Mohan Gems & Jewels Private Limited Vs Vijay Verma (NCLAT Delhi)
Regulation 39C of CIRP Regulations read with Regulations 32, 32A and 45(3) of Liquidation Process Regulations, it is clear that under Regulation 39C, the CoC may recommend that the Liquidator may first explore sale of the ‘Corporate Debtor’ as a going concern under Clause (e) of Regulation 32 or Sale of the business of the ‘Corporate Debtor’ under Clause (f) of Regulation 32. 32A provides that if the Liquidator is of the opinion that sale under Clause (e) or (f) of Regulation 32 shall maximize the value of the ‘Corporate Debtor’, he shall endeavor to sell under the said Clauses 32-(A)-2 provides that for the purpose of sale under Sub-Regulation (1) the group of assets and liabilities of the ‘Corporate Debtor’, as identified by the CoC under Sub-Regulation (2) of Regulation 32C of the CIRP Regulations, shall be sold as a going concern. As can be seen from the agenda filed before us by way of on Affidavit by IBBI, Regulation 45(3) and Regulation 39C were inserted by IBBI to facilitate/strengthen the objectives of the Code. Any Order of dissolution is completely unnecessary in such cases. Having regard to the fact that the Code does not prevent the closure of Liquidation Process in the instance the ‘Corporate Debtor’ is sold as a going concern pursuant to Regulation 32(e) following a closure report filed under Regulation 45(3)(a) of the Liquidation Process Regulations it would be contradictory to observe that closure of Liquidation Proceedings cannot be done and only dissolution is provided for under the Code. This would demolish the very spirit and objective of the Code. It can be safely construed that before the completion of 270 days, if no decision under Regulation 39C is taken by the CoC, only Regulation 32A is to be followed. Additionally, in the instant case, the Application under Section 33 of the Code seeking Liquidation was filed prior to 25.07.2019 (on which date Regulation 39C was inserted), therefore, the question of CoC passing any Resolution does not arise. We are of the considered view that the Liquidator has rightly followed the procedure specified in Regulation 32A of the Liquidation Process Regulations.
It is a well settled proposition that the legality and propriety of any Regulation/Notification/ Rules/Act cannot be looked into by NCLT or NCLAT. The Tribunal can only ascertain whether the procedures provided for under the Code/Companies Act, 2013 are being followed or not. The Adjudicating Authority cannot go beyond this.
Keeping in view the scope and spirit of the Code, read with Section 54 of the Code, Regulation 39C of CIRP Regulations, Regulations 32(e)&(f), 32A and 45(3) of the Liquidation Process Regulations, we are of the view that the sale of the ‘Corporate Debtor Company’ was carried out by the Liquidator in accordance with the Regulations and we are constrained to observe that the Adjudicating Authority, has, apart from travelling beyond its jurisdiction in making observations regarding the power and functions of framing of Regulations by IBBI, has also not appreciated the ratio laid down by the Hon’ble Supreme Court in a catena of Judgements that the Liquidation of the Company is to be seen only as a last resort and every attempt should be made to revive the Company and to continue it as a ‘going concern’.
FULL TEXT OF THE CESTAT DELHI ORDER
1. Challenge in this Appeal is to the Impugned Order dated 16.09.2020 passed by the Learned Adjudicating Authority, (National Company Law Tribunal, Principal Bench, New Delhi) in I.A. No. 1490 of 2020 in CP(IB) No. 590(PB)/2018. I.A. No. 1490 of 2020 is an Application filed by the Liquidator seeking for closure of the Liquidation Process as per Regulation 45(3)(a) of IBBI Liquidation Process Regulations, 2016 (hereinafter referred to as the ‘Liquidation Process Regulations’), as the ‘Corporate Debtor’ was being sold as a going concern in the e-Auction held on 20.11.2019 declaring Mr. Vijay Verma/the first Respondent as the highest bidder at a bid price of Rs. 4,51,99,713/-. By the Impugned Order, the Adjudicating Authority has dismissed this I.A. observing as follows:-
“32. On reading this CIRP Regulation, it appears at the outset, an effort has been strenuously made to rewrite IBC without amendment to the Code- the reasons for saying so is-
“1. Foremost hurdle is, this Regulation is a new concept not backed by any provision of law in IBC. The Regulating Authority cannot stretch its muscle beyond its strength, if it does so, it is exercising jurisdiction not contemplated under IBC. No mention about this arrangement either in section 28 or section 30 or any other section of the Code.
2. The CIRP process is separate and the liquidation process is separate. Separate yardsticks have been set up by the Code.
3. How CoC, which would not remain in existence after liquidation order, will issue its dictum to be followed without any other recourse to the liquidator despite liquidator is to act independently during liquidation process.
4. CoC has not been endowed with powers to give mandate over the progress of liquidator foreclosing the functions of the liquidator as stated under section 35 of the Code.
5. Indeed actions of the liquidator under section 35 are subjection to the directions of this Adjudicating Authority.
6. Liquidator is not bound by the directions of the stakeholders, who are mostly none other than Financial creditors i.e., CoC members.
7. Moreover, the Regulating Authority is implicitly goading this Adjudicating Authority to approve actions not contemplated under the Code.
8. The right given to CoC is to make an effort to keep the assets intact and pass a resolution taking compromises against the right of recovery against the Corporate Debtor.
9. We don’t want to get into the anxiety to ensure the company remains a going concern and also not supposed to get into the veracity of it, but one thing we need to emphasize is that when enactment has come into force, we must respect it. If the Code goes in the pace and direction given by the Parliament, it will go well otherwise only chaos will remain.
10. As to the going concern concept, in CIRP, CoC will put its maximum efforts to derive maximum value from the corporate debtor. The ground reality is if value is there in the company and if the company can be rung as going concern, people will come forward to take it as going concern. When the company has failed to resume its strength as a going concern after making all efforts, it will go to liquidation. When effort in the first phase has not yielded results, another window is left open in the liquidation stage to reorganize or amalgamate or merge the company through a scheme u/s 230-232 of the Companies Act 2013. There also if the company failed to reequip as a going concern, asset or undertaking could be sold as going concern, but not the corporate debtor itself. Assets could be valued and sold as going concern. Even in the case of selling the business as one lot, employees could be protected and other rights could also be protected. Selling assets or undertakings shall not stretch out to the sale of the corporate debtor. If this process of sale of the corporate debtor is approved, it will become third window, besides that, it is in violation of company concept. In fact IBBI has made it almost like a mandate to try for sale of the company as a going concern. Is it that this process has to continue until the corporate debtor is sold as a going concern? If this is permitted, tomorrow somebody may suggest something else. Where is the end for it? It is a policy decision- which cannot be taken by IBBI particularly when no such concept is contemplated under the Code and more particularly when section explicitly given a mandate for dissolution.
11. In most of the cases, these companies remain as going concerns on the records of RoC, but if ground situation is taken into account, these companies are gone cases, companies where only two computers, or companies with one landed property. Not really any business, except in a few companies.
12. The benefit in these liquidation cases mostly go to the buyer, because real value of the asset will not come out, only distress value will come out in the form of liquidation value, in most cases will be far less than real market value or entrepreneur value.
13. Today what is the yardstick to categorize which corporate debtor is a going concern and which one is not a going concern?
14. Let us assume purchase come forward to take the corporate debtor as going concern for a value less than liquidation value, as per this Regulation unless the liquidator has failed to get a purchaser under (e) and (f) of Regulation 32, can’t be opt for another mode? In such a conundrum, how could the liquidator sell the assets in a method other than the method mentioned in (e) and (f)? This will again protract the litigation.”
33. After examining these two Regulations, one from CIRP Regulations and another from Liquidation Regulations, we have not found any merit in either of these regulations, which are set up as foundation to say that by virtue of liquidation Regulation 45 (3), dissolution shall be dispensed with for closure of liquidation.
“45. Final report prior to dissolution.
(1) When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.
(2) if the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.
(Inserted on 25.07.2019)
(3) The Liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for –
(a) Closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern.
(b) for the dissolution of the corporate debtor, in cases not covered under clause (a).”
34. Insolvency and Bankruptcy Code is an embodiment of substantial rights laced with procedural mandates. When procedure itself is part of the enactment, the Regulation Authority cannot rewrite the procedure obliterating the provisions of IBC. Yes, the Regulation authority may bring in subordinate procedure for full implementation of the sections of the Code. What could be liquidated is the assets of the debtor company, this concept of liquidation of assets shall not be construed as inclusion of sale of the company.
35. The procedure is already set out under the Code for rearrangement under insolvency and resolution process thereafter another window under liquidation through Sec. 230 of the Companies Act, 2013, therefore there cannot be any other procedure which is militating the procedure set out under the code. Accordingly, this IA 1940/2020 is hereby dismissed as misconceived.”
2. The main issues which arise for consideration are:-
