Sale as a Going Concern under the Indian Insolvency Regime: An Illustrative Analysis of its Significance

Introduction

The Insolvency and Bankruptcy Code, 2016[1] [hereinafter ‘IBC’] was enacted with the purpose of providing proper mechanisms to resolve the problems that arise out of corporations that face insolvency, amongst other things. The resolution mechanism is the most fundamental and well-known mechanism envisaged by the code.

Formally known as the Corporate Insolvency Resolution Process [‘CIRP’], this process involves methodologies such as resolution and liquidation of the corporate debtor [the corporation(s) that have become insolvent]. The concept of sale as a going concern bears substantial significance with respect to the insolvency process. As the name itself suggests, a sale as a going concern implies a situation where the assets and liabilities of the corporate debtor are sold as a whole by the liquidator.

An important characteristic of sale as a going concern is that the corporation does not lose its existence while undergoing the insolvency process. Therefore, in a layman’s sense, a sale as a going concern can be understood as a sale of the whole business of the company which undergoes the insolvency process [more specifically, liquidation].

In this article, the author shall thoroughly discuss the background and overview of the concept of Sale as a Going Concern. Furthermore, the article will also delve into the significant features and advantages of a sale as a Going Concern, followed by a perusal of the relevant judicial pronouncements. Finally, it will conclude by highlighting some observations and illustrations of the author.

Sale as a Going Concern: An Overview

The concept of a sale as a going concern was introduced in the year 2018. More specifically, the amendment specified a substitution of Regulation 32 of the IBBI Regulations:

“32. Sale of Assets, etc.

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:

 Provided that where an asset is subject to a security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate”.

It is pertinent to contextualize the term ‘Sale as a Going Concern’ [hereinafter ‘GCS’] in order to fully understand its meaning and relevance in a holistic manner. Under this process, the entity which undergoes liquidation i.e. the Corporate Debtor is not deprived of its existence. The corporate debtor maintains its state of functionality.[2]

More specifically, the Corporate Debtor is able to function in the same manner as it did before the initiation of the CIRP. However, it shall also be noted in this scenario that the affairs of the Corporate Debtor are subject to the limitations imposed by the IBC itself.[3] The aspect of ‘assets’ becomes relevant in this context since the ‘sale’ under GCS is of these ‘assets’ itself. There are no restrictions specified on the nature of assets. They might be tangible, intangible, or fixed.

The nature of these assets can also be taken into consideration while assessing the problem from a need-based perspective. The Insolvency and Bankruptcy Board of India’s [IBBI] discussion paper on the topic addresses the aspect of assets under a GCS as that which “is needed to continue to operate independently a business activity which may be whole or a part of the business of the corporate debtor without values being assigned to the individual asset or resource”.[4]

Therefore, under a GCS, the corporate debtor is able to function normally, while at the same time, all of its assets and liabilities are sold to a buyer who refrains from disrupting its business. This is basically providing a chance for the corporate debtor to function, in spite of its state of insolvency.

It is a good mechanism of resolution as it indeed “resolves” the problem of insolvency and non-repayment of dues while at the same time balancing the interests of the relevant stakeholders. The next section indulges into a thorough analysis of other prominent advantages of a GCS.

Why should a GCS be considered? : Implications and Advantages

Prior to a discussion about the pertinent advantages of a GCS, it is essential to fully understand its relevant implications. Going concern, in its essence, is a concept which has arisen out of accounting.[5] The application of this concept to the business of a corporation, therefore, has to be in a holistic manner.

The independence of the business being transferred is one of the crucial aspects which has to be kept in mind while discussing GCS as a concept. Interestingly, while one of the pillars of the process of GCS involves retaining the legal existence and independence of the business being transferred; at the same time, the entire substance of the company goes into the hands of another entity, i.e. the buyer.

On this point, it has been noted in a prominent judicial observation that a going concern will comprise, in a holistic manner, of the immovable property, employees, goodwill, transfers etc.[6]

The process of GCS has certain characteristics which are advantageous to the resolution process as a whole. The Statement of Object and Reasons of the IBC states the following:

“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”.[7]

It can be gathered from this statement that a time-bound resolution and maximisation of value are some of the major objectives of the IBC. It is in this context that the advantages of GCS can be considered.

The assets of the corporate debtor might have a certain value in isolation. However, it is equally true that effecting a sale of these assets in a one-by-one manner is less commercially viable as compared to a sale of the assets as a whole.

Therefore, GCS results in a more fiscally beneficial transaction for the concerned stakeholders and shall be considered over a piecemeal sale of the assets in isolation. Furthermore, a piecemeal sale of the assets of the corporate debtor would mean that ultimately, the corporation is left with no assets, and would most likely be shut down.

However, a GCS ensures that the corporate debtor is able to function and carry out its business normally. This also implies that the workmen and employees of the corporate debtor do not lose their jobs, which is an important consideration as far as the aspect of balancing stakeholders’ interests is concerned.

A GCS also helps in the timely completion of the resolution process, which is one of the important considerations under the Indian insolvency regime. When the business of the corporate debtor is sold as a going concern, it prevents the time-consuming process of selling one asset at a time to multiple buyers; thereby reducing the complexity and tediousness of the process.

These advantages have found great weight in some judicial opinions. In a noted pronouncement, it was observed that: “If there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible”.[8]

Judicial Observations

The concept of GCS has received significant attention in various judicial pronouncements. Most of them involve a specification of the meaning of a GCS. In a noted observation, certain essential features of a GCS were laid down. These included the “capability of the business to be run independently”, “for a foreseeable future”.[9]

Another important characteristic of a GCS is that along with the assets of the Corporate Debtor, the liabilities are transferred as well.[10] Apart from these nuances, it has also been emphasized that the corporate debtor shall be in operation[11] at the time of a GCS. The process of GCS has been considered to be equitable and overall beneficial to the resolution process.[12]

Observations and Conclusion

The aspect of GCS can become relevant in certain situations. For instance, if the corporate debtor owns some asset (e.g. land), that has a crucial bearing on the sustenance of its business, it might be necessary for maintaining its status as a going concern.

Therefore, the relevant aspects of a GCS shall be carefully considered before disposing of such an asset. It can be concluded that with the introduction of the concept of GCS, the insolvency regime in India has become more nuanced. When properly implemented, it can play a positive role in satisfying the fundamental objectives of the resolution process.

End Notes

[1] The Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India) [IBC].

[2] Ministry of Corporate Affairs, Government of India, Report of the Insolvency Law Committee, March 2018 (Oct. 2, 2022, 11:25 PM) https://ibbi.gov.in/ILRReport2603_03042018.pdf.

[3] Ibid.

[4] Insolvency and Bankruptcy Board of India, Discussion Paper on Corporate Liquidation Process, (Oct. 2, 2022, 11:30 PM) https://ibbi.gov.in/Agenda%2011_27_03_19.pdf ; In the matter of M/S Gujarat NRE Coke Limited, C.P. (I.B. No. 182/KB/2017).

[5] In the matter of M/s Rajashri Foods et. Ltd. Advance Ruling No, KAR ADRG 06 / 2018.

[6] Ibid.

[7] IBC, Statement of Objects and Reasons.

[8] Arcelor Mittal India Private Limited v. Satish Kumar Gupta & Ors, decided on October 4, 2018.

[9] In re IndorRama Textile Limited (2013) 4 Comp LJ 141(Del).

[10] Allahabad Bank v ARC Holding AIR 2000 SC 3098.

[11] Jayaprakash Shyamsundar Mandare v. Laxminarayan Murlidhar AIR 1983 Bom 364; IAE International Aero Engines AG and Ors. vs. United Breweries (Holdings) Limited and Ors ILR 2017 KARNATAKA 2225.

[12] Sale Of Company As A Going Concern – Second Chance At Preserving The Legal Existence Of The Company (Mondaq) https://www.mondaq.com/india/insolvencybankruptcy/696100/sale-of-company-as-a-going-concern–second-chance-at-preserving-the-legal-existence-of-the-company.

This article has been authored by Avikalp Mishra, a student at National Law Institute University, Bhopal.