Umang Mehta

November 13, 2019

Beneficial Liquidation: Sale as a Going Concern

On 22nd October 2018, the Insolvency and Bankruptcy Board of India (“IBBI”) notified amendments to the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Process Regulations”)[1], substituting the then-existing Regulation 32 of the Liquidation Process Regulations. After the amendment, Reg. 32 stood amended as under:

“32.Manner of sale. – 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…

Significantly, the Liquidator has now been given the power to sell either the Corporate Debtor as a going concern or to sell its business as a going concern. Pertinently, clause (e) was formerly inserted as clause (c) vide the Amendment of 27th March 2018,[2]creating a new dimension in the power of a Liquidator under clause (e) of S. 35(1) of the Insolvency and Bankruptcy Code, 2016 for beneficial liquidation of the Corporate Debtor.

            The concept of sale of corporate debtor as a going concern is in essence a completely different approach towards the idea of liquidation itself. The general perception has always been that while a company is still a going concern during its insolvency, it ceases to be so the moment it goes into liquidation. The concept of sale as a going concern defies this perception, and allows for a company to retain its going concern status even during liquidation.

Historical background

            While the concept of sale of a company as a going concern during liquidation is a new concept, the idea of sale of a business as a going concern per se has existed for some time. In Re. Rajashri Foods Pvt. Ltd.,[3]“transfer of a going concern” has been defined as “transfer of a running business which is capable of being carried on by the purchaser as an independent business.” The transfer of business as a whole must be a comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. According to the Delhi High Court in M/s. Indo Rama Textile Ltd.,[4]it constitutes a “business activity capable of being run independently for a foreseeable future.” It has been considered as a necessary condition of a demerger of a company with another company under clause (vi) of S. 2(19AA) of the Income Tax Act, 1961.

The concept of going concern liquidation sale, emerged as a result of judicial decisions passed by Hon’ble High Courts in winding upcases. These orders were essentially motivated by a humanitarian approach to the plight of workmen and employees. However, the complications involved in such process were not unnoticed. As held by the Supreme Court in Allahabad Bank v. Arc Holding Ltd.& Ors.,[5] the possibility of a “going concern” liquidation sale during winding up was only to be granted in exceptional cases, and that too only within a strict time-frame, failing which the conventional liquidation sale would be imminent.

            The proposal to permit a going concern sale in liquidation was for the first time mooted by the Eradi Committee of 2000,[6] when it suggested the creation of a National Tribunal to adjudicate matters pertaining to insolvency and winding-up, to have “the power to direct the sale of business of the company as a going concern or at its discretion to sell its assets in a piece-meal manner.”The Eradi Committee’s recommendation was incorporated by the insertion of clause (ca) in S. 457(1) of the Companies Act, 1956. However, the amendment was not notified and the old Act came to be superseded by the Companies Act, 2013. The new Act contained a corresponding provision in S. 282(2), but even the same was not enforced and was in turn superseded by the IBC, which did not contain any similar provision. While S. 35(1)(e) allowed for the liquidator to carry on the business of the company to the extent required for its beneficial liquidation, the same had been interpreted to mean only such activities as are conducive to the immediate objective of liquidation.[7]

            With the advent of the IBC, the possibility of a going-concern liquidation sale came to be recognized when the National Company Law Tribunal, Kolkata Bench in Re. Gujarat NRE Coke Ltd.,[8]relying on the Judgment of the Supreme Court in Allahabad Bank (supra), directed the “going concern” liquidation sale of the Corporate Debtor, to be completed within three months, failing which the liquidation was to proceed in the conventional manner. It was in the aftermath of the Order in Gujarat NRE Coke (supra) that the IBBI, vide Notification dated 27th March 2018, inserted clause (c) in Reg. 32 of the Liquidation Process Regulations, empowering the Liquidator to sell the corporate debtor as a going concern.[9] This power was further expanded to include an option to sell the business of the corporate debtor as a going concern vide the Notification dated 22nd October 2018.[10]

“Going concern” Liquidation Sale Procedure in India

            In India, under the amended Reg. 32 of the Liquidation Process Regulations, the Liquidator has two powers whereby he can affect a going concern sale in relation to the corporate debtor:

  1. Sale of the corporate debtor on a going concern [Reg. 32(e)]: Essentially, this means that the equity shareholding of the corporatedebtor gets transferred, and the acquirer takes over the undertaking of the corporate debtor, withall the licenses, assets, entitlements, etc.Thus, effectively, the corporate debtor survives, as the ownership of the corporate debtor as a whole, along withits assets and its legal entity is moved by the liquidator to the transferee.While in a conventional liquidation, the liquidation estate consists of the assets of the corporate debtor only, which may sold in piece-meal or in a slump sale, here the corporate debtor is the entire liquidation estate, itself to be sold as a whole. In other words, the liquidation process does not end with dissolution of the corporate debtor, and the company is revived with new ownership and new management.
  2. Sale of the business of the corporate debtor as a going concern [Reg. 32(f)]: Inserted by the Amending Notification of 22nd October 2018,[11] this is in the nature of “second-best option” where the going concern sale of the company itself is not possible. This may happen in a case where the proposed transferee is not interested in continuing with the whole legal entity along with all of its business, or only wishes to buy particular business(es) of the corporate debtor. In such a case, only the particular business(es) of the corporate debtor (along with the “business assets”) will be sold, while the other assets of the corporate debtor will then proceed to conventional liquidation (and subsequent dissolution).

Corporate Insolvency Resolution Process and Going concern Liquidation Sale

            A major question that must be addressed in relation to a going concern liquidation sale is its similarity to a corporate debtor being taken over under the Corporate Insolvency Resolution Process (“CIRP”). It may be argued that the two are similar as in both the cases the company’s legal entity gets preserved. However, the essential difference in both the mechanisms is the objective thereof. CIRP is conducted with the prime objective of reviving and saving the corporate debtor, by either paying off or satisfying the creditors. In contrast, the objective of a going concern liquidation sale continues to be paying off the creditors of the company and to ensure maximum value for all creditors and/or contributories out of the sale; a going concern sale will only be permissible if the maximum possible value can be provided to the creditors, or else a conventional liquidation is inevitable. The intention behind the amendment is therefore to give a second chance to the corporate debtor for its revival, even if the CIRP has failed to yield resolution,[12] as far as the same is possible while ensuring that the creditors of the company are paid off.

Issues arising in a going concern liquidation sale

            The introduction of the option of a going concern liquidation sale is no doubt a positive move taken to give a second chance to a corporate debtor to survive, to protect the workmen and employees and at the same time provide maximum value to the creditors out of the liquidation process. Having said that, there are loose ends which need to be addressed to ensure effective implementation. Issues that are likely to arise in a going concern liquidation sale include:

  1. Need for clarity on interpretation of a “going concern” sale: While the definition of a going concern sale has been judicially interpreted in Indian and foreign cases, it would be expedient that the same may be defined in the IBC itself, incorporating the  to place the same beyond doubt and save a lot of confusion. As suggested by one author, it can be defined as a sale of the assets of the Corporate Debtor, where, pursuant to order of the Adjudicating Authority or otherwise, the legal personality of the Corporate Debtor is retained and is transferred to the acquirer, or it is otherwise provided in the terms of sale that all the contractual rights of the Corporate Debtor, including any rights or benefit under contract, license, concession, entitlement, privilege, lease, etc., are transferred to the acquirer.”[13]
  2. Exceptional cases only: A major concern raised in relation to the concept of going concern liquidation sale is that it may effectively make the CIRP futile. Where the CIRP has failed to revive the company in the 270-day time period, unnecessarily incurring more liabilities and prolonging the agony of liquidation by keeping the company running as a going concern is not advisable. Having said that, if there is a reasonable chance of reviving the company even at the last stage, it should be taken up as it would be in the interest of all stakeholders, including the workmen, the creditors and the contributories. Accordingly, in line with the dictum laid down by the Supreme Court in Allahabad Bank (supra), liquidation as a going concern should only be permitted in exceptional circumstances within a strict time-frame.
  3. Time-frame: Unlike a CIRP which is strictly bound by a time limit of 180 days (or 270 days after taking the 90-day extension period into account), the liquidator has a greater flexibility for completing the liquidation process within two years. However, it cannot be reasonably expected that where the CIRP has already failed and the erstwhile resolution professional himself has taken over as the liquidator, he must continue to run the business of the corporate debtor as a going concern for another two years. As a result, it would be more expedient to strictly restrict the time-frame within which a going-concern liquidation sale must be effected; accordingly, the option for a going concern sale of the corporate debtor should be subject to a strict timeline laid down by the Adjudicating Authority (NCLT), failing which the liquidation will have to proceed in the conventional manner.
  4. Rights of secured creditor: In case of a conventional liquidation, a secured creditor has been given the right of election under Section 52 of the IBC to either enforce his security interest or to relinquish the same in favour of the liquidation estate. However, in case of a going concern sale it would become essential for the secured creditors to necessarily relinquish their charge on the assets to enable the asset to pass along with the corporate debtor to the transferee. Accordingly, it is suggested that Section 52 may be suitably amended to create an exception in case of a going concern sale.
  5. Extinguishment of liabilities: Needless to say, it needs to be clarified in the IBC that Section 54 of the Code relating to dissolution of the corporate debtor will not apply in case of the sale of the corporate debtor on a going concern basis, and rather a suitable provision may be made that after the sale of the corporate debtor, the Adjudicating Authority, on application of the liquidator, pass an order for extinguishment of liabilities of the corporate debtor. Though it appears to have been intended to make appropriate provision to this effect from the IBBI’s agenda note,[14] the same has still been left open ended as there is no express provision to that effect made in the IBC.


            As stated earlier, the “going concern” liquidation sale of the corporate debtor has been newly introduced under the IBC with the intention of trying to save the company as far as possible, even in circumstances where the CIRP has failed due to lapse of time or rejection of resolution plan. This intention is motivated by a humanitarian approach to ensure welfare of the workmen and employees. While the intention is laudable, we can notice that there are still issues that are likely to arise out of this move. It is necessary to reconcile the welfare of the workmen and the survival of the company with the interests of the creditors. Pertinently, such a major move has been made merely by amending the subordinate statutory instrument, without any supporting amendments made in the principle statute, leaving loopholes in implementation of this plan. The author submits that a going concern liquidation sale should be allowed only by direction of the Adjudicating Authority (on the application of the liquidator) and not at the individual discretion of the liquidator alone. Likewise, there must be some roadmap that must be submitted by such Liquidator option for beneficial Liquidation which upon satisfaction of the Adjudicating Authority can be approved.  Such process will ensure approval of Authority which would compensate lack of definite guidelines under the Act.

[1] Notification no. IBBI/2018-19/GN/REG037 dated 22nd October 2018

[2] Notification no. IBBI/2017-18/GN/REG028 dated 27th March 2018

[3] KAR ADRG 06/2018 dated 23rd April 2018 at Para 9

[4] 2012 SCC OnLine Del 3799 at Para 41

[5](2001) 1 SCC 736 at 741

[6] Para 7.5, Report of the High-Level Committee on Law relating to Insolvency and Winding-up of companies, 2000

[7] [Accessed on 19/07/2019]

[8]2018 SCC OnLine NCLT 4072

[9]Supra note 2

[10]Supra note 1

[11]Supra note 1

[12] [Accessed 19/07/2019]

[13] [Accessed on 19/07/2019]

[14]Supra note 13

The above article is written by our Partner Mr. Umang Mehta with assistance from our Articled Clerk Mr. Rishab Murli

Umang Mehta
Rishab Murli

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Naresh H. Chheda is Solicitor of the Bombay Incorporated Law Society having over ten years of experience in handling Commercial and Civil Litigation matters as well matters relating to real estate laws, pharma laws, and corporate laws.
Umang P. Mehta has done LL.M. in Intellectual Property Rights from Brunell University in London and has over five years experience in Commercial as well as Quasi-Criminal Litigation matters and real estate transactions.
Vikrant D. Shetty specializes in Maritime Law, General Commercial Litigation and Conveyancing and has advised and represented clients in infrastructure, shipping and commodities sectors. He was also a part-time professor at the Government Law College, Mumbai .

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