On collectively; or (d) sale of assets

On 27 March 2018, the Insolvency and Bankruptcy Board of India (IBBI) notified the Insolvency and Bankruptcy Board Of India (Liquidation Process) (Amendment) Regulations, 2018 (Amendment). Section 4(II) of the Amendment, inter alia, amended Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2018 (“Regulations”). Regulation 32 of the Regulations empowers the liquidator to realize the assets of the company in default (“Corporate Debtor”) during the liquidation of the Corporate Debtor either (a) by sale of assets on a standalone basis; (b) via slump sale; (c) sale of assets collectively; or (d) sale of assets in parcels. Pursuant to the Amendment, the liquidator has been empowered to adopt a new methodology for the realisation of assets namely “to sell the debtor as a going concern.”

In this article, we examine the practical ramifications of the Amendment and evaluate if this is a step in the right direction towards realization of the purposes and objectives of the Insolvency and Bankruptcy Code, 2016 (“Code”).

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Sale of Company as a Going Concern – Meaning and Characteristics
The jurisprudence on the sale of company as a going concern is still nascent under the Code and suffers from a dearth of precedents except for the order of the Kolkata bench of the National Company Law Tribunal (“NCLT-Kolkata”) in the matter of Gujarat NRE Coke Limited. However, numerous precedents under the legal regime pertaining to winding up of the Company under Section 433 of the Companies Act, 1956 bring some clarity into the nature and circumstances under which a company can be sold off as a going concern during the liquidation of the company.

The concept of transferring a company as a ‘going concern’ was examined by the Delhi High Court in the landmark judgment of Inre IndorRama Textile Limited (2013)4CompLJ141(Del). In this case, the Delhi High Court held that a company is said to be transferred as a going concern when the assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future. The Supreme Court in Allahabad Bank v ARC Holding AIR 2000 SC 3098 (“Allahabad Bank Case”) held that if the company is sold off as a going concern, then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are transferred.

In Jayaprakash Shyamsundar Mandare v. Laxminarayan Murlidhar AIR 1983 Bom 364, it was held that a company can be sold off as a going concern only when the company in question is still in operation. Further, the Karnataka High Court observed in IAE International Aero Engines AG and Ors. vs. United Breweries (Holdings) Limited and Ors ILR 2017 KARNATAKA 2225 , that a company cannot be sold off as a going concern if the company in question has already stopped its operations.

Judicial precedents indicate that the Company Courts /Tribunals have often directed the liquidator to sell the company as a going concern in the interests of equity, justice and social welfare of the stakeholders of the company, most importantly the employees and workers (collectively “workmen”) of the company. In the Allahabad Bank Case, the Supreme Court acknowledged the need to sell a company on a going concern basis to preserve the interests of the workmen of the company. However, it is noteworthy that the Supreme Court in Allahabad Bank Case observed that the direction to sell a company as a going concern is generally unsustainable and should only be allowed in extra-ordinary circumstances.

Gujarat NRE Coke Limited – Precursor to the Amendment
Among the first instances of selling a company under liquidation as a going concern under the Code was witnessed in the matter of Gujarat NRE Coke Limited (Company Petition No 182/2017) (“Gujarat NRE Coke Limited Case”) which in our opinion was responsible for setting in motion the wheels for introducing the Amendment.

In this landmark order, the NCLT-Kolkata acknowledged that liquidation of a company has deleterious consequences on several of its stakeholders, especially its workmen. NCLT-Kolkata inter alia observed that Section 33(7) of the Code expressly provides that an order of liquidation under Section 33 of the Code shall be deemed to be a notice of discharge to the workmen of the Corporate Debtor, except when the business of the Corporate Debtor is continued during the liquidation process by the liquidator. In other words, the workmen of the Corporate Debtor shall be stripped off their livelihood unless the Corporate Debtor continues to remain a going concern even subsequent to the order of liquidation.

In this context, the NCLT-Kolkata, with an avowed objective of protecting the livelihood of the workmen of the Corporate Debtor, directed the liquidator of the Corporate Debtor to attempt to sell the Corporate Debtor as a ‘going concern’ through a slump sale, observing that a slump sale is nothing more than the transfer of the whole or part of a business concern as a going concern. The NCLT-Kolkata, along the lines of the observations made by the Supreme Court in Allahabad Bank Case, directed the liquidator to try to sell the Corporate Debtor inter alia under the conditions that the reserve price paid by the person/entity acquiring the Corporate Debtor (“Acquirer”) shall be the amount at least equal to the total decree including the interest in favour of the creditors and pay the balance interest which accrues, till the full payment is made and that the Acquirer shall also pay off the liabilities of other claimants in the proceedings.

The Amendment and Ramifications
Close on the heels of the aforesaid order, the IBBI introduced the Amendment to specifically provide legislative backing for the proposition of law laid down in Gujarat NRE Coke Limited Case.

The most apparent consequence of the same is that if the company is sold off as a going concern, then there will be no need for the dissolution of the Company as laid down under Section 54 of the Code. Additionally, if the company is transferred as a going concern, there is no question of disposal of the assets of the company, either by way of a piecemeal sale or a slump sale. Therefore, it may be argued the liquidation waterfall as stipulated under Section 53 of the Code also does not apply.

It light of the aforesaid observations, introducing this Amendment provides a second chance for preservation of the legal identity of the company. Until the Amendment, the legal existence of the Corporate Debtor could only be preserved if the CIRP could be successfully completed with the statutorily mandated timelines. However, subsequent the expiry of the said timelines, the Corporate Debtor was forced to go into compulsory liquidation thereby getting stripped off its legal existence. However, post the Amendment, even if the CIRP cannot be completed within the statutorily mandated timelines, the legal existence of the Corporate Debtor can still be preserved by attempting to sell the Corporate Debtor as a going concern.

The Code is universally perceived as a legislation to avert the liquidation of the company and to preserve the identity of the Corporate Debtor as a going concern. Although the Mumbai Bench of the National Company Law Tribunal (“NCLT-Mumbai”) took a contrary view in the matter of Gupta Energy Private Limited MA 24,80 & 110/2018 In C.P. No. 43/I&BP/2017 (“Gupta Energy Private Limited Case”) and laid down that there is no authority under the Code which states that the purpose of the Code is to accord primacy to resolution process over liquidation, it is still undisputed that liquidation of the assets of the Corporate Debtor has drastic ramifications on several stakeholders whose livelihoods depend on the legal existence of the Company.

In this context, if the liquidator is ordered to sell the company as a going concern along with directions akin to the directions in Gujarat NRE Coke Limited Case then interests of all the stakeholders including the creditors are protected. If the NCLT orders that the reserve price to acquire the Corporate Debtor should be at least equal to the aggregate sum of principal amount and interest accrued, then all the creditors will get their dues from the Corporate Debtor. Additionally, the livelihood of the workmen is also protected if the Corporate Debtor continues as a going concern.

Legal Authority to Issue Directions
It is evident from the above that if the interests of creditors and the workmen are to be protected simultaneously, then the adjudicating authority has to not only order the sale of the company as a going concern but also issue suitable directions to ensure that the dues of the creditors are adequately realized.

Section 457 of the Companies Act, 1956 conferred liquidator with the requisite powers necessary for winding up a company. However, Section 457(3) made it unequivocal that the exercise of these powers by the liquidator shall be subject to the control of the Company Court /Tribunal as the case may be. The High Courts have often used this provision to exercise a supervisory role over the decisions of the liquidator concerning the disposal of assets of the company. There is a plethora of judicial precedents where the Company Courts/Tribunals have issued directions to the liquidator on the manner in which the assets of the company are disposed off. In fact, the Supreme Court in Industrial Finance Corporation v Official Liquidator, High Court, Calcutta AIR 1993 SC 1524, held that there is no standard or uniform pattern to be followed for disposing the assets of the company and should be examined on a case to case basis.

Similar powers are vested with the adjudicating authority under the Code. Section 35(1)(f) of the Code vests the liquidator inter alia with the powers to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels. However, Section 35 begins with the phrase “Subject to the directions of the Adjudicating Authority.” Therefore, the Adjudicating Authority, (in this case the NCLT) can exercise supervisory control over the liquidator in a manner in pari materia with the power exercised by the Company Court/Tribunal under the Companies Act, 1956. Additionally, although not expressly mentioned in the Gujarat NRE Coke Limited Case, it can be argued that the NCLT vide its powers under Section 60(5) of the Code is empowered to issue directions to the liquidator in such a manner it thinks is necessary to best protect the interest of justice.

Conclusion
The Amendment providing legislative backing to the order in Gujarat NRE Coke Limited Case is indeed a welcome development legal regime pertaining to the resolution of stressed assets. Notwithstanding the order of the NCLT-Mumbai in Gupta Energy Private Limited Case, it is trite to mention that the liquidation of the company has deleterious impact on several stakeholders of the company. The workmen of the company are no doubt the most adversely affected by the Code. In this context, allowing the company to be sold off as a going concern provides a second chance for the preservation of the Company as a going concern. Subsequent to this amendment, if the existence of the Corporate Debtor could not be preserved during the stage of CIRP, there is still some respite as the legal existence of the Corporate Debtor can still be preserved at the stage of liquidation.

However, the adjudicating authority needs to play a pro-active role in supervising and monitoring the sale of the company in this manner by exercising its powers under Section 35 read with Section 60(5) to ensure that the best interests of both, the creditors and the workmen are adequately taken care of.

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