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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Voting Percentage Threshold in IBC

Various voting percentage thresholds, for approvals from CoC, have been mentioned in the Code, i.e.;

• i). Section 12A (90%), 

• ii). Sections 12(2), 22(2), 27(2), 28(3), 30(4) & 33(2) all 66 % and 

• iii). Section 21(8) 51%.

Except in section 25A (3A), voting by financial creditors in a class, the expression used in different sections of the Code reads as “by not less than ( either of, fifty one or sixty-six or ninety)  “per cent. of the voting share”. Now the question is, whether the expression  “per cent of the voting share” includes only the voting percentage of CoC members (financial creditors) present and casting their votes.

Insolvency and Bankruptcy Code, 2016.

# Section 3. Definitions. –

(28) “voting share” means the share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed to such financial creditor in relation to the financial debt owed by the corporate debtor.

# Section 12. Time-limit for completion of insolvency resolution process. -

(2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six per cent. of the voting shares.

 # Section 12A. Withdrawal of application admitted under section 7, 9 or 10. –

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.

# Section 21. Committee of creditors. -

(8) Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent. of voting share of the financial creditors:

Provided that where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be specified.

# Section 22. Appointment of resolution professional. -

(1) The first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors.

(2) The committee of creditors, may, in the first meeting, by a majority vote of not less than sixty-six per cent. of the voting share of the financial creditors, either resolve to appoint the interim resolution professional as a resolution professional or to replace the interim resolution professional by another resolution professional.

# Section 25A. Rights and duties of authorised representative of financial creditors. –

(3A) Notwithstanding anything to the contrary contained in sub-section (3), the authorised representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent. of the voting share of the financial creditors he represents, who have cast their vote:

# Section 27. Replacement of resolution professional by committee of creditors. -

(2) The committee of creditors may, at a meeting, by a vote of sixty-six per cent of voting  shares, resolve to replace the resolution professional appointed under section 22 with another resolution professional, subject to a written consent from the proposed resolution professional in the specified form.

# Section 28. Approval of committee of creditors for certain actions. -

(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of sixty-six per cent. of the voting shares.

# Section 30. Submission of resolution plan.

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability,

# Section 33. Initiation of liquidation. -

(2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six per cent. of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

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

# Regulation 30 A. Withdrawal of application.

(5) Where the application referred to in sub-regulation (4) is approved by the committee with ninety percent voting share, the resolution professional shall submit such application along with the approval of the committee, to the Adjudicating Authority on behalf of the applicant, within three days of such approval.

Case Law;

i). NCLT (PB) New Delhi (29.09.2018) in Nikhil Mehta & Sons (HUF) & Ors. v. M/s. AMR Infrastructure Ltd.  [CA-811(PB)/2018 in CP No. (1B)-02(PB)/2017 ] held that;

• The committee in Para 11.6 recommended to reduce the threshold from 75% to 66% for the critical decisions and 51% for the routine decisions, but in both the cases of the total voting share of the financial creditors. 

• The recommendations of the Insolvency Law Committee has been promulgating by the IBC (Amendment) Ordinance which has been now replaced by IBC (Second Amendment) Act, 2018 w.e.f 06.06.2018. In the light of fact that the Government and Parliament have taken a conscious decision by not introducing the present and voting requirement in the IBC even while amending the IBC, it would not be open to adopt that cannon of interpretation for construction of these provisions. 

• The Committee was of the view a higher threshold with the present and voting requirement, or a lower threshold sans the present and voting requirement, may be adopted. 

• Another aspect which emerges is that the principle of voting share threshold on the basis of present and voting has been discarded. The recommendation of the committee has now been promulgated by Insolvency Bankruptcy Board (Amendment) Ordinance which is now known as Insolvency Bankruptcy Code (Second Amendment) Act, 2018 enacted with effect from 6-6-2018. In the light of the fact that the Government and Parliament have taken a conscious decisions by discarding the present and voting requirement in the Code.

Link for Synopsis of the order;  Nikhil Mehta & Sons (HUF) & Ors. v. M/s. AMR Infrastructure Ltd

ii). NCLAT (04.02.2019) in Tata Steel Limited v. Liberty House Group Pte. Ltd.& Ors. (Company Appeal (AT) (Insolvency) No. 198 of 2018) observed that;

• “If some members of the ‘Committee of Creditors’ having 2.88% voting shares remained absent, it cannot be held that they have considered the feasibility and viability and other requirements as specified by the Board, therefore, their shares should not have been counted for the purpose of counting the voting shares of the Committee of Creditors. In fact, 97.12% voting shares of members being Present in the meeting of the ‘Committee of Creditors’ and all of them have casted vote in favour of ‘JSW Steel’, we hold that the ‘Resolution Plan’ submitted by ‘JSW Steel’ has been approved with 100% voting shares.” 

iii). Supreme Court of India (05.02.2019) in K. Sashidhar v. Indian Overseas Bank & Ors. (Civil Appeal No. 10673 of 2019) observed that, 

• # 29 ………..“For that, the “percent of voting share of the financial creditors” approving vis à vis dissenting is required to be reckoned. It is not on the basis of members present and voting as such. At any rate, the approving votes must fulfill the threshold percent of voting share of the financial creditors.” ………..

• # 39. …………..The fact that substantial or majority percent of financial creditors have accorded approval to the resolution plan would be of no avail, unless the approval is by a vote of not less than 75% (after amendment of 2018 w.e.f. 06.06.2018, 66%) of voting share of the financial creditors. ……………..

It can be observed that SC Judgment overrules the Liberty House Order and suggests that the percent of voting sharing is “not on the basis of members present and voting”.

iv). NCLAT (10.06.2019) in IDBI Bank Limited v. Mr. Anuj Jain, IRP, Jaypee Infratech Ltd. and Anr. (Company Appeal (AT)(Ins) No. 536 of 2019) held that;

• “We make it clear that if any of the ‘Financial Creditor’ remains absent from voting, their voting percentage should not be counted for the purpose of counting the voting shares, as held by this Appellate Tribunal in ‘Tata Steel Ltd. vs. Liberty House Group Pte. Limited & Ors.’”

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Insolvency Law Committee report dated 28.03.2018

# 11.4 The Committee noted the voting thresholds across other statutes and guidelines that deal/have dealt with rehabilitation of companies as follows:

• (a) Section 230(6) of the CA 2013 which deals with power to compromise or make arrangements with creditors and members provides that any compromise or arrangement must be approved by 75 percent in value of creditors or class of creditors or members or class of members, as the case maybe.

• (b) Section 262 of the CA 2013  provided for a scheme of rehabilitation which required approval by (i) secured creditors representing 75 percent in value of the debts owed by the company to such creditors; and (ii)unsecured creditors representing 25 percent in value of the amount of debt owed to them. Further, in case of voluntary winding up, section 311 of the CA 2013 provided for replacement of the company liquidator by approval of 75 percent of creditors or 75 percent of members of the company.79

• (c) The Joint Lender’s Forum (“JLF”) framework formulated by the RBI (which has now been replaced) to enable creditors to identify and deal with stressed assets at an early stage prescribed a voting threshold of 60 percent (reduced from 75 percent) of creditors by value and 50 percent (reduced from 60 percent) of creditors by number in the JLF, for proceeding with the restructuring of the account.

• (d) Section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 provided that in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor would be entitled to exercise any or all of the rights conferred on her under the relevant law (such as taking possession of the secured asset or takeover the management of the borrower) unless exercise of such right was agreed upon by secured creditors representing not less than 60 percent (reduced from 75 percent) in value of the amount outstanding as on a record date and such action was binding on all the secured creditors.

# 11.6 After due deliberation and factoring in the experience of past restructuring laws in India and international best practices, the Committee agreed that to further the stated object of the Code i.e. to promote resolution, the voting share for approval of resolution plan and other critical decisions may be reduced from 75 percent to 66 percent or more of the voting share of the financial creditors. In addition to approval of the resolution plan under section 30(4), other critical decisions are extension of the CIRP beyond 180 days under section 12(2), replacement or appointment of RP under sections 22(2) and 27(2), and passing a resolution for liquidation under section 33(2) of the Code. Further, for approval of the other routine decisions for continuing the corporate debtor as going concern by the IRP/RP, the voting share threshold may be reduced to 51 percent or more of the voting share of the financial creditors.

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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Secured Creditor & Section 53 of the Code

Query ; Whether a liquidator is required to take into account the value of security interest while preparing the list of creditors for the purpose of distribution of funds under the provisions of Section 53 of the Code ?

Let’s look into the various provisions of the Code & Regulations framed thereunder.

# Section 52. Secured creditor in liquidation proceedings.

(9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.

 

# Section 53 Distribution of assets. -

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:

• (i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

• (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following: -

• (i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

• (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

 

Secured creditor can relinquish his security interest to the liquidation estate and stand second highest priority under the liquidation waterfall [Section 53(1)(b)]. This priority is given to “debts owed to a secured creditor in the event such secured creditor has relinquished security interest in favour of the liquidator”. This does not specify whether such debts owed are limited only to the extent of value of the security interest of the creditors’ debt,

 

Code does not specify whether such secured debts are limited to the value of the secured portion of the creditor’s debt only. This fact assumes greater significance in light of the wording of section 30(4) of Code for distribution of funds during insolvency proceedings;

 

Section 30 (4). The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

From the above, it can be observed that Code under section 30(4) specifically & separately mentions section 53(1) & value of the security interest, as the concept of value of security interest is not inherent in provisions of section 53. Had the concept of value of security interest been inherent in the provisions of Section 53, there was no need to separately mention the value of security interest in section 30(4). 

 

There is a significant absence of the term “value of the security interest “  in Section 53 of the Code. Thus the legislative intent of the Parliament is very clear that the amount of secured credit under section 53(1)(b) will not be limited to the extent of the underlying value of the security interest.

 

Secondly, if debt of the secured creditor, under second priority under section 53(1)(b) is limited to the extent of value of security interest, then the provisions of the Code under section 52(9) will create imbalance between the following classes of secured creditors;

1. Secured creditors, who has exercised his security interest under section 52. His debt, beyond the value of security interest will rank 5th priority in waterfall under section 53(1).

2. Secured creditor, who has relinquished his security interest in favour of liquidator. His debt, beyond the value of security interest will rank 4th priority in waterfall under section 53(1).

Section 52(9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.

Case Law;

i). NCLT Allahabad (24.07.2018) in J.R. Agro Industries P Limited V/s. Swadisht Oils P Ltd. [CA 59 of 2018 in CP 13/ALD/2017] held as under:-

• (Page 33/50) “Notably, distinction under section 53 is a two-fold distinction – (i) secured/unsecured, and (ii) operational/financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression “secured,” and there is no indication as to the nature of debt (financial/operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank.”

ii). NCLAT (05.04.2021) in Technology Development Board Vs.Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors.  [Company Appeal (AT) (Insolvency) No.731 of 2020] held that;-

• # 4. . . .Appellate Tribunal in “J M Financial asset Reconstruction Co. Ltd. vs. Finquest Financial Solutions Pvt. Ltd. & Ors.”, held that only the first charge holder i.e. the Secured Creditor being highest in the inter creditor ranking is entitled to enforce his right for the realization of its debt out the secured asset.

• # 8. While it is true that the relinquishment of security interest affects the order of distribution, it is equally true that the Secured Creditor does not lose its status of being a Secured Creditor though he has elected to forego his right of enforcing security interest. Whether the Secured Creditor holds first charge or second charge is material only if the Secured Creditor elects to realise its security interest.  . . . . .

• # 8.  . . . The two sets of Secured Creditors, one relinquishing the security interest and the other realising its security interest are treated differently. A creative interpretation has to be given to the provisions to make them workable and stand in harmony. It is significant to note that Section 53 has been given overriding effect and the non-obstante clause contained in the very opening words of the Section leaves no room for doubt that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.  . . . . 

• # 8.  . . . . Of course first charge holder will have priority in realising its security interest if it elects to realize its security interest and does not relinquish the same. However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) where under all Secured Creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs.

• # 12. We accordingly allow the appeal and set aside the impugned order. I.A. 514 of 2019 in CP(IB) No. 04/2017, is held to be maintainable and we allow the same with direction to the Liquidator to treat the Secured Creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of I&B Code and distribute the proceeds in accordance therewith.

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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