Imp. Rulings - Doctrine of Clean Slate in Liquidation Process (IBC)
Index;
HC Shimla (2024.08.21) in Su-Kam Power System Ltd. and Anr. Vs. State of Himachal Pradesh and Ors. [CWP No.422 of 2024] [Doctrine of Clean slate in a going concern]
NCLAT (2023.11.21) in Punjab National Bank (International Ltd.) Vs. Perfect Day INC. and Ors. [Company Appeal (AT) (Insolvency) No.1427 of 2022] [Right of Reliefs and concessions in a going concern]
NCLT Ahmedabad (2022.06.20) in Arrhum Tradelink Pvt. Ltd. Vs. Vineeta Maheshwari Liquidator of Kaneria Granito Ltd. [IA No. 238 of 2022 in CP(IB) 320 of 2018] [Preference in Equal Bidding]
NCLAT (2022.05.26) in Eastern Power Distribution Company of Andhra Pradesh Ltd. Vs. Maithan Alloys Ltd. [Company Appeal (AT) (Insolvency) No. 961 of 2021] [Doctrine of Clean Slate]
NCLAT (25.02.2022) in M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs. M/s KTC Foods Private Limited [Company Appeal (AT) (Insolvency) No. 650 of 2020] [Doctrine of Clean Slate]
NCLT Mumbai-I (2021.03.09) in Gaurav Jain Vs. Sanjay Gupta, [IA No. 2264 of 2020 in C.P. (IB) No. 1239/MB/2018] [Free from all Encumbrances]
NCLT Mumbai-1 (2018.11.29) in Alchemist Asset Reconstruction Company Ltd. Vs. Abhijeet MADC Nagpur Energy Pvt. Ltd. [MA 1343/2018 IN CP (IB)-1315/MB/2017] [Free from all Encumbrances]
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1). HC Shimla (2024.08.21) in Su-Kam Power System Ltd. and Anr. Vs. State of Himachal Pradesh and Ors. [CWP No.422 of 2024] held that;
Under Section 33(5) of the Code, no legal proceeding could be instituted by or against the Corporate Debtor. This also renders the red entry/charge created on the property of the petitioner-Company on 07.01.2020 void in law.
Thus, as held in the above decision of the Supreme Court in Ghanashyam Mishra’s case (supra-1), the legislative intent was to extinguish all debts owed to the Central Government or any State Government or any Local Authority including the Tax Authorities, when once an approval was granted to Resolution Plan by the NCLT.
As per the amended Section 31 of the Code, the said principle of taking over Corporate Debtor under a Resolution Plan, will also apply to taking over by way of acquisition plan. This is referred to as the “Clean Slate” principle of IBC.
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2). NCLAT (2023.11.21) in Punjab National Bank (International Ltd.) Vs. Perfect Day INC. and Ors. [Company Appeal (AT) (Insolvency) No.1427 of 2022] held that;
# 15. We do not find any merit in any of the substance raised by learned Counsel for the Appellant in this Appeal to question the impugned order dated 11.11.2022. It is further relevant to notice that order dated 11.11.2022 is an order granting reliefs and concessions to Successful Auction Purchaser, when the sale of the Corporate Debtor is as going concern, the Successful Auction Purchaser is entitled to receive certain reliefs and concessions to run the Corporate Debtor as going concern. The submission of the Appellant that this fact ought to have been mentioned in the Process Document that reliefs and concessions will be granted to the Successful Auction Purchaser also do not commend us. The question of reliefs and concessions arises only when Successful Resolution Applicant requires certain reliefs and concessions to run the Corporate Debtor as going concern, which is consequential after acceptance of the highest auction bid by Successful Auction Purchaser. Non-mention in Process Document that reliefs and concessions can also be allowed is inconsequential.
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3). NCLT Ahmedabad (2022.06.20) in Arrhum Tradelink Pvt. Ltd. Vs. Vineeta Maheshwari Liquidator of Kaneria Granito Ltd. [IA No. 238 of 2022 in CP(IB) 320 of 2018] held that;
In case of highest bidder under auction option no. 1 and 2 are equal, then, bidder who has given offer for sale of the Corporate Debtor as a going concern shall be declared as successful bidder”.
It is true that the Applicant ought to have raised the amount of Rs. 5 Lakh but in our considered opinion, the liquidator ought to have taken into consideration of the broad object of Insolvency and Bankruptcy Code, 2016 to sell the Corporate Debtor as a going concern and it was the pre-condition for e-auction set out by the liquidator herself.
It is the object of the Insolvency and Bankruptcy Code, 2016 i.e., to maximize the value of the assets of the corporate person and to promote entrepreneurship etc.
It is the duty of the liquidator to protect the existence of the Corporate Debtor as far as possible and avoid its death by ultimately pushing the Corporate Debtor to be dissolved.
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4). NCLAT (2022.05.26) in Eastern Power Distribution Company of Andhra Pradesh Ltd. Vs. Maithan Alloys Ltd. [Company Appeal (AT) (Insolvency) No. 961 of 2021] held that;
That when the sale proceeds of a ‘Corporate Debtor’ are duly distributed in the Order of priority and in the manner prescribed under Section 53 of the Code, claims of any other Creditor cannot be entertained contrary to the provisions entailed under Section 53;
Subsequent to the distribution of sale proceeds under Section 53 no other entity including any Government entity can claim any past unpaid or outstanding dues against the Appellant who has purchased the ‘Corporate Debtor Company’ as a ‘going concern’
We are of the considered view that at this stage subsequent to the sale of the ‘Corporate Debtor Company’ as a ‘going concern’, these claims cannot be foisted upon the Appellant.
“The scope and objective of the Code is to extinguish all claims specifically the ones which were not even made during the CIRP or in the Liquidation stage, to aid the purchaser of the Company as a ‘going concern’ to start on a ‘clean slate’.
That the purchaser of the Company even in the Liquidation stage cannot be burdened with past liabilities when it is not mentioned in the ‘Sale Notice’.
The submission of the Appellant that they are entitled to recover the entire pre-CIRP and post-CIRP dues from the Successful Auction Purchaser i.e. Respondent No. 1 cannot be accepted.
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5). NCLAT (2022.02.25) in M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs. M/s KTC Foods Private Limited [Company Appeal (AT) (Insolvency) No. 650 of 2020] held that;
# 21. Adverting to the contention of the Learned Counsel for the Appellant that the Adjudicating Authority has erred in denying the sale of the ‘Corporate Debtor’ as a ‘going concern’ to the Appellant without including any contingent liabilities, we hold that it is a settled law that when the sale proceeds of a ‘Corporate Debtor’ are duly distributed in the Order of priority and in the manner prescribed under Section 53 of the Code, claims of any other Creditor cannot be entertained contrary to the provisions entailed under Section 53; subsequent to the distribution of sale proceeds under Section 53 no other entity including any Government entity can claim any past unpaid or outstanding dues against the Appellant who has purchased the ‘Corporate Debtor Company’ as a ‘going concern’. It is significant to mention that the second Respondent/Liquidator has specifically submitted that even these claims by the Uttar Haryana Bijili Vitran Nigam were not submitted in the prescribed form either during the CIRP Process or at the Liquidation stage. We are of the considered view that at this stage subsequent to the sale of the ‘Corporate Debtor Company’ as a ‘going concern’, these claims cannot be foisted upon the Appellant. The scope and objective of the Code is to extinguish all claims specifically the ones which were not even made during the CIRP or in the Liquidation stage, to aid the purchaser of the Company as a ‘going concern’ to start on a ‘clean slate’. The Hon’ble Supreme Court in ‘Ghanshyam Mishra & Sons Pvt. Ltd.’ Vs. ‘Edelweiss Asset Reconstruction Company Ltd. & Ors.’, Civil Appeal No. 8129 of 2019 and in ‘CoC of Essar Steel India Ltd.’ Vs. ‘Satish Gupta & Ors.’ (2020) 8 SCC 531 has laid down the proposition that the purchaser of the Company even in the Liquidation stage cannot be burdened with past liabilities when it is not mentioned in the ‘Sale Notice’.
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6). NCLT Mumbai-I (2021.03.09) in Gaurav Jain Vs. Sanjay Gupta, [IA No. 2264 of 2020 in C.P. (IB) No. 1239/MB/2018] held that;
The crux of the ‘going concern sale’ is that the equity shareholding of the Corporate Debtor is extinguished and the acquirer takes over the undertaking with the assets, licenses, entitlements etc.
The Corporate Debtor survives, only the ownership is transferred by the Liquidator to the purchaser. All the rights, titles and interest in the Corporate Debtor including the legal entity is transferred to the purchaser. After the sale as a ‘going concern’, the purchaser will be carrying on the business of the Corporate Debtor.
As far as the Liquidator is concerned, when the sale consideration is received from the bidder / purchaser, the same will be distributed to the Creditors in accordance with Section 53 of the Code. Since the amount is paid to the Creditors in terms of the Code, the liabilities of the Corporate Debtor towards the Creditors are treated as settled and the purchaser takes the assets free of any encumbrances or whatsoever.
In the normal parlance “going concern” sale is transfer of assets along with the liabilities. However, as far as the ‘going concern’ sale in liquidation is concerned, there is a clear difference that only assets are transferred and the liabilities of the Corporate Debtor has to be settled in accordance with Section 53 of the Code and hence the purchaser of this assets takes over the assets without any encumbrance or charge and free from the action of the Creditors.
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7). NCLT Mumbai-1 (2018.11.29) in Alchemist Asset Reconstruction Company Ltd. Vs. Abhijeet MADC Nagpur Energy Pvt. Ltd. [MA 1343/2018 IN CP (IB)-1315/MB/2017] held that;
It is to be clarified that when sale is to be made on a going concern basis, then certainly after the transfer of undertaking, acquirer gets all right, title and interest in the whole and every part of the undertaking, without any security interest, encumbrance, claim, counterclaim, or any demur, into the acquirer.
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