Regulations 32 and 32A of the IBBI (Liquidation Process) Regulations, 2016: Do they stand beside, or against the code?
Introduction
In common parlance, the term ‘liquidation’ envisages a situation where certain assets are sold off to realise the dues of the entities which are valid claimants for the same. To be more specific, it is a process of ‘bringing a business to an end and distributing its assets to claimants’.[1] In a commercial context, this process happens when a corporation reaches a stage where it is unable to repay the dues which it owes to the relevant claimants i.e. a stage of insolvency. The provisions pertaining to liquidation have been provided under the Insolvency and Bankruptcy Code, 2016 [IBC].[2] Liquidation is usually construed as the last resort as far as the Indian insolvency regime is concerned. The process under the IBC mainly involves the appointment of a liquidator,[3] the verification of the claims made and preparation of the relevant documents, the distribution of the proceeds of the liquidation process,[4] and finally the dissolution of the corporate debtor.[5]
It is pertinent to note that the IBC is not the only legislation that deals with the process of liquidation. The Insolvency and Bankruptcy Board of India [IBBI] inserted certain regulations pertaining to the process of liquidation by means of Notification No. IBBI/2016-17/GN/REG005, dated 15th December 2016 [Liquidation Regulations].[6] In this article, the author will delve into the content and relevance of certain specific regulations which deal with the aspect of sale as a going concern [GCS]. Subsequently, the article will address the contrasting opinions on the legality of these notifications. Finally, the article will conclude by providing relevant observations of the author.
The Relevant Notifications: An Overview
Regulation 32? was substituted vide notification no. IBBI/2018-19/GN/REG037, dated 22 October 2018 (w.e.f. 22 October 2018) to include provisions on sale of the corporate debtor as a going concern; and sale of the business of the corporate debtor as a going concern by the liquidator. Furthermore, Regulation 32A was inserted vide Notification No. IBBI/2019-20/GN/REG047 dated 25th July, 2019 (w.e.f. 25-07-2019) which set out the going concern sale process during a liquidation process in more detail.
“Regulation 32: Sale of Assets, etc.
The liquidator may sell-
(a) an asset on a standalone basis; (b) the assets in a slump sale; (c) a set of assets collectively; (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern:
?Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate”.[7]
“Regulation 32A: Sale as a going concern
(1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses. (2) For the purpose of sale under sub-regulation (1), the group of assets and liabilities of the corporate debtor, as identified by the committee of creditors under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 shall be sold as a going concern. (3) Where the committee of creditors has not identified the assets and liabilities under sub regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee. (4) If the liquidator is unable to sell the corporate debtor or its business under clause (e) or (f) of regulation 32 within ninety days from the liquidation commencement date, he shall proceed to sell the assets of the corporate debtor under clauses (a) to (d) of regulation 32.”[8]
Where does the problem lie?
The regulations pertaining to sale as a going concern can be construed as problematic owing to certain reasons. The major ones of them have been discussed below:
·?????? The concept of a sale as a going concern has not been envisaged under the code. The Insolvency and Bankruptcy Board of India [IBBI] does not have any express authorization under the code to establish rules for conducting sales of corporate debtors on a "going concern" basis. The only alternative allowed by the IBC under Section 35(1)(f)[9] read with Section 54[10] is for the Liquidator to sell both the movable and immovable assets of the corporate debtor before attempting to dissolve the entity. In this regard, the observation of the NCLAT in Binani Industries Ltd. v Bank of Baroda is relevant: “It is not a sale. No one is selling or buying the ‘Corporate Debtor’ through a ‘Resolution Plan’. It is resolution of the ‘Corporate Debtor’ as a going concern. One does not need a ‘Resolution Plan’ for selling the ‘Corporate Debtor’. If it were a sale, one can put it on a trading platform. Whosoever pays the highest price would get it. There is no need for voting or application of mind for approving a ‘Resolution Plan’, as it will be sold at the highest price”.[11]
?
·?????? The regulations might be challenged as ultra vires to the parent law, i.e. the IBC. The Supreme Court of India has established that when a subordinate authority exercises its rule-making authority beyond the bounds of the parent statute's goals and principles and without taking into account those provisions, that action is deemed ultra vires with respect to the parent statute and is consequently deemed unconstitutional and invalid.[12] A perusal of clause (t) of Subsection (1) of Section 196[13] read with Section 240[14] of the Code reveals that IBBI does not have the authority to enact regulations regulating the application of Section 54 by creating a concept (of going concern) that is not specified in the Code. Pertinently, the Liquidation Regulations amendment, and not the parent statute have introduced the going-concern sale provision. As a result, IBBI's exercise of authority in this manner is excessive and in violation of the IBC, which serves as the delegating statute.
?
·?????? The regulations have been construed as contrary to the objectives of the code. The main objectives of the IBC are the following: “(a) promote entrepreneurship and availability of credit; (b) ensure the balanced interests of all stakeholders; and (c) promote time-bound resolution of insolvency for corporate persons/partnership firms/individuals”.[15] It is fairly obvious that the process of the sale of the company as a going concern during liquidation does not fit well with these objectives; as the first order objective is resolution.[16] Taking up the corporate debtor with the sole intention to sell it goes against the objectives of the code.[17]
Justifications for the regulations: Are they in consonance with the code?
In light of the apprehensions about the validity of these regulations, it becomes pertinent to discuss the other side of the story as well. It shall be noted that these regulations have been established in a specific, clear manner which has facilitated the proper implementation of the provisions of the IBC. This section will delve into a perusal of the relevant authorities to establish the validity of the regulations:
·?????? Statute-derived rules and regulations are regarded as subordinate laws.[18] It is widely accepted that rules created in accordance with a statute's provisions are considered to be a part of the law and have statutory authority.[19] Such regulations can only be created by the authority so empowered by the parent statute to the same.[20] Presently, the regulations pertaining to a GCS have been envisaged by the IBBI. The code explicitly grants power to the IBBI to make regulations by notifications.[21] Therefore, the concerned regulations, and the notifications which have established them do have the authority of the parent law i.e. the IBC; and are not ultra vires the same.
?
·?????? The IBC is not simply a debt recovery mechanism.[22] In effect, it is a resolution mechanism where the interests of all the stakeholders are given due consideration.[23] A corporate insolvency resolution process explores a method by which the corporate debtor can carry on as a going concern and contribute to the economy.[24] In addition, liquidation is the last option according to the act's mechanism. The corporate debtor cannot operate as a continuing concern while the corporate liquidation process is underway. The result of liquidation is to effectively ‘kill’ the corporate debtor.[25] In this context, the provision of a GCS acts as a saviour and prevents the effective ‘death’ of the corporate debtor. As a result, the corporate debtor will retain its identity while maintaining a scope of revival. In other words, the regulations envisage the possibility of a company’s revival post liquidation. Therefore, the notification is simply furthering the objectives of the IBC and is not impinging upon the same.[26]
?
Observations and Conclusion
On a cursory perusal of the contentions made against the IBBI Notifications pertaining to a GCS, it appears that the main grounds are the following: (i) the notifications are ultra vires to the code (ii) they are repugnant to the fundamental objectives of the IBC. However, after a more nuanced analysis; it becomes clear that these contentions do not hold much substance. The IBBI is specifically empowered under the code itself to create such regulations via notifications which might be necessary to regulate different aspects of the insolvency process. Furthermore, although liquidation is usually not the most preferred option under the code, it has to be understood that it is being done by way of ‘sale as a going concern’. Therefore, instead of the company being subjected to the usual ‘death sentence’ of liquidation, there is a chance of its redemption.
Furthermore, the IBC by its very nature is a law which regulates commercial affairs. Subjecting the provisions of the code and the adjoining legislations to too much judicial intervention would impinge upon the legislative and commercial wisdom involved; which is usually the dominant factor. Therefore, the judicial intervention shall be minimum and give a deference to legislative wisdom.[27] Any inequity/problem in the legislation shall not be immediately construed as a ground to challenge its legality;[28] and the necessary commercial analysis shall always be given a place in this context.
Therefore, after a thorough analysis of the authorities which have addressed the aspect of a GCS in context of liquidation, it is concluded that Regulations 32 and 32A are legally sustainable; and therefore, shall be interpreted as a means to facilitate the liquidation process involving a sale as a going concern.
[1] What is liquidation? https://www.investopedia.com/terms/l/liquidation.asp (accessed 06th February, 2023).
[2] The Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India) [IBC].
[3] §34, IBC.
[4] §53, IBC.
[5] §54, IBC.
[6] Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, Vide Notification No. IBBI/2016-17/GN/REG005, dated 15th December 2016, published in the Gazette of India, Extraordinary, Part III, Sec.4, dated 15th December, 2016 (w.e.f. 15.12.2016) [Regulations].
[7] Liquidation Regulations, Regulation 32.
[8] Liquidation Regulations, Regulation 32A.
[9] §35(1)(f), IBC.
[10] §54, IBC.
[11] Binani Industries Ltd. v. Bank of Baroda, 2018 SCC OnLine NCLAT 521.
[12] St. Johns Teachers Training Institute v. National Council for Teacher Education, 2003 3 SCC 321; State of U.P v. Renusagar Power Co. and ors., 1988 AIR 1737.
[13] §196(1), IBC.
[14] §240, IBC.
[15] Lalit Kumar Jain v. Union of India and Ors, 2021 SCC OnLine SC 396;
[16] supra note 11, ?17.
[17] Superna Dhawan & Anr. v. Bharti Defence and Infrastructure Ltd., 2019 CA (AT) (Insolvency) No. 195 of 2019.
[18] Chethu Thozhilai Union v State of Kerala (2006) 4 SCC 327.
[19] General Officer Commanding-in-Chief v. Subhash Chandra Yadav, (1988) 2 SCC 351.
[20] In Re The Delhi Laws Act, AIR 1951 SC 332; Unnikrishnan A., Scope and Limitations of Subordinate Legislation under IBC, QUINQUENNIAL OF INSOLVENCY AND BANKRUPTCY CODE, 2016, Oct. 2021; at 321
[21] §§196,240 IBC.
[22] supra note 15.
[23] Periasamy Palani Gounder v. Radhakrishnan Dharmarajan, 2021 SCC OnLine NCLAT 2050.
[24] MINISTRY OF CORPORATE AFFAIRS, REPORT OF INSOLVENCY LAW COMMITTEE, (1st ed. 2020).?
[25] Vidarbha Industries Power Ltd. v. Axis Bank Ltd., 2022 SCC OnLine SC 841.
[26] WORLD TRADE ORGANIZATION, DOING BUSINESS 2019 96 (16th ed. 2019); IBBI, ANNUAL REPORT 2019-20 7 (1st ed. 2020).
[27] Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.
[28] Joseph Lochner v. People of the State of New York, 198 US 45 (1905).