Sale of a company, that is under the liquidation process, as a ‘going concern’ has several advantages, but is subject to the will of the liquidator
As per the latest IBBI newsletter, six large companies have been sold as a going concern under the liquidation process until June 2021.
By Charanya Lakshmikumaran
The IBC contemplates two forms of resolution of a stressed company: either a successful resolution plan, by which the company continues to exist as a going concern under a new management, or liquidation, by which the company usually comes to an end and its assets are sold in part or whole. The NCLAT, in M/s. Mohan Gems & Jewels, considered that IBC’s larger objective was that a stressed company should be saved and continued as a going concern to the extent possible. The NCLAT therefore allowed the sale of a company as a ‘going concern’ even under liquidation proceedings, after attempts for a successful resolution failed.
This challenges the concept of ‘liquidation’ which usually follows dissolution and corporate death of a stressed company. A liquidator, thus, typically liquidates and disposes the assets of the company. Unlike a Resolution Professional’s duty to keep the stressed company as a going concern (to obtain a successful resolution), a liquidator does not have any duty to keep the company as a going concern. The liquidator is required to run the business only to the extent required for beneficial liquidation and is under no compulsion to continue the company as a going concern. An order for liquidation purports to discharging the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is voluntarily continued during the liquidation process by the liquidator.
There has however been an increasing trend in companies being kept alive by liquidators voluntarily as a going concern, to keep open the possibility of their sale as a live entity during liquidation, as opposed to a sale of assets in part or whole followed by dissolution. Supporting this trend, the IBBI specifically amended the liquidation regulations in 2018, providing for the option of a going concern sale even during liquidation.
Companies may end up in liquidation due to the lack of a suitable resolution plan or non-approval of a resolution plan by the CoC or expiry of the time-limit for the CIRP or similar reasons. Liquidation for such companies may be premature and result in avoidable loss of going concern value, employment, and revenue to the government—and cause critical disruption for creditors. While a going concern sale usually ensures continuity of business and workforce, it also avoids goodwill loss and loss of brand value. The option of a going-concern-sale during liquidation therefore has several advantages, depending on the nature of the business of the company and its importance.
However, one anomaly is that it remains entirely hinged to the will of a liquidator on continuing the business of the company as a going concern while having no statutory duty to do so. The liquidator may even be taking a risk by continuing the company and incurring costs that adversely impact creditors’ claims. The CoC has been given the power to ‘recommend’ a going concern sale while passing a resolution for liquidation upon the failure of insolvency resolution. A committee of stakeholders similarly advises a liquidator in liquidation proceedings. These recommendations, however, do not bind the liquidator, who will have to balance interests of stakeholders on his own.
The Standing Committee on Finance, in its recent report on IBC Implementation, also noted the anomaly that the Code necessarily requires dissolution of company in liquidation and recommended amendments allowing for a going-concern-sale. In addition to this, there is no mechanism in place to allow the liquidator to appoint new board of directors or issue fresh equity to the liquidation-purchaser. Another issue which remains nebulous is the extent of a going concern sale, i.e., the exact scope of inclusions in this kind of a sale—whether the contractual relationships of the company will necessarily get transferred/assigned to the liquidation-purchaser given the change in management/shareholding of the corporate debtor, or can these relationships be terminated for convenience by either party with or without damages. These issues have to be ironed out on a case-to-case basis.
As per the latest IBBI newsletter, six large companies have been sold as a going concern under the liquidation process until June 2021. These companies had a combined debt amounting to `4,325.16 crore. While the liquidators in these cases only realised `336.76 crore, these companies avoided dissolution. Anomalies certainly need to be plugged to allow for such forms of liquidation; yet, it is a welcome sign to see the NCLAT, IBBI and stakeholders choosing to keep companies alive rather than see them dissolved.
The author is Partner, Lakshmikumaran Sridharan Attorneys
Co- authored by Puneeth Ganapathy & Ishita Mathur, both principal associates, Lakshmikumaran Sridharan Attorneys
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