The sale of a business as a going concern, long treated as a commercial strategy, is now legally enshrined in Indian insolvency and corporate law. It reflects a doctrinal evolution in which liquidation serves not as terminal closure but as a bridge to continuity. This article analyzes the relevant statutory framework, jurisprudential interpretation, and doctrinal developments in India, with attention to emerging limitations and necessary safeguards.
A. Statutory Framework: Reading the IBC and Company Law in Tandem
Under the Insolvency and Bankruptcy Code, 2016 ("IBC"), the foundational authority for a going concern sale rests with the liquidator under Sec. 35(1)(f), which empowers him to sell both movable and immovable assets of the corporate debtor by way of public auction or private contract. However, the doctrinal shift toward preservation arises through subordinate legislation: namely, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Regulation 32(e) permits the liquidator to sell the corporate debtor "as a going concern," while Regulation 32A(1) directs that such a method be prioritized if it better preserves value. Importantly, Regulation 32A(4) mandates that in such sales, the corporate debtor must not be dissolved, and must be transferred with its assets, liabilities, and operations intact. This provision ensures the juridical continuity of the debtor entity, facilitating the seamless transfer of licenses, contracts, and tax registrations.
In the context of non-insolvency transactions, company law imposes its own procedural safeguards. Per Sec. 180(1)(a) of the Companies Act, 2013, a company may sell the whole or substantially the whole of its undertaking only with shareholder approval by a special resolution. Explanation (i) to the provision defines "undertaking" in terms of contributing 20% or more to the company's net worth or turnover. Failure to comply renders such a sale ultra vires and voidable, particularly in private companies where board actions can override minority interests.
Separately, Sec. 282(2) of the Companies Act allows the National Company Law Tribunal ("NCLT") to order a going concern sale of the company during liquidation. The Tribunal may also constitute a sale committee comprising creditors, promoters, and officers to assist the liquidator, emphasizing judicial oversight.
B. Judicial Interpretation: From Value Maximization to Clean Slate Doctrine
1. Swiss Ribbons Pvt. Ltd. v. Union of India
The Supreme Court in Swiss Ribbons upheld the constitutional validity of the IBC and emphasized its primary goal: the resolution and revival of distressed businesses, not their liquidation. The Court acknowledged that the IBC prefers outcomes that preserve the corporate debtor as a going concern, reflecting a policy alignment with international insolvency norms.
2. Essar Steel India Ltd. v. Satish Kumar Gupta
In Essar Steel, the Court took a significant step toward protecting the "clean slate" of the resolution applicant, ruling that once a resolution plan is approved under Sec. 31 of the IBC, the successful bidder should not be burdened with past liabilities unless expressly stated. This judicial endorsement strengthened bidder confidence in going concern sales.
3. UltraTech Nathdwara Cement Ltd. v. Union of India
The Rajasthan High Court, however, narrowed the ambit of the clean slate principle. In UltraTech, the Court held that unless the resolution plan explicitly extinguishes statutory dues, such as excise or tax arrears, those dues remain enforceable. This ruling underscored that general resolution approval does not nullify state claims unless specifically addressed.
4. State Tax Officer v. Rainbow Papers Ltd.
Most recently, in Rainbow Papers, the Supreme Court held that government dues, particularly under tax statutes, cannot be subordinated without express treatment in the plan. The Court characterized such dues as "secured claims" under Sec. 53 of the IBC, complicating assumptions about automatic discharge in General Corporate sales.
C. Structuring Challenges: Liability Transfer and Legal Immunity
Despite regulatory encouragement, the legal success of a going concern sale depends on the explicit treatment of liabilities. Indian courts have signaled that unless a liability is accounted for, whether by extinguishment, absorption, or indemnification, it may survive the sale. This introduces a significant caveat to the buyer's expectation of a "clean slate."
Further, not all regulatory licenses or approvals may transfer automatically. For instance, environmental clearances, telecom licenses, or SEBI registrations may be entity-specific and subject to regulator discretion. The legal continuity created by Regulation 32A(4) must therefore be paired with sector-specific compliance mechanisms. The absence of legislative harmonization here creates avoidable legal uncertainty.
D. Stakeholder Implications
1. The Buyer: Continuity with Caveats
The buyer in a going concern sale benefits from juridical and operational continuity, but must undertake robust due diligence. Judicial developments post- Rainbow Papers suggest that buyers may inherit unaddressed or contingent liabilities unless the resolution plan or business transfer agreement ("BTA") includes precise language excluding or addressing them.
Indemnity clauses and representations are thus essential legal instruments for risk allocation. However, their enforceability, particularly against a seller in liquidation, is often illusory unless backed by escrow arrangements or tribunal-approved exclusions.
2. The Seller or Liquidator: Procedural Fidelity
For the liquidator or corporate board, the legal obligations are twofold: maximize value and comply with the governing statute. Under IBC Regulation 2016, Regulation 32A(1), the liquidator must favor a General Corporate sale if it fetches higher value, failing which they must justify their decision. Simultaneously, Sec.180 of the Companies Act requires shareholder approval where the transaction involves a "substantial undertaking."
Further, the seller's legal responsibility includes clearly documenting which liabilities transfer and which do not. Omission or vagueness here exposes both the seller and the buyer to post-transaction claims, undermining the legal finality intended under Sec.31 of the IBC.
Conclusion: Toward a Consistent Doctrine of Legal Continuity
The legal doctrine surrounding going concern sales in India is steadily evolving but remains partially unsettled. The statutory framework under the IBC and the Companies Act is robust, and judicial interpretation has largely favored revival and continuity. However, inconsistency in the treatment of statutory dues and regulatory obligations has introduced doctrinal ambiguity.
To fully realize the promise of going concern sales, Indian law must:
- Harmonize the IBC with tax and regulatory statutes;
- Clarify the legal effects of tribunal-approved resolution plans on past liabilities;
- Mandate precision in sale documentation;
- Provide safe harbors for bona fide acquirers.
Until then, the doctrine remains a powerful but cautious legal tool—demanding technical precision, judicial guidance, and regulatory support.
Frequently Asked Questions (FAQs)
1. What is a "going concern sale" under the IBC?
A going concern sale (Sec.35(1)(f) IBC + Reg.32A) allows the liquidator to transfer a corporate debtor with its assets, liabilities, and operations intact, preserving value.
2. When must a going concern sale get shareholder approval?
Under Sec.180(1)(a) of the Companies Act, 2013, any sale of the whole or substantially whole of an undertaking requires a special resolution.
3. Does a clean‑slate principle apply automatically?
No. Post‑Essar Steel and Rainbow Papers, only those statutory dues explicitly extinguished in the resolution plan will not survive the sale.
4. What are the key due diligence checkpoints for buyers?
Buyers must verify transferability of licenses, precise liability carve‑outs in the BTA, and any sector‑specific regulatory consents.
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