Gaurav Jain Vs. Sanjay Gupta - Sale of CD as a Going Concern during Liquidation Process.

 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] held that;

• 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.

• 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.

• 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.

• 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.

Excerpts of the order;

# 1. The Applicant herein is the successful bidder in the E-auction for the Sale of the assets of the Corporate Debtor as a going concern and the Respondent herein is the Liquidator of the Corporate Debtor.

# 2. On a Petition under Section 7 filed under the Insolvency and Bankruptcy Code, 2016 (the Code) by Bank of Baroda, the Corporate Debtor viz. Topworth Pipes & Tubes Private Limited was put under Corporate Insolvency Resolution Process (CIRP) by an order dated 11/12/2018 of this Bench.

# 3. In the absence of a Resolution Plan, this Bench on 12/06/2020 passed an order for liquidation of the Corporate Debtor under Section 33 of the Code.

# 4. The Liquidator invited bids for the sale of the Corporate Debtor as a ‘going concern’ by an E-auction process memorandum dated 13/10/2020. The Liquidator published first addendum to

the E-auction process memorandum on 29/10/2020 and second addendum on 03/11/2020.

# 5. The E-auction process memorandum states that the sale of the Company is on ‘going concern’ basis in accordance with the provisions of the Code, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Process Regulations) and the E-auction process information document. It further states that the sale of the Company is proposed to be done on “as is where is basis”, “as is what is basis”, “whatever there is basis” and “no recourse basis” and the proposed sale of the Company on going concern basis does not entail transfer of any other title, except the title which the Company had on its assets as on the date of transfer. The Liquidator does not take or assume any responsibility for any shortfall, defect or shortcoming in the moveable / immoveable assets of the Company. The Reserve Price fixed was Rs. 152 Crores.

# 8. The Liquidator issued an Addendum dated 29/10/2020 to the E Auction process document wherein the key timelines were mentioned. The Liquidator issued another Addendum dated 03/11/2020 to the main E-auction process document wherein the key highlights of the asset sale process mentioned in the E Auction process document dated 13/10/2020 is replaced  . . .  .

• The Company proposed to be sold on a “going concern” basis, as per the order of the Adjudicating Authority on June, 12th 2020. Accordingly, Corporate Debtor along with the business, assets and liabilities, including all contracts, licenses, concessions, agreements, benefits, privileges, rights or interests be transferred to the acquirer. Post the transfer, the Successful Bidder shall be entitled to transfer/apply for transfer of all the licenses, approvals, concessions, and benefits as may be applicable to the unit.

# 11. The Applicant participated in the E-auction process held on 11/11/2020 and submitted bid for Rs. 190.90 Crores to acquire the Corporate Debtor as a ‘going concern’. The Applicant being the H1 Bidder, Liquidator confirmed the Applicant’s bid and issued letter of intent (LoI) to the Applicant on 12/11/2020.

# 12. On 18/11/2020 the Applicant deposited a sum of Rs.32,52,50,000/-. This amount along with the EMD worked out to a total of Rs. 47,72,50,000/- which is 25% of the sale consideration of Rs. 190.90 Crores.

# 14. The Applicant submits that the mere purchase of the Corporate Debtor as a ‘going concern’ as per Liquidation Process Regulations will not suffice. In order to ensure smooth running of the business of the Corporate Debtor, it is imperative that certain additional reliefs / concessions / relaxations / and permissions are allowed which would be essential and necessary to run the business of the Corporate Debtor as a ‘going concern’. Unless these reliefs / concessions / permissions are provided, the purpose of the revival of the Corporate Debtor as a ‘going concern’ under Liquidation Process Regulations will not be achieved. In fact, these permissions / relaxation / concessions / reliefs are crucial to kickstart the business of the Corporate Debtor and achieve value maximization of the Corporate Debtor.

# 15. The Applicant further submits that this Tribunal is empowered  to grant necessary reliefs in relation to the Corporate Debtor, sold as a ‘going concern’ under the provisions of the Liquidation Process Regulations, under Section 60(5)(c) of the Code. Therefore, the Applicant submits that the instant case is a fit case to grant the reliefs in favour of the Applicant.

# 16. In the above background this Applicant preferred Application with the following reliefs:

• (a) the Applicant along with the entities as mentioned in Paragraph 2 above may be permitted to pay/adjust the Sale Consideration in the following manner (i) INR 40,00,00,000/- (Indian Rupees Forty Crores only) by way of investment into the equity shares of the Corporate Debtor; and (ii) the balance amount of INR 150,90,00,000/- (Indian Rupees One Hundred and Fifty Crores and Ninety Lakhs only) in the form of unsecured debt;

• (b) a direction be issued that immediately upon payment of the entire Sale Consideration, the Applicant (or the entities as mentioned in Paragraph 2 above, as the case may be) get all the rights, title and interest in the whole and every part of the Corporate Debtor, including but not limited to contracts, free from security interest, encumbrance, claim, counter claim or any demur, and the Sale Consideration shall be distributed by the Liquidator in terms of the Section 53 of the Code;

• (c) a direction be issued that on and from the Date of Acquisition, all the claims or demands made by, or liabilities or obligations owned or payable to any actual or potential creditors of the Corporate Debtor including the Government Dues (including but not limited to liabilities, interest and penalties, duties, etc. on account of income-tax, tax deduction at source, tax collection at source, goods and services tax, custom duty, value added tax, service tax, wealth-tax, cess, DGFT dues, etc.) whether direct or indirect, whether admitted or not, due or contingent, asserted or unasserted, crystallized or uncrystallized, known or unknown, secured or unsecured, disputed or undisputed in relation to any period prior to the Date of Acquisition will be written off in full and shall stand permanently extinguished;

• (d) a direction be issued that the all inquiries, investigations, assessments, notices, causes of action, suits, claims, disputes, litigations, arbitration, or other judicial, regulatory or administrative proceedings against, or in relation to, or in connection with the Corporate Debtor or the affairs of the Corporate Debtor (other than against the Erstwhile Promoters or former members of the management of the Corporate Debtor), pending or threatened, present or future, in relation to any period prior to the Date of Acquisition or arising on account of the Acquisition shall be deemed to be withdrawn or dismissed; 

• (e) a direction be issued that all financial and pecuniary liabilities of the Corporate Debtor, (including without limitation, any penalty, whether contingent, assessed, known or unknown, interest, fines or fees and any other liabilities and/or obligations which may have a financial impact) in relation to any period prior to the Date of Acquisition shall be deemed to be extinguished; 

• (f) a direction be issued that any non-compliance of provisions of any laws, rules, regulations, directions, notifications, circulars, guidelines, policies, licenses, approvals, consents or permissions prior to the Date of Acquisition shall be deemed to be extinguished;

• (g) a direction be issued that all the existing shares of the Corporate Debtor shall be extinguished without any consideration, and rights and liabilities arising out of the same shall also be extinguished;

• (h) a direction be issued that on and from the Date of Acquisition, the status of the Corporate Debtor in the records of the Registrar of Companies should be reflected as 'active' from the status of 'liquidation'

• (i) a direction be issued that from the Date of Acquisition, the Board of Directors of the Corporate Debtor be reconstituted as per the Companies Act, 2013 and that the following individuals be permitted to act as Directors of the Corporate Debtor duly appointed under the provisions of the Companies Act, 2013, and direct the Registrar of Companies to do all such acts, deeds and things that are necessary to appoint the following individuals as directors of the Corporate Debtor, who are individuals recommended by the Applicant, in order to enable the Corporate Debtor to file relevant returns required by applicable law:

• (j) a direction be issued that all subsisting consents, licenses, approvals, rights, entitlements, benefits and privileges whether under law, contract, lease or license, granted in favour of the Corporate Debtor or to which the Corporate Debtor is entitled to shall, notwithstanding any provision to the contrary in their terms and irrespective of the commencement of the insolvency/liquidation proceedings under the Code, in relation to the Corporate Debtor be deemed to continue without disruption, for the benefit of the Corporate Debtor and all additional licenses, registrations and consents required by the Corporate Debtor be made available immediately from the Date of the Acquisition;

• (k) a direction be issued that the Corporate Debtor shall have a right to review and terminate any contract that was entered into prior to the date of the Liquidation Order;

• (l) a direction be issued that on and from the Date of Acquisition, all the assets specified in the complete EAuction Memorandums shall continue to be the assets of the Corporate Debtor, towards which the Applicant has made payment by way of the Sale Consideration; 

• (m) a direction be issued to the Liquidator to cooperate with, and provide all necessary support and assistance to the Applicant, including but not limited to perfecting / amending / modifying / creating the land records in relation to all parcels of land, the immovable properties and assets, belonging to the Corporate Debtor in favour of the Corporate Debtor within 15 days from Date of Acquisition;

• (n) a direction be issued to the Liquidator to, immediately,

• - (i) write back all the liabilities of the Corporate Debtor, including creditors, term loans, working capital loans, tax liabilities, other statutory liabilities, etc. which are not payable and reflect the total liabilities at the amount of the consideration (as reduced by the amount of insolvency resolution process costs and the liquidation costs) determined in the auction; and 

• - (ii) the assets which are not recoverable (debtors, inventories and loans and advances, etc.) should be written down to their realizable value; in the financial statements (Profit and Loss Account and the Balance Sheet) of the Corporate Debtor as on 31st March 2020. The said financial statements should be prepared and filed by the Liquidator with the relevant regulators such as Registrar of Companies, Income Tax Authorities,etc.;

• (o) a direction be issued to the Liquidator that all the compliances for the period up to the Date of Acquisition including filing of necessary documents and returns with the Registrar of Companies, Income Tax Authorities any other Government Authorities should be completed;

• (p) a direction be issued that the brought forward tax losses of the Corporate Debtor be permitted to be carried forward and set-off against future income as change of shareholding of the Corporate Debtor is pursuant to the bid submitted by the Applicant under the E-Auction Process;

• (q) a direction be issued that the eligibility of the Corporate Debtor to claim incentives under the Package Incentive Scheme, as framed by the Government of Maharashtra, shall be extended for a period of 5 (five) years from the Date of Acquisition;

• (r) the bid submitted by the Applicant should be considered to be a resolution plan under Section 79 of the Income Tax Act, 1961;

• (s) Other or further order or orders be passed and/or direction or directions be given as this Hon’ble Tribunal may deem fit and proper.

# 17. The Respondent / Liquidator in his reply stated that the Prayer in Clause (a) is in consonance with the letter and spirit of the Eauction Memorandum and he has no objection to the said prayer.

# 19. The Respondent further submits that in respect of the prayers (m), (n) & (o) he does not have any objections.

# 20. Regulation 32 of the Liquidation Process Regulations provides for the realisation of assets and the same is extracted below: 

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.]”

# 24. One advantage of the sale of the Corporate Debtor as a ‘going concern’ is that the Corporate Debtor is retained, it will not be dissolved and the Corporate Debtor will be transferred along with the assets. So, the Corporate Debtor as a legal entity remains as such.

# 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. The undertaking includes the business of the Corporate Debtor, assets, properties and rights etc. excluding the liabilities. However, in this case the assets that are included in the E-Auction Memorandum only have to be taken over by the Applicant.

# 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.

29. This Bench feels that following are the advantages of selling the Corporate Debtor “as a going concern”: 

• a. The entity i.e., the Corporate Debtor itself gets transferred;

• b. The equity shareholding gets transferred or extinguished and new shares are issued;

• c. The purchaser is expected to carry on the business of the Corporate Debtor after the sale of assets is confirmed;

• d. The existing employees will have a chance to continue in their employment.

# 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.

# 34. As a consequence to the above discussions and on perusal of the pleadings and submissions made by the learned senior counsel for the Applicant the following order is passed:

• (a) Prayer (a) is allowed. The Applicant is permitted to bring in Rs. 40 crores as share capital and Rs. 150.90 crores as unsecured debt towards payment of sale consideration.

• (b) The Applicant shall get all the rights, title and interest over whole and every part of the Corporate Debtor, including but not limited to contracts free from security interest, encumbrance, claim, counter claim or any demur. The sale consideration, when received, shall be distributed by the Liquidator in terms of the Section 53 of the Code. Prayer (b) is accordingly allowed.

• (c) The Applicant shall not be responsible for any other claims / liabilities / obligations etc. payable by the Corporate Debtor as on this date to the Creditors or any other stakeholders including Government dues. All the liabilities of the Corporate Debtor as on date stand extinguished, as far as the Applicant is concerned.

• (d) Any proceedings pending against the Corporate Debtor (other than against the Erstwhile Promoters or former members of the management of the Corporate Debtor) as on date with respect to its liabilities, enquiries, investigations, assessments, claims, disputes, litigations etc. will not have any bearing against the assets sold in this process. The said assets are free from any financial implications arising out of any pending proceedings before relevant authorities, if any.

• (e) The existing shares / share capital of the Corporate Debtor shall stand cancelled without there being any payment to the Shareholders. The Liquidator in consultation with the Registrar of Companies (RoC) concerned shall take action to change the status of the Corporate Debtor in the records of the RoC from the status of “liquidation” to the status of “active”. The concerned RoC shall do the needful.

• (f) The Board of the Corporate Debtor can be reconstituted as indicated in prayer (i) and necessary filings may be made to the RoC concerned.

• (g) Prayer (j) is allowed subject to payment of renewal fees, if any, from this date to the licensing authorities.

• (h) The Applicant / Corporate Debtor shall have the right to review and terminate any contract that was entered into prior to the date of this order. The assets specified in the E-auction memorandum, on payment of the consideration as above will vest with the Applicant. Accordingly, prayers (m), (n) & (o) are allowed.

• (i) The Applicant shall not be held responsible / liable for any of the past liabilities of the Corporate Debtor in inquiries, investigations, assessments, notices, causes of action, suits, claims, disputes, litigations, arbitration or other judicial, regulatory or administrative proceedings against or in relation to, or in connection with the Corporate Debtor prior to this date. They shall not have any effect on the Applicant.

• (j) The Applicant is entitled to get all the rights, title and interest whole and every part of the Corporate Debtor.

• (k) Creditors of the Corporate Debtor which include Creditors in any form or category including Government Departments shall stand extinguished qua the Applicant.

• (l) The non-compliance of provisions of any laws, rules, regulations, directions, notifications, circulars, guidelines, policies, licenses, approvals, consents or permissions prior to the date of acquisition shall stand extinguished qua the Applicant.

• (m) All the assets specified in the E-auction memorandum shall continue to be the assets of the Corporate Debtor on making the payment of the balance sale consideration to the Liquidator by the Applicant.

• (n) The Liquidator is directed to provide all support and assistant to the Applicant for the smooth functioning of the Corporate Debtor to complete the acquisition.

• (o) The Liquidator and Applicant shall be at liberty to take all the steps required to make accounting entries for the smooth transmission and clearing the balance sheet.

• (p) The Liquidator is directed to ensure completion of pending filings with the Registrar of Companies, Income Tax Authorities and any other Government /Statutory Authorities.

• (q) The Corporate Debtor is entitled to get the benefits of brought forward losses, if any, subject to permission of the appropriate authority if so entitled under the relevant provisions of the Income Tax Act, 1961.

• (r) The Corporate Debtor may apply for incentives under the Package Incentive Scheme, framed by the Government of Maharashtra, subject to eligibility and other norms as provided in the said Scheme. 

• (s) As far as the prayer for considering the bid submitted by the Applicant as Resolution Plan under Section 79 of Income Tax Act, 1961 is concerned, the Applicant may approach the authority concerned who would consider such request under the Income Tax Act.

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Blogger’s comments; Following observations of AA in the order are quite significant;

# 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.

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