IBBI Proposes Reform of Liquidation: Ending Inefficient 'Going Concern Sales'

When a business is in financial trouble and can't pay its debts, it might go into liquidation. This means the company is closed down and its assets (things it owns) are sold to pay off its debts. Sometimes, instead of selling everything piece by piece, the business is sold as a whole to keep it running.

This is called a "going concern sale."

The concept of "going concern sales" in liquidation has sparked significant debate. Essentially, it involves selling a company as a whole, rather than breaking it up and selling its assets individually. This approach aims to preserve the business's value and potentially save jobs. However, critics argue that it often leads to unnecessary delays, legal uncertainties, and financial inefficiencies.

The issue is that this process can take a long time and often doesn't help creditors (people or companies the business owes money to) get their money back. In fact, it might make things worse by causing more legal problems and increasing costs.

The Indian government is considering changing the rules to make liquidation faster and more efficient, so creditors can recover more of their money.

The Insolvency and Bankruptcy Board of India (IBBI)'s recent discussion paper has taken a decisive step in addressing these issues, proposing reforms to streamline the liquidation process and maximize recovery for creditors. If implemented, these changes could ensure that liquidation serves its intended purpose more effectively.

India's current framework allows liquidators to keep entities artificially alive, creating a scenario where resources are spent on maintaining a business that has already been deemed unviable. The Insolvency and Bankruptcy Board of India (IBBI) has proposed removing the "sale as a going concern" option from Liquidation Regulations to ensure that liquidation serves its intended purpose.

Empirical data suggests that "going concern" sales in liquidation take just as long as regular dissolution but deliver worse outcomes. Creditors recover only about 2.4% of claims compared to 3.7% in standard dissolutions. This process can fuel legal disputes, inflate costs, and enable bidders to game the system by waiting for price reductions.

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