Sale Of Corporate Debtor As A 'Going Concern' Includes Both Assets And Liabilities: NCLT Mumbai

Background Facts

The NCLT Mumbai Bench ("Adjudicating Authority") had passed the Liquidation order against the Gajanan Industries Ltd. ("Corporate Debtor") on 06.11.2019 and C.A. Devang P Sampat was appointed as the Liquidator. The E-auction of the assets of the Corporate Debtor was scheduled on 03.03.2021 and Mr. Gaurav Agarwal ("Applicant") had submitted an Earnest Money Deposit of Rs. 50,00,000/- for participating in the e-auction. The Applicant was declared as the Successful Bidder of the Corporate Debtor as a going concern with a bid amount of Rs. 4,65,00,000/- and was accordingly issued a letter of intent dated 19.05.2021 by the Liquidator. On 31.05.2021, the Applicant paid the entire remaining consideration of Rs. 4,15,00,000/- along with an interest of Rs. 10,09,000/- towards the auction purchase and the same was acknowledged by the Liquidator on 01.06.2021.

Thereafter, the Applicant filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 ("IBC") against the Liquidator before the Adjudicating Authority, seeking:

" ii. The Applicant shall not be responsible for any other claims/ liabilities/ obligations etc. payable by the Corporate Debtor as on this date to the Creditors or any other stakeholders including Government dues. All the liabilities of the Corporate Debtor as on the date stand extinguished, as far as the Applicant is concerned."

Contentions Of The Applicant

The Applicant argued that the Liquidator had indicated the Applicant to take entire liability of the Corporate Debtor in accordance with Regulation 32A of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Liquidation Regulations"), even when the auction process documents did not mention anything about the liabilities of the Corporate Debtor. The Applicant's main contention was that an auction purchaser who purchased the Corporate Debtor as a going concern is not bound by any of its liabilities.

Contentions Of The Liquidator

The Liquidator submitted that the Applicant upon its own assumption was unnecessarily accusing the Liquidator of imposing a clause of liability on the Applicant, while no such imposition has been done. It was submitted that the Applicant did not follow the terms e-auction process document, took possession factory premises without following the due process of law and was trying to mislead the tribunal.

It was contended that the Applicant was attempting to go beyond the e-auction terms and was seeking modification of the same. The Applicant cannot seek to rewrite the contract/agreement which stood concluded on receipt of the entire consideration on 31.05.2021.

Issue

Whether the sale of the Corporate Debtor as a going concern under the IBC and the Regulations includes both assets and liabilities or assets alone without any liabilities?

Decision

The Adjudicating Authority placed reliance on the NCLAT judgment in M/s Visisth Services Limited v S.V. Ramani, Company Appeal (At) (Ins) No. 896 of 2020, wherein it was held that: "It can be seen from the afore-noted discussion as well as Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016 that Sale as a 'Going Concern' means sale of assets as well as liabilities and not assets sans liabilities…….sale of a Company as a 'Going Concern' means sale of both assets and liabilities, if it is stated on 'as is where is' basis…"

The Bench further observed the bid documents had clarified beforehand that the liquidator will not take any responsibility for any dues of the Company which may affect transfer of the liquidation assets in the name of the Successful Bidder and such dues, if any, will have to be borne/paid by the Successful Bidder. Also, the Liquidator had put the Applicant on notice that the bidders prior to submitting the bid should make their independent inquiries regarding the encumbrances, title of property claims/right/dues/affecting the property, inspect the property at their own expenses and satisfy themselves.

Regulation 32A(3) of Liquidation Regulations cast a duty upon the stakeholders committee as well as the liquidator to find out the liabilities of the Corporate Debtor. Accordingly, the Bench held that the sale of the Corporate Debtor as going concern includes both assets and liabilities not assets sans liabilities.

"In view of the above observations and the law laid down by the Hon'ble NCLAT in M/s Visisth Services Limited VS. S.V. Ramani, this Bench has no hesitation in holding that the Applicant is not entitled for the relief sought in prayer clause ('ii') in the above Application and the above Application deserves to be dismissed."

Case Title: Harsh Vinimay Pvt. Ltd. v Gajanan Industries Ltd., C.P. No. (IB) 2521/MB/2018

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

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

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