[Kumari Saloni is a 4th year B.A.LL.B. (Hons.) student at National Law University, Delhi]
The corporate insolvency resolution process under the Insolvency and Bankruptcy Code 2016 (‘IBC’) aims at the revival of financially distressed companies. Contrarily, liquidation only aims at maximum recovery to the creditors because in liquidation a debtor does not survive after the event. However, the emerging IBC jurisprudence challenges this proposition and generously explores the possibility of revival even during liquidation, in the form of going concern sales (‘GCS’) of the debtors. In the past three months, five companies under liquidation (PSL Ltd., Mohan Gems,Enviiro Bulk, Vishwa Infrastructures, and Topworth Pipes) have been sold as going concerns. GCS is gaining traction for it allows the debtors under liquidation to survive, saves employment, and yields higher recovery to creditors than in any other mode of liquidation (whether itemised or collective asset sale). While a GCS-debtor may offer a promising deal to the creditors under liquidation, its growing popularity may jeopardise the efficacy of future resolution processes under the IBC.
Going Concern Sales – Legal Framework and an Emerging Trend
Liquidation, which generally commences upon a failure of the resolution process under the IBC, entails a sale of the debtor’s assets to get maximum recovery. The mode of such sale was originally limited to a standalone sale, slump sale, or a sale of the assets (regulation 32, Insolvency and Bankruptcy Board of India (Liquidation) Regulations 2016), and the leftover entity would be dissolved (section 54, IBC). However, a need was later felt to explore options to sell the entire entity as a going concern without breaking down its assets. Thus, the Liquidation Regulations were amended to provide for the concept GCS (regulation 32(e)). Although this amendment was made back in 2019, the numbers of successful GCS have been rising only recently. While one reason for this sudden rise may be the post-pandemic economic resumption, a more compelling reason seems to be the attractive reliefs that the successful bidders for GCS-debtors have been obtaining from the National Company Law Tribunal (‘NCLT’). In all the above cases, to allow successful takeover of the debtors, the NCLT had granted various reliefs like cessation of all the pending dues, immunity from past offences, civil liabilities and pending proceedings. These reliefs are almost similar to the ones that a successful resolution applicant enjoys pursuant to a successful resolution under the IBC. This trend shows a growing tendency to treat GCS as a ‘second chance’ of resolution following a failure of the original resolution process, which is raises concerns.
Inherent Problems in a Going Concern Sale
Both GCS and resolution lead to the revival of the debtor. But that is where the resemblance ends. The National Company Law Appellate Tribunal (‘NCLAT’) in Binani Industries Ltd. v Bank of Baroda clarified that a resolution under the IBC is not a ‘sale’, as the successful resolution applicant does not ‘buy’ the debtor. It involves multi-stakeholder consultations and application of mind in planning the future viability of the debtor, and takes place within the institutional framework of the IBC. Further, a resolution plan is binding on all stakeholders and, as a result, the stakeholders take the exercise of restructuring carefully and pragmatically. On the contrary, GCS is a mere sale instead of a restructuring, and nothing in the law makes it binding upon the buyer to continue the debtor as a going concern after purchasing it. Hence, even though a GCS ‘revives’ the debtor, one should not applaud it for ‘saving’ the debtor from corporate death just like a resolution plan does. The IBC strives to craft long-term and binding viability plans for distressed debtors under a comprehensive framework. Certainly, a fragile and unplanned revival of the debtor through a GCS is beyond the IBC’s radar, which is probably why it does not envisage revival post-liquidation and assumes dissolution as the outcome of liquidation (section 54). Pertinently, GCS was introduced by an amendment to the Liquidation Regulations, and not the parent law. Therefore, observing that GCS is ultra vires the IBC, the Standing Committee on Finance 2020-21 has recommended deletion of the GCS-debtor provision from the regulations (page 32). However, until this recommendation is accepted (if at all), it is likely that the popularity of GCS would continue, as it offers an attractive deal to all: the creditors, employees and buyers. However, its very attractiveness may, in the long-term, become a threat for future resolutions.
GCS: A Threat for Future Resolutions?
The above cases, being the early ones relating to on GCS, would shape its future discourse. As it gets more popular as a ‘second chance’ of revival, to prospective acquirers this option may sound more attractive than a resolution. The Reasons for this are: (a) acquisition through GCS may occur for a much lesser consideration than in a corresponding resolution (as seen in the above cases), (b) unlike resolution, GCS does not require an elaborate negotiation within the committee of creditors and compliances under the IBC, and (c) the acquirers would not be bound to keep the debtor as a going concern in future. Therefore, the prospective acquirers may be less-willing to improve the terms of their resolution plans, eyeing at a ‘second chance’ to acquire the debtor much more favourably. Thus, the mere existence of an option of GCS may disincentivize the acquirers to propose good resolution plans in the future. Pertinently, the Insolvency Law Committee Report 2020 had also discarded GCS, for it may undermine efficiency of the resolution process.
Conclusion and the Way Forward
According to an Insolvency and Bankruptcy Board of India report, the economic value of around 75% of the debtors under liquidation was already very low even before they underwent the resolution process. Thus, a GCS that offers better outcomes to the creditors may be the best option available for them, which is probably why the NCLT is generously approving them. However, the presence of an option for easy acquisition through GCS should not disincentivize future resolution processes. If GCS is being used to strengthen the liquidation framework, there is a need to introduce measures to make the resolution framework even stronger. If resolutions fall weak and GCS starts being considered as an alternative resolution, there will be unplanned and fragile revivals, questioning the efficacy of the IBC altogether.
– Kumari Saloni
Nicely explained.