On 11th September 2021, the Ahmedabad bench of the NCLT passed an order approving the liquidation of an insolvent company even when it was a “going concern”. Nitin Jain (for PSL Ltd Vs Ashok Punj & Ors) IA No. 132 of 2020 in CP (IB) No. 37/10/NCLT/AHM /2017. 

On 24th August 2021, the Principal NCLT Bench in Delhi passed a similar order in Mohan Gems & Jewels Pvt. Ltd. Vs Vijay Verma & IBBI Company Appeal AT (Insolvency) No. 84 of 2020. 

The concept of liquidation of insolvent companies as a going concern is gaining popularity. 

What does going concern mean?

Black’s dictionary defines a “going concern” as a business currently successful with indications in foreseeable future of continuing to do well. 

In the insolvency parlance, the sale of an entity as a going concern implies that the entity would be functional as it would have been prior to initiation of sale / liquidation.

In economic terms, the value or valuation of the total of all assets – tangible and intangible as against each asset being valued individually. 

The Impact

The above stated judgments are based on Regulation 32(e) & (f) of IBBI (Liquidation Process) Regulations 2016. Introduced on 23rd March 2018, the Regulations deal with sale of corporate debtor or the business of the corporate debtor as a going concern. 

Regulation 32(e) permits sale of assets of the corporate debtor as going concern. Regulation 32(f) deals with sale of business of the corporate debtor as going concern. However, the parent legislation, the Insolvency & Bankruptcy Code 2016 contains provisions relating to liquidation. Liquidation mandates dissolution. Hence there is a dichotomy between the Code and the Rules. This created ambiguity in interpretation and implementation of the Code and its Rules as both have contrasting provisions. While passing the judgment in the Mohan Gems & Jewellery case, the NCLAT observed that it is not within the jurisdiction of NCLT and NCLAT to address issues relating to basic provisions of the Code and Rules.

Regulation 32A of the Liquidation Rules 2016 was introduced on 25th July 2019. The said Regulation lays down the process for sale of a corporate debtor as going concern. Simply put, the Liquidator shall first try to sell the assets and or business of the corporate debtor as a going concern within stipulated timeline of 90 days. If not possible i.e, if there is either no resolution plan or the resolution plans submitted are not up to the mark, only then liquidation can be availed of as last resort. Even in liquidation, the liquidator can sell the assets or business of the corporate debtor as a going concern. There are several judgments such as Arcelormittal India Private Limited’(2019) 2 SCC 1; ‘Swiss Ribbons Private Limited & Anr.’ (Supra) (2019) 4 SCC 17 in which the Hon’ble Supreme Court has decided that liquidation of the Company is to be seen only as a last resort and every attempt should be made to revive the Company and to continue it as a ‘going concern’.

Sale of a corporate debtor as a going concern will achieve the main objective of the IBC of maximization of value of assets and providing relief to stressed entities on the following grounds:

• Maximum value of assets in toto as against value in piece meal
  Economically, value or valuation of individual assets is generally less than value or valuation of the assets in toto of a corporate debtor as a going concern. As a result, maximum value shall arise or accrue on sale of a corporate debtor as a going concern as against sale in piece meal.

• Promotion of entrepreneurship
  Piece meal purchase of assets of a corporate debtor may deter bidders or potential buyers from showing interest in such purchase as it may not offer the benefit of synergy of combined assets and resources including human resources. Acquisition of a corporate debtor as a going concern may actually prove economically viable and promote entrepreneurship.

• Balancing interest of stakeholders
  Acquiring assets and resources of a corporate debtor as a going concern, lock stock and barrel will ensure a win-win proposition to all stake holders – employees, workers, management and the entrepreneurs. All their interests will be safeguarded. While employees can earn their livelihood uninterrupted, good will remain intact. Entrepreneurs can benefit from uninterrupted operations by acquiring the corporate debtor as a going concern.

• Avoidance of delay
  In the event of any disagreement or dispute arising out of acquisition of any asset or any related issue including but not limited to taxation, it is mandatory for the RP’s/ liquidators / bidders to seek relief by filing application(s) to the NCLT / NCLAT. This only delays the process of insolvency. The volume of pending cases before the tribunals only increase. As a result, the insolvency process is not completed within the timeline mentioned in the IBC. Sale of a corporate debtor as a going concern may be comparatively less time consuming.

The Way Ahead

The IBC Code was enacted in 2016 as a one stop shop legislation offering an effective legal framework for timely resolution of insolvency and bankruptcy by maximizing the value of assets of debt-ridden corporates and balancing the interests of all stakeholders involved. Since its inception, it has undergone several amendments making it a dynamic law, in tune with requirements of time. While the amendments have managed to address key challenges, certain amendments (such as the “going concern” amendment) are contradicting. The rising pendency of cases in the NCLT / NCLAT has only added to this. This has prompted the Standing Committee of the Parliament to re-visit the entire legislation. Amongst other suggestions, it has called for deletion of clauses 32(e) & (f) of the Liquidation Regulations 2016. A decision regarding this is awaited. 

For full tex of Judgements:

PSL case:

https://ibbi.gov.in//uploads/order/b4f43107385c9e0d135f5049c619ecdd.pdf

Mohan Gems & Jewels case:

https://ibbi.gov.in//uploads/order/ed29b92ace06f136a9060e3964e27ad8.pdf