‘Going Concern' Sale during Liquidation: The Best of the Bunch?
Updated: Jun 3, 2022
Partner at Saraf and Partners
Final Year Student at National Law University Odisha
Liquidators under the insolvency code can sell corporate debtor’s assets in liquidation by opting for one or a combination of options provided under liquidation regulations. One such option is the sale of a corporate debtor or business of a corporate debtor as a going concern. This option has gained prominence in the recent past. However, neither the Code nor regulations define ‘going concern’. The ‘going concern’ was defined and discussed in the committee reports but was never tested before the tribunals or courts. But, it is now being used, considered, and discussed at length by them. This article discusses the concept of going concern and its relevance in the liquidation process.
The sale of a corporate debtor as ‘Going Concern’ implies that the company would not be dissolved. The procedure of a Going Concern sale is such that during the corporate insolvency resolution, the creditors are required to identify the group of assets and liabilities. The same is done for the liquidator to consider if the corporate debtor enters into liquidation. If the creditors fail to identify, the liquidator must identify. Also, the liquidator must first attempt the sale of the corporate debtor as a going concern within 90 days of the liquidation commencement date.
Simply speaking, sale as a going concern means selling on “as, is where is basis” that allows the Liquidator, including all assets, liabilities, and properties, to sell the business of the company or the corporate debtor under Liquidation. This also helps in saving jobs as existing employees get transferred. This question was recently scrutinized by the appellate tribunal in the M/s. Visisth Services Limited v. SV Ramani order. The Tribunal confirmed that the ‘Going Concern’ sale means the sale of all such assets and liabilities which constitute an integral business. This Order raised concerns to the bidders as the liabilities were being transferred.
Does going concern means ‘sale of the company’ with settlement of liabilities and fresh start? Like the clean slate principle in the resolution process where all the stakeholders are paid as per the Code and all past liabilities will be wiped off. However, there exists no such provision in the Code. The recent orders from the tribunals indicate that clean slate principle will extend to ‘going concern’ sale under liquidation. It is worth examining these orders.
In Dekon Enterprises order, Hon’ble NCLT Kolkata, allowed certain reliefs and concessions to the successful bidder including relief on past liabilities. In the matter of KTC Foods Private Limited, Hon’ble NCLAT has extended the ‘clean slate’ principle to going concern sale under liquidation. This order fundamentally alters bidders view of ongoing concern sales and addresses SV Ramani order apprehensions. Consequently, the Hon’ble tribunals have remained supportive to the bidders in granting ‘clean slate’ shield or specific reliefs and concessions to the successful bidders.
To conclude, the concept of going concern justifies the objective of liquidation. The going concern sale under liquidation focuses on selling off the assets for maximum value realization and not necessarily killing the entity. Though the statute might provide for liquidation of the entity as the last resort, the sale as going concern relieves the harms of that last resort. With recent clarifications on ‘clean slate’ principle extending to the going concern sale under liquidation, there will be significant interest from the bidders towards ‘going concern’ sale.