2023 (12) TMI 1481 - Tri - IBC

Sale of corporate debtor as going concern, Section 53 IBC distribution, limited waivers, guarantor liability continues

NCLT (Kolkata) approved the sale of the corporate debtor as a going concern and directed the liquidator to issue a sale certificate to the successful ... Seeking confirmation of sale of the Corporate Debtor as a going concern - waivers with regard to extinguishment of claims which arose prior to the initiation of CIRP - Applicability of decision in Ghanashyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Company Ltd [2021 (4) TMI 613 - SUPREME COURT] and Lalit Kumar Jain v. Union of India [2021 (5) TMI 743 - SUPREME COURT] - HELD THAT:- It is evident that some of the reliefs, waivers and concessions sought by the Liquidator and the Successful Bidder come within the purview of the Code and the Companies Act 2013, while many others fall under the power and jurisdiction of different government authorities/departments. This Adjudicating Authority has the power to grant reliefs, waivers and concessions only with respect to the reliefs, waivers and concessions that are directly in relation to the Code and the Companies Act (within the powers of the NCLT). The reliefs, waivers and concessions that pertain to other governmental authorities/departments shall be dealt with the respective competent authorities/forums/offices, Government or Semi Government of the State or Central Government with regard to the respective reliefs, waivers and concession. The competent authorities including the Appellate authorities may consider grant such reliefs, waivers and concessions keeping in view the spirit of the I&B Code, 2016. The reliefs, waivers and concessions shall be consistent with extant law. Further since this is a ‘Going concern sale’, the Successful Bidder shall make necessary applications to the concerned regulatory or statutory authorities for renewal of business permits and supply of essential services, if required, and all necessary forms along with filing fees etc. and such authority shall also consider granting the same keeping in mind the objectives of the Code which is concerned with resolving of the insolvency of the Corporate Debtor. With respect to the waivers with regard to extinguishment of claims which arose prior to the initiation of CIRP and which have not been claimed are granted in terms of Ghanashyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Company Ltd [2021 (4) TMI 613 - SUPREME COURT] wherein the Hon’ble Apex Court has held that once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Govt, any State Govt or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan. With respect to the waivers sought in relation to guarantors, the judgment of Lalit Kumar Jain v. Union of India [2021 (5) TMI 743 - SUPREME COURT] laid down that the sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor's liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this Court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability. The sale of the Corporate Debtor as a going concern is akin to a de-facto CIRP, and therefore the aforementioned judgments shall be applicable in the present case as well. The Liquidator is directed to issue sale certificate in favour of the Respondent for such sale of Corporate Debtor as going concern upon verifying the due payment, if any, on part of the Respondent and to complete the acquisition of the Corporate Debtor as going concern - the applicant shall make distribution of the purchase consideration received from the respondent in terms of Section 53 of the I&B Code read with Rule 42 of the IBBI (Liquidation Process) Regulations, 2016 among the stakeholders. Application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the sale of the corporate debtor as a going concern, pursuant to a Swiss Challenge auction with an anchor bid, should be confirmed in favour of the successful bidder and a sale certificate directed to be issued. 1.2 What is the scope of the Tribunal's jurisdiction to grant the reliefs, waivers and concessions sought in connection with the going concern sale, particularly those described in the successful bidder's request letter and its schedules. 1.3 Whether, in a liquidation-stage going concern sale, claims arising prior to commencement of CIRP and not otherwise provided for are liable to be extinguished on a 'fresh slate' basis, and whether the ratio in the decision concerning extinguishment of claims upon approval of a resolution plan applies. 1.4 Whether the waivers sought in relation to personal guarantors can be granted in light of the law on the continuing liability of guarantors after resolution of the corporate debtor, and whether the ratio in the decision on personal guarantors applies to a going concern sale in liquidation. 1.5 Whether the sale of the corporate debtor as a going concern in liquidation is to be treated as analogous to a de facto CIRP for purposes of applying the above precedents and consequences relating to claims and guarantors. 1.6 How the purchase consideration received from the successful bidder is to be distributed amongst stakeholders following confirmation of the going concern sale. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Confirmation of going concern sale and issuance of sale certificate Interpretation and reasoning: The Tribunal examined the material placed on record, including (i) the public notice dated 24 July 2023 issued for the sale of the corporate debtor as a going concern with the successful bidder as anchor bidder, and (ii) the correspondence dated 11 September 2023 from the successful bidder describing the manner of acquisition and seeking specific directions and reliefs. The record showed that no competing expressions of interest were received in response to the said public notice, and that the anchor bid of Rs. 96 crore stood as the highest and binding offer. The successful bidder was accordingly treated as the successful bidder for the going concern sale. No reply affidavit disputing the process or outcome was filed on behalf of the successful bidder. The application before the Tribunal was filed pursuant to an earlier direction requiring the liquidator to conduct a Swiss Challenge auction and to place the result before the Tribunal for approval. Conclusions: The Tribunal confirmed the sale of the corporate debtor as a going concern in favour of the successful bidder for a consideration of Rs. 96 crore, and directed the liquidator to issue a sale certificate in favour of the successful bidder upon verification of full payment and to complete the acquisition of the corporate debtor as a going concern. Issue 2: Scope of Tribunal's power to grant reliefs, waivers and concessions Legal framework (as discussed): The Tribunal considered that its powers emanate from the Insolvency and Bankruptcy Code, 2016 and the Companies Act, 2013, and that other reliefs fall within the domain of separate governmental and regulatory authorities. Interpretation and reasoning: The Tribunal scrutinised the reliefs, waivers and concessions sought in the application and those contained in Schedule 1 (Part A and B) and Schedule 2 to the successful bidder's request letter. It noted that some of the requested measures fall squarely within the ambit of the I&B Code and the Companies Act (and hence within the jurisdiction of the Tribunal), whereas several others concern actions or decisions of various governmental departments, regulatory or statutory authorities at State or Central level. The Tribunal held that it can grant reliefs, waivers and concessions only to the extent they are directly referable to, and authorised by, the I&B Code and the Companies Act and the Tribunal's own statutory powers. Reliefs sought which require exercise of statutory or administrative powers by other authorities cannot be granted by the Tribunal and must be considered by those competent authorities. The Tribunal further observed that such external authorities and appellate authorities may consider the grant of appropriate reliefs, waivers and concessions keeping in view the spirit and objectives of the I&B Code, particularly the resolution of insolvency of the corporate debtor. It clarified that any reliefs, waivers and concessions granted must be consistent with extant law. For renewal of business permits and supply of essential services post-sale, the successful bidder must approach the relevant authorities with necessary applications and filings, and those authorities should consider such applications mindful of the Code's objectives. Conclusions: The Tribunal held that it will grant only those reliefs, waivers and concessions which are within its jurisdiction under the I&B Code and the Companies Act, 2013. Reliefs pertaining to other governmental or regulatory authorities must be sought before and decided by the respective competent forums, which are, however, expected to consider them in light of the object and spirit of the I&B Code. Issue 3: Extinguishment of pre-CIRP claims and applicability of the precedent on 'fresh slate' in a going concern sale Legal framework (as discussed): The Tribunal relied upon the judgment wherein the Supreme Court interpreted section 31 of the I&B Code and held that once a resolution plan is approved by the Adjudicating Authority, (i) claims provided in the plan stand frozen and are binding on all stakeholders including government authorities; (ii) all claims not forming part of the resolution plan stand extinguished; and (iii) no proceedings can be initiated or continued for such non-plan claims, including statutory dues, for the period prior to the date of approval. Interpretation and reasoning: The Tribunal identified that the successful bidder sought a 'fresh slate' acquisition of the corporate debtor, including extinguishment of prior claims not forming part of the sale terms. It noted that in the cited Supreme Court decision, the extinguishment of all claims not forming part of an approved resolution plan, including statutory dues, was clearly affirmed. The Tribunal then posed the core question: whether the ratio of that decision, rendered in the context of a CIRP resolution plan under section 31, can be applied in the present case where the corporate debtor is being sold as a going concern in liquidation. The Tribunal reasoned that the nature and effect of a going concern sale in liquidation is functionally akin to a de facto CIRP, inasmuch as the corporate debtor is transferred as an ongoing business to a new owner, with the objective of revival and maximisation of value, rather than mere asset-stripping. On that basis, the Tribunal considered it appropriate to treat the legal consequences relating to claims in a going concern sale in liquidation as analogous to those in an approved resolution plan. Conclusions: The Tribunal held that the sale of the corporate debtor as a going concern in liquidation is akin to a de facto CIRP, and therefore the ratio of the Supreme Court decision on extinguishment of claims upon approval of a resolution plan applies. Accordingly, waivers related to extinguishment of claims which arose prior to commencement of CIRP and have not been claimed are granted in terms of that precedent, so that such non-included claims (including statutory dues) stand extinguished and cannot be enforced or continued against the corporate debtor post-sale, consistent with the 'fresh slate' principle. Issue 4: Waivers concerning guarantors and applicability of the precedent on liability of guarantors Legal framework (as discussed): The Tribunal referred to the Supreme Court decision which held that approval of a resolution plan for a corporate debtor and the finality attached under section 31 of the I&B Code does not, by itself, discharge the liability of personal guarantors; the liability of guarantors depends on the terms of the guarantee and is not extinguished merely because of an involuntary act or loss of security on the part of the principal debtor. Interpretation and reasoning: The Tribunal considered that, in light of the above Supreme Court ruling, any waiver or extinguishment of guarantor liability sought as part of the going concern sale cannot be granted as a matter of course. The principles laid down make it clear that guarantor liability is independent and survives, unless specifically dealt with according to law and the terms of the guarantee. The Tribunal linked this analysis to its earlier finding that a going concern sale in liquidation is akin to a de facto CIRP and hence the same principles governing guarantors in a resolution scenario would apply here as well. Conclusions: The Tribunal held that, consistent with the Supreme Court decision on personal guarantors, approval and implementation of the going concern sale (treated as akin to a de facto CIRP outcome) does not per se discharge the guarantors' liability. Any waivers sought in relation to guarantors must conform to this settled law and cannot be granted in derogation of the principle that the guarantor's obligations are not automatically extinguished by resolution or sale of the corporate debtor. Issue 5: Characterisation of going concern sale in liquidation as de facto CIRP and consequent application of precedents Interpretation and reasoning: The Tribunal addressed the central question of whether a sale of the corporate debtor as a going concern during liquidation can be equated with a CIRP outcome for the purpose of applying the two Supreme Court precedents discussed above. It reasoned that in a going concern sale, the corporate debtor is transferred as a functioning business with the intent of revival and maximisation of value, which is conceptually and functionally similar to the objective of CIRP and approval of a resolution plan, as opposed to a mere piecemeal sale of assets. On that reasoning, the Tribunal concluded that the legal consequences regarding (i) extinguishment of prior claims not provided for, and (ii) the independent and subsisting liability of guarantors, should be aligned with those applicable in a resolution plan scenario. Conclusions: The Tribunal held that a going concern sale in liquidation is to be treated as akin to a de facto CIRP for the limited purpose of applying the Supreme Court decisions relating to extinguishment of claims (for non-included pre-CIRP liabilities) and the non-discharge of guarantors. Those ratios are therefore applicable to the present going concern sale. Issue 6: Distribution of sale proceeds Legal framework (as discussed): Section 53 of the I&B Code and Rule 42 of the IBBI (Liquidation Process) Regulations, 2016, which govern the distribution of liquidation proceeds among stakeholders. Interpretation and reasoning: Having confirmed the going concern sale and directed issuance of a sale certificate upon full payment, the Tribunal considered the manner in which the realised consideration of Rs. 96 crore (less any amounts already received/adjusted) is to be distributed. It reiterated that distribution of sale proceeds must strictly follow the statutory waterfall under section 53, read with the applicable liquidation regulations. Conclusions: The Tribunal directed the liquidator to distribute the purchase consideration received from the successful bidder among all stakeholders strictly in accordance with section 53 of the I&B Code read with Rule 42 of the IBBI (Liquidation Process) Regulations, 2016.