Feature Article (cont'd)
Controls on related party transactions: The Regulations impose several such controls. For example, the insolvency professionals, their respective firms, the valuers involved in the liquidation process and any professionals appointed by a liquidator to assist him in the discharge of his duties must satisfy certain threshold criteria for independence (both personal and professional) from the corporate debtor. In addition, the liquidator is prohibited from selling assets to related parties without the prior permission of the NCLT.
Empowering the liquidator to maximize value for stakeholders: The Regulations empower the liquidator with a wider set of regulatory tools to maximize recoveries than under the old law. As an example, the liquidator can unwind transactions that fall within the categories of “undervalue,” “extortionate” and “preferential” transactions or constitute a “transaction defrauding creditors.” There is an extended look back period of 2 years for related parties and 1 year for other parties as opposed to a blanket 6-month period for fraudulent preferences under the old law. In addition, the liquidator is authorized (but not obliged) to consult any of the stakeholders entitled to a distribution of the proceeds of the liquidation.
New liquidation waterfall including abolition of crown preference: In a marked departure from the old law and in some cases, from major international precedents: (i) the costs of insolvency resolution (including the fees paid to IPs) rank first in the waterfall; (ii) government dues including taxes now rank below the claims of unsecured creditors; and (iii) claims of unsecured financial creditors rank higher than other unsecured claims which would include, among other things, claims of operational creditors.