IBC

REVIVAL UNDER LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

If a Corporate Debtor has been admitted to liquidation, that is not end of the road for the Corporate Debtor. Even during liquidation, Corporate Debtor can be revived through compromise or arrangement or sold as a going concern.

NCLAT in S C Sekeran1 relying on the Supreme Court’s judgments in Meghal Homes2 and Swiss Ribbons3 directed the Liquidator to take firstly steps for compromise or arrangement, then make attempt for sale as going concern and thereafter sell the company in part. Relevant para is as under:

8. In view of the provision of Section 230 and the decision of the Hon’ble Supreme Court in ‘Meghal Homes Pvt. Ltd.’ and ‘Swiss Ribbons Pvt. Ltd.’, 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. The Liquidator will access information under Section 33 and will consolidate the claim under Section 38 and after verification of claim in terms of Section 39 will either admit or reject the claim, as required under Section 40. 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.

 9. The ‘Liquidator’ if initiates, will complete the process under Section 230 of the Companies Act within 90 days. For the purpose of counting the period of liquidation, the pendency of the appeal(s) preferred by the ‘Eight Finance Pvt. Ltd.’ that is from 12th July, 2018 and till date should be excluded. In the circumstances, while we are not inclined to interfere with the impugned order(s) both dated 25th June, 2018 direct the Liquidator to act in accordance with law and as observe above.

The decision of NCLAT in S C Sekeran has been followed by NCLAT in Y. Sivaram Prasad4.

COMPROMISE OR ARRANGMENT (REGULATION 2B)

A proposal for compromise and arrangement under Section 230 of the Companies Act, 2013 can be made after initiation of Liquidation Proceedings under Liquidation Regulation 2B. Liquidation Regulation 2B reads as under:

2B. Compromise or arrangement.

 (1) Where a compromise or arrangement is proposed under section 230 of the Companies Act, 2013 (18 of 2013), it shall be completed within ninety days of the order of liquidation under section 33.

 Provided that a person, who is not eligible under the Code to submit a Resolution Plan for insolvency resolution of the Corporate Debtor, shall not be a party in any manner to such compromise or arrangement.

(2) The time taken on compromise or arrangement, not exceeding ninety days, shall not be included in the liquidation period.

(3) Any cost incurred by the Liquidator in relation to compromise or arrangement shall be borne by the Corporate Debtor, where such compromise or arrangement is sanctioned by the Tribunal under sub-section (6) of section 230:

Provided that such cost shall be borne by the parties who proposed compromise or arrangement, where such compromise or arrangement is not sanctioned by the Tribunal under sub-section (6) of section 230.

Provided further that where the recommendation to explore proposal of compromise or arrangement has been made by the committee under regulation 39BA of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall file the proposal within thirty days of the order of liquidation.

A proposal of compromise and arrangement under Section 230 of the Companies Act, 2013 has to be completed under ninety days of order of liquidation. The period of ninety days is not included in the liquidation period.  

A person, who is not eligible to submit a Resolution Plan for insolvency resolution of the Corporate Debtor, will not be a party in any manner to such compromise or arrangement.

Any cost incurred by Liquidator in relation to compromise or arrangement has to be borne by the Corporate Debtor, in cases where such compromise or arrangement is sanctioned by the Tribunal under Section 20(6).  Such cost has to borne by the parties who propose compromise or arrangement, where such compromise or arrangement is not sanctioned by the Tribunal under Section 230 (6).

If  Committee of Creditors have recommended to explore proposal of compromise or arrangement under CIRP Regulation 39BA , the Liquidator has to file the proposal within thirty days of the order of liquidation of the Corporate Debtor.

This regulation was challenged before the Supreme Court in Arun Kumar Jagatramka5.The Supreme Court held the regulation constitutionally valid and held that provisions of 29A and Section 35(1)(f) will attach to scheme of compromise or arrangement under Section 230 of   Companies Act, 2013. Relevant para is as under:

91. Based on the above analysis, we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC. As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B (1), is also constitutionally valid. For the above reasons, we have come to the conclusion that there is no merit in the appeals and the writ petition. The civil appeals and writ petition are accordingly dismissed.

ASSESSMENT OF SALE AS A GOING CONCERN BY COC

In case of liquidation, the priority has been given under the Code to sell the Corporate Debtor as going concern before selling in parts.

CIRP Regulation 39 C provides that at the time of approving a Resolution Plan under Section 30 or deciding to liquidate the Corporate Debtor under Section 33, the Committee of Creditors may recommend that the Liquidator may first explore sale of the Corporate Debtor as a going concern or business of the Corporate Debtor as a going concern under Liquidation Regulation 32 (e) and (f) respectively, if an order of liquidation is passed.  Where the Committee of Creditors   recommends sale as a going concern it has to identify and group the assets and liabilities, which according to its commercial considerations ought to be sold as a going concern.

Resolution Professional has to submit the recommendation of the Committee of Creditors to the Adjudicating Authority, while filing application for approval of Resolution Plan or Liquidation.

ASSESSMENT OF COMPROMISE OR ARRANGEMENT

CIRP Regulation 39BA provides that while deciding to liquidate the corporate debtor under section 33, the committee has to  examine whether to explore compromise or arrangement as referred to under Liquidation Regulation 2B(1) and the Resolution Professional has to  submit the  recommendation of the Committee of Creditors to the Adjudicating Authority while filing application under section 33.

Where a recommendation has been made by the Committee of Creditors, the Resolution Professional and the Committee of Creditors  has to  keep exploring the possibility of compromise or arrangement during the period the application to liquidate the corporate debtor is pending before the Adjudicating Authority.

SALE AS A GOING CONCERN

Selling the Corporate Debtor as going concern provides continuity to the Corporate Debtor and helps in saving employment of persons who are dependent on the Corporate Debtor for livelihood. Firstly, efforts have to be made to sell the Corporate Debtor as going concern and when such efforts fail, the assets of the Corporate Debtor can be sold in parts. Liquidation Regulation 32A provides details for selling of the Corporate Debtor as going concern, which is as under:

32A. Sale as a going concern.

 (1) Where the Committee of Creditors has recommended sale under clause (e) or (f) of regulation 32 or where the Liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the Corporate Debtor, he shall endeavour to first sell under the said clauses.

 (2) For the purpose of sale under sub-regulation (1), the group of assets and liabilities of the Corporate Debtor, as identified by the Committee of Creditors under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 shall be sold as a going concern.

 (3) Where the Committee of Creditors has not identified the assets and liabilities under sub regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.

(4) If the Liquidator is unable to sell the Corporate Debtor or its business under clause (e) or (f) of regulation 32 within ninety days from the liquidation commencement date, he shall proceed to sell the assets of the Corporate Debtor under clauses (a) to (d) of regulation 32.

Where the Committee of Creditors has recommended under CIRP Regulation 32A sale of Corporate Debtor as going concern under Liquidation Regulation 32 (e) and sale of businesses of Corporate Debtor as going concern under Liquidation Regulation 32 (f), the Liquidator has to endeavour to first sell the Corporate Debtor as going concern. Even if there is no recommendation by Committee of Creditors under CIRP Regulation 32A and Liquidator is of the opinion that sale under Liquidation Regulation 32 (e) and (f) will maximize the value of the Corporate Debtor, the Liquidator has to endeavor to first sell the Corporate Debtor or businesses of Corporate Debtor as going concern.

If any group of assets and liabilities of the Corporate Debtor have been identified by the Committee of Creditors under CIRP regulation 39C to be sold as a going concern, such assets have to be sold as going concern. If the Committee of Creditors has not identified the assets and liabilities under CIRP Regulation 39C, the Liquidator has to identify and group the assets and liabilities to be sold as going concern in consultation with the Stakeholders’ Consultation Committee.

The Liquidator may sell the assets of the Corporate Debtor under clause (e) of Regulation 32 exclusively only at the first auction.

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1. S C Sekeran Vs. Amit Gupta; Company Appeal (AT) (Insolvency) 495 & 496/2018

2. M/s Meghal Homes Pvt Ltd. Vs. Shree Niwas Girni K K Samiti & Ors; Appeal (Civil)3179-3181/2005

    3. Swiss Ribbons Pvt. Ltd. & Anr Vs. Union of India & Ors; Writ Petition (Civil) 99/2018)

    4. Y. Sivaram Prasad Vs. S D Dhanpal & Ors.; Company Appeal (AT) (Insolvency) 224/2018

    5. Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd & Anr.; Civil Appeal 2719/2020

    Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

    Mukesh Kumar Suman

    Mukesh Kumar Suman

    Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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