Insolvency and Bankruptcy

Sale of Going Concern under IBC

The sale of going concern means selling on “as is where is basis” wherein the liquidator sells the business of the company as a whole which is undergoing liquidation. The biggest benefit of adopting sale of going concern is that the corporate debtor survives and only the ownership is transferred instead of part sale of the corporate debtor. 

What is meant by a ‘going concern’?

The jurisprudence around is fairly well developed from the erstwhile liquidation regime under the Companies Act, 1956. While the Liquidation Process Regulations recognised sale of going concern as one of the method of sale, however, the term of ‘going concern’ has not been defined anywhere either under the Act or in the Regulations. A report was released by the Insolvency Law Committee in the year 2018 wherein the concept of a ‘going concern’ was examined. The report explained the phrase of ‘as a going concern’ as the Corporate Debtor would be functional as it would have been before the initiation of Corporate Insolvency Resolution Process (CIRP) other than the restrictions imposed by the code.

The meaning of ‘going concern’ was further explained by the IBBI Discussion Paper on Corporate Liquidation Process and the Draft Regulations which were released in 2019. It defined the term of ‘going concern’ as all such assets and liabilities constituting integral business of the corporate debtor which must be transferred together and the consideration must be for the business of the corporate debtor. The buyer of the business will be able to run the business without disrupting it. The business or the Corporate Debtor should be a running one, and it must be transferred along with its employees. In case of sale of a Corporate Debtor as going concern, the equity shareholding of the corporate debtor is transferred and the buyer takes over the business of the corporate debtor including its  business, affairs and operations, its entitlements, assets, licenses, brand, trademarks, beneficial interests, government approvals etc.

Advantages of sale of going concern

Following are the advantages of sale of the corporate debtor as a going concern:

• The corporate debtor as a whole is transferred
• The purchaser gets to run the business of the corporate debtor after the sale of assets of the going concern
• The existing employees are usually not fired and can continue with their jobs
• The equity shareholding is transferred instead of part sale and new shares are issued

Legal framework for sale of going concern under Insolvency and Bankruptcy Code  

Clause (f) of sub section (1) of section 35 of Insolvency and Bankruptcy Code, 2016 provides power to the Liquidator, subject to the directions of the Adjudicating Authority, to sell the property of the Corporate Debtor in liquidation either by public auction or private contract with the power to transfer such property to any other person or body corporate or to sell that property in parcels.

Regulation 32 of the Liquidation Process Regulations, 2016 also provides an option to the liquidator to sell the corporate debtor as going concern or the business of the corporate debtor as going concern. Other options have been provided by the regulations such as sale of asset on a standalone basis, sale of assets in slump sale or sale of a set of assets collectively or assets in parcels.

Who decides to make a sale of going concern?     

Amendments were introduced in 2019 in the Liquidation Process Regulations, 2016 which inserted Regulation 32A which allows the stakeholders and the liquidator to take decision on making a sale of going concern exercising the following options:

• In case where the committee of creditors has recommended that sale must be made under either as corporate debtor as a going concern 32(e) or the business of the corporate debtor as a going concern 32 (f) or where the liquidator believes that sale must be done as per the given abovementioned options, then the liquidator shall make an endeavour to make sale as per the given clauses.
• Then the group of assets and liabilities of the corporate debtor identified by the committee of creditors under Regulation 39C(2) of the CIRP Regulations, 2016 shall be sold as going concern. In case the Committee of Creditors has not identified the and grouped the assets and liabilities under Regulation 39C(2), then the liquidator shall identify the assets and liabilities to be sold as a going concern after consulting committee of creditors.
• If the liquidator has been unable to sell the assets of the corporate debtor in accordance with the above mentioned methods within 90 days from the commencement of liquidation date, then the liquidator shall sell the assets according to the other methods such as from clause (a) to (d) mentioned Regulation 32.

Difference of sale in Regulation 32(e) and Regulation 32(f)     

There is difference between sale of corporate debtor as going concern [Reg. 32(2)] and sale of business of corporate debtor as going concern [Reg. 32(f)]

Sale of corporate debtor as going concern [Reg. 32(2)]

In this type of sale of going concern, the corporate debtor is not is not dissolved rather it forms part of the liquidation estate. It is transferred along with other business assets and liabilities including all contracts, concessions, contracts, agreements, benefits, privileges, rights and interests to the acquirer. The consideration will be split into share capital and liabilities based on the capital structure that is decided by the acquirer. Shares will be issued by the corporate debtor and sold to the extent of share capital. The existing shares, however, of the corporate debtor will not be transferred and shall be extinguished. The existing shareholders will become claimants from the liquidation proceeds under section 53 of the Insolvency and Bankruptcy Code, 2016.

Sale of business(s) of the corporate debtor as going concern [Reg. 32(f)]

The business(s) of the corporate debtor along with its assets and liabilities including its intangibles shall be transferred as a going concern to the acquirer without the transfer of corporate debtor. This results in dissolution of corporate debtor. The existing shares will be extinguished. The remaining assets which were not sold as part of the business will be sold and the proceeds derived from such sale will be used to meet claim under section 53 of the Insolvency and Bankruptcy Code, 2016.

Sale of going concern means sale of assets and liabilities

Sale of a business as a going concern means sale of assets and liabilities attached with it. In the case of M/s. Visisth Services Ltd. v Mr. S. V. Ramani, Liquidator of United Chloro-Paraffins Pvt. Ltd., NCLAT held that according to Regulation 32A of IBBI (Liquidation Process) Regulations, 2016, sale of a going concern means of sale of both assets and liabilities and not assets without liabilities. It is concluded that sale of going concern means that sale of both assets and liabilities if it is stated that on ‘as is where is’ basis.

Dissolution of Corporate Debtor  

One of the advantages of sale of corporate debtor as going concern is that the corporate debtor is retained and not dissolved. It is instead transferred with its assets. This keeps intact legal entity of the corporate debtor. The corporate debtor is not dissolved according to section 54 of the Insolvency and Bankruptcy Code. According to Regulation 45(3)(a) of Liquidation Process Regulation, 2016^[1], the liquidator shall submit an application along with the final report. The compliance certificate is also submitted to the Adjudicating Authority to close the liquidating process of the corporate debtor where the corporate debtor will be sold as a going concern.  All the assets with the attendant, claims, licenses, limitations, permits or business authorisations remain with the company. It is only the ownership of the company that is acquired by the successful bidder from the liquidator.

In both the cases, the corporate debtor continues to service with or without the business after the process gets completed. If the Corporate Debtor is left without any business, it will be liquidated and then dissolved. It is left with business, then it will continue to carry on the business. It this case, the corporate debtor shall not be liquidated or dissolved.

It must be noted that even if an order of liquidation of a corporate debtor has been passed under section 33 of the Insolvency and Bankruptcy Code, on completion of the process under section 230 of the Companies Act, 2013 or sale of going concern under the Code, the corporate debtor may not be liquidated or dissolved. If a complete liquidation of the assets of the corporate debtor does not take place, it does not become be necessary for the liquidator to make an application to the Adjudicating Authority u/s 54 of the Insolvency and Bankruptcy Code for the dissolution of the corporate debtor.

Timeline of the sale of going concern

Regulation 47 of the Liquidation Process Regulations, 2016 provides a timeline for the liquidation process. This regulation provides a timeline for the completion of the liquidation process in 365 days where the commencement of the liquidation proceedings and appointment of the liquidator begin under sections 33 and 34 of the Insolvency and Bankruptcy Code, 2016.

In the case of BDR Builders and Developers Pvt. Ltd. v Mohan Lal Jain, Liquidator, the NCLAT decided that if the liquidation is going on of a corporate debtor as a going concern, an additional period of 90 days can be given beyond the period of one year for the completion of the liquidation process.

Case Study   

In the case of M/s. Mohan Gems and Jewels Pvt. Ltd. thorough its liquidator Debashish Nanda v Vijay Sharma, an application was filed under regulation 45(3)(a) of IBBI Liquidation Process Regulations, 2016 seeking closure of the liquidation process as the corporate debtor was being sold as a going concern in the e-Auction. The application was dismissed by the Adjudicating Authority and held that after examining regulations 39C and 32, one from Corporate Insolvency Resolution Process Regulations and another from Liquidation Regulations, found no merit in any of these regulations which are setup as a foundation to state that by virtue of liquidation Regulation 45(3), dissolution shall be dispensed for closure of liquidation. Only the assets of the debtor company can be liquidated and the concept of liquidation of assets shall not be considered as inclusion of sale of the company. The procedure is set out in the Code for rearrangement under insolvency and resolution process thereafter another window under liquidation u/s 230 of the Companies Act, 2013 which is militating the procedure set out under the Code. Accordingly, the Insolvency Application was dismissed as misconceived. However, an appeal was filed before the NCLAT for the following considerations:

• Whether the liquidator is authorised to sell the Corporate Debtor as going concern in accordance with Regulation 32 of IBBI (Liquidation Process) Regulations, 2016?
• Whether the Adjudicating Authority was correct in deciding that Regulation 39C of CIRP Regulations and Regulations 32A, 45(3) of Liquidation Process Regulations are consistent with section 54 of the Insolvency and Bankruptcy Code?
• Whether the interpretation made by the Adjudicating Authority is contrary to the scope and spirit of the Code?

The order of the Adjudicating Authority was set aside by the NCLAT holding that Regulation 39C of Corporate Insolvency Resolution Process Regulations read with Regulations 32, 32A and 45(3) of the Liquidation Process Regulations make it clear that under Regulation 39C, the Committee of Creditors may recommend that the Liquidator may first explore the option of selling the Corporate Debtor as going concern under Regulation 32(e) or Sale of the business of the Corporate Debtor under clause (f) of Regulation 32.  Regulation 32A provides that if the liquidator believes that sale under clause (e) or (f) of Regulation 32 will maximize the value of the Corporate Debtor, then the liquidator shall pursue the liquidation under the said clauses. Regulation 32A(2) provides for the purpose of sale under Sub-Regulation (1), the group of assets and liabilities as identified by the Committee of Creditors under Regulation 32C(2) of the Corporate Insolvency Resolution Process Regulations, shall be sold as a going concern. The tribunal held that the Regulation 45(3) and 39C were inserted with the view to facilitate the objectives of the Code. An order of dissolution is unnecessary in such cases. The Code does not arrest the closure of Liquidation Process in case the Corporate Debtor is sold as going concern following a closure report being filed under Regulation 45(3)(a) of Liquidation Process Regulations. The Tribunal held that it would be contradictory to hold that closure of Liquidation proceedings can’t be done and only dissolution is provided under the Code. It would be held against the spirit of the Code. Therefore, it was held that even after the passage of 270 days, if no decision can be reached under Regulation 39C by the Committee of Creditors, then only Regulation 32A needs to be followed. Further, since the application was filed prior to 25.07.2019 (the date on which Regulation 39C was inserted), the question of Committee of Creditors passing any resolution in that regards does not arise. The Tribunal is of the view that the Liquidator has followed the procedure rightfully which is specified in Regulation 32A. The Tribunal also held that the sale of the Corporate Debtor as going concern has been rightfully carried out in accordance with the above mentioned sections and Regulations and also disagreed with the decision of the Tribunal.  

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