IBBI vide notification dt. 25 Jul 2019 inserted Regulation 32A in the Liquidation Regulations whereby the Liquidator may sell the Corporate Debtor, or the business thereof, as a going concern. This was supposed to be a welcome move, as it is generally known that the economic value of a going concern business is higher than the value of assets. Hence, this move was supposed to increase the economic worth of national assets under Liquidation.
However, it
has been repeatedly mentioned in the Regulation that under such a mechanism,
the “assets and liabilities” of the business will be sold as a going concern, which
opens a Pandora ’s Box for the buyers under such a scheme.
As per the
data published by IBBI[i],
as of 30 Jun 2020, 957 cases had resulted in liquidation with a total
liquidation value of Rs. 40 kCr. Against this, the total claims were Rs. 5.46
lac Cr, i.e. the total liquidation value of the 957 cases in liquidation was a
mere 7% of the total claim amount. If these companies were to be sold as going
concerns, what would happen to the remaining 93% of the claims being Rs. 5.07
lac Cr? Does the company as a going concern get sold with all those liabilities?
Assuming the proceeds of this liquidation value are distributed among the
creditors in the Waterfall mechanism of Section 53 of the IBC, what action
would the creditors take to recover these remaining dues, which have been sold
to a new buyer? Are we staring at another round of CIRP for these remaining
dues?
The
Corporate Debtor in liquidation is already one which has gone through the
process of insolvency and has failed to find a resolution. If the Corporate
Debtor is left again in the economic playing field with 93% of its liabilities,
it is highly unlikely that it’ll survive and won’t fall into the trap of
insolvency again.
Our view is
that once the liquidation process is initiated and completed, either by sale of
assets or sale of business or sale as going concern, and the proceeds have been
distributed to the claimants as per Section 53 of the IBC, the Liquidator
cannot take responsibility for any pending claims. The liabilities of the
Corporate Debtor are already converted to claims under the CIRP and Liquidation
processes. The liabilities, if unclaimed or unsettled, cannot turn live again because
their claims had not been submitted in the insolvency or liquidation processes.
But more
important than that, the sale of liabilities under liquidation as a going concern
is in complete violence to Section 53 itself, which speaks of settlement of
claims under liquidation. If the liabilities were to come live once again even
after receiving proceeds from liquidation, then the liquidation process itself
is deemed to have been failed. However, one may still argue that in case of
liquidation as a going concern, Section 53 of the IBC does not apply and the
proceeds of liquidation shall simply be used to reduce the liabilities rather
than to settle them completely.
It should
also be understood that at certain times, the assets are inherently linked to
certain liabilities and their separation is not possible for a going concern.
Examples include long-term supply contracts where the goods are to be called
off over a period as required, certain infrastructure contracts which require
submission of performance guarantees, indemnification obligations etc. These
are pecuniary liabilities which are essential for the operations of the going
concern. Such liabilities cannot be settled under Section 53 of the IBC if the
Corporate Debtor is to be sold as a going concern.
In conclusion, the transfer of liabilities in liquidation as a going concern does not do justice to the spirit of the IBC. However, there is a need of clarity from the IBBI whether the liabilities are necessary to be required to be transferred during sale as a going concern. Meanwhile, all eyes will be on the future course of legal proceedings on this issue. The Adjudicating Authority may take a view that is contrary to ours, which it has the right to do and settle the matter. However, the same Adjudicating Authority may make use of its generic powers under Section 60(5) of the IBC to clear the matter and bring a unique opportunity of liquidation as going concern giving a real resolution to the strained Corporate Debtor.
[i] https://www.ibbi.gov.in/uploads/whatsnew/a98a313021b1250be5ca3b9301626f25.pdf
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