Enhancing Beneficial Liquidation: NCLAT's Directive on Sale as a Going Concern in Insolvency Proceedings

Introduction

The case of Prakash Chandra Kapoor v. Vijay Kumar Iyer (Liquidator) rendered by the National Company Law Appellate Tribunal (NCLAT) on December 8, 2021, marks a significant development in the landscape of insolvency proceedings in India. The appellants, including former directors of Bharati Defence and Infrastructure Limited (BDIL) and the Bhartiya Kamgar Sena Workmen Union, challenged the liquidation orders initiated under the Insolvency and Bankruptcy Code, 2016 (IBC). The core dispute revolves around the methodology employed by the liquidator in selling the assets of BDIL, particularly the contention over whether the sale was conducted as a 'going concern'—a term denoting the transfer of the entire business operations intact—to maximize asset value and preserve employment.

Summary of the Judgment

The NCLAT upheld the liquidation orders passed by the National Company Law Tribunal (NCLT), Mumbai Bench, affirming the liquidator's actions in compliance with statutory directives. The tribunal emphasized the importance of selling a corporate debtor as a going concern to achieve beneficial liquidation, thereby safeguarding stakeholder interests and maximizing asset values. The judgment dismissed the appellants' arguments regarding procedural lapses, including inadequate international advertisement for Expression of Interest (EOI) and alleged arbitrary actions by the liquidator. Additionally, the tribunal granted an extension of six weeks to the liquidator to finalize the sale as a going concern, highlighting the tribunal's commitment to equitable and efficient liquidation processes.

Analysis

Precedents Cited

The judgment references several pivotal cases that shaped the tribunal's reasoning:

• Y. Shivaram Prasad vs. S. Dhanpal & Ors. (2019): This case underscored the tribunal’s directive to maintain the company as a going concern during liquidation to protect asset value and employment.
• Arun Kumar Jagatramka vs. Jindal Steel and Power Ltd. & Anr. (2021): Highlighted the eligibility criteria under Section 29(A) of the IBC, reinforcing that only qualified applicants can submit resolution plans.
• GSEC Green Energy Pvt. Ltd. (2021) and Forward Shoes (India) Pvt. Ltd. & Anr. (2021): Demonstrated tribunal’s flexibility in allowing delayed submission of schemes under exceptional circumstances.
• M.C.T.M. Chidambaram Chettiar vs. The Official Receiver, High Court: An early judgment recognizing the importance of selling assets as a going concern to preserve business value.

These precedents collectively reinforced the tribunal’s stance on prioritizing beneficial liquidation and maintaining corporate operations to the extent possible during the insolvency process.

Legal Reasoning

The tribunal meticulously examined whether the liquidator adhered to the procedural and substantive requirements under the IBC and the Companies Act, 2013. Key aspects of the legal reasoning included:

• Compliance with Section 35(1)(e): Mandated the liquidator to carry on the business of the corporate debtor for beneficial liquidation, ensuring asset preservation and stakeholder satisfaction.
• Regulation 32 and 32-A: Provided the framework for the sale of assets, emphasizing the preference for selling as a going concern to maximize value.
• Procedural Adherence: The liquidator’s efforts to invite EOIs through multiple platforms, including international channels, were scrutinized and ultimately deemed compliant.
• Stakeholder Consultation: The tribunal upheld the necessity of constituting a Stakeholders' Consultation Committee to guide the liquidation process, ensuring transparency and inclusivity.

The tribunal concluded that the liquidator had acted within the bounds of the law, making reasonable efforts to secure a favorable sale while balancing the interests of all stakeholders, including employees, creditors, and potential buyers.

Impact

This judgment has far-reaching implications for insolvency proceedings in India:

• Reinforcement of Beneficial Liquidation: Emphasizes the government's objective under the IBC to maximize the value of assets and protect stakeholder interests.
• Clarification on 'Going Concern' Sales: Provides a clearer framework for courts and liquidators to follow when opting to sell a company as a going concern, highlighting the conditions and expectations.
• Judicial Discretion: Affirms the tribunal’s inherent powers to extend deadlines in the interest of justice, acknowledging exceptional circumstances such as the COVID-19 pandemic.
• Stakeholder Participation: Underlines the importance of involving stakeholders through consultation committees, fostering a collaborative approach in liquidation processes.

Future insolvency cases will likely reference this judgment to advocate for sales that preserve business continuity, the importance of strict procedural compliance, and the tribunal’s role in balancing various stakeholder interests.

Complex Concepts Simplified

Conclusion

The NCLAT's judgment in Prakash Chandra Kapoor v. Vijay Kumar Iyer serves as a cornerstone for future insolvency proceedings, particularly in guiding how liquidators approach the sale of corporate debts. By affirming the necessity of pursuing sales as a going concern and emphasizing beneficial liquidation, the tribunal has provided a clear directive aimed at balancing stakeholder interests, preserving employment, and maximizing asset value. This judgment not only clarifies procedural expectations under the IBC but also reinforces the judiciary's role in ensuring equitable and efficient liquidation processes, ultimately advancing the cause of justice in corporate insolvency scenarios.