Richa Saraf and Devisha Dhanuka (

Pursuant to Notification No. IBBI/2017-18/GN/REG028, dated 27.03.2018, the very first amendment was brought into Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 w.e.f. 01.04.2018 to permit sale of the corporate debtor as a going concern. The insertion, as aforementioned, was brought in force keeping in view the object with which the Insolvency and Bankruptcy Code, 2016 (“Code”) was formulated, i.e. to provide for an opportunity of revival of the entity under distress.

Now, on 22.10.2018, the second amendment was made in the said regulations, wherein the most significant change seems to be the introduction of the concept of “sale of the business of the corporate debtor as a going concern”. The amendments largely capture the discussions that took place at IBBI meeting of liquidators held on 11.10.2018[1]. In this article, we analyze the various amendments.

Sale options available:

Vide the IBBI (Liquidation Process) (First Amendment) Regulations, 2018 the Liquidator was permitted to sell the corporate debtor as a going concern. Subsequently, the Second Amendment Regulations introduced the option of selling the business(s) of the corporate debtor as a going concern. Essentially, a corporate debtor may have multiple line of business and each business can be sold separately as a going concern. Also, the assets of the corporate debtor can be categorized as “business assets” and “non-business assets”. While the business assets will have to be sold along with the business, the non-business or the peripheral assets may be sold separately on piece meal basis or otherwise.


Here, it is crucial to identify the distinguishing factor between sale of corporate debtor as a going concern [Regulation 32(e)] and sale of business of corporate debtor as a going concern [Regulation 32(f)]. Under both the clauses, the assets are not sold by way of slump sale or piecemeal sale, the acquirer buys the business with the assets. The business can either operate under the existing brand and structure of the Corporate Debtor or not. Seemingly the only difference between “the corporate debtor as a going concern” and “the business(s) of the corporate debtor as a going concern” is that in the former situation, the corporate debtor itself will be retained, will not be dissolved, and will be transferred along with the assets. However, in the latter case, the business will be transferred as a going concern, without transferring the legal entity, and therefore, the legal entity will be taken for dissolution.


Going concern sale:

The amendments have been made considering that the acquirer may or may not want to continue with the same legal entity, and may or may not be interested in one or more business(s) of the corporate debtor, but the liquidation regulations still does not provide for the definition of “going concern”, leaving the meaning open for interpretation.

The transfer of business as a going concern is a well- known concept. Demerger of an undertaking into another undertaking usually happens by transferring the undertaking to a new company on a going concern basis. The said condition has been interpreted by the Delhi High Court in Indorama Textile Limited (23.07.2012), CO.PET. 4/2003, as meaning if assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.

In KBD Sugars & Distilleries Ltd., Bangalore v. Asstt. Commissioner of Income-Tax[1] (30.10.2013), ITA Nos 1362 & 1362 of 2011, it was held that going concern always means to say ‘alive’, whether profit-making or not.

Also, the Income Tax Appellate Tribunal (ITAT) held in the above case, for a going concern to mean, that the undertaking constituted a business activity capable of being run independently for the foreseeable future. Similar view was taken in the case of Hindustan Engineering by ITAT, Kolkata[2] (16.03.2016) I.T.A No.330/Kol/2013.

Going concern, as an accounting notion, is defined in AS- 1 as follows:

“The enterprise is normally viewed as a Going Concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.”

The general judicial impression of going-concern sales is that the employees will be passed on to the acquirer. Several rulings have actually noted that if the entity was shut for some time, it should first be run at least for a day before transfer, and then transferred as a going concern. The impracticality involved in the process has been noted in a Supreme Court ruling in Allahabad Bank v. ARC Holding and another (26.09.2000), C.A. Nos. 5411-5413 of 2000 [Arising out of SLP (C) Nos. 4084-4086 of 1999], wherein the Apex Court observed as follows:

“But subsequent order directs sale of the entire assets of the company as a ‘going concern’. This means revive the company first to make it operational, re-employ its employees, which would involve huge investment by the prospective buyer, a Herculean task, making execution practically infructuous.”

Under Section 33(7) of the Code, the cessation of employment is an automatic consequence arising out of the order of liquidation. Therefore, the sale of the corporate debtor cannot defacto result in transfer of employees of the corporate debtor to the acquirer. In most cases, re-hiring the employees will mean transfer of employee liabilities, and that itself may make the option unviable.

There also seems to be persistent ambiguity as to whether sale of corporate debtor as a going concern will result in transfer of its liabilities. Therefore, it would have been apt to create a precise definition of going concern, rather than leaving the matter for interpretation.

Considering the lack of clarity, for any going concern sale, the liquidator will have to apply to the National Company Law Tribunal, for appropriate directions with regard transfer of legal entity without its liabilities. It is, therefore, important to prepare a scheme for going concern transfer and take it for adjudication before the NCLT before going ahead with the liquidation of the corporate debtor.

Relinquishment of security interest:

In liquidation, there are two options available for a secured creditor. One to relinquish its security interest, and file his claim with the Liquidator, whereby the asset will form part of the liquidation estate or to realize his security interest. Second, to realize the security interest outside the liquidation process. If any secured creditor wants to avail the second option, the same should be intimated to the liquidator immediately on commencement of liquidation process, and it should file its claim with the liquidator for residual amount of due, if any, after such realization.

If a secured creditor submits its claim for the entire amount due, it shall be deemed to be a relinquishment of his security interest. The amendment stipulates that where an asset is subject to security interest, it shall not be sold unless the security interest therein has been relinquished to the liquidation estates. However, there may be circumstances where the secured creditor neither relinquishes its security interest, nor intimates the liquidator of retention of security interest. The same may cause to be an impediment on the liquidation process, since the liquidator will not be able to sell such asset. In such a scenario, the liquidator is left to no avail.

A creditor cannot not relinquish its security interest, and at the same time opt to not cause sale of the assets, and although there was no provision requiring explicit communication of intention to relinquish security interest, however, for practical purposes, and to provide comfort to the acquirer, it was advisable to get a no- objection certificate (NOC) from the secured creditors. In all current or upcoming liquidations, the assets which are subject to security interests have to be invariably sold, and the proviso to Section 32, creates a mandatory requirement, which may not be practically feasible at all times.

Again, in case of shared security interests, can one or more secured creditors choose to remain outside liquidation proceedings, while the creditors having pari passu charge on the same asset opt to file their claim with the liquidator? In our view, the option to realise the security interest outside liquidation process is available only in cases where the security interest is severable. In case of shared security interests, having pari passu rights, there should be collective sale by secured lenders, and since the purport of liquidation process is to liquidate the assets and distribute the proceeds to the stakeholders, if the secured lenders cause a collective sale outside liquidation, liquidation will lose its meaning altogether.

Valuation option:

During the IBBI meeting, several liquidators discussed the point that the requirement of conducting valuation during corporate insolvency resolution process, and again, during liquidation may prove to be a burden on the estate of an already liquidating company. Some of the insolvency professionals were of the view that valuation during liquidation stage may be unnecessary if the assets have already been valued during resolution phase.

In line of the above, Regulation 35(1) of the liquidation regulation has been amended as follows:

where the valuation has been conducted under Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 or Regulation 34 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017, as the case may be, the liquidator shall consider the average of the estimates of the values arrived under those provisions for the purposes of valuations under these regulations.”

The language, as may be comprehended from the above regulation, is that the option of valuation by liquidator is not even available. The liquidator is, thus, required to consider the valuation derived during resolution process only, and cannot opt for conducting valuation during liquidation. This clearly should not have been the intent. The liquidator should not be mandated to give up the option of having the assets valued during liquidation. The liquidator should have been enabled to either use the resolution valuation, or get a fresh valuation done. However, if the resolution valuation is necessarily to be adopted, there are several impediments. Notably, in liquidation, the corporate debtor ceases to be a going concern by definition, and whether the liquidator will exercise the option of going concern transfer could not have been known at the time of resolution. Several of the intangible assets and business rights of the corporate debtor will converge to zero value once liquidation commences. Also, practically, if the valuation during resolution was realistic, the question of a resolution plan not coming by, and therefore, the entity slipping into liquidation, would not have arisen. Hence, if the liquidator has to start with the same valuation with which a resolution failed, it is quite probable that the liquidation sale will also meet the same fate as the resolution. Hence, it is important that the language of regulation be modified to “may” in place of “shall”.

Applicability of the Amended Regulations:

Another pertinent question that arises is w.r.t. the applicability of the amendment. The amendment was notified on a certain date, having immediate effect, and thus, being applicable on existing liquidation proceedings as well. However, it cannot be applied to liquidation cases where the process of sale is already under way.


Since the time the Code was formulated, IBBI has been instrumental to seek solutions to issues faced during liquidation and resolution processes, and has been instrumental in bringing in amendments in the respective regulations and also, in the Code, whether to ensure that bottlenecks, if any, are addressed or for expediting of the process, so that the benefits of the Code may be accrued. However, there is still the requirement to bring in some more changes to resolve the issues faced by liquidators, particularly, in the direction of liquidation as going concern.

[1] One of our colleagues attended the meeting on behalf of Vinod Kumar Kothari, Insolvency Professional.



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