According to a recent judgement by the National Company Law Appellate Tribunal (NCLAT), a firm can continue to operate normally or as a "going concern" even if it is being wound up in an administered sale, enhancing recovery prospects for lenders looking to maximize value on sour loans.
A previous order by the National Company Law AppellateTribunal was overturned by the major bench in New Delhi, which was made up of two-Members Bench – Judicial Member Justice Anant Bijay Singh, and Technical Member Shreesha Merla. According to the National Company Law Appellate Tribunal, the Corporate Insolvency Resolution Plan (CIRP) and the Committee of Creditors (CoC) would make every attempt to extract the most value from the corporate debtor.
In the matter of M/s Mohan Gems & Jewels Pvt. Ltd versus Vijay Verma & Another, REED 2021 NCLAT Del 08561, an order was issued on 24 August 2021, saying that the sale of a corporate debtor (borrower) as a going concern during the liquidation process is valid under the Insolvency and Bankruptcy Code (IBC).
Regulation 32 of the Insolvency Bankruptcy Code, 2016 was amended in October 2018 to include an additional section allowing liquidators to sell "the corporate debtor as a going concern."
“The reality is that if the company has value and can be run as a going concern, people will come forward to buy it as a going concern,” NCLAT stated.
The liquidator's motion for closure of the liquidation process (not the dissolution of the company) was refused by NCLT around a year ago since the corporate debtor was being sold as a continuing concern during liquidation.
On 16 September 2020, last year, the NCLT ruled that once a company is in the process of being liquidated, it must be dissolved.
The NCLAT, on the other hand, claimed that the NCLT did not understand the Supreme Court's ruling that liquidation should be viewed as a last choice and that every effort should be made to revive the company and keep it operating as a "going concern."
“We are of the opinion that the liquidator sold the ‘Corporate Debtor Company' in accordance with the Regulations,” NCLAT justices said.
The liquidator referenced section 32(e) & (f) of the Liquidation Process Regulations, claiming that such a transaction is in line with the Code's goal. He had the authority to sell the corporate debtor's business or the debtor's assets as a "going concern."
“Sale of the Corporate Debtor as a going concern during the liquidation process is a novel concept,” according to Anil Goel, Founder AAA Insolvency Professionals LLP.
For successful implementations, certain clarifications are required. For example, Goel explained that one must determine if the benefits of revisions to certain Income Tax Act provisions, such as the squaring of brought-forward losses and exemption from Minimum Alternate Tax (MAT), apply to such sales.
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