Selling a corporate debtor as a “going concern” includes both assets and liabilities: NCLT Mumbai

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The National Company Law CourtMumbai bench, consisting of Shri HV Subba Rao (Judicial Member) and Shri Chandra Bhan Singh (technical member), while ruling on a provisional application filed in Dur Vinimay Pvt. Ltd v Gajanan Industries Ltd.ruled that when a debtor company is sold as a “going concern”, that sale must include both assets and liabilities and not just assets without liabilities.

Background Facts

The NCLT Mumbai Bench (“Arbitration Authority”) issued the winding up order against Gajanan Industries Ltd. (“Debtor Company”) on 06.11.2019 and CA Devang P Sampat was appointed liquidator. The electronic auction of the assets of the debtor company was scheduled for 03.03.2021 and Mr. Gaurav Agarwal (“Applicant”) had submitted a deposit of Rs. 50,00,000/- to participate in the auction in line. The applicant was declared the successful bidder of the debtor company as a going concern with a bid amount of Rs. liquidator. On 31.05.2021, the plaintiff paid the entire remaining consideration of Rs. 4,15,00,000/- with interest of Rs. 10.09,000/- for the auction purchase and the same was acknowledged by the liquidator on 01.06.2021.

Subsequently, the Claimant filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the Liquidator before the Adjudication Authority, requesting:

” ii. The plaintiff will not be liable for any other claims/liabilities/obligations etc. payable by the debtor company on this date to creditors or any other party, including government assessments. All debts of the debtor company to the date are extinguished, as far as the Applicant is concerned.”

Plaintiff’s Arguments

The plaintiff argued that the liquidator instructed the plaintiff to take full responsibility for the debtor company as per Regulation 32A of the Insolvency and Bankruptcy of India (Winding Up) Regulations 2016 (“Rules of liquidation”), even when the auction process documents did not mention anything about the liabilities of the debtor company. Plaintiff’s main argument was that an auction buyer who purchased the debtor company as a going concern is not bound by any of its obligations.

Liquidator’s speech

The liquidator argued that the plaintiff, on his own assumption, was unnecessarily accusing the liquidator of imposing a liability clause on the plaintiff, when no such imposition was made. It was argued that the petitioner failed to follow the terms of the electronic auction process document, took possession of the factory premises without following due process and attempted to mislead the court.

It was argued that the claimant was attempting to go beyond the terms of the electronic auction and seeking to modify them. The Claimant cannot seek to rewrite the contract/agreement that was entered into upon receipt of all consideration on 31.05.2021.

Publish

Does the sale of the debtor company as a going concern under IBC and the Regulations include both assets and liabilities or assets only without any liabilities?

Decision

The contracting authority relied on the NCLAT judgment in M/s Visisth Services Limited v SV RamaniCompany Appeal (At) (Ins) No. 896 of 2020, in which it was held that: “It is apparent from the above discussion as well as from Regulation 32 A of the IBBI (Winding-Up) Regulations, 2016 that sale as a ‘going concern’ means the sale of assets as well as liabilities and not assets without liabilities…….selling a company as “Going Concern” means selling both assets and liabilities, if stated on an “as is where is” basis…”

The Chamber further observed that the offer documents had specified beforehand that the liquidator will not assume any responsibility for the contributions of the Company which may affect the transfer of the liquidation assets in the name of the successful Bidder and these contributions, the where applicable, must be borne/paid by the contractor. In addition, the liquidator had advised the claimant that bidders, prior to submitting the bid, should make their independent inquiries regarding charges, title of ownership/right/rights claims/affecting the property, inspect the property at their own fresh and satisfied. .

Article 32A(3) of the Liquidation Rules imposes on the stakeholders’ committee as well as on the liquidator the obligation to know the liabilities of the debtor company. Accordingly, the Chamber held that the sale of the debtor company as a going concern includes both assets and liabilities and not assets without liabilities.

“In view of the above observations and the law established by the Honorable NCLAT in M/s Visisth Services Limited VS. SV Ramani, this bench has no hesitation in considering that the plaintiff is not entitled to the relief sought in the prayer clause (‘ii’) in the above petition and the above petition deserves to be rejected.”

Case title: Dur Vinimay Pvt. ltd. against Gajanan Industries Ltd..CP No. (IB) 2521/MB/2018

Counsel for the Applicant: Adv. Nausher Kohli, Adv. Amey Hadwale and Adv. Geeta Lundwani.

Counsel for Respondents: Adv. Rohaan Cama, Adv. Kunal Mehta and Adv. Gauri Joshi.

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