Revival of CD as a going concern during Liquidation Process

 Query 

1. Whether a liquidator can revive the CD as a going concern for better asset realization.

2. Whether liquidator, for revival of the unit, can re-employ workmen / employees on contractual basis, after liquidation order has been issued by AA, which is deemed to be a notice of  discharge to the officers, employees and workmen of the corporate debtor. [Section 33(7)].

Let’s look into provisions of the Code & regulations.

Section 33. Initiation of liquidation.

(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

Section 34. Appointment of liquidator and fee to be paid.

(2) On the appointment of a liquidator under this section, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the liquidator.

(3) The personnel of the corporate debtor shall extend all assistance and cooperation to the liquidator as may be required by him in managing the affairs of the corporate debtor and provisions of section 19 shall apply in relation to voluntary liquidation process as they apply in relation to liquidation process with the substitution of references to the liquidator for references to the interim resolution professional.

Section 35. Powers and duties of liquidator. -

(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely: -

(e) to carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;

(i) to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities;

(n) to apply to the Adjudicating Authority for such orders or directions as may be necessary for the liquidation of the corporate debtor and to report the progress of the liquidation process in a manner as may be specified by the Board; and

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. [Amended upto 05.08.2020]

Regulation 2. Definitions.

(ea) “liquidation cost”

(v) costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern;

Regulation 7. Appointment of professionals.

(1) A liquidator may appoint professionals to assist him in the discharge of his duties,

obligations and functions for a reasonable remuneration and such remuneration shall

form part of the liquidation cost.

Regulation 13. Preliminary report. The liquidator shall submit a Preliminary Report to the Adjudicating Authority within seventy-five days from the liquidation commencement date, detailing-

(d) the proposed plan of action for carrying out the liquidation, including the timeline within which he proposes to carry it out and the estimated liquidation costs.

Regulation 21A. Presumption of security interest.

(1) A secured creditor shall inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II:

Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate.

Regulation 32. Sale of Assets, etc.

The liquidator may sell-

• (a) an asset on a standalone basis;

• (b) the assets in a slump sale;

• (c) a set of assets collectively;

• (d) the assets in parcels;

• (e) the corporate debtor as a going concern; or

• (f) the business(s) of the corporate debtor as a going concern:

Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate.

Regulation 32A. Sale as a going concern.

(1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses.

From the provisions of the Code & regulations following are major takeaways;

1, If the business is not continuing at the time of liquidation order (i.e. CD is not a going concern at the time of liquidation order), the liquidation order shall be deemed to be the order of discharge for  the officers, employees and workmen of the corporate debtor.

2. In case Liquidator is of the opinion that   sale of CD / businesses of the CD, under clause (e) or (f) of regulation 32 ( as a going concern) shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses [regulation 32A (1)], provided the security interest therein have been relinquished by the secured creditors in favour of the liquidator. A secured creditor is required to inform enforcement of security interest within 30 days of commencement of liquidation. (regulation 21A)

3. In case CD is not a going concern at the time of liquidation order and,

1. Security interests have been relinquished by the secured creditors, &

2. Liquidator is of the opinion that sale of CD / businesses of the CD as a going concern shall maximise* the value of the corporate debtor.(regulation 32A).

Liquidator may propose for revival of the unit as a going concern under the proposed plan of action for carrying out the liquidation while filing preliminary report to AA under regulation 13(d). & seek directions of AA for revival of the unit as a going concern along with attendant permissions for appointment of personnel on contract basis. 

* Asset realization as a going concern should be expected to be more than the liquidation value net of additional liquidation cost for revival of the unit as a going concern. This aspect needs to be elaborately discussed in the preliminary report of the liquidator. 

4. This aspect has a natural corollary, that in case of a going concern at the time of liquidation order, liquidator is of the opinion that;

• Maintaining the CD as a going concern, will not maximise the asset realization,  due to recurrent negative cash flows & gains of asset realization (expected realization less liquidation value) of the going concern will be more or less, neutralized by the liquidation cost (negative cash flow) of maintaining the unit as a going concern. 

The Liquidator will be well advised to recommend closure of the working of the unit in his  proposed plan of action for carrying out the liquidation in the preliminary report under regulation 13(d).

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.