Sale of Corporate Debtor as a Going Concern

The Insolvency and Bankruptcy Code, 2016 (IBC) aims to maximise the value of assets and ensure time-bound resolution of distressed companies. One of the major developments in the liquidation framework under the IBC has been the introduction of the concept of “sale of corporate debtor as a going concern”.

This approach allows the entire business of a corporate debtor to be sold as a functional unit rather than selling its assets separately. It helps in preserving the company’s operational structure, retaining employees, protecting goodwill, and maintaining business continuity.

Meaning of “Going Concern”

The term “going concern” generally refers to a business that continues to operate and is capable of generating revenue. When a corporate debtor is sold as a going concern, it means the entire business (assets, liabilities, employees, and operations) is transferred to the buyer.

Such a sale usually happens on an “as is, where is” basis, meaning the buyer purchases the business in its existing state without any major changes. Unlike a simple asset sale, a going concern sale ensures that the business remains alive and operational even after the change in ownership.

Legal Framework on Sale of Corporate Debtor as a Going Concern 

The legal framework for the sale of a corporate debtor as a going concern is provided under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, particularly in Regulation 32 and 32A.

Regulation 32: Modes of Sale

Regulation 32 outlines the different modes through which the liquidator may sell the assets of a corporate debtor. The liquidator may sell:

The liquidator must consider which mode of sale would yield maximum value for stakeholders. If a sale as a going concern is possible, it is preferred over the sale of individual assets.

Regulation 32A: Sale of Corporate Debtor as a Going Concern

Regulation 32A was introduced to provide clarity on how and when the liquidator may sell the corporate debtor as a going concern. It provides the following framework:

1. Recommendation by the Committee of Creditors (CoC) or Liquidator’s Opinion – If the CoC (during the resolution process) recommends a sale under clause (e) or (f) of Regulation 32, or if the liquidator believes that such a sale will maximise value, the liquidator must first attempt a sale as a going concern.
   
2. Identification of Assets and Liabilities – The group of assets and liabilities to be sold is identified by the CoC under Regulation 39C of the Insolvency Resolution Process Regulations, 2016. These are to be sold as a single unit.
   
3. Timeline for Sale – If the liquidator is unable to sell the corporate debtor as a going concern within 90 days from the liquidation commencement date, the assets can then be sold through other methods under Regulation 32 (standalone, slump sale, etc.).
   
4. Consultation Committee – During liquidation, a Stakeholders’ Consultation Committee (SCC) assists the liquidator in deciding whether to sell the company as a going concern.

Purpose and Significance of the Provision

The inclusion of Regulation 32A represents a shift in the liquidation philosophy from mere asset recovery to value preservation. Its objectives include:

• Maximisation of value of the corporate debtor’s assets.
• Preservation of employment, since the workforce remains intact.
• Continuation of business operations, avoiding a complete shutdown.
• Retention of goodwill and brand value of the company.
• Higher recovery for creditors, as the business as a whole often fetches better value than the sum of its parts.

This approach also reduces the socio-economic impact of liquidation, as jobs, business relationships, and supplier contracts may continue even under new ownership.

Process of Sale as a Going Concern

The process involves the following steps:

1. Decision by Liquidator or CoC – Based on recommendations, the liquidator identifies whether the sale as a going concern would yield higher value.
2. Valuation – Assets and liabilities of the corporate debtor are valued collectively to determine the reserve price.
3. Public Announcement – The liquidator makes a public announcement inviting bids for the sale as a going concern.
4. Due Diligence and Bidding – Interested buyers conduct due diligence and submit bids within the prescribed timeline.
5. E-Auction – The sale is conducted through an e-auction process as per the guidelines of the IBBI.
6. Transfer to Buyer – On completion, the ownership of the corporate debtor or its business is transferred to the successful bidder, along with identified assets and liabilities.

Sale Consideration and Distribution

After the sale is completed, the sale proceeds are distributed by the liquidator in accordance with Section 53 of the IBC, which lays down the waterfall mechanism for payment of dues.

The priority order is as follows:

1. Insolvency resolution process and liquidation costs
2. Workmen’s dues and secured creditors
3. Wages and dues to employees
4. Unsecured financial creditors
5. Government dues and remaining secured creditors
6. Other debts and shareholders

Thus, the money received from the sale is used to discharge liabilities in the above order.

Landmark Judgments on Sale of Corporate Debtor as a Going Concern

Several judicial pronouncements have clarified the scope and practical aspects of selling a corporate debtor as a going concern.

Dr. Devaiah Pagidipati v. Southern Online Bio Technologies Limited

The National Company Law Tribunal (NCLT), Hyderabad held that the sale of assets of a corporate debtor as a going concern during liquidation does not require prior approval from the NCLT. However, it observed that certain orders may be necessary to claim tax or contractual reliefs that enable smooth continuation of the business.

The tribunal also noted that merely purchasing a business as a going concern without such reliefs might render the purchase ineffective.

M/s. Visisth Services Limited v. S. V. Ramani & Ors.

The National Company Law Appellate Tribunal (NCLAT) clarified that a sale as a going concern means the sale of both assets and liabilities of the corporate debtor. It also clarified that the sale can be made even without separate identification of assets and liabilities, and the buyer assumes ownership of the entire entity as a whole.

Bank of Baroda v. Topworth Pipes & Tubes Pvt. Ltd.

The NCLT, Mumbai Bench held that the successful bidder in a going concern sale cannot be held liable for past liabilities of the corporate debtor incurred before the sale. This includes tax dues, penalties, or ongoing litigations. The purpose of the going concern sale is to ensure business continuity without burdening the buyer with historical liabilities.

Key Distinctions: Sale as a Going Concern vs Sale of Assets

Challenges in Sale as a Going Concern

Despite its benefits, the process faces certain practical challenges:

• Lack of clarity on treatment of liabilities: The extent to which liabilities are transferred to the buyer is often disputed.
• Regulatory approvals: Approvals from tax, labour, and environmental authorities may be required for business transfer.
• Pending litigations: Ongoing legal cases against the corporate debtor complicate the transaction.
• Limited buyer interest: Buyers may be hesitant to take over a distressed entity due to risk of hidden liabilities.
• Valuation difficulties: Determining the fair value of a going concern, including goodwill and brand, can be complex.

Benefits of Going Concern Sale

Despite challenges, the advantages of this method are significant:

1. Preserves employment: Workers retain their jobs as the business continues operations.
2. Maximises realisation: The corporate debtor fetches higher value when sold as a functioning unit.
3. Protects creditors’ interests: Creditors receive better recovery as compared to asset-wise liquidation.
4. Retains brand and customer goodwill: The enterprise’s reputation remains intact.
5. Ensures economic stability: Avoids sudden closure of industries and associated economic consequences.

Role of Liquidator and Stakeholders’ Consultation Committee

The liquidator plays a central role in assessing the feasibility of selling the corporate debtor as a going concern. The Stakeholders’ Consultation Committee (SCC), constituted within 60 days of liquidation commencement, assists the liquidator in this decision.

While the advice of the SCC is not binding, it ensures transparency and participation of all stakeholders (including secured creditors, government authorities, and operational creditors) in the decision-making process.

Conclusion

The concept of sale of corporate debtor as a going concern represents a progressive reform under the Insolvency and Bankruptcy Code. It aligns with the Code’s objective of maximising value and ensuring balance between liquidation and revival.

By allowing the sale of the entire business as a functional entity, the regulation provides a lifeline to companies that would otherwise face complete closure. However, consistent judicial interpretation, administrative clarity, and practical guidelines are still needed to address issues relating to liabilities, taxation, and employee continuity.