Management of Operations of Corporate Debtor as a Going Concern – Section 20 IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) provides a comprehensive framework to resolve the insolvency of companies in a time-bound manner. One of its major objectives is to ensure that the assets and business value of the corporate debtor are preserved during the Corporate Insolvency Resolution Process (CIRP). To achieve this, Section 20 of the Code lays down the duty of the Interim Resolution Professional (IRP) to manage the operations of the corporate debtor as a “going concern.”

This provision ensures that even during insolvency proceedings, the company continues to operate, employees remain engaged, and the value of the enterprise is not eroded due to inactivity or mismanagement. Managing the corporate debtor as a going concern thus forms a crucial foundation of the insolvency resolution process.

Meaning of Managing as a Going Concern

Managing a corporate debtor as a going concern means that the business of the debtor continues to operate during the insolvency proceedings, instead of being shut down. The objective is to keep the company functional so that it can either be revived through a resolution plan or sold as a running business, thereby generating maximum value for stakeholders.

The responsibility for managing the company as a going concern lies with the Interim Resolution Professional (IRP) or later, with the Resolution Professional (RP). They are empowered to take over control of the management and operations of the corporate debtor from its existing management once the CIRP begins.

Objective of Managing a Corporate Debtor as a Going Concern

Section 20 of the IBC serves several key purposes that align with the overall goals of the Code.

• Preserving Value: The main aim is to protect the value of the corporate debtor’s assets and business. If operations are stopped, the value of assets may decline rapidly due to loss of customers, contracts, and goodwill.
  
• Avoiding Liquidation: By keeping the company running, there is a higher possibility of finding a resolution applicant who can revive the business. A revival or sale as a running business usually provides a better outcome than liquidation.
  
• Protecting Stakeholders: Managing the company as a going concern safeguards the interests of creditors, employees, shareholders, and other stakeholders by ensuring continuity.
  
• Maintaining Employment: Employees can continue working, and their expertise remains available to the resolution professional, contributing to stability during the process.

Statutory Provision under Section 20 IBC

Section 20 of the Insolvency and Bankruptcy Code reads as follows:

(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

(2) For the purposes of sub-section (1), the interim resolution professional shall have the authority—

(a) to appoint accountants, legal or other professionals as may be necessary;

(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;

(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property:

Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.

(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and

(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.

Key Responsibilities of the Interim Resolution Professional

The IRP plays a central role in maintaining the operations of the corporate debtor as a going concern. Some of the major responsibilities include:

Taking Control and Custody of Management

Once appointed, the IRP takes control over the management of the corporate debtor. The powers of the board of directors are suspended, and the IRP assumes authority over all operations, finances, and decision-making.

Protection and Preservation of Assets

The IRP is mandated to make every effort to safeguard and maintain the value of the corporate debtor’s assets. This includes protecting physical, financial, and intellectual property assets from loss, misuse, or deterioration.

Appointment of Professionals

Under Section 20(2)(a), the IRP has the power to appoint accountants, legal advisors, valuers, and other professionals. These experts assist the IRP in managing the affairs, verifying claims, preparing financial statements, and ensuring compliance with the law.

Managing Contracts

The IRP can enter into new contracts or modify existing ones that were signed before the CIRP started. This authority ensures that essential business relationships and supply chains continue without interruption.

Raising Interim Finance

The IRP may raise interim finance to ensure the smooth functioning of the business. However, Section 20(2)(c) provides a safeguard—no security interest can be created over encumbered property without the prior consent of the secured creditors.
The proviso further clarifies that such consent is not required if the value of the property used is at least double the debt amount.

Issuing Instructions to Personnel

The IRP has the power to direct the employees and key managerial personnel of the corporate debtor. This authority ensures that the workforce continues to perform duties required for maintaining normal business operations.

Ensuring Continuity

The IRP is expected to take all necessary measures—administrative, financial, or operational—to maintain business continuity. This may include negotiating with suppliers, maintaining utilities, and ensuring compliance with laws.

Concept of Interim Finance

The Code recognises that a company undergoing insolvency might need financial support to continue operations. To address this, it allows the IRP/RP to raise interim finance—a short-term financial arrangement made during the CIRP.

As per Section 5(15) of the IBC, “interim finance” means any financial debt raised by the resolution professional during the insolvency resolution process period and such other debt as may be notified.

The Insolvency Resolution Process Costs (IRPC) include the amount of interim finance and the costs incurred in raising it. These costs are given priority in repayment during both the resolution and liquidation stages as per Section 53.

This priority treatment encourages lenders to provide funds to a financially distressed company without fear of losing their investment.

Importance of the Going Concern Principle

The concept of going concern is vital for ensuring the success of the insolvency process. Its importance can be understood through the following points:

• Maintaining Business Value: When the business continues, its brand, customer relationships, and goodwill remain intact, preserving its commercial worth.
• Better Realisation for Creditors: Selling a running business or restructuring it through a resolution plan fetches more value than selling individual assets in liquidation.
• Protecting Employment: Continued operations help retain jobs, contributing to social and economic stability.
• Encouraging Resolution Applicants: A functioning company is more attractive to potential resolution applicants, increasing the chances of revival.

In several judgments, courts have emphasised the importance of managing the corporate debtor as a going concern.

In Sunil Kumar Jain and others v. Sundaresh Bhatt and others, the Supreme Court held that for wages or salaries of workmen and employees during the CIRP to be treated as part of the CIRP costs, it must be shown that the Resolution Professional managed the corporate debtor as a going concern and that the concerned workmen or employees actually worked during that period.

This judgment underlines that continuing operations is not just a procedural formality but a substantive requirement that determines how costs and liabilities are treated under the Code.

Outcome of Managing as a Going Concern

The approach of managing the corporate debtor as a going concern can lead to two major outcomes:

Successful Resolution

If the company is maintained as a going concern, the Committee of Creditors (CoC) may receive viable resolution plans from prospective applicants. Once approved by the CoC and the Adjudicating Authority (NCLT), the corporate debtor can be revived, enabling continuity of business and repayment to creditors.

Sale as a Going Concern in Liquidation

If no resolution plan is approved and the company enters liquidation, the liquidator may still sell the corporate debtor as a going concern under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016.
In such a sale, the entire business—including assets, employees, and licences—may be transferred to a new buyer, maximising value realisation for stakeholders.

Challenges Faced by IRP/RP in Managing as a Going Concern

While the Code grants wide powers to the IRP/RP, there are several practical challenges:

• Shortage of Funds: Raising interim finance is often difficult as lenders are reluctant to fund an insolvent company.
• Non-cooperation by Management or Employees: The suspended management may not fully cooperate with the IRP, making control and decision-making difficult.
• Operational Disruptions: Suppliers and vendors may withdraw support, affecting the supply chain.
• Legal and Regulatory Hurdles: Obtaining statutory approvals and maintaining compliance during CIRP can be complex.

Despite these challenges, effective management by the IRP/RP ensures that the objectives of Section 20 are fulfilled.

Conclusion

Section 20 of the Insolvency and Bankruptcy Code, 2016, plays a pivotal role in the effective management of insolvency proceedings. By empowering the Interim Resolution Professional to manage the corporate debtor as a going concern, it ensures that the company’s business value is protected and that stakeholders have the best chance of recovery.

Through provisions relating to asset protection, professional appointments, interim finance, and operational control, the section creates a structured mechanism for maintaining business continuity. Judicial interpretations have further reinforced the necessity of genuine and proactive management during CIRP.