NCLAT (11.01.2022) In Visisth Services Ltd. Vs. S. V. Ramani, Liquidator of United Chloro-Paraffins Pvt. Ltd. [Company Appeal (AT) (Insolvency) No.896 of 2020 ] held that;
It can be seen from the afore-noted discussion as well as Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016 that Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities.
Paragraphs 3.2.1 and 4.2.1 of the afore-noted discussion paper amply specified that all assets and liabilities, which constitute an integral business of the Corporate Debtor Company would be transferred together and the consideration paid must be for the business of the Corporate Debtor.
We conclude that Sale of a Company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is basis’.
Excerpts of the Order;
# 1. The Present Appeal has been filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘Code’), by M/s. Visisth Services Limited (Hereinafter referred as ‘Appellant’) against the Impugned Order dated 07th August, 2020 passed by National Company Law Tribunal, Kolkata Bench, Kolkata, in CA (IB) No. 1313/KB/2019 connected with C.P.(IB) No.-898/KB/2018. By the Impugned Order, the Adjudicating Authority has dismissed the Application preferred by the Appellant and also disposed of the Application CA (IB) No. 1313/KB/2019 filed by the Liquidator with the following directions:
“i). The Liquidator shall issue fresh invitation to the bidder to provide balance sale consideration within such time as per clause (12) of Schedule I of Regulation 33;
ii). In case of payment of the full amount the liquidator shall execute certificate of sale or sale deed to transfer the assets in the manner specified in the terms of sale as per bidding document following clause (13) of the Schedule I of Regulation 33;
iii). In case of failure to pay the balance sale consideration he is at the liberty to cancel the sale in favour of the bidder by forfeiting the EMD and the amount paid towards the price of biding document and to proceed with sale as per Regulation 32-A; (Emphasis Supplied)
# 2. The facts in Brief are as follows:
On 12.10.2018, an Application under Section 10 of the Code filed by the Corporate Debtor was admitted by the Adjudicating Authority. On 19.07.2019, an Order of Liquidation was passed and Mr. S. V. Ramani/the first Respondent was appointed as Liquidator. On 01.09.2019, the Liquidator issued advertisements inviting Bids from prospective buyers through e-Auction for sale of the Company under Liquidation as a ‘Going Concern’. The Appellant purchased e-Auction Process Information Document from the Liquidator upon payment of Rs. 5 Lakhs.
On 04.09.2019, the Appellant issued an email to the Liquidator seeking clarifications on several issues with respect to e-Auction process and proposed different payment terms and specified in the email that their offer of acceptance was conditional to extinguish claims of Financial Creditors, Tax Department, Operational Creditors, Provident Fund Employees and other contingent liabilities.
On 05.09.2019, the Liquidator issued two emails to the Appellant informing that the Terms and Conditions of the Bid Document could not be changed or revised after public notification. M/s. State Bank of India (SBI) had also replied to the email and clarified the conditions. The Appellant submitted EMD of Rs. 37,10,000/- to the Liquidator. On 08.09.2019, the Appellant sent an email to the Liquidator stating that if any litigation arises from any source, the EMD amount and the bidding document purchase amount was to be refunded within three days.
On 26.09.2019, the Liquidator issued a provisional sale letter dated 25.09.2020 in favour of the Appellant upon receipt of communication from SBI confirming that it was the highest successful bidder in the e-Auction.
On 29.10.2019, the Appellant addressed a letter to the Liquidator stating the Provisional Letter of Sale was inconsistent with the terms of payment specified by the Appellant and sought for refund of the money paid with the interest.
On 09.01.2020, an Affidavit was filed by the Appellant in the Application preferred by the Liquidator before the Adjudicating Authority seeking direction for ‘Approval of the Sale’ as a ‘Going Concern’, and sought for approval without transfer of any liabilities and if there exists any impediment, the Appellant sought for withdrawing from the Bid and the refund of the amount paid.
Assessment:
# 6. The Issues which arise in this Appeal for consideration are:
a. Whether sale of Corporate Debtor as a ‘Going Concern, in Liquidation Proceedings includes its liabilities;
b. Whether the Appellant herein can withdraw from the Bid after payment of the EMD and seek for refund of the amount paid on the ground that the offer made by the Bidder was a ‘conditional offer’.
# 7. Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 reads as follows:
“32A. Sale as a going concern.
1. Where the committee of creditors has recommended sale under clause (e) or (f) or 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.” (Emphasis Supplied)
# 8. At this juncture, it is relevant to reproduce paragraphs 3.2, 3.2.1, 3.2.2. 4.2 and 4.2.1 of the IBBI Discussion Paper on Corporate Liquidation Process along with Draft Regulations, which are dated 27.04.2019:
“……..
3.2 Going Concern Sale under regulation 32 of the Regulations:
The Liquidator has the option to explore Going Concern Sale (GCS)- sale of the CD as a going concern or sale of the business of the CD as going concern-alongside other available modes for sale. It is necessary to provide a complete framework to enable him to exercise this option. Sale of CD as a going concern under regulation 32(e) and sale of business of CD as a going concern under regulation 32(f) are different.
3.2.1 Sale under regulation 32(e): In this form of GCS, the CD will not be dissolved. It will form part of liquidation estate. It will be transferred along with the business, assets and liabilities, including all contracts, licences, concessions, agreements, benefits, privileges, rights or interests to the acquirer. The consideration received from sale will be split into share capital and liabilities, based on a capital structure that the acquirer decides. There will be an issuance of shares by the CD being sold to the extent of the share capital. The existing shareholders will become claimants from liquidation proceeds under section 53 of the Code.
3.2.2 Sale under regulation 32(f): The business(s) along with assets and liabilities, including intangibles, will be transferred as a going concern to the acquirer, without transfer of the CD, and therefore, the CD will be dissolved. The existing shares will be extinguished. The remaining assets, other than those sold as part of business will be sold and the proceeds thereof will be used to meet the claims under section 53 of the Code.
……..
4.2 Should ‘Going Concern Sale’ be defined?
4.2.1. The term is well understood in legal parlance. The jurisprudence in this regard is fairly well-developed out of the erstwhile liquidation regime under the Companies Act, 1956. The Code recognises ‘going concern’ and envisages resolution as a ‘going concern’ but does not define it. It has been in vogue for more than two years and has not caused any difficulty. The Insolvency Law Committee in its report dated 26th March, 2016 noted that the phrase “as a going concern” implies that the CD would be functional as it would have been prior to initiation of CIRP, other than the restrictions put by the Code. It may not, therefore, be defined. However, it may be explained that going concern means all such assets and the liabilities, which constitute an integral business or the CD, that must be transferred together and the consideration must be for the business or the CD. The buyer of the assets and liabilities should be able to run business without any disruption. The business or the CD must be a running one, and it must be transferred along with its employees. In case of 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 licenses, assets, entitlements, beneficial interests, trademarks, brand, government approvals, etc.” (Emphasis Supplied)
# 9. It can be seen from the afore-noted discussion as well as Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016 that Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities. Paragraphs 3.2.1 and 4.2.1 of the afore-noted discussion paper amply specified that all assets and liabilities, which constitute an integral business of the Corporate Debtor Company would be transferred together and the consideration paid must be for the business of the Corporate Debtor. We conclude that Sale of a Company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is basis’.
# 10. Now, we address to the issue whether the Successful Bidder, can, upon corresponding with the Liquidator, before the date of e-Auction, state that his Bid is conditional i.e. the liabilities would not be foisted upon the Bidder, and if in case his conditional offer is not accepted, he can withdraw from the Bid and seek for refund of his EMD amounts. Learned Counsel for the Appellant drew our attention to the email addressed by the Appellant to the Liquidator on 04th September, 2019. The relevant paragraphs of the said email is reproduced as hereunder:
“……….The Company shall have no liabilities towards the persons currently classified as promoter or promoter group (including the Existing Promoter Group), persons acting in concert with promoters, holding companies, subsidiary companies, associate companies, group companies and/or their respective affiliates /associates). However, it is clarified that all claims of the Company against such related parties (and all Liabilities of such related parties towards the Company) shall remain outstanding due and payable to the successful bidder in accordance with their terms.
Any Liabilities, claims, demands, capital contributions or any other form of financial commitment; including but not limited to pledge of shares or any security interest created or provided, whether guaranteed or contractually agreed in writing or otherwise by the Company on behalf of or for its subsidiary companies, associate companies, Group companies and / or their respective Affiliates, shareholders/associates; as the case may be, which are in existence prior to the Closing Date and which may be invoked prior to the Closing date or at any time thereafter, shall stand irrevocably and unconditionally waived and extinguished.
2. We propose the following payment terms if we are chosen as the successful bidder in the following manner:
Rs 42 lacs upfront as EMD and purchase of bidding document
50% of the remaining successful bid amount within 45 days of being the successful bidder.
Remaining Amount of successful bid within 75 days of being the successful bidder.
3. Finally we are having profit on one crore only in one of the three financial years prior to financial year 2018.19. If you can allow us given this eligibility to bid then only we can enable us to bid for it.
4. In the event of any litigation arising in any courts of India by any party upon payment by successful bidder and prior to successful transfer of all assets along with the company then all monies paid by the successful bidder will be refunded within 7 days.
5. In the event of non acceptance of any condition mentioned herewith by the bankers or liquidator all monies paid shall duly be refunded.
6. If the situation arises for refund of any monies paid to your good selves then any delay beyond the stipulated period mentioned above it would carry interest @15% per annum till the date of repayment.
Regard
Nathmal Bangani
Director
Visisth Services Ltd.”
(Emphasis Supplied)
# 13. It is the main case of the Appellant having communicated to the Liquidator prior to the e-Auction date; they had participated in the Bid process with the bona fide intention to comply the sale process as the second Respondent/SBI had accepted the payment terms. Since the liquidator did not assist the Appellant in clarifying the liabilities of the Corporate Debtor, the Appellant informed the Liquidator that if their Bid is not accepted with its terms they would seek to withdraw from the Bid. An affidavit to this extent was filed before the Adjudicating Authority on 09.01.2020.
# 14. A perusal of the Terms And Conditions of the Proposed Sale show that clauses 12,13,14 and 15 are relevant to the facts of this case which read as under:
“………..
12. The Applicant should thoroughly satisfy itself about the nature, conditions and quality of the assets. The Liquidator gives no guarantee or warranty as to title of assets or the conditions of the assets/material or/its quality for any specific purpose or use. It should be clearly understood that no claim/complaint about the quality/conditions/fitness for use will be entertained by the Liquidator.
13. The submission of the bid means and implies that the Applicant has read carefully and unconditionally and irrevocably agreed to and accepted all the terms and conditions laid herein.
14. Bids once submitted cannot be withdrawn or revised.
15. The Liquidator reserves the right to accept or reject any/or all the bids or adjourn, postpone or cancel the auction sale anytime without assigning any reason thereon. Any notice of such adjournment/ postponement/ cancellation of the auction sale shall be published on the website https://ncltauction.acutiontigernet. ……..” (Emphasis Supplied)
# 15. Clauses detailed above show that Applicant has accepted all the terms and conditions and cannot revise the same. The Bid Document also specifies under the heading ‘Costs, Expenses and Tax Implications’ that payment of all statutory and non-statutory dues, taxes, rates, assessments, charges, fees, owed by the Corporate Debtor to anybody in respect of the subject property shall be the sole responsibility of the Successful Bidder. It is also significant to note that an email dated 06.09.2019; the Liquidator has clearly mentioned that ‘legal issues pertaining to e-Auction cannot be changed after public notification’. By paying the EMD amount and accepting the Bid, the Successful Bidder cannot now say that it was not a concluded contract. The Bidder-Appellant is bound by the terms and conditions of the Bid document and no communication to the Liquidator stating that it is a conditional offer, is sustainable. If the Appellant had any apprehensions and conditions about the liabilities the Appellant could have exercised their choice of not participating in the Bid. Having participated, the Appellant cannot propose certain conditions subsequent to their participation and putting in their Bid. We are also conscious of the fact that the Appellant was supposed to comply the auction purchase in 2019 itself and the Pandemic erupted in the year 2020. The Judgment ‘Dresser Rand S.A’ (supra) relied on by the Learned Counsel for the Appellant is not applicable to the facts of the instant case as the Liquidator in the email dated 05.09.2019 communicated to the Appellant that the ‘legal issues pertaining to e-Auction cannot be changed after public notification’. The decision of ‘M/s. Padia Timber Company Pvt. Ltd. Vs. The Board of Trustees of Visakhapatnam Port Trust through its Secretary’, (Supra) is also not applicable for the same reason noted above. Learned Counsel for the Appellant had also relied on the decision of National Company Law Tribunal, New Delhi, Principal Bench in Mohan Gems and Jewels Pvt. Ltd. in CP(IB) No. 590(PB)2018 which was set aside by this Tribunal vide Order dated 2.08.2021 in Company Appeal (AT) Ins. No. 849 of 2020.
# 16. The Liquidator will carry on the business of the Corporate Debtor for its beneficial Liquidation as prescribed under Section 35 of the Code. The Liquidator will only act and cannot modify/revise the terms of the contract. The Liquidator shall endeavour to sell the Corporate Debtor Company as a ‘Going Concern’ only in accordance with the law. If the Bidder is allowed to withdraw from the Bid at this stage and seek refund on the ground that their conditional offer has not been accepted, then the liquidation process would be a never ending one, defeating the scope and objective of the Code. In the declaration signed, the Appellant-Bidder unconditionally agreed to abide by the terms of the e-Auction which is inclusive of forfeiture of the EMD, in the event the Bidder did not perform their part of obligation after the acceptance of the Bid in their favour. The acceptance was conveyed to the Bidder on 25.09.2019. Clearly noting the terms and conditions that the Company was being sold as a ‘Going Concern in an as is very basis’, the Bidder cannot now be permitted to turn around and plead that their offer was conditional. The Hon’ble Supreme Court of India in ‘Pawan Kumar Agarwal Vs. Association of Management Studies and Anr.; Meerut Development Authority 2009(6) SCC 171 has observed in Paragraph 26 as follows:
“26. A tender is an offer. It is something which invites and is communicated to notify acceptance. Broadly stated it must be unconditional; must be in the proper form, the person by whom tender is made must be able to and willing to perform his obligations. The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. However, a limited judicial review may be available in cases where it is established that the terms of the invitation to tender were so tailor made to suit the convenience of any particular person with a view to eliminate all others from participating in the bidding process.” (Emphasis Supplied)
# 17. The Hon’ble Apex Court in ‘Punjab Urban Planning and Development Authority and Ors. Vs. Raghu Nath Gupta and Ors’ (2012) 8 SCC 197 has referred to another Judgement of the Hon’ble Supreme Court in ‘UT Chandigarh Admn. Vs. Amarjeet Singh’, (2012) 8 SCC 202 and observed as follows:
“The Apex Court after having referred to the Judgement of this Court in Shantikunj Investment Case, this Court held as follows:
“19. ….In a public auction of sites, the position is completely different. A person interested can inspect the sites offered and choose the site which he wants to acquire and participate in the auction only in regard to such site. Before bidding in the auction, he knows or is in a position to ascertain, the condition and situation of the site. He knows about the existence or lack of amenities. The auction is on `as-is-where-is-basis’. With such knowledge, he participates in the auction and offers a particular bid. There is no compulsion that he should offer a particular price…..
20. Where there is a public auction without assuring any specific or particular amenities, and the prospective purchaser/lessee participates in the auction after having an opportunity of examining the site, the bid in the auction is made keeping in view the existing situation, position and condition of the site. If all amenities are available, he would offer a higher amount. If there are no amenities, or if the site suffers from any disadvantages, he would offer a lesser amount, or may not participate in the auction. Once with open eyes, a person participates in an auction, he cannot thereafter be heard to say that he would not pay the balance of the price/premium or the stipulated interest on the delayed payment, or the ground rent, on the ground that the site suffers from certain disadvantages or on the ground that amenities are not provided.”
# 18. Keeping in view the ratio laid down by Hon’ble Supreme Court of India in a catena of Judgments that the Bidder cannot wriggle out of the contractual obligations arising out of acceptance of his Bid and also having regard to Regulations 32A and the scope and objective of the Code together with the Principle laid down by this Tribunal in ‘Mohan Gems and Jewels’ (Supra) we are of the opinion that the Appellant cannot be entitled to the EMD amount and the amount paid towards the Bid Purchase document, if he does not comply with the terms of the contract.
# 19. We do not find any illegality or infirmity in the well-reasoned order of the Adjudicating Authority. Hence this Appeal fails and is dismissed, accordingly. No order as to costs.
# 20. The Registry is directed to upload the Judgement on the website of this Tribunal and send the copy of this Judgement to the Learned Adjudicating Authority (National Company Law Tribunal, Kolkata Bench) forthwith.
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Blogger’s Comments; The question here is whether the Code mandates Liquidator for sale/auction of liabilities of the CD under liquidation.& whether the liabilities of CD survive post completion of the liquidation process.(In the present case/transaction the liabilities are sought to be transferred to auction purchaser, along with assets in going concern sale of the CD.)
# Section 36. Liquidation estate. -
(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.
# Section 53. Distribution of assets. -
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -
As per the provisions of the Code, liquidator can only sell/auction the assets of the CD, which forms the part of “Liquidation Estate” and all the liabilities of the CD are to be mandatorily settled in terms of the provisions of Section 53 of the Code.
(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.
Case Law;
i). NCLT Mumbai-1 (2018.11.29) in Alchemist Asset Reconstruction Company Ltd. Vs. Abhijeet MADC Nagpur Energy Pvt. Ltd. [MA 1343/2018 IN CP (IB)-1315/MB/2017] held that;
It is to be clarified that when sale is to be made on a going concern basis, then certainly after the transfer of undertaking, acquirer gets all right, title and interest in the whole and every part of the undertaking, without any security interest, encumbrance, claim, counterclaim, or any demur, into the acquirer.
ii). 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.
iii). NCLT Hyderabad (30.06.2021) in Viswa Infrastructures Finance & Services Pvt Ltd Vs SREI Equipment Finance Ltd [IA (IBC)/157/2021 in CP (IB) No. 329/7/HDB/2018 ] held that;
Corporate Debtor is being sold on an ongoing concern basis which is more or less in the nature of resolution of the Corporate Debtor as such he has no objection if the prayers sought for in the term sheet submitted by the successful bidder are allowed by the Tribunal. Already Successful Bidder has deposited Rs. 57 crores. In order for the Successful bidder to kick start the business and follow the law laid down under the Companies Act, 2013, it is imperative for the Tribunal to grant necessary reliefs.
The said assets are free from any financial implications arising out of any pending proceedings before relevant authorities, if any. Further non compliance of provisions of any laws, rules, regulations, directions, notifications, circulars etc on the Corporate Debtor under various Acts and Regulations stands extinguished, qua the successful bidder.
The erstwhile promoters or any member, associate of the Existing and Erstwhile promoter groups is hereby restrained from doing any business directly or indirectly in connection with the products and services presently offered by the Corporate Debtor
Relief sought with regard to issuance/renewal of all kinds of licenses / permissions/ approvals required is allowed subject to payment of renewal fees, if any, from this date to the Licensing Authorities.
iv). NCLT Ahmedabad (08.09.2021) In Nitin Jain Liquidator of PSL Ltd. Vs. Lucky Holdings Pvt. Ltd [IA 391 (AHM)/2021 in CP (IB) 37 (AHM) 2017 ] Adjudicating Authority using residuary powers of NCLT under section 60(5) granted relief to Successful Auction Bidder in liquidation process beyond the provisions of section 32A;
Thus, considering these findings of the Hon'ble Supreme Court, it is crystal clear that this Adjudicating Authority has got adequate jurisdiction as regard to most of the issues raised in this application, being issues arising out of or insolvency resolution as well as are in relation to liquidation proceedings of the Corporate Debtor.
Thus, in our considered view, the reliefs and concessions on the parallel line of an approved resolution plan can be granted subject to one condition that such reliefs/concessions must be central issues and also in relation to or arising out of liquidation proceedings of a Corporate Debtor so as to confer jurisdiction on Adjudicating Authority under Section 60(5)(c) of the IBC, 2016.
The Successful Auction Bidder shall not be liable for any action/responsibility of the Corporate Debtor or its erstwhile management as per provisions of Section 32A of IBC, 2016.
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# Section 240. Power to make regulations. –
ReplyDelete(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.