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The need for interpretation and amendment of the Insolvency and
Bankruptcy Code, 2016 (IBC), has arisen repeatedly since its
enactment. A recent instance can be seen in the matter of Gujarat
NRE Coke Ltd.
As the committee of creditors failed to agree on a corporate
insolvency resolution plan, the National Company Law Tribunal
(NCLT), Kolkata, on 11th January, 2018 ordered liquidation of the
company with a clear direction that the liquidation should be done
by sale as a going concern. This is because it had been
successfully argued before the tribunal that the company's
period of crisis was over and closing the business would adversely
affect about 1,178 employees, their families, numerous vendors and
job workers – totalling about 10,000 people.
This decision is significant as at the time, the Insolvency and
Bankruptcy Board of India (Liquidation Process) Regulations, 2016,
provided four viable options: liquidation by way of sale on
stand-alone basis, slump sale, sale of assets in parcel and sale of
assets collectively. After the NCLT, Delhi, made another order for
"beneficial liquidation" of a corporate entity, on 15th
February 2018, the regulations were amended to allow for
liquidation by sale as a going concern.
The pros and cons, present need and future utility of such a
process are briefly assessed below.
Liquidation by sale as a going concern will primarily benefit
the employees of the insolvent company. The corporate insolvency
resolution process (CIRP) can be triggered by a single instance of
default in repayment of `100,000 (US$1,500). When the CIRP of an
insolvent company, whose business is not generally loss-making,
fails to culminate into a viable resolution plan, liquidation and
sale for scrap value could threaten the jobs and livelihood of
everyone who works for the company.
While the case for employees may be rooted in social welfare,
liquidation as a going concern of a financially troubled entity
also makes sound business sense. Staff who occupy the lower rung in
the IBC's "waterfall mechanism" will not need to
worry about full recovery of the amounts owed to them after
distribution to employees and secured creditors that are given
higher priority, as they will earn through their continued
employment. Moreover, the presence of those who ran and worked for
the company means the new owners will not need to start from
scratch.
The quick process of an auction-driven, going-concern sale
– particularly in a competitive, open market –
maximizes the value of the insolvent entity's assets for
distribution to its creditors. This supports the IBC's intent
to ensure continuity of the business, without undue erosion of the
asset base, so as to ensure maximum value for creditors.
This method could also protect contracts and valuable
intellectual property such as trademarks. Finally, a transparent
process conducted within a framework in which an independent
liquidator carries out and submits periodic progress reports to the
NCLT will make it difficult to challenge or object to the outcome
of the liquidation.
By way of cons, the main one is that, as a distressed sale is
often made on an "as is, where is" basis, the buyer's
interests are not protected by any representations or warranties.
The buyer will have limited recourse against the seller if there is
any variance in the terms of sale or agreement. This is why the
reserve price in a sale by way of liquidation tends to be lower
than the value mooted by a resolution plan or a general business
acquisition. It is also evitable that the goodwill of a business,
cultivated over time, will be lost with the change in management
and control of the corporate entity.
It is thus apparent that the insolvency framework has to sustain
a fine balance between preserving a business and deriving maximum
value from its assets for the creditors, who are, admittedly,
supreme. A rising trend in jurisdictions such as the US, UK and
Canada is to allow "pre-packaged" sales, where a business
is sold as a going concern to individuals from the former
management, where found eligible. This is usually done for
businesses that are insolvent due to slipups by the management, yet
healthy enough to continue with a slightly altered management that
already understands the intricacies of the business. This may be a
possible scenario under the IBC as well, given the diverse cases
that are being admitted. The area of sale in liquidation as a going
concern is bound to generate interesting developments in the
future, possibly including pre-packaged sales.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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