Mohan Gems & Jewels Private Limited Vs. Vijay Verma & Ors. - It is also permissible to sell the ‘Corporate Debtor’ as a going concern at the Liquidation stage.

 NCLAT (24.08.2021) in  Mohan Gems & Jewels Private Limited Vs. Vijay Verma & Ors.  [COMPANY APPEAL (AT) (INSOLVENCY) No. 849 of 2020] held that; 

• As noted above, under the Companies Act, 2013, it is permissible to sell the Company undergoing winding up as a going concern and since winding up is nothing but Liquidation under the IBC, it is also permissible to sell the ‘Corporate Debtor’ as a going concern at the Liquidation stage.

• we are of the view that the sale of the ‘Corporate Debtor Company’ was carried out by the Liquidator in accordance with the Regulations and we are constrained to observe that the Adjudicating Authority, has, apart from travelling beyond its jurisdiction in making observations regarding the power and functions of framing of Regulations by IBBI, has also not appreciated the ratio laid down by the Hon’ble Supreme Court in a catena of Judgements that the Liquidation of the Company is to be seen only as a last resort and every attempt should be made to revive the Company and to continue it as a ‘going concern’.

Excerpts of the order; 

# 1. Challenge in this Appeal is to the Impugned Order dated 16.09.2020 passed by the Learned Adjudicating Authority, (National Company Law Tribunal, Principal Bench, New Delhi) in I.A. No. 1490 of 2020 in CP(IB) No. 590(PB)/2018. I.A. No. 1490 of 2020 is an Application filed by the Liquidator seeking for closure of the Liquidation Process as per Regulation 45(3)(a) of IBBI Liquidation Process Regulations, 2016 (hereinafter referred to as the ‘Liquidation Process Regulations’), as the ‘Corporate Debtor’ was being sold as a going concern in the e-Auction held on 20.11.2019 declaring Mr. Vijay Verma/the first Respondent as the highest bidder at a bid price of Rs. 4,51,99,713/-. By the Impugned Order, the Adjudicating Authority has dismissed this I.A. observing as follows:-

• “32. On reading this CIRP Regulation, it appears at the outset, an effort has been strenuously made to rewrite IBC without amendment to the Code- the reasons for saying so is- . . . 

• 33. After examining these two Regulations, one from CIRP Regulations and another from Liquidation Regulations, we have not found any merit in either of these regulations, which are set up as foundation to say that by virtue of liquidation Regulation 45 (3), dissolution shall be dispensed with for closure of liquidation.

• 34. Insolvency and Bankruptcy Code is an embodiment of substantial rights laced with procedural mandates. When procedure itself is part of the enactment, the Regulation Authority cannot rewrite the procedure obliterating the provisions of IBC. Yes, the Regulation authority may bring in subordinate procedure for full implementation of the sections of the Code. What could be liquidated is the assets of the debtor company, this concept of liquidation of assets shall not be construed as inclusion of sale of the company.

• 35. The procedure is already set out under the Code for rearrangement under insolvency and resolution process thereafter another window under liquidation through Sec. 230 of the Companies Act, 2013, therefore there cannot be any other procedure which is militating the procedure set out under the code. Accordingly, this IA 1940/2020 is hereby dismissed as misconceived.”

# 2. The main issues which arise for consideration are:-

• Whether the Liquidator is authorized to sell the ‘Corporate Debtor’ as a going concern pursuant to Regulation 32 of IBBI (Liquidation Process) Regulations, 2016.

• Whether Adjudicating Authority was correct in concluding that Regulations 39C of CIRP Regulations and 32A, 45(3) of the Liquidation Process Regulations are inconsistent with Section 54 of the Code.

• Whether the interpretation by the Adjudicating Authority of the provisions of the Code and ‘Liquidation Process Regulations’ in the Order impugned is contrary to the scope and spirit of the I&B Code.

# 5. Submissions on behalf of the Learned Counsel appearing for the second Respondent/IBBI:

Learned Counsel strenuously contended that sale ‘as a going concern’ at the Liquidation stage achieves the principle objects of the Code which are as follows:-

• a) maximization of value of assets

• b) promotion of entrepreneurship

• c) balancing the interest of stakeholders

The sale of ‘Corporate Debtor’ as a going concern even at the Liquidation stage achieves all the aforenoted objects and the employees remain in employment keeping the goodwill intact. There is no inconsistency between the objective of the Code and the provisions of the Code and the Learned Adjudicating Authority has overstepped its jurisdiction in trying to segregate the two.

Sections 281(3), Sections 280(2), Sections 290(1)(d) of the Companies Act, 2013, make it clear that a Company can be sold as a going concern at the Liquidation stage, the Hon’ble Supreme Court in ‘Arcelormittal India Private Limited’ (Supra) and ‘Swiss Ribbons Private Limited & Anr.’ (Supra) has observed that dissolution of the Company is to be carried out only as the last resort.

Upon enactment of the IBC in the year 2016, under Section 255 read with the XI schedule of the Code, certain provisions of the Companies Act, 2013 were amended and made harmonious with provisions of the Code. Sub-Section (94A) was inserted in Section 2 to define the term ‘winding up’ as follows:-

• “(94a) “winding up” means winding up under this act or Liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.”

As noted above, under the Companies Act, 2013, it is permissible to sell the Company undergoing winding up as a going concern and since winding up is nothing but Liquidation under the IBC, it is also permissible to sell the ‘Corporate Debtor’ as a going concern at the Liquidation stage.

Assessment:

# 6. The Code is an economically beneficial Legislation which aims to put the ‘Corporate Debtor’ back on its feet maximizing the value of assets of the ‘Corporate Debtor’ and promotes entrepreneurship. The long title to the legislation indicates the objective:-

• “An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and bankruptcy Board of India, and for matters connected therewith or incidental thereto.” (Emphasis Supplied)

# 7. The regime under the IBC is positively progressive as can be seen from several amendments that were brought forth. Having regard to the observations made by the Adjudicating Authority in the Order impugned, we find it significant to detail the discussion by IBBI on this issue.

# 8. Discussion Paper dated 30.01.2019 on ‘Corporate Liquidation Process by IBBI:-

“A. Sale as a Going Concern:-

• 2.16 The BLRC made a distinction between business and firm. The business is the underlying structure whose operations generate revenue, either as a whole or in parts. The firm includes management, ownership and financial elements around this core business. In the liquidation phase, the liquidator can coordinate proposals from the market on sale of the business, in parts or even as a whole. The evaluation of these proposals come under matters of business. The selection of the best proposal is, therefore, left to the creditors’ committee which form the board of the erstwhile firm in liquidation.

• 3. It thus emerges that rescuing the CD or its business, even after liquidation order has been passed under section 33 of the Code, has certain advantages and is the preferred choice of the law, the authorities and the stakeholders. Many recent decisions of the Appellate Authority and the AA have directed the liquidators to make efforts to sell the CD as a going concern. The BLRC anticipated this for realisation of higher value. It helps in realisation of higher value, value preservation, and rescuing a viable business. It minimises disruption to business and prevents loss of employment. The law enables broadly two options in this regard:

• 3.2 Going Concern Sale under regulation 32 of the Regulations: The Liquidator has the option to explore Going Concern Sale (GCS) - sale of the CD as a going concern or sale of the business of the CD as going concern - alongside other available modes for sale. It is necessary to provide a complete framework to enable him to exercise this option. Sale of CD as a going concern under regulation 32(e) and sale of business of CD as a going concern under regulation 32(f) are different.

• 3.2.1 Sale under regulation 32(e): In this GCS, the CD will not be dissolved. It will form part of liquidation estate. It will be transferred along with the business, assets and liabilities, including all contracts, licenses, concessions, agreements, benefits, privileges, rights or interests to the acquirer. The consideration received from sale will be split into share capital and liabilities, based on a capital structure that the acquirer decides. There will be an issuance of shares by the CD being sold to the extent of the share capital. The existing shares of the CD will not be transferred and shall be extinguished. The existing shareholders will become claimants from liquidation proceeds under section 53 of the Code.

• 3.2.2 Sale under regulation 32(f): The business(s) along with assets and liabilities, including intangibles, will be transferred as a going concern to the acquirer, without transfer of the CD, and therefore, the CD will be dissolved. The existing shares will be extinguished. The remaining assets, other than those sold as part of business will be sold and the proceeds thereof will be used to meet the claims under section 53 of the Code. ………………………….

• 4. Both the options under the Act and the Code have some common threads:

• 4.1 Employment: In terms of section 33(7) of the Code, the order for liquidation is deemed to be a notice of discharge to the officers, employees and workmen of the CD, except when the business of the CD is continued during the liquidation process by the Liquidator. Section 35(1)(e) allows the Liquidator to carry on the business of the CD for its beneficial liquidation. Since both the options require continuation of business in beneficial interest, the employees may not be discharged. They should be transferred along with the CD or the business of the CD.

• 4.2 Continuation of Going Concern: The issue of an order under section 33 of the Code for liquidation does not mean cessation of business immediately. The classic jurisprudence of liquidation laws suggests that the Liquidator can keep the entity as a going concern for the benefit of stakeholders. Even section 35 (1) (e) of the Code requires the Liquidator to carry on the business of the CD for its beneficial liquidation as he considers necessary. He may carry on business to the extent necessary for realization of better value from GCS………..” (Emphasis Supplied)

The Law laid down by the Hon’ble Supreme Court on ‘Sale of ‘Corporate Debtor’ as a going concern’:

# 11. The Hon’ble Supreme Court in ‘M/s. Innoventive Industries Ltd.’ Vs. ‘ICICI Bank and Anr.’, Civil Appeal Nos. 8337-8338 of 2017 has observed as follows:-

• From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realization is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay.” (Emphasis Supplied)

# 12. The Hon’ble Supreme Court in ‘Arcelormittal India Private Limited’ (Supra) in paragraph 86, noted thus:-

• 86.  . . . However, we cannot forget that the consequence of the chopper falling is corporate death. The only reasonable construction of the Code is the balance to be maintained between timely completion of the corporate insolvency resolution process, and the corporate debtor otherwise being put into liquidation. We must not forget that the corporate debtor consists of several employees and workmen whose daily bread is dependent on the outcome of the corporate insolvency resolution process. If there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible.  . . . . 

# 13. It is clear from the aforenoted observations that if there is a Resolution Applicant who can continue to run the ‘Corporate Debtor’ as a going concern, every plausible effort must be made to ensure the same.

# 14. The Hon’ble Supreme Court in ‘Swiss Ribbons Private Limited & Anr.’ (Supra) in paras 27 & 28 has reiterated the same principle:-

• “27. . . . .  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. (See Arcelor Mittal [Arcelor Mittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3).

• 28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”

• (Emphasis Supplied)

# 15. It is seen that the Hon’ble Apex Court in a catena of Judgements has time and again observed that ‘Liquidation’ should be the last resort only if the Resolution Plan submitted is not up to the mark and even in Liquidation, the Liquidator can sell the business of the ‘Corporate Debtor’ as a ‘going concern’.

# 16. Regulations 32A and 45(3) which were inserted in the Liquidation Process Regulations subsequent to ‘Arcelormittal India Private Limited’ (Supra) and ‘Swiss Ribbons Private Limited & Anr.’ (Supra) specifically define the process for sale of ‘Corporate Debtor’ or its business as a going concern.

# 17. This Tribunal in the matter of ‘S.C. Sekaran’ Vs. ‘Amit Gupta & Ors.’ in Company Appeal (AT) (Insolvency) No. 495 & 496 of 2018, directed as under:-

• “ .. we direct the ‘Liquidator’ to proceed in accordance with law. He will verify claims of all the creditors; take into custody and control of all the assets, property, effects and actionable claims of the ‘corporate debtor’, carry on the business of the ‘corporate debtor’ for its beneficial liquidation etc. as prescribed under Section 35 of the I&B Code.... Before taking steps to sell the assets of the ‘corporate debtor(s)’ (companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets wholly and thereafter, if not possible to sell the company in part and in accordance with law.

• ... The ‘Liquidator’ if initiates, will complete the process under Section 230 of the Companies Act within 90 days...”.

# 18. This Tribunal in the matter of ‘Y. Shivram Prasad’ Vs. ‘S. Dhanapal & Ors.’ in Company Appeal (AT) (Insolvency) No. 224 of 2018, observed as under:-

• “.. we hold that the liquidator is required to act in terms of the aforesaid directions of the Appellate Tribunal and take steps under Section 230 of the Companies Act. If the members or the ‘Corporate Debtor’ or the ‘creditors’ or a class of creditors like ‘Financial Creditor’ or ‘Operational Creditor’ approach the company through the liquidator for compromise or arrangement by making proposal of payment to all the creditor(s), the Liquidator on behalf of the company will move an application under Section 230 of the Companies Act, 2013 before the Adjudicating Authority i.e. National Company Law Tribunal, Chennai Bench, in terms of the observations as made in above. On failure, as observed above, steps should be taken for outright sale of the ‘Corporate Debtor’ so as to enable the employees to continue.”.

Conclusion:

# 19. IBBI in furtherance of its delegated power has framed the regulations in accordance with the objectives and also as empowered under Section 240 of the Code. As per Section 241 of the Code, every rule and regulation made under the Code will be placed before the Parliament. For a total period of 30 days for both Houses to make any modification or annulment.

# 24. As per Regulation 39C of the CIRP Regulations, the Committee of Creditors may recommend that the Liquidator may first explore the sale of the ‘Corporate Debtor’ as a going concern or sale of business of the ‘Corporate Debtor’ as a going concern under Regulation 32 of the Liquidation Process Regulations.

# 25. Regulation 39C of CIRP Regulations read with Regulations 32, 32A and 45(3) of Liquidation Process Regulations, it is clear that under Regulation 39C, the CoC may recommend that the Liquidator may first explore sale of the ‘Corporate Debtor’ as a going concern under Clause (e) of Regulation 32 or Sale of the business of the ‘Corporate Debtor’ under Clause (f) of Regulation 32. 32A provides that if the Liquidator is of the opinion that sale under Clause (e) or (f) of Regulation 32 shall maximize the value of the ‘Corporate Debtor’, he shall endeavor to sell under the said Clauses 32-(A)-2 provides that for the purpose of sale under Sub-Regulation (1) the group of assets and liabilities of the ‘Corporate Debtor’, as identified by the CoC under Sub-Regulation (2) of Regulation 32C of the CIRP Regulations, shall be sold as a going concern. As can be seen from the agenda filed before us by way of on Affidavit by IBBI, Regulation 45(3) and Regulation 39C were inserted by IBBI to facilitate/strengthen the objectives of the Code. Any Order of dissolution is completely unnecessary in such cases. Having regard to the fact that the Code does not prevent the closure of Liquidation Process in the instance the ‘Corporate Debtor’ is sold as a going concern pursuant to Regulation 32(e) following a closure report filed under Regulation 45(3)(a) of the Liquidation Process Regulations it would be contradictory to observe that closure of Liquidation Proceedings cannot be done and only dissolution is provided for under the Code. This would demolish the very spirit and objective of the Code. It can be safely construed that before the completion of 270 days, if no decision under Regulation 39C is taken by the CoC, only Regulation 32A is to be followed. Additionally, in the instant case, the Application under Section 33 of the Code seeking Liquidation was filed prior to 25.07.2019 (on which date Regulation 39C was inserted), therefore, the question of CoC passing any Resolution does not arise. We are of the considered view that the Liquidator has rightly followed the procedure specified in Regulation 32A of the Liquidation Process Regulations.

# 26. It is a well settled proposition that the legality and propriety of any Regulation/Notification/Rules/Act cannot be looked into by NCLT or NCLAT. The Tribunal can only ascertain whether the procedures provided for under the Code/Companies Act, 2013 are being followed or not. The Adjudicating Authority cannot go beyond this.

# 27. In ‘Arun Kumar Jagatramka’ Vs. ‘Jindal Steel Power Ltd. & Anr.’ reported in Civil Appeal No. 9664 of 2019, the Hon’ble Apex Court while discussing the issue, ‘whether in a Liquidation Proceeding under the Code, a person ineligible under Section 29A of the Code, is permitted to propose a scheme for revival under Section 230 of the Companies Act, 2013, has noted in the Epilogue that ‘the need for judicial intervention or innovation from the NCLT & NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC’.

# 28. Keeping in view the scope and spirit of the Code, read with Section 54 of the Code, Regulation 39C of CIRP Regulations, Regulations 32(e)&(f), 32A and 45(3) of the Liquidation Process Regulations, we are of the view that the sale of the ‘Corporate Debtor Company’ was carried out by the Liquidator in accordance with the Regulations and we are constrained to observe that the Adjudicating Authority, has, apart from travelling beyond its jurisdiction in making observations regarding the power and functions of framing of Regulations by IBBI, has also not appreciated the ratio laid down by the Hon’ble Supreme Court in a catena of Judgements that the Liquidation of the Company is to be seen only as a last resort and every attempt should be made to revive the Company and to continue it as a ‘going concern’.

# 29. For all the aforenoted reasons this Appeal is allowed and the Impugned Order dismissing the Application I.A. 1940/2020 is set aside. No Order as to costs.

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Blogger’s comments; The question remains whether protection under section 32A(1) shall be available to the auction purchaser of the CD as a going concern.

• # Section 32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-

• (a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or

• (b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

• Provided that if a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having fulfilled:

Some important judgments of the Hon'ble Supreme Court, in the present context.

i). Hon’ble Supreme Court (24.03.2006) in  Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [Appeal (civil)  1732 of 2006 ], it has been held as follows: 

• "17. A rule is not only required to be made in conformity with the provisions of the Act where under it is made, but the same must be in conformity with the provisions of any other Act, as a subordinate legislation cannot be violative of any plenary legislation made by the Parliament or the State Legislature. 

• 37. Furthermore, the terms and conditions which can be imposed by the State for the purpose of parting with its right of exclusive privilege more or less has been exhaustively dealt with in the illustrations in sub-section (2) of Section 29 of the Act. There cannot be any doubt whatsoever that the general power to make rules is contained in sub-section (1) of Section 29. The provisions contained in sub-section (2) are illustrative in nature. But, the factors enumerated in sub-section (2) of Section 29 are indicative of the heads under which the statutory framework should ordinarily be worked out. 

• 43. The submission of Mr. Iyer that there exists a distinction between carrying out the provisions of the Act and the purpose of the Act, is not relevant for our purpose. The power of delegated legislation cannot be exercised for the purpose of framing a new policy. The power can be exercised only to give effect to the provisions of the Act and not dehors the same. While considering the carrying out of the provisions of the Act, the court must see to it that the rule framed therefore is in conformity with the provisions thereof. 

• 46. In Hotel Balaji and Others v. State of A.P. and Others (1993 Supp (4) SCC 536), whereupon Mr. Iyer placed reliance, it is stated: "The necessity and significance of the delegated legislation is well accepted and needs no elaboration at our hands. Even so, it is well to remind ourselves that rules represent subordinate legislation. They cannot travel beyond the purview of the Act. Where the Act says that rules on being made shall be deemed "as if enacted in this Act", the position may be different. (It is not necessary to express any definite opinion on this aspect for the purpose of this case.) But where the Act does not say so, the rules do not become part of the Act."

ii). Hon’ble Supreme Court  (15.03.2021) in  Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr.  [Civil Appeal No. 9664 of 2019] held that; 

• # 89 At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience. Consequently, the need for judicial intervention or innovation from the NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC. This conscious shift in their role has been noted in the report of the Bankruptcy Law Reforms Committee (2015) in the following terms:

• “An adjudicating authority ensures adherence to the process At all points, the adherence to the process and compliance with all applicable laws is controlled by the adjudicating authority. The adjudicating authority gives powers to the insolvency professional to take appropriate action against the directors and management of the entity, with recommendations from the creditors committee. All material actions and events during the process are recorded at the adjudicating authority. The adjudicating authority can assess and penalise frivolous applications. The adjudicator hears allegations of violations and fraud while the process is on. The adjudicating authority will adjudicate on fraud, particularly during the process resolving bankruptcy. Appeals/actions against the behaviour of the insolvency professional are directed to the Regulator/Adjudicator.”

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