The National Company Law Tribunal, Mumbai bench (“NCLT”) has in its order dated March 09, 2021 (“Judgement”), in the matter of Gaurav Jain v. Sanjay Gupta [IA No. 2264 of 2020 in C.P.(IB)No. 1239/MB/2018], allowed an application seeking reliefs essential to run a corporate debtor sold as ‘going concern’ during liquidation.

Facts

The Bank of Baroda filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against Topworth Pipes and Tubes Private Limited (“Corporate Debtor”/ “Company”). By an order of NCLT dated December 11, 2018, the Corporate Insolvency Resolution Process (“CIRP”) was initiated against the Corporate Debtor. Thereafter, on June 12, 2020, NCLT passed an order for liquidation of the Corporate Debtor under Section 33 of the IBC since no resolution plan was received in relation to the CIRP of the Company.

Subsequently, Mr. Sanjay Gupta (“Liquidator”) had invited bids by an e-auction process memorandum dated October 13, 2020, for the sale of the Corporate Debtor. The Liquidator published two addendums dated October 29, 2020 and November 03, 2020, to the e-auction process memorandum. The e-auction process memorandum stated that the sale of the Company was on a ‘going concern’ basis in accordance with the provisions of the IBC read with Regulation 32(e) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Process Regulations”) and the e-auction process memorandum. It further stated that the sale of the Company was proposed to be done on ‘as is where is basis’, ‘as is what is basis’, ‘whatever there is basis’ and ‘no recourse basis’. The reserve price fixed was INR 152 Crores. It was clarified that, the proposed sale of the Company on ‘going concern’ basis did not entail transfer of any other title, except the title which the Company had on its assets as on the date of transfer.

Among other information mentioned in the e-auction process memorandum, it was also stated that, “any liabilities, current or long term, contingent or not whether due or otherwise pertaining to the operations of Khopoli unit post liquidation commencement date and all current employees related liabilities including provident fund, employee state insurance and other retirement/terminal benefits shall be to the account of the successful bidder including any liabilities accruing post auction date, i.e. November 2nd, 2020.” Further, it was also mentioned that on payment of the total bid amount, and applicable taxes, registration fees, etc. the successful bidder shall be issued the letter for confirmation of sale, which was subject to the necessary approvals, if any, by various statutory and non-statutory authorities.

Mr. Gaurav Jain (“Applicant”) had participated in the e-auction process held on November 11, 2020 and had submitted a bid for INR 190.90 Crores to acquire the Corporate Debtor as a ‘going concern’ (“Sale Consideration”). The Liquidator confirmed the Applicant’s bid and issued letter of intent to the Applicant on November 12, 2020. Thereafter, the Applicant submitted his bid price before the Liquidator by depositing the earnest money deposit (“EMD”) of INR 15.2 Crores. Subsequently, on November 18, 2020, the Applicant deposited a sum of INR 32.52 Crores. Therefore, in total, the money deposited by the Applicant amounted to INR 47.72 Crores, that is, 25% of the Sale Consideration.

Issue
1.   To consider the sale of Corporate Debtor as a ‘going concern’ during liquidation.

Submissions

Submissions made by the Applicant:

The Applicant submitted that it was agreed between the Liquidator and the Applicant that on payment of the remaining 75% of the Sale Consideration to the Liquidator on December 11, 2020, the Corporate Debtor would be transferred to the Applicant in accordance with the provisions of the IBC and the Liquidation Process Regulations and that such a date of transfer would be considered as the date of acquisition.

The Applicant submitted that the mere purchase of the Corporate Debtor as a ‘going concern’ as per the Liquidation Process Regulations would not suffice to ensure smooth running of the business of the Corporate Debtor. Therefore, it was imperative that certain additional reliefs, concessions, relaxations and permissions be granted by the NCLT, which would be essential and necessary to run the business of the Corporate Debtor as a ‘going concern’, to achieve the purpose of revival and value maximization of the Corporate Debtor. The Applicant submitted that, the NCLT was empowered to grant necessary reliefs, as mentioned in the application, in favour of the Applicant, in relation to the Corporate Debtor sold as a ‘going concern’ under the provisions of the Liquidation Process Regulations and under Section 60(5)(c) of the IBC.

Submissions made by the Liquidator:

The Liquidator submitted that he had filed second progress report dated October 10, 2020, with the Registry of the NCLT, in accordance with Regulation 15(1)(b) of the Liquidation Process Regulations and informed that all the secured financial creditors had relinquished their security interest in liquidation estate of the Corporate Debtor. The Liquidator stated that the prayer (a) to permit the Applicant to pay/adjust the Sale Consideration in a two-fold manner such that, an investment of INR 40 Crores into the equity shares of the Corporate Debtor and the balance amount of INR 150.90 Crores in the form of unsecured debt, were in consonance with the letter and spirit of the e-auction memorandum.

The Liquidator further submitted that he did not have any objections in respect of the prayers (m), (n) and (o) of the application, that sought directions to be issued to the Liquidator to, (i) cooperate and provide assistance to the Applicant in amending, modifying, creating the land records in relation to the immovable properties and assets, (ii) write back all the liabilities which were not payable and reflect the total liabilities at the Sale Consideration, (iii) the assets which were not recoverable to be written down to their realizable value, in the financial statements of the Corporate Debtor and finally that the filing of necessary documents and returns along with said financial statements had to be prepared and filed with the relevant regulators and authorities, by the Liquidator.

Observations of the NCLT

The NCLT noted that while the Liquidation Process Regulations recognised ‘going concern’ sale as one of the methods of sale of the Corporate Debtor, however, there was no definition provided for the term ‘going concern’ either in the IBC or in the Liquidation Process Regulations. Therefore, a reference was made to paragraph 8.1 of the report of the Insolvency Law Committee dated March 26, 2018, wherein the committee observed the meaning of the term ‘going concern’ as follows “… that the Corporate Debtor would be functional as it would have been prior to the initiation of CIRP, other than the restrictions put by the Code.” Further, a reference was also made to paragraph nos. 7 and 8 of the Round Table of Insolvency and Bankruptcy Board of India (“IBBI”) held on May 21, 2018, wherein a note as published by IBBI defining ‘going concern’ was noted as follows, “‘Going Concern’ means all the assets, tangibles or intangibles and resources needed to continue to operate independently a business activity which may be whole or a part of the business of the corporate debtor without values being assigned to the individual asset or resource.” In view of the said definitions, the following options were considered by NCLT:

• The Corporate Debtor may be sold as a going concern, as provided in the Liquidation Process Regulations. Therefore, the legal entity of the Corporate Debtor would survive and, consequently, there would be no need for dissolution of the Company in terms of Section 54 of the IBC. The NCLT noted that the ownership generally is transferred by the Liquidator to the purchaser. Consequently, after the sale of the Corporate Debtor as a ‘going concern’, the Applicant would be carrying on the business of the Corporate Debtor.
• The business of the Corporate Debtor may be sold as a ‘going concern’, that is, sale of business only and not the Corporate Debtor. Therefore, the Corporate Debtor would be liquidated in accordance with the Liquidation Process Regulations. The NCLT noted that, the assets and liabilities relevant for the business are transferred to a new entity, and stakeholders are paid from proceeds of sale in accordance with Section 53 of the IBC and, thereafter, the Corporate Debtor would be dissolved. The NCLT observed that since the amount is paid to the creditors in terms of the IBC, the liabilities of the Corporate Debtor towards the creditors would be treated as settled.

The NCLT observed that, both the options required consent of the secured creditors to relinquish security interest. Further, if security interest was not relinquished, other modes of sale as available under the Liquidation Process Regulations would have to be considered.

The NCLT observed that the crux of the sale as ‘going concern’ is that the equity shareholding of the Corporate Debtor was extinguished and the acquirer would take over the undertaking. The undertaking included the business of the Corporate Debtor, assets, properties, licenses and rights etc. excluding the liabilities. The NCLT noted that, however, in the instant case the assets that were included in the e-auction memorandum only had to be taken over by the Applicant.

The NCLT observed the difference that, in the normal parlance ‘going concern’ sale would be transfer of assets along with the liabilities. However, as far as the ‘going concern’ sale in liquidation is concerned, there was a clear difference that only assets were transferred and the liabilities of the Corporate Debtor had to be settled in accordance with Section 53 of the IBC. Hence, the Applicant would take over only the assets without any encumbrance or charge and they would be free from the action of the creditors.

Conclusively, the NCLT observed that, selling the Corporate Debtor ‘as a going concern’ included the following advantages:

• The corporate debtor itself would be transferred.
  b.The equity shareholding would be transferred or extinguished and new shares would be issued.
• The purchaser would be expected to carry on the business of the corporate debtor after the sale of assets would be confirmed.
• The existing employees would have a chance to continue in their employment.

Decision of the NCLT

As a consequence, the NCLT allowed the application and granted the following reliefs that were considered essential and necessary to run the Corporate Debtor sold as ‘going concern’ during liquidation and to achieve the purpose of revival of the Corporate Debtor:

• The Applicant was permitted to bring in INR 40 crores as share capital and INR 150.90 crores as unsecured debt towards payment of Sale Consideration.
• 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 were to be transferred to the Applicant upon payment of the Sale Consideration. Further, that the Sale Consideration, when received, were to be distributed by the Liquidator in terms of Section 53 of the IBC.
• All the claims, demands, liabilities of the Corporate Debtor, in relation to any period prior to the date of acquisition, were to be written off in full and extinguished, qua the Applicant. The Applicant was not to be responsible for any other claims, liabilities, obligations etc. payable by the Corporate Debtor thereon, to the creditors or any other stakeholders.
• Any proceedings against or in relation to, or in connection with the Corporate Debtor (other than those against the erstwhile promoters or former members of the management of the Corporate Debtor) pending or threatened, present or future, as on date of the Judgement, with respect to its liabilities, enquiries, investigations, assessments, claims, disputes, litigations etc. would not have any bearing against the assets sold in the liquidation process. The said assets were free from any financial implications arising out of any pending proceedings before relevant authorities, if any.
• The existing share capital of the Corporate Debtor would stand cancelled without any consideration 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 board of the Corporate Debtor could be reconstituted and necessary filings could be made with the RoC concerned.
• 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 was entitled to were deemed to be continued subject to payment of renewal fees, if any, from date of the Judgement, to the licensing authorities.
• The assets specified in the e-auction memorandum, on payment of the Sale Consideration would vest with the Applicant. The Applicant and Corporate Debtor shall have the right to review and terminate any contract that was entered into previously.
• 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 the date of the Judgement.
• The Applicant was entitled to get all the rights, title and interest whole and every part of the Corporate Debtor.
• The dues of all creditors of the Corporate Debtor would stand extinguished qua the Applicant.
• The non-compliance of provisions of any of the laws, rules, regulations, directions, notifications, circulars, guidelines, policies, licenses, approvals, consents or permissions, prior to the date of acquisition, stood extinguished qua the Applicant.
• All the assets specified in the e-auction memorandum would be continued as the assets of the Corporate Debtor on total payment of the Sale Consideration to the Liquidator.
• The Liquidator was directed to provide all support and assistance to the Applicant for the smooth functioning of the Corporate Debtor and to complete the acquisition.
• The Liquidator and Applicant would be at liberty to take all the steps required to make accounting entries for the smooth transmission and preparing the balance sheet.
• The Liquidator was directed to ensure completion of pending filings with the concerned RoC, Income Tax Authorities and any other government / statutory authorities.
• The Corporate Debtor was entitled to get the benefits of brought forward losses, if any, subject to permission of the appropriate authority under the relevant provisions of the Income Tax Act, 1961.
• The Corporate Debtor could apply for incentives under the ‘Package Incentive Scheme’, framed by the state government of Maharashtra, subject to the eligibility and other norms as provided in the said scheme.
• As far as the prayer for considering the bid submitted by the Applicant as resolution plan under Section 79 of Income Tax Act, 1961 was concerned, the Applicant could approach the relevant authority who would consider such request.

VA View:

It is rare that a company survives through the liquidation process as a ‘going concern’. In this Judgement, the NCLT granted reliefs to the Applicant that were necessary for allowing the Corporate Debtor to survive and run as a ‘going concern’ on completion of the sale under relevant provisions of the IBC and Liquidation Process Regulations. This Judgement is in line with and amplifies the main objectives of the IBC including maximization of value and revival of the Corporate Debtor. The Judgement has also analyzed the meaning of the term ‘going concern’ in view of lack of a definition under the IBC and Liquidation Process Regulations. This Judgement of the NCLT addresses various concerns of acquirers in general, including but not limited to apprehensions of being hit by unknown/uncertain liabilities or other contingencies and concerns related to the smooth functioning and continuity of business operations of the Corporate Debtor, that is sold as a ‘going concern’ during the liquidation process.

For more information please write to Mr. Bomi Daruwala at [email protected]

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