THEME • INSOLVENCY RESOLUTION & GOING CONCERN REVIVAL The Chartered Accountant • December 2022 • Vol. 71 • pp. 63–70 (Journal pp. 643–650)

Demystifying Going Concern Revival under Insolvency and Bankruptcy Code, 2016 - CIRP vs Liquidation Process

BM
CA. S. Badri Narayanan & CA. Ojass Modi
Authors are members of the Institute. They may be reached at badri2k3@gmail.com, caojasmodi@gmail.com and eboard@icai.in

Legislative Paradigm Shift & The BLRC Foundation

“Prior to enactment of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), there were multiple legislations operating parallelly, like Presidency-Towns Insolvency Act, 1909, The Provincial Insolvency Act 1920, The Recovery of Debts due to Banks and Financial Institutions and Bankruptcy Act, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 etc. with a similar objective of recovery of outstanding dues from the borrowers. However, to optimize and harmonize the insolvency resolution framework with the intent of revival and resolution of the debtor in a time bound manner, a committee was set up under the chairmanship of Dr. T.K. Viswanathan, namely the Bankruptcy Law Reforms Committee (“BLRC”), which submitted its Report (“BLRC Report”) in 2015 which is the foundation on which the Code was framed and legislated. The Code envisages a change from an existing ‘debtor in possession’ to a ‘creditor in control’ regime.”

1. Introduction, The Preamble Mandate & Defining “Going Concern”

The enactment of the Code has been considered as a paradigm shift in the insolvency resolution framework in India enabling the re-organization and consolidation of various ‘not so effective laws’ under the existing insolvency resolution framework and creating comprehensive legislation aimed at a time-bound resolution process under the supervision of Adjudicating Authority.

Apex Court in Swiss Ribbons Pvt. Ltd. & Another Vs. UoI & Other (2019):

“the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors.... maximization of the value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code..... What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern.”

Even though Going Concern is not defined in the Code, however, reference to the same was made in the Report of Insolvency Law Committee dated 26th March 2018 (“ILC Report”) which states that:

“the phrase ‘as a going concern’ implies that the corporate debtor would be functional as it would have been prior to initiation of CIRP, other than the restrictions put by the code”.

Further, the Discussion Paper on the Corporate Liquidation Process dated 27.04.2019 (“Discussion Paper”) stated that going concern means:

“all such assets and the liabilities, which constitute an integral business or the CD, that must be transferred together, and the consideration must be for the business or the CD. The buyer of the assets and liabilities should be able to run business without any disruption. The business or the CD must be a running one, and it must be transferred along with its employees. In case of sale of the CD as a going concern, the equity shareholding of the CD must be transferred, and the buyer must take over the CD, its business, affairs and operations, including its licenses, assets, entitlements, beneficial interests, trademarks, brand, government approvals, etc. via a going concern sale, the company survives and all the assets remain vested in the company, with the transfer of ownership from the Liquidator to the Acquirer.”

CIRP Architecture

  • Section 5(26): Defines resolution plan as “a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern..”.
  • Section 20: Mandates IRP/RP to protect/preserve CD property and manage operations as a going concern (raising interim finance, entering contracts, instructing personnel).
  • Regulation 39C: Mandates CoC to assess going concern sale under liquidation if CIRP fails.

Liquidation Architecture

  • Section 35(1)(e) & (n): Empowers liquidator to carry on CD business for beneficial liquidation and seek AA directions.
  • Regulation 32(e) & 32A: Enables liquidator to sell corporate debtor or business of corporate debtor as a going concern.
  • Origin in Gujarat NRE Coke: First judicial direction by NCLT (01.11.2018), subsequently codified by IBBI on 27.03.2018.

Empirical Revival Metrics (IBBI Published Data as on June 2022):

Approximately 517 Corporate Debtors have been revived pursuant to receipt of successful Resolution Plans under CIRP, and 18 Corporate Debtors have been revived under liquidation by way of sale as a going concern. These 18 Corporate Debtors helped in the recovery of INR 600.84 Crores during liquidation as against their liquidation value of INR 527.69 Crores (>113.8% realization).

2. Judicial Evolution: Topworth, Visisth Services & AAR AAR Technoplast

1. Gaurav Jain v. Sanjay Gupta (“Topworth Judgement”, NCLT Mumbai, 09.03.2021)

Hon’ble NCLT observed that the crux of the sale as ‘going concern’ is that the equity shareholding of the Corporate Debtor was extinguished and the acquirer would take over the undertaking (including business, assets, properties, licenses, and rights, excluding liabilities).

NCLT drew a sharp distinction: In normal parlance, a going concern sale is a transfer of assets along with liabilities. However, in liquidation, only assets are transferred and liabilities are settled strictly under Section 53 of the IBC. Hence, the applicant takes over assets without encumbrance or charge, free from creditor actions.

Four Inherent Advantages in Liquidation Going Concern Sale:
  1. The corporate debtor itself would be transferred.
  2. The equity shareholding would be transferred or extinguished and new shares would be issued.
  3. The purchaser would be expected to carry on the business of the corporate debtor after the sale is confirmed.
  4. The existing employees would have a chance to continue in their employment.

2. M/s. Visisth Services Limited v. SV Ramani (NCLAT, 11.01.2022)

Assessing whether sale of Corporate Debtor as a going concern includes liabilities, Hon’ble NCLAT referred to the Liquidation Regulations, ILC Report, and Discussion Paper, holding that: “Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities…… We conclude that Sale of a Company as a ‘Going Concern’ means sale of both assets and liabilities, if it is stated on ‘as is where is basis’”.

3. HSIIDC Vs. M/s. AAR AAR Technoplast Pvt. Ltd. (NCLAT, 06.09.2022)

Hon’ble NCLAT held that the principle of clean slate propounded for resolution applicants in CIRP applies equally to the purchaser in liquidation, as the scope and purpose of the Code is to be interpreted in its truest sense.

3. Statutory Disparities: Resolution under CIRP vs. Liquidation Going Concern Sale

Noticeable differences in the legal and regulatory framework available for Resolution under CIRP vis-à-vis a going concern sale under Liquidation across 8 key statutes:

S.No. Statute Resolution under CIRP Going Concern Sale under Liquidation
1 The Insolvency and Bankruptcy Code, 2016 Section 32A protects successful resolution applicant and property of CD from prosecution/liability for pre-CIRP offences pursuant to change in management.

Section 29A Exemption: Acquisition of NPA CD/subsidiary does not make applicant ineligible under Section 29A to participate in other CIRPs for 3 years from plan approval date. 		Similar relief has not been laid down in the Code for going concern sale under liquidation. Hence, risk of additional liability/prosecution on CD w.r.t past non-compliances/offences exists.

Such waiver is not available; bidders attract Section 29A ineligibility for other acquisitions if connected persons are classified as NPA.
2 CIRP Regulations & Liquidation Regulations Explanation to S.5(26) allows restructuring via merger, amalgamation, and demerger.

Regulation 37 (CIRP Regulations): Enables transfer of assets, modification of security interest, extension of maturity/terms of debt, delisting/cancellation of shares, issuing securities, and statutory approvals. 		Sale is generally conducted on “As is Where is” basis.

Liquidation Regulations do not explicitly allow submission of any plan/scheme for acquisition/bidding; terms of auction notice are binding as such.
3 Income Tax Act, 1961 While Section 79(1) bars carry-forward of business losses on shareholding change, Section 79(2) explicitly protects CD’s right to carry forward business losses where shareholding changes pursuant to an approved resolution plan under IBC. Benefit of carry forward of previous year losses under Section 79(2) is not available to a Corporate Debtor whose shareholding changes on account of going concern sale under liquidation.
4 SEBI (Delisting of Equity Shares) Regulations SEBI has relaxed delisting regulations for listed companies delisted pursuant to Section 31 approved plan, provided the plan lays down delisting terms or an exit opportunity to public shareholders at specified price. No such relaxation has been provided for listed companies sold on a going concern basis under liquidation.
5 SEBI (SAST) Regulations (Takeover Code) SEBI relaxed limits for substantial acquisition of shares/voting rights and granted blanket exemption from open offer obligations for acquisitions pursuant to approved resolution plan. No open offer relaxation is available for listed companies sold on a going concern basis under liquidation.
6 SEBI (ICDR) Regulations Relaxed applicability of provisions regarding preferential issue of shares (except lock-in restrictions) for listed companies acquired under approved resolution plan. No such relaxation is available for listed companies sold on a going concern basis under liquidation.
7 Securities Contracts (Regulation) Rules Relaxations provided to listed companies acquired under approved resolution plan to meet Minimum Public Shareholding (MPS) requirements over an extended glide path. No such relaxation is available for listed companies sold on a going concern basis under liquidation.
8 Companies Act, 2013 MCA clarified that approval of shareholders/members for actions requiring such approval under the Companies Act, 2013 shall be deemed granted upon plan approval by the Adjudicating Authority. No such blanket approval is available for companies sold on a going concern basis under liquidation.

4. Condition Precedents (CPs), Reliefs & Concessions: The Regulatory Vacuum

A resolution plan cannot be conditional as upheld by the Hon’ble Supreme Court in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Anr. (2021). However, RFRPs often allow Condition Precedents (CPs) necessary for implementation. Apart from CPs, applicants pray for extensive reliefs, concessions, and waivers.

Even though the commercial wisdom of CoC is sacrosanct, CoC cannot usurp statutory jurisdiction; applicants must pray before the Adjudicating Authority. In liquidation going concern auctions, successful bidders similarly pray for Part II benefits, creating a significant grey area and regulatory vacuum.

The Milestone Jurisprudence in Nitin Jain (Liquidator of PSL Ltd) vs Lucky Holdings Pvt Ltd (NCLT Ahmedabad, 2021)

Referencing orders in V.K Global Vs M/s SMAAT India, Dr. Devaiah Pagidipati Vs Southern Online Bio Technologies (SBTL), and Topworth, the Liquidator argued that being akin to a resolution plan, a going concern buyer is naturally entitled to consequential reliefs.

The Adjudicating Authority applied Supreme Court rulings in Arun Kumar Jagatramka (sale under resolution plan and liquidation Reg 32(e)/32(f) r.w. 32A share similar nature and object), Gujarat Urja Vikas Nigam, and Embassy Property Developments (Section 60(5) jurisdiction confined to issues central to insolvency/liquidation).

“there still remains a vacuum as neither the basic provisions under the Code nor regulations made so far prescribe as to what reliefs and concessions can be granted to a Successful Auction Bidder who takes over a Corporate Debtor as a going concern like a resolution applicant so as to enable such person to run the affairs of the Corporate Debtor as a going concern in a smooth manner without any hiccups.”

NCLT concluded that reliefs and concessions on parallel lines of an approved resolution plan can be granted subject to the sole condition that such reliefs/concessions must be central issues arising out of liquidation proceedings under Section 60(5)(c) of the IBC.

5. Catalog of Reliefs Granted: CIRP Resolution vs. Liquidation Going Concern Sale

Read with the landmark Supreme Court ruling in Ghanshyam Mishra and Sons v. Edelweiss Asset Reconstruction Co. (2021) and Embassy Judgement, the Adjudicating Authorities have granted extensive reliefs in both channels:

A. Reliefs Granted in CIRP Resolutions (Cura Healthcare, Sai Wardha Power, Shri Ram Cement, Essar Power MP, Omni Auto Tech, Jhabua Power):

Exhaustive list of 23 waivers, concessions, and statutory protections granted to Resolution Applicants:

1) Extinguishment of debts, liabilities & de-recognition in P&L Account.
2) Restatement of carrying value of assets & write-off non-realizable amounts to P&L.
3) Board dissolution, new directors, amending constitutional docs, share transfer at nil consideration.
4) Renegotiation / termination of third-party contracts.
5) Renewal / extension of licenses and government approvals.
6) Accrual of cash balance benefit up to plan approval by CoC.
7) Vesting of assets / properties with resolution applicant.
8) Discretion to utilize security premium account under Companies Act.
9) Waiving past non-compliances by Government Authorities.
10) Bar on ED/SFIO from attaching assets or continuing criminal proceedings against CD.
11) Regularization of Corporate Debtor’s bank accounts.
12) Termination of onerous related-party contracts.
13) Freezing of amounts payable to Customs for SEZ de-notification.
14) Termination of all captive PPAs without any financial liability.
15) Complete extinguishment of all claims, whether lodged in CIRP or not.
16) Power supply restoration subject to connection charge/security deposit.
17) Uninterrupted water supply and land use for 12 months.
18) MoEF waiver of past non-compliance and extension for emission norms.
19) Stamp duty and transaction tax exemptions under resolution plan.
20) Abatement of pending winding-up proceedings.
21) Bar on guarantors enforcing subrogation rights against CD.
22) Mandatory withdrawal of all creditor legal proceedings against CD.
23) Income Tax exemption on exceptional gains from debt waivers and receipt of income without TDS under IT Act, 1961 for 10 years from effective date.

B. Reliefs Granted in Liquidation Going Concern Sales (PSL, Topworth, SBTL, VNR Infrastructures):

Exhaustive list of 14 waivers and concessions granted to Successful Auction Bidders:

1) Transfer of licenses, consents, and statutory approvals.
2) Complete settlement and ring-fencing of past liabilities.
3) Extinguishment of existing shares of the Corporate Debtor.
4) Vacation of office by existing board directors.
5) Change of CD status to “Active” by Registrar of Companies (ROC).
6) Corporate Debtor allowed to review and terminate contracts.
7) Vesting of all CD assets with the successful auction acquirer.
8) Satisfaction and release of all existing charges.
9) Authorities to waive non-compliances prior to approval date.
10) Withdrawal of all civil and criminal inquiries/investigations.
11) Removal of company’s name from DGFT ‘Denied Entity List’.
12) Income Tax benefit for carry forward of business loss & depreciation.
13) 100% equity shareholding of CD to be allotted to successful bidder.
14) Exemption from registration fees, stamp duty, and waiver of tax penalties.

6. Conclusion & Future Legislative Roadmap

Undoubtedly, based on the above in-depth analysis of provisions of the Code and judicial precedents available as on date, the revival of Corporate Debtor, whether in CIRP or Liquidation can be touted as the ultimate object of the Code and such revival may not be practically viable unless and until certain waivers, reliefs and concessions are granted to the resolution applicant under CIRP and the successful bidder under liquidation.

In absence of specific legal provisions, the judiciary has attempted to extend the required assistance to the acquirers within the framework of The Code. In time to come, these judicial precedents may become the guiding light for the legislature to enact necessary amendments to the Code and Regulations to bring in specific provisions for the treatment of such reliefs/concessions/waivers, and for defining the powers of CoC and AA to consider the same, to mitigate post-acquisition complications and enable the acquirer to proceed based on the clean slate theory propounded by the Apex Court and operate the Corporate Debtor as an ongoing concern.

“Such an amendment will surely be aligned with the essence of The Preamble of the Code.” ❖❖❖