The Going Concern Sale Conundrum: Is Liquidation a Mandatory Death Sentence under IBC? – By Adv. Ashutosh Jain & Adv. Eshan Jaipuriar

The Going Concern Sale Conundrum: Is Liquidation a Mandatory Death Sentence under IBC?

Advocate Ashutosh Jain
Eshan Jaipuriar
(Trainees at the Graduate Insolvency Program, Indian Institute of Corporate Affairs)

The Insolvency and Bankruptcy Code, 2016 (Code) provides for a market mechanism for rescuing, failing but viable entities and liquidating, failing and unviable ones. Since there is no straight jacket formula to determine viability of an entity, market forces at times may rescue an unviable entity and close a viable one. The IBC, therefore, envisages that the market first rescues the entity followed by Liquidation, if CIRP fails. However, given the inherent complexities involved in this rescue operation, an entity, though viable, could be dragged to the ventilator leading to its ultimate demise. To abate this, the regulator IBBI has made necessary amends in CIRP and Liquidation regulations warranting the Liquidator to first attempt for sale of CD or its business as a going concern, failing which the assets of the CD can be liquidated as per the scheme of the Code.

Concept of “Sale as going concern” 

Though the term “sale as a going concern” is not defined under the Code (or regulations), it is fairly well understood in the common legal parlance. The Insolvency Law Committee in its report dated 26th  March 2016[i] noted that the phrase “as a going concern” to imply that the CD would be functional as it would have been prior to initiation of CIRP, other than the fetters put by the Code. A general understanding of the term “going concern sale of CD” means the assets and the liabilities constituting an integral part of the CD, must be transferred together, and the consideration must be for the CD. In sale of the CD as going concern, the equity shareholding of the CD must be transferred, and the buyer must take over the CD, its business, affairs and operations, including its employees, licenses, assets, entitlements, beneficial interests, trademarks, brand, government approvals, etc. 

How to effect “Sale as going concern” under the Code

Post the order of Liquidation passed by AA in terms of section 33 of the Code, a Liquidator is appointed under section 34 who is vested with all the powers of the Board of the CD. His powers and duties are enumerated under section 35 which includes, among other things, beneficial liquidation of the CD and/or sale of assets of the CD. The manner of Sale of Assets, business and CD are provided in regulation 32 of the Liquidation Regulations reproduced herein: 

“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.”

However, the regulations envisage that sale under (e) and (f) must be explored first by the Liquidator either on the recommendations of the Committee of Creditors to be given under regulation 39C of CIRP regulations or on his own volition under regulation 32A of Liquidation regulations within 90 days from the Liquidation commencement date. The sections are reproduced herein: 

39C. Assessment of sale as a going concern.[ii] 

(1) While approving a resolution plan under section 30 or deciding to liquidate the corporate debtor under section 33, the committee may recommend that the liquidator may first explore sale of the corporate debtor as a going concern under clause (e) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 or sale of the business of the corporate debtor as a going concern under clause (f) thereof, if an order for liquidation is passed under section 33. 

32A. Sale as a going concern.[iii] 

(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 endeavor to first sell under the said clauses. 

If the Liquidator is able to sell the CD or its business as going concern, he has to take recourse to regulation 45(3) (a) for the closure of the Liquidation proceedings. The regulation states that: 

“45. Final report prior to dissolution.

(3) The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for – 

(a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or”

If the order of closure is passed by AA, it puts an end to the liquidation proceedings and offers a safe harbor to the CD to be rescued as a going concern, thereby inevitably saving it from the clutches of Dissolution under section 54 of the Code.

Judicial Pronouncements on “Sale as going concern”

The scheme of the Code and various judicial pronouncements also suggests that keeping the CD as a going concern is of pivotal importance even at the stage of Liquidation, as explained hereinafter:

The Hon’ble Supreme Court in Arcelor Mittal India Private Limited Vs. Satish Kumar Gupta & Ors.[2018] 31 SC . observed thus: 

“We must not forget that the corporate debtor consists of several employees and workmen whose daily bread is dependent on the outcome of the corporate insolvency resolution process. If there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible.” 

Relying on regulation 32 (e) of the Liquidation Regulations which envisages sale of the CD as going concern, the Hon’ble Supreme Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors [2019] 03 SC., observed that: 

“What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. … It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.” 

As a matter of fact, in plethora of cases, the Courts has directed the Liquidator to make endeavors to revive the company in liquidation either through a scheme of compromise or arrangement with creditors under section 230 of the Companies Act, 2013[iv] or dispose of the CD by selling it on a going concern basis as per the IBC[v]

The curious case of Mohan Gems[vi] 

An interesting debate was thrown open by the Hon’ble NCLT, Principle Bench at Delhi in the case of Mohan Gems, where an application was filed by the Liquidator seeking closure of the Liquidation Process under Regulation 45(3)(a) of the IBBI Liquidation Process Regulations, 2016, on the premise that the CD was sold as a going concern in the E-auction to the highest bidder. However, the Hon’ble NCLT dismissed the application on the pretext that “dissolution” is mandatory after liquidation under section 54 and hence an application under regulation 45(3)(a) would not be sustained.

There is an overarching support for the Sale of CD as a going concern amongst market players and thus, the judgment of Hon’ble NCLT, Delhi in Mohan Gems case seems to be an aberration. The judgment says that after the CD goes into Liquidation, the only mandate under the Code is “dissolution” of the CD under section 54 and the regulations envisaging the “sale of CD as going concern” and subsequent closure of Liquidation proceedings is ultra vires the Code.

The authors, however, opine that the Hon’ble NCLT could have taken a holistic approach and should have interpreted the provisions of the Code and regulations in perspective.

While dismissing the application for closure of Liquidation proceedings, the AA gave following rationale:

  1. That, the liquidation process cannot be closed under reg. 45(3) (a) on selling the CD as going concern under regulation 32 & 32A without dissolving the corporate debtor under section 54 of the Code. Thus, regulation 32A & 45(3)(b) of the Liquidation Process Regulation is repugnant to the purpose of Section 54.
  2. That, the liquidator cannot on his own explore sale of the CD as going concern without any recommendation by CoC as per regulation 39C of CIRP regulations. 
  3. That, IBBI does not have the power under clause (t) of subsection (1) of section 196 read with section 240 of the Code to pass regulations directing dispensation of operation of section 54 by devising a concept (of going concern) not present in the Code.  As such, such exercise of power by IBBI is in excess of and contrary to the delegating statute i.e. the Code. 

This judgment, therefore, raises a question of jurisprudential value on the extent of power delegated to the IBBI under the Code. The ratio laid in this case envisages section 54 as a death sentence for the CD and thereby dissolution should naturally ensue. There is, however, a fundamental fallacy in this approach as it presupposes demise and thus mechanically order dissolution. 

No repugnancy exists between regulation 45 (3) (a) and section 54

The Dissolution of Corporate Debtor, as envisaged under section 54, should not be made prisoner to a myopic interpretation, which runs contrary to the objective of the Code. The wording of the Section, which reads “where the assets of the corporate debtor have been completely liquidated”, reveals a more nuanced approach, that only in cases where the liquidator has disposed off all the asset of the CD, he shall make an application to AA for dissolution of such corporate debtor. There are possibilities that the corporate debtor rather than being completely liquidated, might besold as a going concern” (as envisaged under reg. 32A), and in such cases dissolution inevitably would not happen and the liquidator would be directed to go for “closure of the liquidation process” under Regulation 45(3)(a) of Liquidation Process Regulations. 

Therefore, the Code under section 54 leaves the scope of closure in case where the CD is sold as a going concern. To then read repugnancy between the two provisions tantamount to doing injustice to the cause of the Liquidation Regulations which is merely complimenting the letter and spirit of the Code. Thus, dismissing an application for closure u/reg 45(3)(a) on the pretext of “peremptory direction” made to the liquidator under section 54 appears per incuriam. 

Liquidator’s power to opt for Sale of CD as a going concern

Another issue raised in the judgment was ‘whether Liquidator can, on his own, opt for sale of the CD as a going concern’?

This question raised by the Hon’ble NCLT rests on the premise that the Liquidator, sans the recommendation of the CoC and prior approval of the AA, cannot sell the CD as a going concern. 

The approval envisaged under regulation 39C is to push the CD into liquidation on the decision of the CoC under Section 30 or 33, as the case may be. The mandate to seek approval of the AA for the manner of sale which could be ‘as going concern’ is not envisaged under regulation 39C and therefore the Liquidator has enough elbow room to make a choice in the manner of sale which is to the beneficial interest of the Corporate Debtor, for which he is duty-bound under Section 35(e) of the Code, which reads thus:

“35. Powers and Duties of Liquidator:

Subject to the directions of the AA, 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;”

Moreover, a cursory reading of Regulation 32A makes it amply clear that “where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximize the value of the Corporate Debtor, he shall endeavor to sell under the said clause. Thus, the decision with regard to the manner of sale of assets of the CD is the sole prerogative of the Liquidator subject only to post facto judicial scrutiny.

Hence, to hold that the Liquidator on his own cannot opt for sale of the CD as a going concern, sans the CoC recommendation and approval of the AA is again, in our opinion, per incuriam.

The Delegated Legislation test: IBBI’s mandate

As explained hereinabove, regulation 45(3) (a) directs the Liquidator to file an application for  closure of Liquidation proceedings after CD or its business is sold as going concern. However, Hon’ble NCLT was of the view that since Code does not empower IBBI to pass this regulation, they are not bound by it. Although, the Hon’ble Court agreed that parties can approach the forum if so provided under the regulations, nevertheless, such regulation, being in the nature of delegated legislation, must pass the muster of “doctrine of ultra vires” vis a vis parent statute. 

The twin tests to be followed while dealing with subordinate legislation are: –

a. Conflict with Parent Statute

Subordinate legislation must not be in conflict with or repugnant to the Parent Act. The regulations are in consonance with and not repugnant to the Code has already been discussed above in this Article. 

b. When the Subordinate Legislation is in excess of the power of Delegated Authority 

When the subordinate authority exercises the power of rule-making beyond the principles and objects laid down in the Act and the rules are made without any reference to the provisions of the Act, under which such power is given, it is declared ultra vires the Act. In all circumstances the power of delegated legislation should be exercised within the scope of the rulemaking power provided in the Parent statute.

The Power to make regulations conferred over IBBI under Section 240(1) is a wide ranging one with general powers bestowed upon the Board. The generality of this clause accords indicative powers to make/notify regulations consistent with the Code.

The argument of the Hon’ble NCLT that IBBI has overstepped its mandate in making regulations for sale of CD as a going concern seems misplaced on the pretext that Section 35(e) of the Code envisages such a sale which is in the beneficial interest of the CD. Moreover, section 54 does not envisage a bar on sale as going concern as has been discussed above. 

Furthermore, the generality of Section 240(1) read with 240(2)(y) itself allows the Board to make regulations for the manner of sale of the CD. Sub-clause 2 of Section 240 is an indicative and not an exhaustive list and the fact that sale as a going concern is explicitly not mentioned in the clause, does not take away the power to make a regulation which is a natural outcome of liquidation.

The opening words of clause (2) makes a specific case that the generality of clause (1) in any case shall not be fettered or undermined by the enumerations mentioned in clause (2), thus to cast an artificial shackle on the powers of the Board with regard to clause (2) defeats the purpose of the Code. 

Author’s Opinion

The essence of an economic legislation is to allow enough breathing space to maneuver and experiment with novel ideas, the common theme pervading the Code is the market-based approach of rescue, both during the CIRP and Liquidation stage. The paramount interest of the CD to be run as a going concern is the underlying theme of the Code, all attempts must be made to rescue the business with minimum haircut; if that is achieved, the AA should bless the application with a favorable order. However, to contend that once a Liquidation Order is passed, the only resort left with the Liquidator to seek dissolution of the CD is misconceived and essentially defeats the sum and substance of having a rescue mechanism.



[i] Insolvency Law Committee Report

[ii] CIRP Regulations

[iii] Liquidation Regulations

[iv] See, Y. Shivram Prasad Vs. S. Dhanapal & Ors,[2019] 03 NCLAT ; Rasiklal S. Mardia Vs. Amar Dye Chem Limited & Ors, [2019] 213 NCLAT; Meghal Homes (P) Ltd. Vs. Shree Niwas Girni K.K. Samiti & Ors ; Rajendra Prosad Agarwalla & Ors Vs. Official Liquidator;                             

[v] See M/s. Gujarat NRE Coke Limited (2020) 131 NCLT; Edelweiss Asset Reconstruction Company Ltd. Vs. Bharati Defence and Infrastructure Ltd (2017) 26 NCLT; Rukmani Infra Projects Private Limited

[vi] CP No. (IB)-590 (PB)/2018

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