For success of sale as Going Concern under liquidation, more process rationalisation needed
Sale of a corporate debtor as Going Concern under liquidation process is needs further rationalisation of the processes for investors confidence, feels Satyam Poddar, a qualified CA and a restructuring professional. Here’s his thoughts on the subject.
The Insolvency and Bankruptcy Code (IBC or Code) is an act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It has been seen in past that liquidation followed by dissolution was the last resort for recovery proceedings resulted into the corporate death. Since the implementation of the code, the various judgment under the IBC regime has aligned various laws including tax laws, corporate laws, competition laws. The code has implemented in innovative way in order to avoid corporate death of any viable business entity.
Keeping the prime intent of code for revival of corporate debtor along with balancing the interest of all stakeholders with value maximisation; the Former Chairperson Mr. M. S. Sahoo once quoted that “The objective of the law is to rescue viable companies and close down unviable ones and it will be dangerous to let viable firms shut down under IBC.”
The Hon’ble Supreme Court in matter titled Swiss Ribbons (P.) Ltd. v. Union of India [2019] observed that “the objective of the IBC is to ensure revival and continuation of the corporate debtor by protecting it from its own management and from liquidation and that the Code is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.”
As announced by the Insolvency and Bankruptcy Board of India (IBBI) in its quarterly newsletter for Oct-Dec 2021; a total of 4946 CIRPs have commenced by the end of December 2021. Out of which 457 CIRPs ended with approval of resolution plan and 1514 CIRPs were ended with order for liquidation. Further, the said newsletter also states that at the end of December 2021, 167 liquidations were closed by dissolution and 8 by going concern sale and 7 by Compromise/Arrangement.
The intent of revival during the liquidation process is clearly defined in the provision related to IBBI (Liquidation Process) Regulations, 2016 which are produced herein below.
Regulation 32- Sale of Asset, 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.
Regulation 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 sub-regulation (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.
(4) If the liquidator is unable to sell the corporate debtor or its business under clause (e) or (f) of regulation 32 within ninety days from the liquidation commencement date, he shall proceed to sell the assets of the corporate debtor under clauses (a) to (d) of regulation 32.
Regulation 45- Final Report prior to Dissolution
(1) When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.
(2) If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.
(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
(b) for the dissolution of the corporate debtor, in cases not covered under clause (a).]
Accordingly, it is clear that the code and relevant regulations empowers revival of the Corporate Debtor during the Liquidation Process also by sale of corporate debtor as going concern under Reg 32(e) and/or sale of business(s) of the corporate debtor under going concern under Reg 32(f) of the IBBI (Liquidation Process) Regulations, 2016. In case of sale of the Corporate Debtor as Going Concern, there is no even no requirement of dissolution concluding revival of the entity rather than taking it to corporate death through dissolution. The jurisprudences are evolving in this context. As per the IBBI Quarterly Newsletter (Oct-Dec 2021); total 8 liquidation processes namely Emmanuel Engineering Private Limited, KTC Food Private Limited, Southern Online Bio Technologies, Smaat India Private Limited, Winwind Power Energy Private Limited, Topworth Pipes & Tubes Private Limited, Ennviro Bulkk Handling Systems Private Limited and Autodecor Private Limited have been closed through Going Concern Sale. The aforesaid 8 CDs has admitted claims amounting to Rs 4598.45 Crores, as against the liquidation value of Rs 319.33 Crores. The liquidators in these cases realised Rs 367.59 Crores and companies were rescued.
The code has provided a lucrative opportunity for serious investors looking for acquisitions or expansion through distress assets wherein the investors are reviving these assets and making good business which is finally resulting into employment generation, contribution towards domestic production or service, collection to revenue authorities, betterment of infrastructure, technological advancement and effective utilisation of resources.
Further, it has been seen that during the Corporate Insolvency Resolution Process (CIRP); the Resolution Applicant place a Resolution Plan compliant with provisions of the code for approval of the Committee of Creditors and the Adjudicating Authority. These resolution plans contain various reliefs, waivers, concessions, extinguishments and other benefits to the Successful Resolution Applicant to carry on the business of Corporate Debtor as clean slate in order to revive the entity and also to smooth functioning, operation and management of affairs of the Corporate Debtor without any hinderance to serve the intent of the code. The provisions of the IBBI (Insolvency Resolution Process for Corporate Debtor) Regulations, 2016 also contain these benefits to the Successful Resolution Applicants by binding the resolution plans to all the stakeholders including authorities, creditors, employees, workers etc.
Also read: Why going concern status of corporate debtor important for resolution under IBC
Although, the intent of revival of the Corporate Debtor during the liquidation process through sale of Corporate Debtor as Going Concern is similar to revival through Corporate Insolvency Resolution Process wherein the Resolution Applicant claims reliefs, waivers, concessions, extinguishments and other benefits for smooth functioning in future, there are no such provisions laid down in the IBBI (Liquidation Process) Regulations, 2016 as the sale is made through auction wherein the successful bidder need to submit bid amount only. It has been observed from the various matters before the Adjudicating Authorities that after declaration as successful bidder, the bidder files an intervening application to the authority which is clubbed with the liquidation process closure petition filed by the liquidator and the Adjudicating Authorities are considering the prayers made by the successful bidder seeking reliefs, waivers, concessions, extinguishments and other benefits to the extent the authority finds it legitimate on case to case basis. In order to rationalization of the process, the Board should consider necessary formal document like resolution plan to include reliefs, waivers, concessions, extinguishments and other benefits in order to standardize the process and curtail the time before the authority for final clearance upon the same.
Conclusion
The legislation has allowed the sale of Corporate Debtor as Going Concern with intent of revival and to avoid closure of viable business entities. The jurisprudence is evolving as few corporate liquidation processes closed through Going Concern. Further, the rationalisation of the provisions can be made to get investor confidence for smooth functioning after the acquisition of distressed Corporate through the route of sale of Corporate Debtor as Going Concern in liquidation process under the provision the code.
The author is a qualified CA Professional with 7+years of Experience in Insolvency and Restructuring, Management Consulting, Financial Modelling, Business Planning, Financial Accounting Services for various verticals like EPC, FMCG, Automobile, IT, Packaging Industry
