Sale as 'Going Concern' in Liquidation is Akin to CIRP, Grants 'Clean Slate' from Past Liabilities: NCLT Kolkata

NCLT Kolkata Grants 'Clean Slate' to Buyer in Going Concern Sale, Extinguishes Past Liabilities of Corporate Debtor

Kolkata, India – The National Company Law Tribunal (NCLT), Kolkata Bench, has delivered a significant order reinforcing the "clean slate" doctrine for companies acquired as a 'going concern' through liquidation. The tribunal, comprising Shri. Labh Singh (Member, Judicial) and Ms. Rekha Kantilal Shah (Member, Technical), granted a wide array of reliefs and concessions to the successful bidder, M/s Veena Credit & Holdings Pvt. Ltd., effectively wiping out the past statutory, financial, and operational liabilities of A.K. Power Industries Pvt. Ltd.

The bench held that the objective behind selling a company as a going concern during liquidation is akin to its revival under the Corporate Insolvency Resolution Process (CIRP). Therefore, the successful bidder is entitled to similar protections, including freedom from past encumbrances, to ensure a fresh start.

Case Background

A.K. Power Industries Pvt. Ltd. entered liquidation after a resolution plan could not be approved during its CIRP. The liquidator, Mr. Pratim Bayal, conducted an e-auction for the sale of the company "as a going concern," which included its residual assets like two flats and scrap inventory.

M/s Veena Credit & Holdings Pvt. Ltd. emerged as the successful bidder with a bid of ₹75.50 Lakhs. After completing the payment and receiving the sale certificate, Veena Credit approached the NCLT under Section 60(5) of the Insolvency and Bankruptcy Code (IBC), 2016. They sought numerous concessions, arguing that these were imperative for the effective revival and seamless operation of A.K. Power Industries, free from the "hydra head" of past liabilities.

Arguments Presented

The successful bidder (Applicant) contended that without the extinguishment of past debts, tax liabilities, non-compliances, and pending litigations, the purchase of the company as a going concern would be futile. They requested waivers on compliances under the Companies Act, extinguishment of old shares, removal of charges with the Registrar of Companies (ROC), and immunity from all creditor claims and regulatory actions pertaining to the pre-acquisition period.

The Liquidator did not object to the majority of the reliefs sought. He confirmed the completion of the sale and noted that the auction's process document itself stipulated that the successful bidder would need to approach the NCLT for such concessions. He pointed out some responsibilities that fell on the bidder, such as filing forms with the ROC, which the applicant subsequently agreed to undertake or amended in their prayer.

Tribunal's Analysis and Legal Precedents

The NCLT's order extensively relied on landmark jurisprudence to extend the "clean slate" principle, traditionally applied in CIRP, to liquidation sales conducted on a going concern basis.

• Parallel with CIRP: The Tribunal observed, "The primary goal of a resolution plan as well as the sale of a Corporate Debtor as a going concern remains the same i.e revival of the Corporate Debtor’s business." It reasoned that the challenges faced by a buyer in a going concern sale are similar to those of a resolution applicant, thus warranting comparable reliefs.

• Reliance on Supreme Court Judgments: The bench cited pivotal Supreme Court rulings, including:

  • Ghanashyam Mishra and Sons Pvt Ltd Vs. Edelweiss Asset Reconstruction Company Ltd : This case established that once a resolution plan is approved, all claims not included in it are extinguished, preventing "surprise claims" from being flung at the new management.
  • Committee of Creditors of Essar Steel India Limited : This judgment reinforced that a successful applicant must start on a "fresh slate" for the revival to be viable.
  • Manish Kumar Vs. Union of India : The NCLT referred to this case to highlight the legislative intent behind Section 32A of the IBC, which grants immunity to the corporate debtor from offenses committed prior to the CIRP.

The Tribunal concluded that the law laid down in Ghanashyam Mishra should be applicable to cases where a corporate debtor is sold as a going concern in liquidation.

Final Order and Key Reliefs Granted

The NCLT granted a substantial majority of the over 80 reliefs and concessions sought by Veena Credit & Holdings. The key directions issued by the tribunal include:

• Extinguishment of Liabilities: All past liabilities—including financial, operational, statutory, and tax-related—stand permanently extinguished. This provides the new management with complete immunity from any pre-acquisition claims.
• Clean Slate for Compliances: The company's status with the ROC is to be restored to 'active' from 'in liquidation'. Past non-compliances under various laws are deemed extinguished, and penalties for delayed filings (except statutory fees) are to be waived.
• Corporate Actions: The existing share capital of A.K. Power Industries is extinguished, and the successful bidder is permitted to issue new shares.
• Continuation of Business: All licenses, approvals, and permits are deemed to continue for a period of 12 months, giving the new management time to secure renewals. Utility providers are directed to continue their services.
• Immunity from Proceedings: All pending civil, regulatory, and investigative proceedings (including by CBI, ED) against the company for the pre-acquisition period are deemed withdrawn or dismissed.

The NCLT's comprehensive order provides a significant boost to the framework for selling companies as going concerns in liquidation, making it a more attractive and viable option for reviving distressed assets.