ‘Operation successful, patient dead’ scenario where the application moved by the liquidator is allowed but since the stay is still operative, any extension granted by the tribunal cannot be utilized by the liquidator to realize the asset value of the estate and repay the due to corporate debtor.


In an order passed by the NCLT Hyderabad bench in IA No. 184/2020 in CP (IB) No. 10/7/HDB/2017, the tribunal was dealing with the unamended law which allowed for two years to finish the liquidation process. In this case, the liquidator was stopped from realizing the estate of the corporate debtor but was kept in charge of the day-to-day affairs of the corporate debtor for approximately 14 months. Once the stay was finally lifted, the liquidator attempted to culminate the liquidation process but could not succeed and finally decided to move an application to exclude the stay period from the computation of the completion period. The tribunal found this to be a fit case for exclusion.


In 2021, NCLT Hyderabad Bench in IA No. 28 of 2021 in CP (IB) No. 150/9/HDB/2017 passed another noteworthy order. The tribunal was hearing an application that sought exclusion of 423 days for computation of the liquidation timeline on two grounds: (i) exclusion of the COVID-19 pandemic-induced lockdown period under Regulation 47A and (ii) exclusion of the stay period under Regulation 44(2). The tribunal used its discretion and deemed it proper to grant an extension of one year, instead of excluding the 423 days’ time as was prayed in the interim application moved by the liquidator. These two instances provide a perspective into the contrasting views of the same bench of the NCLT.


Another instance of this divergent approach is when NCLT Chennai Bench vide an order dated 14th September 2021 in IA No. 1343 of 2021 excluded the stay period but in its order dated 23rd November 2021 in proceedings for IA No. 808 of 2021, granted an extension in a plea which sought exclusion of time, and was even underpinned by Regulation 47A which only allows for ‘exclusion’ and not an extension for the lockdown period.

Possible causes for divergence

There are multiple possible reasons for the mismatch in the exclusion-extension dynamic. One of the most prominent reasons why the adjudicating authority may prefer granting an extension over exclusion is the way the Insolvency and Bankruptcy Board of India (hereinafter, IBBI) has framed its regulations. As stated earlier, there are scenarios when both exclusion and extension may be used interchangeably. That being said, the true operation and implication of any law must be understood with the help of statutory cues and legislative assistance. Regulation 44(2) only speaks of “additional time that shall be required for liquidation” i.e. an extension and does not envisage an exclusion in its strict sense.

This view is further supported by the fact that the IBBI deliberately chose to “exclude” the lockdown period when it inserted Regulation 47A in April 2020, merely months after it amended Regulation 44. Further, the causus omissus rule states that if a situation has purposefully, or even mistakenly, not been provided by the law-maker, it shall not be produced or constructed by the court as it would amount to judicial legislating. In this context, it is seen that IBBI consciously chose to ‘extend' under Regulation 44, and ‘exclude’ under Regulation 47A. Therefore, relying upon Regulation 44, it is not appropriate for the NCLT to exclude the time when the application under Section 60(5) is moved and to extend the time when the application is read with Regulation 47A.


On the other hand, it can be argued that the power to exclude is a corollary of the power to extend even after considering the interplay with stay orders which do not allow the process to be completed. The crux of the argument stems from the NCLT decision in Quinn Logistics India Pvt. Ltd. v. Mack Soft Tech Pvt. Ltd. (hereinafter, Quinn Logistics) dated 8th May 2018 where the NCLAT held that the period of a stay order which rendered the Corporate Insolvency Resolution Process (hereinafter, CIRP) immobile can be excluded from the computation of 270 days period (180 + 90) provided under Section 12 of the IBC for the completion of CIRP. The NCLAT also noted that the practice of exclusion has met approval from different benches of the NCLT. It is contended that the reasoning in the decision can, mutatis mutandis apply, to the liquidation proceedings initiated under Section 33 as well. However, this point of view can be criticized just as well.


The contention that Quinn Logistic’s reasoning can be extended mutatis mutandis may be considered shaky since the nature of extension under Section 12 for CIRP, and the nature of extension for liquidation under Regulation 44(2) is very different. Court’s satisfaction with respect to the 90-day extension under Section 12 only comes to the fore if the committee of creditors passes a resolution by sixty percent of the voting shares, whereas the commercial wisdom of the creditors is not a prelude in liquidation proceedings and does not play a role in seeking extension in liquidation proceedings, where they are merely considered as claimants. Moreover, any extension under Section 12 cannot be granted more than once whereas such a restricting proviso is not available within the liquidation process, neither in the Code nor in its subordinate legislations. Limitations put by the legislation and the wisdom of the CoC will play a vital role in determining whether the two kinds of extension are similar enough for one’s judgment to be appropriated to the other’s, especially because the court’s discretionary powers under the CIRP and the Liquidation process are different.

Conclusion

Currently, there is no finality to the extend-exclude problem. Different Corams and Benches have shown a propensity to decide differently. In matters where the stay is lifted, an extension can be granted for the same duration of time for which the stay was in operation, but in matters where the stay is still in operation and the one-year liquidation period is over, the golden rule for the tribunals should be to lean towards granting an exclusion of the stay period irrespective of whether the time period is quantifiable or not. Under this practice, the computation is automatically halted for ‘n’ duration of time. This ensures that the liquidator does not have to approach the tribunal time and again if the extended time also gets over and the stay is not lifted, or even if the stay is lifted but the liquidation process cannot be completed in the remaining time. It also ensures that liquidators’ fee is not impacted by a court stay outside of their scope of duties, and the maxim Actus Curiae Neminem Gravabit is followed.

Another method of dealing with this conundrum for the tribunals can be to keep it simple and stick to the prayer made by the liquidator. In this vein, the NCLAT New Delhi’s decision In Re: Ashish Arjunkumar Rathi, Liquidator For Ind-Barath Power (Madras) Ltd. is worth mentioning. The impugned order, decision in I.A. 28 of 2021 mentioned above, had allowed for an extension of one year where the stay on proceedings had rendered the liquidation process moot. The NCLAT, on appeal, noted that the NCLT had erred in granting an extension since the prayer of the liquidator did not seek an extension but only to exclude the stay period, which was a fair plea considering the facts and circumstances. By virtue of this decision, the liquidator's fee was saved from suffering drastically. Apart from the changes that the tribunals can make, this problem of divergence can also be solved by bringing in a clarificatory amendment with respect to the intention of IBBI in excluding under Regulation 47A but extending under Regulation 44.


The author strongly contends that, in view of the problems highlighted above such as the inability of the liquidator to alienate property in the extended period, determining the liquidator’s fee, and the divergent approaches of the tribunals, it would be prudent for the IBBI to insert a new stipulation by way of a notification in the name and form of Regulation 44(3) which should use the term ‘exclude’ for dealing with stay and alike situations. The operation of Regulation 44(3) should be automatic and should not require the liquidator to move the tribunals for relief, saving precious judicial time and costs while also guaranteeing a just application of the fee table under Regulation 4.