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The objective of 含羞草社区 corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), is to ensure a company’s revival as a going concern. However, there may be situations where the sale of assets outside the ordinary course of business becomes necessary, or a business unit/asset-wise resolution is more commercially viable, especially where a corporate debtor has diversified businesses. While the IBC does not lay down a framework for such sales, section 196(1)(t) empowers the Insolvency and Bankruptcy Board of India (IBBI) to regulate insolvency matters including a mechanism for the time-bound disposal of assets.

Sale under regulation 29

Regulation 29 of the CIRP Regulations permits the sale of unencumbered assets of corporate debtors outside the ordinary course of business – with the approval of the Committee of Creditors (CoC), with 66% voting share – if necessary for better value realisation.

While such sales may sometimes be necessary to achieve better value, avoid further decline in value, or address critical financial issues, they must be carefully assessed and justified under law, as they can affect the overall viability of resolution.

In case of a regulation 29 sale, challenges include:

1. Lack of clarity on the application of the clean slate principle (which may disincentivise prospective bidders);
2. Ceiling of 10% of the admitted claims on the aggregate book value of assets sold (which may put major assets with declining value outside regulation 29);
3. Possibility of the sale of the undertaking/business, as opposed to assets (especially on account of the treatment of intrinsically linked liabilities, approvals and litigations); and
4. Non-likelihood of any asset remaining unencumbered by the time a debtor enters the CIRP.

Therefore, while regulation 29 has always existed in the statute books, it is fraught with issues that require further clarity.

Asset-wise resolution

While recognising that a combination of bidders taking different business units/assets under a resolution plan may be far superior to one bidder acquiring the entire business, the 32nd Report of the Standing Committee on Finance on “Implementation of the IBC: Pitfalls and Solutions”, in 2021, recommended that the IBC be amended to clarify the same.

Use of the word “clarify” is pertinent, as any legislative amendment in the form of a clarification assumes pre-existence of the clarified concept in the legislation, and any such clarification is ordinarily retrospective.

These views were also echoed by the IBBI in its Discussion Paper, dated 27 June 2022, which ultimately led to the introduction of regulations 36B(6A) and 37(m). Regulation 36B(6A) allows for the sale of corporate debtor assets – either collectively or individually – as part of a resolution plan.

Similarly, regulation 37(m) specifically permits the “sale of one or more assets of the corporate debtor to one or more persons”, while providing the manner of dealing with the remaining assets, thereby endorsing the possibility of dividing company undertakings/assets and selling them to different buyers as part of the resolution process.

Together, these regulations allow greater flexibility in tailoring a resolution plan to meet the unique circumstances of the corporate debtor and provide a robust framework for the sale of assets/businesses during the CIRP, maximising the value of the debtor’s estate while considering diverse strategies for resolution.

The IBBI has been proactive in recognising the need for a business-unit/asset-wise resolution of corporate debtors. In many situations, it may be necessary to allow business unit-wise sales, as bidders may not be forthcoming for the entire debtor.

Even if the entire debtor interests bidders, they may not have the wherewithal to operate such a business unit, and so discount their bid with a corresponding risk premium, resulting in lower realisation.

Challenges and way forward

Although it is clear that legislative and regulatory intent supports a business-unit/asset-wise resolution under the IBC, a lack of clear provisions and dearth of jurisprudence continues to complicate matters.

含羞草社区 National Company Law Tribunals have been forthcoming in approving such resolution plans. However, there is still scope for improvement through legislative/regulatory intervention to clarify important issues such as the manner of dealing with remaining assets and allocation of mandatory payments under the business unit-wise resolution plan.

Meanwhile, commercial and practical issues such as allocation and distribution of liabilities and payouts may be considered by the CoC.

Although these provisions for a business unit/asset-wise resolution offer numerous benefits – including the ability to maximise recovery and tailor solutions to specific needs of the corporate debtor – they must be carefully managed to ensure protection of all stakeholder interests. With the right safeguards and legislative clarity in place, these provisions can contribute significantly to many successful resolutions.

Sagar Dhawan is a partner and Ahkam Khan is an associate at Shardul Amarchand Mangaldas & Co.