Sale as a going concern: Alternative in liquidation?

The need for interpretation and amendment of the Insolvency and Bankruptcy Code, 2016 (IBC), has arisen repeatedly since its enactment. A recent instance can be seen in the matter of Gujarat NRE Coke Ltd.

As the committee of creditors failed to agree on a corporate insolvency resolution plan, the National Company Law Tribunal (NCLT), Kolkata, on 11 January 2018 ordered liquidation of the company with a clear direction that the liquidation should be done by sale as a going concern. This is because it had been successfully argued before the tribunal that the company’s period of crisis was over and closing the business would adversely affect about 1,178 employees, their families, numerous vendors and job workers – totalling about 10,000 people.

This decision is significant as at the time, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, provided four viable options: liquidation by way of sale on stand-alone basis, slump sale, sale of assets in parcel and sale of assets collectively. After the NCLT, Delhi, made another order for “beneficial liquidation” of a corporate entity, on 15 February 2018, the regulations were amended to allow for liquidation by sale as a going concern.

The pros and cons, present need and future utility of such a process are briefly assessed below.

Liquidation by sale as a going concern will primarily benefit the employees of the insolvent company. The corporate insolvency resolution process (CIRP) can be triggered by a single instance of default in repayment of ₹100,000 (US$1,500). When the CIRP of an insolvent company, whose business is not generally loss-making, fails to culminate into a viable resolution plan, liquidation and sale for scrap value could threaten the jobs and livelihood of everyone who works for the company.

Dhir & Dhir Associates is a leading full-service law firm in India. Ashu Kansal is a principal associate and Manmayi Sharma is an associate at the firm.