TMI Blog2021 (8) TMI 1000X X X X Extracts X X X X X X X X Extracts X X X X ..... 32A and 45(3) which were inserted in the Liquidation Process Regulations subsequent to ARCELORMITTAL INDIA PRIVATE LIMITED VERSUS SATISH KUMAR GUPTA ORS. [ 2018 (10) TMI 312 - SUPREME COURT] and SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. [ 2019 (1) TMI 1508 - SUPREME COURT] specifically define the process for sale of Corporate Debtor or its business as a going concern. IBBI in furtherance of its delegated power has framed the regulations in accordance with the objectives and also as empowered under Section 240 of the Code. As per Section 241 of the Code, every rule and regulation made under the Code will be placed before the Parliament. For a total period of 30 days for both Houses to make any modification or annulment - Regulation 32-A(1) emphasizes the importance placed on the transfer of the Corporate Debtor or its business on a going concern basis. Regulation 39C of CIRP Regulations read with Regulations 32, 32A and 45(3) of Liquidation Process Regulations, it is clear that under Regulation 39C, the CoC may recommend that the Liquidator may first explore sale of the Corporate Debtor as a going concern under Clause (e) of Regulation 32 or Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 20.11.2019 declaring Mr. Vijay Verma/the first Respondent as the highest bidder at a bid price of ₹ 4,51,99,713/-. By the Impugned Order, the Adjudicating Authority has dismissed this I.A. observing as follows:- 32. On reading this CIRP Regulation, it appears at the outset, an effort has been strenuously made to rewrite IBC without amendment to the Code- the reasons for saying so is- 1. Foremost hurdle is, this Regulation is a new concept not backed by any provision of law in IBC. The Regulating Authority cannot stretch its muscle beyond its strength, if it does so, it is exercising jurisdiction not contemplated under IBC. No mention about this arrangement either in section 28 or section 30 or any other section of the Code. 2. The CIRP process is separate and the liquidation process is separate. Separate yardsticks have been set up by the Code. 3. How CoC, which would not remain in existence after liquidation order, will issue its dictum to be followed without any other recourse to the liquidator despite liquidator is to act independently during liquidation process. 4. CoC has not been endowed with powers to give mandate over the progress of liquid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old as a going concern? If this is permitted, tomorrow somebody may suggest something else. Where is the end for it? It is a policy decision- which cannot be taken by IBBI particularly when no such concept is contemplated under the Code and more particularly when section explicitly given a mandate for dissolution. 11. In most of the cases, these companies remain as going concerns on the records of RoC, but if ground situation is taken into account, these companies are gone cases, companies where only two computers, or companies with one landed property. Not really any business, except in a few companies. 12. The benefit in these liquidation cases mostly go to the buyer, because real value of the asset will not come out, only distress value will come out in the form of liquidation value, in most cases will be far less than real market value or entrepreneur value. 13. Today what is the yardstick to categorize which corporate debtor is a going concern and which one is not a going concern? 14. Let us assume purchase come forward to take the corporate debtor as going concern for a value less than liquidation value, as per this Regulation unless the liquidator has fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Corporate Debtor as a going concern pursuant to Regulation 32 of IBBI (Liquidation Process) Regulations, 2016. Whether Adjudicating Authority was correct in concluding that Regulations 39C of CIRP Regulations and 32A, 45(3) of the Liquidation Process Regulations are inconsistent with Section 54 of the Code. Whether the interpretation by the Adjudicating Authority of the provisions of the Code and Liquidation Process Regulations in the Order impugned is contrary to the scope and spirit of the I B Code. Submissions on behalf of Learned Counsel appearing for Appellant/ Liquidator: 3. The Learned Sr. Counsel submitted as follows:- The Learned Adjudicating Authority has failed to appreciate that the Liquidator is authorized to sell the Corporate Debtor or its business as a going concern pursuant to Regulations 32(e) (f) of the Liquidation Process Regulations; that such a sale is consistent with the objective of the Code as affirmed by the Hon ble Supreme Court in several Judgements and that the Liquidation should be the last resort as it results in loss of daily bread for the workmen. The Hon ble Supreme Court in Arcelormittal India Private Limited Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Adjudicating Authority and therefore passing of Resolution of CoC under Regulation 39C was not possible. The Adjudicating Authority has erroneously rejected I.A. No. 1490 of 2020 on the ground that Regulation 32A and 45(3) are inconsistent with the Code and framed without jurisdiction by IBBI. Learned Sr. Counsel drew our attention to the Notice issued by this Tribunal on 28.09.2020, wherein the Impugned Order was stayed only to avoid the death of the Corporate Debtor . 4. Submissions on behalf of the Learned Counsel appearing for the first Respondent/Successful Bidder: The auction was successfully conducted on 20.11.2019, the first Respondent/Mr. Vijay Verma emerged as the highest successful bidder at a bid price of ₹ 4,51,99,737/- and was immediately intimated by the Liquidator to execute the sale document. The entire amount was deposited within the period from 18.12.2019 to 16.01.2020 into the Liquidator account of the Corporate Debtor and if the Corporate Debtor is put into dissolution, then there would be no purpose in purchasing the Company at such a high price for the same asset. The bidder suffered a huge loss by way of interest since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and bankruptcy Board of India, and for matters connected therewith or incidental thereto. (Emphasis Supplied) 7. The regime under the IBC is positively progressive as can be seen from several amendments that were brought forth. Having regard to the observations made by the Adjudicating Authority in the Order impugned, we find it significant to detail the discussion by IBBI on this issue. 8. Discussion Paper dated 30.01.2019 on Corporate Liquidation Process by IBBI:- A. Sale as a Going Concern:- 2. The Insolvency and Bankruptcy Code, 2016 (Code) provides a market mechanism for rescuing, failing but viable corporate debtors (CD) and liquidating, failing and unviable ones. There is no mathematical formula to identify a CD as viable and another as unviable. If correct identification is not made, a viable CD will be liquidated and unviab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 230. Power to compromise or make arrangements with creditors and members.- (1) Where a compromise or arrangement is proposed- (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.... .2.15 The Bankruptcy Law Reforms Committee (BLRC) drew on the liquidation experiences both in India as well as other countries and listed two other ways, in addition to sale of assets, in which higher economic value can be realised other than just sale of assets. It provided the following drafting instruction: Box 5.21: Drafting instructions for regulations on realisation in Liquidation other than through sale of assets a. There could be two source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement under section 230 of the Act is proposed, it must be utilised first and only on its failure, liquidation under the Code should commence. The Code read with regulations may provide that where a credible proposal is made to the Liquidator under section 230 of the Act for compromise or arrangement of the CD within three days of the date of order under section 33 of the Code for liquidation, the Liquidator shall file an application under the said section within seven days of the order of liquidation. If approved by the NCLT, the Liquidator shall complete the process under section 230 within 90 days of the order of liquidation. The Regulations may provide that liquidation process under the Code shall commence at the earliest of the four events (a) there is no proposal for compromise or arrangement within three days, (b) the NCLT does not approve the application under section 230 of the Act, (c) the process under section 230 is not completed within 90 days or such extended period as may be allowed by the NCLT, or (d) the process under section 230 is not sanctioned under section 230(6) of the Act. A tight time schedule is necessary to ensure that the liquidation process is concluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They should be transferred along with the CD or the business of the CD. 4.2 Continuation of Going Concern: The issue of an order under section 33 of the Code for liquidation does not mean cessation of business immediately. The classic jurisprudence of liquidation laws suggests that the Liquidator can keep the entity as a going concern for the benefit of stakeholders. Even section 35 (1) (e) of the Code requires the Liquidator to carry on the business of the CD for its beneficial liquidation as he considers necessary. He may carry on business to the extent necessary for realization of better value from GCS .. (Emphasis Supplied) 9. Section 240(1) empowers IBBI with the power to make regulations in the following terms: (1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code. Under Sub-Section (1) of Section 240, the power to frame regulations is conditioned by two requirements: first, the regulations have to be consistent with the provisions of the IBC and the rules framed by the Central Government; and second, the regulations must be to carry out the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor option to (i) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or (ii) realise its security interest in the manner specified in section 52 of the code read with regulation 37. Thus, a secured creditor may opt to realise its security interest outside the liquidation, foreclosing the option of sale of CD as a going concern by the liquidator. In order to sell the CD as a going concern in liquidation process, either the secured creditors opt in favour of relinquishing their security interest in favour of liquidation estate; or the secured creditors postpone exercise of their option under section 52 to realise security interest outside liquidation process to allow the liquidator to explore the possibilities of sale as a going concern. 8. Further, liquidation is the process that entails disposal of the assets of the entity. A Liquidator does not run the company; his task is to liquidate, though the law has always empowered the liquidator to carry on the business of the company to the extent required for its beneficial liquidation. The liquidator may do only such thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Innoventive Industries Ltd. Vs. ICICI Bank and Anr. , Civil Appeal Nos. 8337-8338 of 2017 has observed as follows:- From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realization is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay. (Emphasis Supplied) 12. The Hon ble Supreme Court in Arcelormittal India Private Limited (Supra) in paragraph 86, noted thus:- 86. Given the fact that both the NCLT and NCLAT are to decide matters arising under the Code as soon as possible, we cannot shut our eyes to the fact that a large volume of litigation has now to be handled by both aforesaid Tribunals. What happens in a case where the NCLT or the NCLAST decide a matter arising out of Section 31 of the Code beyond the time-limit of 180 days or the extended time-limit of 270 days? Actus curiae neminem gravabit the act of the court shall harm no man is a maxim firmly rooted in our jurispr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximize their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then cases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y claims of all the creditors; take into custody and control of all the assets, property, effects and actionable claims of the corporate debtor , carry on the business of the corporate debtor for its beneficial liquidation etc. as prescribed under Section 35 of the I B Code.... Before taking steps to sell the assets of the corporate debtor(s) (companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company s assets wholly and thereafter, if not possible to sell the company in part and in accordance with law. .. The Liquidator if initiates, will complete the process under Section 230 of the Companies Act within 90 days... . 18. This Tribunal in the matter of Y. Shivram Prasad Vs. S. Dhanapal Ors. in Company Appeal (AT) (Insolvency) No. 224 of 2018, observed as under:- .. we hold that the liquidator is required to act in terms of the aforesaid directions of the Appellate Tribunal and take steps under Section 230 of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) emphasizes the importance placed on the transfer of the Corporate Debtor or its business on a going concern basis. 23. Regulation 45(3) of Liquidation Process Regulations and 39C of the CIRP Regulations, the main subject matter of the Order impugned, read as follows:- 45. Final report prior to dissolution. (3) [The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for (a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or (b) for the dissolution of the corporate debtor, in cases not covered under clause (a).] 39C. Assessment of sale as a going concern. (1) While approving a resolution plan under section 30 or deciding to liquidate the corporate debtor under section 33, the committee may recommend that the liquidator may first explore sale of the corporate debtor as a going concern under clause (e) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 or sale of the business of the corporate debtor as a going concern under clause (f) thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would be contradictory to observe that closure of Liquidation Proceedings cannot be done and only dissolution is provided for under the Code. This would demolish the very spirit and objective of the Code. It can be safely construed that before the completion of 270 days, if no decision under Regulation 39C is taken by the CoC, only Regulation 32A is to be followed. Additionally, in the instant case, the Application under Section 33 of the Code seeking Liquidation was filed prior to 25.07.2019 (on which date Regulation 39C was inserted), therefore, the question of CoC passing any Resolution does not arise. We are of the considered view that the Liquidator has rightly followed the procedure specified in Regulation 32A of the Liquidation Process Regulations. 26. It is a well settled proposition that the legality and propriety of any Regulation/Notification/Rules/Act cannot be looked into by NCLT or NCLAT. The Tribunal can only ascertain whether the procedures provided for under the Code/Companies Act, 2013 are being followed or not. The Adjudicating Authority cannot go beyond this. 27. In Arun Kumar Jagatramka Vs. Jindal Steel Power Ltd. Anr. reported in Civil Appeal No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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