[IBC] Sale of Company As A ‘Going Concern’ Includes Assets & Liabilities
Can a Successful Bidder wriggle out of the contractual obligations and withdraw the bid after payment of Earnest Money Deposit in case of conditional offers?
Does sale of company as a going concern under IBC include sale of liabilities?
To break down minor jargons for the uninitiated, a successful bidder is mandatorily required to make a deposit as security. This security known as earnest money binds him towards performance of his contractual obligations. The customary and legal practice is a reflection of the bidder’s commitment towards the performance of his contract.
In the event of breach, the earnest money is generally kept by the recipient as pre-determined or liquidated damages.
Coming back to the case, the Principal bench of NCLAT comprising Justice Anant Bijay Singh and Shreesha Merla has answered the question in the negative. (M/S Vasisth Services Limited V S.V. Ramani)
The Appellant (M/S Vasisth Services) cannot be entitled to the EMD amount if he does not comply with the terms of the contract, the tribunal concluded based on the facts of the case.
In October 2018, an Application under Section 10 of the Code filed by the Corporate Debtor was admitted by the Adjudicating Authority. Section 10 of IBC 2016 gives a locus standi to the Corporate Applicant to initiate a Corporate Insolvency Resolution Process (“CIRP”) against itself.
Subsequently, an order for liquidation was passed and the appointed liquidator S.V. Raman (respondent) initiated the e-auction process for sale of the company as a ‘going concern’.
Provisional Letter of Sale Under Dispute
The Appellant purchased e-Auction Process Information Document from the Liquidator upon payment of Rs. 5 Lakhs. On 04.09.2019, the Appellant issued an email to the Liquidator seeking clarifications on several issues with respect to e-Auction process and proposed different payment terms and specified in the email that their offer of acceptance was conditional to extinguish claims of Financial Creditors, Tax Department, Operational Creditors, Provident Fund Employees and other contingent liabilities.
On 05.09.2019, the Liquidator issued two emails to the Appellant informing that the Terms and Conditions of the Bid Document could not be changed or revised after public notification. M/s. State Bank of India (SBI) had also replied to the email and clarified the conditions. The Appellant submitted EMD of Rs. 37,10,000/- to the Liquidator.
On 08.09.2019, the Appellant sent an email to the Liquidator stating that if any litigation arises from any source, the EMD amount and the bidding document purchase amount was to be refunded within three days.
On 26.09.2019, the Liquidator issued a provisional sale letter dated 25.09.2020 in favour of the Appellant upon receipt of communication from SBI confirming that it was the highest successful bidder in the eAuction.
On 29.10.2019, the Appellant addressed a letter to the Liquidator stating the Provisional Letter of Sale was inconsistent with the terms of payment specified by the Appellant and sought for refund of the money paid with the interest.
Sale As Going Concern With or Without Liabilities
On 09.01.2020, an Affidavit was filed by the Appellant in the Application preferred by the Liquidator before the Adjudicating Authority seeking direction for ‘Approval of the Sale’ as a ‘Going Concern’, and sought for approval without transfer of any liabilities and if there exists any impediment, the Appellant sought for withdrawing from the Bid and the refund of the amount paid.
The interesting aspect of the case was that Sale as a Going Concern is a relatively new concept under IBC. There is still some ambiguity on whether such arrangement includes sale of liabilities along with sale of assets and properties.
The NCLAT tribunal discussed the concept at length. Emphasis, in particular was laid on Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016; and IBBI's Discussion Paper on Corporate Liquidation Process along with Draft Regulations.
Sale as a ‘Going Concern’ means sale of assets as well as liabilities and not assets sans liabilities, The Bench said.
All assets and liabilities, which constitute an integral business of the Corporate Debtor Company would be transferred together and the consideration paid must be for the business of the Corporate Debtor, it added.
Bidder cannot propose certain conditions subsequent to participation in tender process: NCLAT
After a perusal of the clauses of the contract, the NCLAT bench was of the view that the Bidder-Appellant is bound by the terms and conditions of the Bid document and no communication to the Liquidator stating that it is a conditional offer, is sustainable.
If the Appellant had any apprehensions and conditions about the liabilities the Appellant could have exercised their choice of not participating in the Bid. Having participated, the Appellant cannot propose certain conditions subsequent to their participation and putting in their Bid, the Bench said.
The Bench also pointed out that the Liquidator through an email exchange with the appellant in September 2019 had clarified that the legal issues pertaining to e-Auction cannot be changed after public notification.
We do not find any illegality or infirmity in the well-reasoned order of the Adjudicating Authority, the NCLAT Bench said.
Counsel for the Appellant on behalf of Khaitan & Co : Mr. Jeevan Ballav Panda, Ms. Shalini Sati Prasad, Mr. Gaurav Sharma & Ms. Meher Tandon, Advocates.
Counsel for the Respondents on behalf of L&L Partners : Mr. Sanjeev Kumar and Mr. Anshul Sehgal, Advocates. Mr. Om Narayan Rai, Advocate.
