90 DAYS PERIOD UNDER REGULATION 32A OF IBBI (LIQUIDATION PROCESS) REGULATIONS, 2016 IS DIRECTORY AND NOT MANDATORY

[Mr. M. GOVINDARAJAN]

Sale as going concern

Regulation 32A was inserted vide Notification No. IBBI/2019-20/GN/REG047, dated 25.07.2019 in IBBI (Liquidation Process) Regulations, 2016.    This regulation provides for the sale of corporate debtor as going concern.  This regulation provides that if 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 maximize the value of the corporate debtor, he shall endeavor to first sell under the said clauses.

Section 32(e) and (f) provides that the liquidator may sell-

(e) the corporate debtor as a going concern; or

(f) the business(s) of the corporate debtor as a going concern.

For the purpose of sale as going concern the Committee of Creditors shall identify the group of assets and liabilities of the corporate debtor under Regulation 39C(2) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.  If the committee of creditors has not identified the assets and liabilities the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the Stakeholders Consultation Committee.

Such sale shall be effected within 90 days from the liquidation commencement date.  If the liquidator is not able to sell the same within 90 days from the liquidation commencement date the liquidator shall proceed to sell the assets in any one of the following ways-

• an asset on a standalone basis;
• the assets in a slump sale;
• a set of assets collectively;
• the assets in parcels.

Case law

In EKAMBARESWARA RAO MANNE VERSUS MR. GONUGUNTA MADHUSUDHAN RAO, LIQUIDATOR - M/S SERVOMAX INDIA PRIVATE LIMITED, AVASARALA VENKATESWARA RAO, INSOLVENCY AND BANKRUPTCY BOARD OF INDIA, THE REGISTRAR OF COMPANIES COMPLAINTS AND GRIEVANCE CELL, THE INDIAN INSTITUTE OF INSOLVENCY PROFESSIONAL OF ICAI [2022 (3) TMI 93 - NATIONAL COMPANY LAW TRIBUNAL HYDERABAD BENCH], Servomax India (P) Limited, corporate debtor was ordered to be liquidated by the Adjudicating Authority, Hyderabad Bench, vide their order dated 04.02.2019.  The respondent Gonugunta Madhushudhana Rao was appointed as liquidator for conducting the liquidation process of the corporate debtor.  The liquidator made a public announcement on 08.02.2019 inviting claims from the stakeholders of the corporate debtor.  The applicant also filed its claim before the Liquidator.  The applicant became the member of the Stakeholders Committee. 

In the Stakeholders’ meeting held on 10.10.2019 it was decided to sell the corporate as going concern within 90 days from the date of commencement of liquidation.  The reserve price was fixed at ₹ 72 crores later reduced to ₹ 24.59 crores.  The auction date was fixed on 25.07.2021.  The time line of 90 days has gone and the liquidator continued to pursue the sale as going concern.  At the time of auction the corporate debtor was not a going concern. 

The applicant assailed the actions of the liquidator and filed an IA before the Adjudicating Authority.  In the said application the applicant prayed the Adjudicating Authority to pass the following reliefs by directing the liquidator-

• to produce records before the Adjudicating Authority as how to realizable value arrayed and the same reduced in every auction;
• to place the records/registers maintained by him with respect to the e-auctions conducted by him;
• to file an affidavit with respect to the difference in realizable value of ongoing concern and realizable value of corrective price of individual assets in all sale notice;
• to restrain in taking any further actions to conclude the E-auction proceedings dated 15.07.2021 which is in violation of Regulation 32A of the Regulations to sell the company as ‘going concern’;
• to produce the records and documents submitted by the bidders with respect to e-auction;
• to produce the records maintained by him regarding the deposit of bids of all the e-auctions conducted by him;
• not to take any coercive actions with respect of the e-auction declaring the successful bidder or to issue letter of intent etc.
• to place on record with respect to the permission sought in terms of Regulation 10.

The applicant submitted the following before the Adjudicating Authority-

• The liquidator, instead of taking action under Regulation 32 (a) to (d), continued making efforts to sell it as an ongoing concern basis even beyond 90 days from the commencement of liquidation, which is against the provisions of Regulation 32.
• At the time of issue of notice for e-auction the corporate debtor is not an ongoing concern.
• The liquidator did so with an ulterior motive to facilitate the promoter of the corporate debtor or his associates to purchase the assets at a cheap rate.
• The liquidator failed to explain as to how the realizable value has been decreased from the collective value of total assets individually.
• The liquidator has entertained some of the parties before or after the timeline specified in the e-auction notice with the intention to aid and assist the promoters to participate in the e-auction process.
• All the assets mentioned in the E-auction notice are not actually in the possession of the liquidator.
• The liquidator illegally granted the permission to the promoters of the corporate debtor for using the brand and credentials of the company and allowed him to incorporate a company using similar name of the corporate debtor.
• The website of the company is being used by the promoter for doing business for the reasons best known to the liquidator.
• The liquidator has not obtained any permission either in the form of order or directions from the Adjudicating Authority before taking any action with respect to sale in any manner during the liquidation process.
• The liquidator cannot at his will, wish, caprice and desire dispose away the assets of the corporate debtor.
• Since the liquidator did not comply with the provisions of the Code the sale is not legal under the eyes of the law.
• The act of the liquidator conducting sale as ongoing concern after 600 days is bad in law as law mandates only 90 days for such sale.
• Regulation 32A, inserted by means of a notification, shall be treated as an open ended provision relating to procedural law which in no way states that it will not apply to the pending liquidation.

The liquidator strongly refuted the allegations of the applicant.  He contended the following before the Adjudicating Authority-

• Despite efforts to comply with the directions of the Adjudicating Authority, he was unable to arrive at any effective compromise or arrangement, he proceeded with the liquidation proceedings as per the decisions taken in the first Stakeholders’ meeting.
• The applicant was also present in the said meeting and he did not object to the same.
• The applicant never raised any objection to the sale of corporate debtor as a going concern nor about the reserve price in any of the Stakeholders’ meeting.
• He has issued prior notices and participated in the entire Stakeholders’ meetings where the reserve price at the auctions were fixed and reduced.
• Though in response to the sale notice dated 03.02.2021 the successful bidder agreed to purchase the company as a going concern the said successful bidder had subsequently backed out because of the threats allegedly received from the applicant.
• The Regulations gives powers to the liquidator to reduce the reserve price up to 25% for conducting the subsequent auction.
• The liquidator has reduced only 8% of the value in order to explore the possibilities of selling the corporate debtor as a going concern at a maximum price.
• Regulation 32A(4) was amended on 25.07.2019 fixing the time line 90 days but the Adjudicating Authority passed the liquidation order much before the amendment date.  Therefore there is no time limit for selling the corporate debtor as a going concern.
• The properties are secured properties of Kotak Mahindra Bank and the bank has not relinquished its security to the liquidation estate.  Therefore the liquidator has no right over the said properties.
• The applicant intended to float a company in the name of ‘Lohitha Power Products Private Limited which is similar to the business of the corporate debtor.  The applicant is opposing the sale with the intention to grab the business of the corporate debtor.
• He has filed regularly the progress reports, Asset Sale Reports, Asset Memorandum to the Adjudicating Authority and to IBBI.
• He placed all the records/information before the Adjudicating Authority in the above said reports and also disclose all to the Insolvency Professional Agency.
• The successful bidder paid the entire sale consideration along with the applicable interest within due date and the liquidator issued sale certificate to the successful bidder.

The Adjudicating Authority considered the submissions put forth by the parties to the application.  The Adjudicating Authority framed the following points for its consideration-

• Whether the sale of the corporate debtor as a going concern held on 11.02.2021 is contrary to Regulation 32A of IBBI (Liquidation Process) Regulations, 2016?
• If so whether the impugned order is liable to be set aside?

The Adjudicating Authority considered the events that have taken place from the date of issue of liquidation order by it.  The Adjudicating Authority analyzed the decisions relied on by the applicant as well as by the liquidator.  The Adjudicating Authority also analyzed the provisions of Regulation 32 and 32A besides the IBBI Circular dated 26.08.2021 which clarifies that the timeline fixed in this regulation will not be applicable for the liquidation process started before that amendment.  The Adjudicating Authority also perused the proceedings of the Stakeholders’ meeting held on 10.10.2019.

The Adjudicating Authority observed that the Stakeholders’ meeting approved for the sale of corporate debtor as a going concern.  The applicant is the member of Stakeholders’ Consultation Committee and he was present in the meeting in which the decision was taken to sell the corporate debtor as a going concern.  Having accepted the decision of the committee he has no locus standii to agitate on the said matter before the Adjudicating Authority.

The IBBI circular clarified that the time line of 90 days under Regulation 32A (4) is not applicable to the liquidation process before the amendment.  The consequences of non compliance of this provision are not spelt out in the Regulations.  Therefore  the word ‘shall’ used in Regulation 32A raises a presumption that the particular provision is directory and not mandatory.  The Adjudicating Authority further observed that the liquidator is entitled to reduce the reserve price up to 25% whenever the auction fails. The average price reduced by the liquidator is only 8%.  The Committee has also agreed to such reduction in the reserve price from time to time and allowed the sale notices to be published.

The Adjudicating Authority dismissed the application as devoid of merits