Pitfalls of ‘Going Concern Sales’ During Liquidation: Recent Judicial Trends

  August 1, 2021

(The first prize winning entry by Kumari Saloni, a fourth year law student at NLU, Delhi, in IBC16’s first edition of the blog writing competition.)


In June 2021, the National Company Law Tribunal (‘NCLT’) Mumbai in M/S Elecon Engineering Company Ltd. v M/S Enviiro Bulkk Handing Systems (‘Enviiro Bulkk’) and NCLT Hyderabad (in Srei Equipment Finance Limited v M/S Vishwa Infrastructures and Services Pvt. Ltd. (‘Vishwa Infrastructures’) approved the sales of the respective corporate debtors (‘debtors’) as going concerns under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’) during their liquidations. Resultantly, the assets of the debtors were not liquidated individually/collectively, rather the debtors were sold as going concerns to the respective bid-winners in their entirety. Generally, on completion of liquidation, the corporate identities of the debtors get extinguished. However, in these cases, it did not happen, and the debtors were rescued from corporate death during their liquidations. These cases, along with some other recent ones, reveal an early judicial trend regarding ‘going concern sale of corporate debtor’ (‘GCS-debtor’) that warrants attention. The author highlights that trend, and from that vantage, argues that GCS-debtor should be completely impermissible.

Going Concern Sale – The Legal Framework

A liquidation order is generally passed after the failure of the Corporate Insolvency Resolution Process (‘CIRP’) and a liquidator is appointed by the NCLT (Section 35 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’)). Under Section 35(1)(f), the liquidator sells the assets of the debtor and distribute the proceeds among stakeholders as per Section 53. The Liquidation Regulations provide for various options for sale of the assets (Reg. 32). Originally, only four options were there, viz. standalone sale, slump sale, collective sale, sale in parcels. However, later, a series of amendments to the Liquidation Regulations and the IBBI (Insolvency Resolution for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’), introduced a framework for going concern sales (‘GCS’). Thus, Regulation 32, Liquidation Regulations now provides two more sale options, viz. GCS-debtor, and going concern sale of debtor’s business (‘GCS-business’), provided, the secured creditors relinquish their security interests to the liquidation estate (proviso, Reg. 32). If the liquidator opines that either of these two options would yield maximum recovery, he shall attempt sale through that option for the first ninety days. Only if such sale fails during those ninety days, the liquidator can explore other options. Further, GCS can also be recommended by the Committee of Creditors (‘CoC’) during CIRP. Neither the IBC nor the Regulations define GCS. However, attempts were made in the IBBI Discussion Paper on Liquidation to differentiate between the two GCS. In GCS-debtor, the debtor does not get dissolved, but is transferred to the acquirer in entirety, including its assets, liabilities, contracts, licences, concessions, etc. However, in GCS-B, only particular business(s) gets transferred along with the associated assets/liabilities, and not the debtor in entirety. Post such sale, the remaining assets are sold separately, and the debtor gets dissolved (page 7).

The Judicial Trend in Going Concern Sales – Juxtaposing ‘GCS-debtor’ with ‘resolution’

In Enviiro, the debtor went into liquidation on CIRP failure and GCS-debtor was ordered. The liquidator accepted the purchasers’ bid for INR 15.3 crores. They sought various reliefs from the NCLT for smooth takeover of the debtor. The NCLT, among others, ordered that (a) purchasers would not have any liability vis-à-vis the debtor’s past liabilities and the bid amount would be distributed among stakeholders as per Section 53, (b) all liabilities regarding pending/decreed cases/proceedings against debtor would extinguish, (c) all subsisting licences, approvals, lease, etc. would continue on payment of statutory dues/renewal fees, and, (e) purchasers would become owners of the debtor’s assets free from encumbrances, claims, etc.

A week later, the purchaser in Vishwa Infrastructures sought similar reliefs from NCLT-Hyderabad pursuant to a GCS-debtor. The Tribunal here was more explicit in granting them those. Here, in addition to granting the reliefs/concessions similar to that in Enviiro, the Tribunal extinguished all of debtor’s past non-compliances under laws, rules, regulations, etc. It thus went a step ahead of Enviiro by extinguishing even those non-compliances where a proceeding had not been initiated.

While this difference in the orders of the two NCLTs may not be significant, it tells something about the growing tendency of NCLTs to treat GCS-debtor in almost similar manner as resolution under IBC. A bare reading of any NCLT order approving a plan would reveal that in the above cases, the NCLTs have granted almost all the reliefs/concessions that they generally grant to a successful resolution plan (‘Plan’). In fact, NCLTs’ generosity can also be seen in two earlier cases. In Dr. Devaiah Pagidipati v Southern Online Bio-Technologies Ltd., the NCLT had granted similar reliefs, holding that not granting the reliefs would render the GCS-debtor futile. Gaurav Jain v Sanjay Gupta is another case in the league. The author argues that this trend, of treating GCS-debtor and resolution alike in terms of reliefs/concessions, being set by the NCLTs, is not a judicial misinterpretation. Rather, it is a concrete codification of GCS-debtor as originally conceptualized. Therefore, it is imperative to understand the rationale for introducing GCS-debtor.

The Rationale behind Introducing GCS-debtor

The IBC does not envisage a GCS-debtor. Evidently, Section 54 talks about application before the NCLT for dissolution of debtors on completion of liquidation. The assumption is that liquidation would culminate into dissolution of debtors. However, IBC is silent where liquidation does not result in dissolution, as happens in GCS-debtor. To fill this gap, the amended Liquidation Regulations contain Regulation 45(3) under which a closure report is filed before the NCLT post GCS-debtor. So, in GCS-debtor, instead of Section 54, Regulation 45(3) is complied with. Here, one may validly argue whether Regulation 45(3) (of a sub-ordinate legislation) can override Section 54 (of the primary legislation), when the primary legislation clearly envisages dissolution and not revival as the outcome of liquidation.

However, despite the above issue, GCS-debtor was introduced to further IBC’s objective of ‘resolution’ over ‘liquidation’. Since it offered another chance of saving the debtor from liquidation, it was even accepted with appreciation by the judiciary. A significant decision here was Gujarat NRE  (2018). In this case, NCLT Kolkata had, on failure of resolution, in the interest of the debtor’s employees, ordered the liquidator to explore options of GCS-debtor (despite the absence of such provision) so that the jobs would be saved. This was the starting point of GCS-debtor under the IBC regime. Soon, GCS-debtor was added to the Liquidation Regulations as another option of sale during liquidation (Reg. 32(c)). Thereafter, the Insolvency and Bankruptcy Board of India (‘IBBI’), in a roundtable with stakeholders (‘Roundtable’) discussed that GCS-debtor preserves employments and maximises returns to the stakeholders, both of which are lost in regular asset sales. Further, pre-mature liquidations were said to cause avoidable loss of employment. So, efforts were deemed necessary to rescue debtors from corporate death even during liquidation. Noting this value of GCS-debtor, the newly introduced Regulation 32(c) was appreciated. The above discussion clarifies that the idea behind GCS-debtor was to provide a ‘second chance’ (after a failed resolution) of revival of the debtor, akin to the resolution process. Pertinently, it was also discussed in the Roundtable that in GCS-debtor, the NCLT may, among others, order – (a) payment to stakeholders as per Section 53 from the bid amount, and (b) protection of the purchaser from all past claims/liabilities. Therefore, now NCLTs are merely codifying it in express terms that GCS-debtor is indeed a ‘second chance’ akin to resolution. However, despite the general appreciation of GCS-debtor, the author further argues that their existence itself is problematic, especially when they are juxtaposed with resolution.

Arguments Against the Juxtaposition of GCS and Resolution

The Insolvency Law Committee Report 2020 (‘ILC Report’) discussed whether GCS-debtor is permissible during liquidation by the IBC or not. It observed that liquidation has been envisaged as the ‘state the entity enters at the end of CIRP, where neither creditors nor debtors can find a commonly agreeable solution by which to keep the entity as a going concern.’ Therefore, it inferred, liquidation itself implies that the debtor is no longer viable as a going concern. So, selling its viable assets is better than attempting a full-fledged revival through GCS-debtor because further revival efforts may (a) lead to delays, (b) undermine the efficacy of the CIRP. The author argues that the ILC Report discarded GCS-debtor for very right reasons, albeit in short. The author proposes further arguments for disallowing GCS-debtor.

  • ‘GCS-debtor’ is inherently different from ‘resolution’

The NCLAT, in Binani Industries Ltd. v Bank of Baroda, held that resolution is not a ‘sale’ of the debtor for a price. The resolution process involves voting by the CoC, application of mind in approving a Plan, etc. Further, resolution process involves various stakeholders, interim finance, calm period, CoC, resolution applicants, and overall, an elaborate and regulated process for reviving the debtor. If it were a sale, there was no need for such an elaborate and calculated process, and simply the highest bidder would have acquired the debtor. But the very idea of resolution is the rescue of debtors (from distress) as going concerns (page 15).

Thus, one can somewhat be confident that rescue pursuant to a Plan would be a viable rescue of the debtor. Pertinently, Section 31 makes the terms of a Plan binding upon the stakeholders, including the debtor, and intentional violation of the Plan entails criminal punishment (Section 74(3)). This gives good reasons to the resolution applicants and other stakeholders to diligently and pragmatically chalk out the Plan for long-term viability of the debtor.

Against this background, one would realise that GCS-debtor is precisely what a Plan is not, i.e., sale for a price. Since, GCS-debtor is a mere sale, the short/long-run plans of the purchaser get veiled. Pertinently, nothing akin to Section 31 exists for purchasers. So, even if, after purchasing the debtor, the debtor is not continued as a going concern, there would be no consequences for the purchaser. In fact, NCLTs would lack the jurisdiction to hear this issue because as discussed in Venus Recuiters v Union of India (‘Venus’), Section 60(1) confers jurisdiction to the NCLTs only in relation to insolvency resolution and liquidation and on the permitted grounds qua Plans. It held that on approval of a Plan, ‘insolvency resolution’ ends, therefore, the NCLTs lack jurisdiction after that point (para 68).

Therefore, it is unlikely that the NCLTs would assume jurisdiction once ‘liquidation’ ends, except on permitted grounds (like avoidance proceedings, Venus (para 93)), especially when nothing akin to Section 31 binds the purchaser. Unsurprisingly, soon after GCS-debtor, the debtor may get abandoned or become distressed again. So, even though GCS-debtor ‘revives’ the debtor, one should not applaud it for ‘saving’ the debtor from corporate death just like a Plan does. IBC strives to craft long-term and binding viability plans for distressed debtors under a comprehensive framework. Certainly, a fragile and unplanned revival of the debtor would be beyond IBC’s radar.

  • Inequitable outcome for creditors

In resolution, the quantum of distribution to creditors is determined in the Plan. Furthermore, a Plan has to mandatorily allocate at least that amount to the operational creditors as they would have got in liquidation of the debtor (Section 30(2)(b)). Though, experts argue, that this enfranchisement of operational creditors is not adequate, successful resolutions have witnessed around 42% recovery of claims to operational creditors (and 44% to financial creditors). The reason for not-worse recovery to operational creditors, experts cite, is their criticality to the debtor’s operations. Nevertheless, one thing that is equitable about resolution is that almost all the creditors suffer haircuts in claims.

However, in GCS-debtor, distribution happens as per Section 53 priority, as discussed. Section 53 provides a ‘waterfall mechanism’ under which, only after the claims of the top-placed stakeholders are satisfied, the surplus goes to the next level. The top-placed creditors get the most, while the rest get significantly less/nil. Clearly, not all stakeholders suffer haircuts, at least not equitably.

Now, due to NCLT’s granting similar reliefs/concessions in Plans and GCS-debtor, the outcome of GCS-debtor for purchasers is similar to that in a resolution. Whereas, the creditors get the inequitable outcome of liquidation. Therefore, GCS-debtor, by unfairly benefitting the purchasers at the cost of creditors, is inequitable. So, it should definitely not be appreciated.

GCS-Debtor May Jeopardise Good Resolutions

Having discussed the reasons for not juxtaposing GCS-debtor with resolution, an important counterargument requires attention. One may argue that, GCS-debtor may not be the same as resolution, but it is the best option in liquidation for it preserves employment, revives the debtor, and maximises returns to stakeholders, it is meritorious (Roundtable). This argument portrays GCS-debtor as the best option for stakeholders during liquidation.

However, this argument overshadows the bigger picture being built regarding GCS-debtor. It is not about one solitary case where the NCLT has allowed GCS-debtor in exceptional circumstances. Now that GCS-debtor has been codified and applied, these early experiences would shape the future discourse. The author argues, since the intended objectives and outcomes of the cases, all suggest that GCS-debtor is a ‘second chance’ of revival, this option might sound more attractive to the market players than a resolution. Reasons being, (a) GCS-debtor would require much less consideration amount (as has been in the discussed cases) than in resolution, (b) GCS-debtor, unlike resolution, does not require an elaborate CoC negotiation and compliances, and (c) the purchaser is not bound to keep the debtor as a going concern in future. So, market players (say, resolution applicants) might be unwilling/less-willing to improve the terms of their Plans during CIRP, eyeing for a ‘second chance’ to acquire the debtor at lesser prices during liquidation. Therefore, the mere existence of ‘GCS-debtor’ in law may disincentivise them to propose good Plans for the debtors. Pertinently, the ILC Report had also discarded GCS-debtor, for it may undermine CIRP’s efficiency.


IBBI’s latest newsletter suggests that very few of the admitted cases have reached successful resolutions, and most of them have gone under liquidation after failed resolutions (page 12). Given the high number of failed resolutions, the attractiveness of GCS-debtor might increase for offering a second chance of rescue to those debtors. However, as discussed, it may affect the efficacy of resolutions in the broader IBC landscape. It is further concerning when the judiciary is overwhelmingly juxtaposing GCS-debtor with resolution. Therefore, GCS-debtor should be removed from the IBC regime altogether because any scope for this ‘second chance’ may jeopardise resolutions, something that is the crux of the IBC. If the numbers qua resolutions are not promising, that calls for improvements in the CIRP process instead of introducing absurd measures for revivals during liquidations, like the GCS-debtor. Further, liquidation has value for extremely distressed and unviable debtors as it offers them a graceful exit from the market by allowing the sale of their viable assets, and dissolution of the unsold entity. This value of liquidation should also not be jeopardised by attempting repeated rescues of unviable businesses by absurd measures like GCS-debtor.

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