Going Concern Sale under IBC – By Mr. Ashutosh Sharma

Going Concern Sale under IBC

– By Ashutosh Sharma,
2^nd Year, B.B.A L.L.B (Hons.) ICFAI University Dehradun

Introduction

The phrase “as a going concern” implies that the corporate debtor would be functional as it would have been prior to initiation of CIRP, other than the restrictions put by the code. According to the meaning given by IBBI, Going Concern means all the assets, tangibles or intangibles and resources needed to continue to operate independently a business activity which may be whole or a part of the business of the corporate debtor without values being assigned to the individual asset or resource.

It is a settled concept that for lots of establishments, there is a much better value as a going concern, as compared to the value if the assets of a business are sold piecemeal. In fact, the whole purpose of liquidation is that, a slump sale or a going concern sale by the liquidator as a fiduciary for all the creditors is likely to fetch a better value for all the stakeholders involved. Following the above perspective the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, was amended, which permitted the sale of the corporate debtor as a going concern.

Regulation 32 of the Liquidation Regulations[1] as amended specifies the manner of sale, wherein the Liquidator may sell-

(a) an asset on a standalone basis;

(b) the assets in a slump sale;

(c) a set of assets collectively;

(d) the assets in parcels;

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

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

Objectives of the Going Concern Sale under the Code

One of the essential objectives of Insolvency and Bankruptcy Code, 2016 was to ensure speedy recovery of cases but in many cases it is seen that due to delay in the liquidation process there was a loss to the entity, its employees, workers and the CoC had no say in this process. After the amendment, now an entity can be sold as a going concern which provides for better utilization of assets and resources of the entity. The entity retains the assets and liabilities on being transferred as a going concern Also, the entity survives as it was, the only difference being the ownership, which is moved from the liquidator to the acquirer.

Advantages of Going Concern Sale

• It aims at value preservation of the undertaking including intangible assets.
• Smooth transition, while the ownership changes from the liquidator to the acquirer.
• Intangible assets such as leases, licenses, concessions, trademarks, registrations, contracts and vendor registrations are reduced to zero value if the entity is taken into liquidation. Wherein a going concern sale, the legal entity survives and the value of the above intangibles will be preserved.
• A going concern sale helps in achieving synergy as the collective value of the assets will be higher than value of assets disposed separately.

Enabling Going Concern Sale

The liquidator shall make an application to the Adjudicating Authority for approval of the sale of the corporate debtor as a going concern and the Adjudicating Authority may pass an order with respect to[2]:

• Sale of the corporate debtor to the intended buyer as a going concern;
• Transfer of shares of the corporate debtor to the intended buyer;
• Transfer of the going concern of the corporate debtor to the buyers;
• Continuation of the authority, powers and obligations of the Liquidator to complete the liquidation process as provided under the Code and the regulations including the control, operations and continuation of the liquidation bank account of the corporate debtor;
• Payment to stakeholders in accordance with Section 53 from the liquidation bank account; and
• Protection of the intended buyer from all claims and liabilities pertaining to the period prior to the sale of the corporate debtor as a going concern

Essentials of a Going Concern Sale

• Retention of the legal entity.
• Capital contribution by the acquirer.
• Variation in terms of employment.
• Transfer to be carried out by a slump sale, not itemized sale.
• Liabilities of the CD must be treated in terms of the Code.
• Idea must be to run the business.

Interplay of Going Concern Sale with Other Laws

Income Tax Act, 1961:

The transfer of business as a going concern is a well- known concept, and has been analysed in various tax rulings as well. In KBD Sugars & Distilleries Ltd., Bangalore v. Asstt. Commissioner of Income-Tax8 (30.10.2013)[3], it was held by the Income Tax Appellate Tribunal (ITAT) that going concern always means to say ‘alive’, whether profit-making or not. It was also held in the same case that for a sale to mean going concern is that, the undertaking constituted a business activity capable of being run independently for the foreseeable future.

Central Goods & Service Tax Act, 2017:

By the virtue of Notification No. 12/ 2017- Central Tax (Rate) it was clarified that, services by way of transfer of a going concern, as a whole or an independent part thereof shall not be liable to GST.

Companies Act, 2013:

In the matter of National Tannery Co Ltd[4] a committee of management was formed to run the company until its sale on going concern basis and, eventually the West Bengal Government offered to acquire the company on a going concern basis, pay consideration, and also agreed to pay the wages of the workmen.

Conclusion

In reference to the above, going concern sale will be the most relevant method of sale, since this process will help in maximization of value of assets of the corporate debtor, as compared to that under piecemeal sale, or for that matter, in case of slump sale. If the corporate debtor is sold as a going concern, it will have social and economic benefits, the workers and employees of the concerned corporate debtor will retain their jobs, and a much better value will be available for the stakeholders. Further, any acquirer aiming to run the business of the corporate debtor will be having a better standing if he can acquire the entity as a going concern, as the formalities or compliances will be less in the said process. The acquirer will be free from having to obtain fresh permits/ licenses and business authorizations for the entity.

Reference

[1] IBBI(LIQUIDATION PROCESS) REGULATIONS,2016

[2] https://ibbi.gov.in/Agenda_03_26062018.pdf

[3] ITA Nos 1362 & 1362 of 2011

[4] 1993 AIR 1524