NCLT upholds sale of company without liabilities in appeal case

The National Company Law Tribunal (NCLT) dismissed the appeal challenging the closure of the liquidation process of a company and the sale of the Corporate Debtor as a going concern without liabilities. The NCLT upheld the sale without previous liabilities, distributing proceeds to the Financial Creditor and denying payment to the Operational Creditor. The appeal was deemed without merit, and no costs were awarded.

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Issues Involved:
1. Validity of the closure of the liquidation process.
2. Applicability of the Liquidation Process Amendment Regulation, 2019.
3. Formation of the consultation committee.
4. Ownership of liabilities by the purchaser in a going concern sale.
5. Compliance with Section 53 of the Insolvency and Bankruptcy Code (IBC).
6. Distribution of sale proceeds and claims of creditors.

Issue-wise Detailed Analysis:

1. Validity of the Closure of the Liquidation Process:
The Appellant (Operational Creditor) challenged the order dated 18.05.2020 by the National Company Law Tribunal (NCLT), Chandigarh, which approved the closure of the liquidation process of K.T.C. Foods Pvt. Ltd. The Liquidator had sought the closure of the liquidation process and the sale of the Corporate Debtor as a going concern without liabilities. The NCLT rejected the Appellant's prayer for directions to Respondent No. 2 to make the payment of claims.

2. Applicability of the Liquidation Process Amendment Regulation, 2019:
The Appellant argued that the Liquidation Process Amendment Regulation, 2019, notified on 25.07.2019, was not applicable to liquidation processes before this date. The liquidation order for the Corporate Debtor was passed on 31.05.2019. The NCLT observed that despite the non-constitution of the Stakeholders Committee, the going concern sale process could be followed under Regulation 45(3)(a) with Regulation 32A and 33(1) of the Liquidation Process Regulations, 2016.

3. Formation of the Consultation Committee:
The Appellant contended that the consultation committee was not formed, which was necessary under the new regulations if assets and liabilities were to be sold as a going concern. The NCLT, however, allowed the sale of the Corporate Debtor as a going concern, citing the amended regulations.

4. Ownership of Liabilities by the Purchaser in a Going Concern Sale:
The Appellant argued that since the Corporate Debtor was sold as a going concern, it should own both its assets and liabilities. The NCLT relied on the decision in Bank of India Vs. Southern Online Biotechnologies Ltd., which stated that liabilities prior to the e-auction during the liquidation process would not be applicable to the purchaser of the Corporate Debtor as a going concern. The NCLT held that the sale as a 'going concern' or 'as is where is whatever there is' basis includes only assets and not liabilities.

5. Compliance with Section 53 of the Insolvency and Bankruptcy Code (IBC):
The Respondent No. 1 argued that the liquidation process was conducted in compliance with the IBBI (Liquidation Process) Regulations, 2016. The e-auction sale was completed, and proceeds were distributed as stipulated under Section 53 of the IBC. The NCLT found no illegality in the distribution of proceeds.

6. Distribution of Sale Proceeds and Claims of Creditors:
The Respondent No. 3, the Liquidator, distributed the sale proceeds of INR 18.45 crores towards 13.17% of the admitted debt of the sole Financial Creditor, Oriental Bank of Commerce. The NCLT observed that claims of third parties must be distributed as per Section 53 of the IBC. The Appellant, being an Operational Creditor, was not entitled to any payment as the sale proceeds were appropriated towards the debt of the Financial Creditor.

Findings:
The NCLT affirmed that the sale of the Corporate Debtor as a going concern was without previous liabilities or encumbrances. The Oriental Bank of Commerce, as the sole Financial Creditor, had relinquished its security interest and was paid from the sale proceeds. The Appellant's claims were subordinate to the Financial Creditor's claims.

Order:
The NCLT dismissed the Appeal, affirming the impugned order dated 18.05.2020. The closure of the liquidation process and the sale of the Corporate Debtor as a going concern without liabilities were upheld. The Appeal was found to be without merit, and no costs were awarded. The Registry was directed to upload the Judgment and send a copy to the NCLT, Chandigarh Bench.

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