Sale of Assets & Liabilities of CD as a going Concern during Liquidation - Violation of Fundamental Rights of Equality (Article 14 of Constitution) of claimants (liabilities)

Recently Appellate Authority (NCLAT) in Visisth Services Ltd. Vs. S. V. Ramani, Liquidator of United Chloro-Paraffins Pvt. Ltd. [Company Appeal (AT) (Insolvency) No.896 of 2020] upheld the orders of Adjudicating Authority (NCLT) confirming sale/auction of Assets & Liabilities of CD as a going concern during liquidation process. 

Genesis of the orders of NCLT & NCLAT lies in the following regulations;

a). Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# 39C. Assessment of sale as a going concern.

(2) Where the committee recommends sale as a going concern, it shall identify and group the assets and liabilities, which according to its commercial considerations, ought to be sold as a going concern under clause (e) or clause (f) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

b). Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# 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.

(2) For the purpose of sale under sub-regulation (1), the group of assets and liabilities of the corporate debtor, as identified by the committee of creditors under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 shall be sold as a going concern. 

(3) Where the committee of creditors has not identified the assets and liabilities under subregulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.

The word “Liability” or “Liabilities” is nowhere defined in the Code, CIRP Regulations, Liquidation Regulations or The Companies Act.

Elaborate provisions have been provided in the Code to identify the assets & claims (liabilities) of the CD.

a). Section 36 - Identification of Assets.

b). Section 38 to 42 - Identification of claims on CD (Liabilities of CD).

Further Section 52 & 53 provides for disposal of  assets & settlement of claims (liabilities).

As per the provisions of Section 53, after distribution of the proceeds of assets by the liquidator, all claims/liabilities stand satisfied/extinguished.

 

Now the question is how CoC can identify the liabilities (claims on CD) during insolvency process, even prior to public announcement of Liquidator calling for the claims on CD. 

Liabilities, auctioned/sold along with assets in going concern auction/sale during liquidation, will thus get novated and will be satisfied in full in due course of time. Clubbing of liabilities (claims on CD) with assets will also tantamount to preferential treatment of such liabilities vis-a-viz liabilities/claims settled by liquidator under the provisions of Section 53. 

This will also be the violation of Fundamental Rights of Equality enshrined under the Constitution of India.

• The Constitution Of India 

• Article 14. Equality before law The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.

Now the questions arise;

1. What are the criterias to be adopted by CoC [Regulation 39(c)] & liquidator [Regulation 32A] for identifying the liabilities for clubbing the same with assets in going concern sale during liquidation?

2. Whether these liabilities so identified (supra) will stand attached with the assets and constitute as part of Liquidation Estate (Section 36)?

3. Whether the liquidator has powers to auction/sale any asset/liability, which are not part of Liquidation Estate?

4. Whether liquidator has to settle liabilities/creditors mandatorily as per the priority specified in section 53 or the priority of liabilities/creditors can be altered by RP/Liquidator by clubbing the liabilities with assets in consultation with CoC [CIRP Regulation 39(c)] / SCC [Liquidation Regulation 32A]

5. How will the compliance of Section 54 be taken care of?

In another case, in Nitin Jain Liquidator of PSL Ltd. Vs. Lucky Holdings Pvt. Ltd [IA 391 (AHM)/2021 in CP (IB) 37 (AHM) 2017 ] Adjudicating Authority using residuary powers of NCLT under section 60(5) granted relief to Successful Auction Bidder in liquidation process beyond the provisions of section 32A;

• Thus, considering these findings of the Hon'ble Supreme Court, it is crystal clear that this Adjudicating Authority has got adequate jurisdiction as regard to most of the issues raised in this application, being issues arising out of or insolvency resolution as well as are in relation to liquidation proceedings of the Corporate Debtor.

• Thus, in our considered view, the reliefs and concessions on the parallel line of an approved resolution plan can be granted subject to one condition that such reliefs/concessions must be central issues and also in relation to or arising out of liquidation proceedings of a Corporate Debtor so as to confer jurisdiction on Adjudicating Authority under Section 60(5)(c) of the IBC, 2016.

• The Successful Auction Bidder shall not be liable for any action/responsibility of the Corporate Debtor or its erstwhile management as per provisions of Section 32A of IBC, 2016.

Insolvency and Bankruptcy Code, 2016.

# Section 32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not- 

(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having fulfilled:

XXXXX

Some other cases;

i). NCLT Hyderabad (30.06.2021) in Viswa Infrastructures Finance & Services Pvt Ltd  Vs SREI Equipment Finance Ltd  [IA (IBC)/157/2021 in CP (IB) No. 329/7/HDB/2018 ] held that; 

• Corporate Debtor is being sold on an ongoing concern basis which is more or less in the nature of resolution of the Corporate Debtor as such he has no objection if the prayers sought for in the term sheet submitted by the successful bidder are allowed by the Tribunal. Already Successful Bidder has deposited Rs. 57 crores. In order for the Successful bidder to kick start the business and follow the law laid down under the Companies Act, 2013, it is imperative for the Tribunal to grant necessary reliefs. 

• The said assets are free from any financial implications arising out of any pending proceedings before relevant authorities, if any. Further non compliance of provisions of any laws, rules, regulations, directions, notifications, circulars etc on the Corporate Debtor under various Acts and Regulations stands extinguished, qua the successful bidder. 

• The erstwhile promoters or any member, associate of the Existing and Erstwhile promoter groups is hereby restrained from doing any business directly or indirectly in connection with the products and services presently offered by the Corporate Debtor

• “Relief sought with regard to issuance/renewal of all kinds of licenses / permissions/ approvals required is allowed subject to payment of renewal fees, if any, from this date to the Licensing Authorities. 

ii). NCLT Mumbai-1 (2018.11.29) in Alchemist Asset Reconstruction Company Ltd. Vs. Abhijeet MADC Nagpur Energy Pvt. Ltd. [MA 1343/2018 IN CP (IB)-1315/MB/2017] held that;

• It is to be clarified that when sale is to be made on a going concern basis, then certainly after the transfer of undertaking, acquirer gets all right, title and interest in the whole and every part of the undertaking, without any security interest, encumbrance, claim, counterclaim, or any demur, into the acquirer.

iii). 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] held that;

• 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.

• 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.

• 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.

• 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.

Thus, there are contradictions in the various orders (supra), in respect of the following question;

1. Whether the auction purchaser during liquidation process under IBC takes over the assets without any encumbrance or charge and free from the action of the Creditors.  

This position is negated when the assets & liabilities are clubbed together for auction/sale in going concern sale as per the existent regulations. Rather, provisions of going concern sale  in liquidation are being used as a backdoor resolution process and reliefs, concessions & protections [Section 32A(1)] of the resolution process are being allowed in arbitrary manner, in absence of Rules & Regulations. Even in the resolution process, all liabilities stand extinguished, post approval of the resolution plan by the Adjudicating Authority. Thus clubbing of liabilities with assets in going concern sale during liquidation process is antithesis of the objectives of the Code. 

Way forward; Keeping in view the letter & spirit of the section 240 (1), Board may consider amendments to the CIRP & Liquidation Regulations, in respect of treatment of going concern auction/sale during liquidation process or as a regulator propose amendments in the Code, to make Code & Regulations sync together.  

 # Section 240. Power to make regulations. –

(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.

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.