Don’t scrap sale of firm as going concern

If we plan to do away with provision of selling the corporate debtor in liquidation rules, we must look for a replacement within the IBC.

On February 4, the Insolvency and Bankruptcy Board of India (IBBI), issued a discussion paper on proposed amendments for solutions to operational challenges encountered in the Corporate Insolvency Resolution Process (CIRP) and the liquidation process under provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). One of the proposed amendments is to do away with provisions on the “sale of the corporate debtor (CD, or the insolvent company to be liquidated) as a going concern” in the liquidation regulations. Liquidation is generally understood to be a permanent closure. However, the sale of CD as a going concern under liquidation is innovative. This would provide a last resort to safeguard entities from liquidation. This can apply to some unresolved aspects during the CIRP which could have some continued business operations.

It would be interesting to note that during FY18, the outcome of the CIRPs were more visible. By December 31, 2018, 305 CIRPs (approximately 30%) resulted in liquidation. To safeguard such entities from distressed sales under liquidation, the IBBI amended the liquidation regulations in October 2018 and introduced “the sale of CD as a going concern”, under which the CD continues to be in business after the completion of the liquidation process.

According to the discussion paper, creditors recovered only 2.4% through going concern sales (75% of liquidation value). This was 3.7% via regular dissolution (101% of liquidation value). While these figures would make it appear that it may be appropriate to discontinue this provision because of lower recovery, the extensive time required, and the increased process costs, one important differentiating factor is that after the successful completion of this process, the CD survives and is able to create more economic value. However, it involves a relatively less flexible process where the reserve price is determined upfront and the entire sale consideration must be paid within 90 days or extended time approved by the Stakeholders’ Consultation Committee (SCC). Moreover, lenders would want to realise the proceeds from the successful e-auction at the earliest, but bidders would want to wait until they get necessary approvals from the adjudicating authority (AA), resulting in uncertainty and inherent conditionalities for both the SCC and the bidders from the beginning. Currently, there are no provisions under the IBC or regulations on how the approval from the AA is to be obtained. As a result, bidders often prefer the CIRP over buying a CD as a going concern in liquidation.

If we plan to do away with this provision, we must look for a replacement within the IBC. The entities which have a reasonable remaining value, the potential to generate future businesses, or some ongoing long-term projects must be prioritised for resolution. For example, CDs from the engineering, procurement, and construction sector would have long-term projects of national importance, ranging from four to six years, and there is a possibility of no substantial surplus left owing to various issues such as delays in claim settlement by government clients and escalation of costs. Such projects would have substantial amounts of bank guarantee exposure, the return of which is linked to the completion of projects. Such projects, if retained and eventually completed, would not only help in the continued employment of thousands of workers and employees, but also have a potential return of the bank guarantees, resulting in an indirect recoveries for banks. This would also ensure completion of projects of national importance and protect the brand value/credentials of the CD.

A potential game-changing option could be that immediately after a failed resolution, before approving the formal liquidation, the Committee of Creditors could be allowed to explore the possibility of declaring a fresh liquidation value on the basis of reserve price. The e-auction should be conducted in a time-bound manner within the framework of the CIRP. This would also help save time, otherwise spent in initiating a formal liquidation and fresh approval of the SCC and the AA. If the sale of CD as a going concern under liquidation is decided, regulations should be amended to bring in the concept of submission of a proper “resolution plan” and flexibility in payment terms, like the one submitted under the CIRP, which gets approved by the SCC and then by the AA.

The objectives of the IBC, as mentioned in the preamble, are the maximisation of value of assets of the CD and to promote entrepreneurship. We must continue to evolve, keeping that objective and industry-specific issues in mind.

This article first appeared in the Financial Express on 29 March 2025.