Sale of CD as a Going Concern during Liquidation Process

Recently NCLT Mumbai-I in Gaurav Jain  Vs. Sanjay Gupta while permitting sale of CD as a going concern observed as under;

• # 25. The crux of the ‘going concern sale’ is that the equity shareholding of the Corporate Debtor is extinguished and the acquirer takes over the undertaking with the assets, licenses, entitlements etc. ……..

• # 26. The Corporate Debtor survives, only the ownership is transferred by the Liquidator to the purchaser. All the rights, titles and interest in the Corporate Debtor including the legal entity is transferred to the purchaser. After the sale as a ‘going concern’, the purchaser will be carrying on the business of the Corporate Debtor.

• # 27. As far as the Liquidator is concerned, when the sale consideration is received from the bidder / purchaser, the same will be distributed to the Creditors in accordance with Section 53 of the Code. Since the amount is paid to the Creditors in terms of the Code, the liabilities of the Corporate Debtor towards the Creditors are treated as settled and the purchaser takes the assets free of any encumbrances or whatsoever.

• # 28. In the normal parlance “going concern” sale is transfer of assets along with the liabilities. However, as far as the ‘going concern’ sale in liquidation is concerned, there is a clear difference that only assets are transferred and the liabilities of the Corporate Debtor has to be settled in accordance with Section 53 of the Code and hence the purchaser of this assets takes over the assets without any encumbrance or charge and free from the action of the Creditors.

• # 31. In the case of sale as a ‘going concern’ the Corporate Debtor will not be dissolved in terms of Section 54 of the Code. The assets with the attendant, claims, limitations, licenses, permits or business authorisations, remains in the Company. Only the ownership of the Company is acquired by the successful bidder from the Liquidator.

• # 32.  It is to be noted that even though there is no specific provision in the Code regarding “sale of the Company as a going concern”, IBBI has formed the Liquidation Process Regulations, under the Code and we have to take them as guiding principles in dealing with the case.

The question arises whether the provisions of “Subordinate Legislation” (Liquidation Regulations) can override the provisions of the “Principal Legislation”, (Insolvency & Bankruptcy Code, 2016)  specifically when concerned provision of the “Principal Legislation” (Section 54) does not mandate Board for “Subordinate Legislation”.

• Section 54. Dissolution of corporate debtor. -

• (1) Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.

• (2) The Adjudicating Authority shall on application filed by the liquidator under sub-section (1) order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.

• (3) A copy of an order under sub-section (2) shall within seven days from the date of such order, be forwarded to the authority with which the corporate debtor is registered.

Thus, as per section 54, the liquidation process attains finality or say gets completed, with the dissolution of the CD.

In another case NCLT (PB) New Delhi in Invest Asset Securitisations and Reconstruction Pvt Ltd v/s Mohan Gems & Jewels Pvt. Ltd. AA dismissed the application of Liquidator for sale of CD as a going concern, as misconceived, observing as under;

• # 4. By looking at this argument and section 54, it is clear that the mandate u/s 54 is to terminate the life of corporate debtors by dissolving them after liquidation of their assets. As against this statutory mandate, can IBBI pass Regulations directing dispensation of operation of section 54 by devising a concept not present in the Code, stating that to maximize the value of the Corporate Debtor the liquidator may sell the corporate debtor as a going concern or business of the corporate debtor as a going concern and close the liquidation process with the approval of this Adjudicating Authority bypassing dissolution mandate u/s 54? If it is selling business of the corporate debtor, we may not call for scrutiny of the Regulations because business will remain tied up with undertaking. But selling of a company is not envisaged either under IBC or in corporate jurisprudence. It is unknown to law and beyond the discretion given to IBBI under section 240 (2) (y) of the Code. 

• # 6. The legal issue involved in the relief sought is whether the relief sought could be granted or not, if not why it could not be granted. Answer is - this being a Tribunal, it can exercise its powers only to the extent conferred upon in the statute. For there being no mandate in the statute to grant such relief, this Tribunal is barred from passing such relief. We must always remind ourselves Courts can pass any order unless it is specifically or impliedly barred; when it comes to Tribunals, they cannot exercise adjudicating powers beyond the power conferred upon. In this Code, this Tribunal is not conferred with general power to deal with any issue falling under this Code. That being the scenario, we can't even think of granting a relief repugnant to the mandate under section 54 of Code. For that matter no authority, no matter whether it is a court or Tribunal or any other authority bound by this Code, could grant relief repugnant to the provision of law unless such law is struck down. 

• 34. Insolvency and Bankruptcy Code is an embodiment of substantial rights laced with procedural mandates. When procedure itself is part of the enactment, the Regulating Authority cannot rewrite the procedure obliterating the provisions of IBC. Yes, the Regulating authority may bring in subordinate procedure for full implementation of the sections of the Code. What could be liquidated is the assets of the debtor company, this concept of liquidation of assets shall not be construed as inclusion of sale of the company. 

Here, the second important question arises;

• “ Whether the successful bidder in the liquidation process, in the above situation of acquiring the CD as a going concern, will get the protection as available to the Resolution Applicant under Section 32A. “

References; 

1.  NCLT Mumbai-I (09.03.2021) in Gaurav Jain  Vs. Sanjay Gupta, [IA No. 2264 of 2020 in C.P. (IB) No. 1239/MB/2018]

2.  NCLT (PB) New Delhi (16.09.2020) Invest Asset Securitisations and Reconstruction Pvt Ltd v/s Mohan Gems & Jewels Pvt. Ltd. [IA 1490/2020 in CP No. (IB)-590 (PB)/2018]

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.

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