Going Concern Sale Does Not Transfer Subsidiaries Outside Liquidation Estate: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Chennai has recently held that a purchaser of a corporate debtor sold as a going concern in liquidation cannot claim rights over its subsidiaries, joint ventures, or associate entities merely because they belong to the same corporate group.

The tribunal ruled that such assets fall outside the liquidation estate and do not automatically pass to the successful bidder.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindra Nath Swain held that the insolvency framework expressly excludes subsidiary assets from the liquidation estate of a corporate debtor.

The bench ruled, "The provisions contained Section 36 (4) clearly stipulates and carves out an exception that the assets of Indian or foreign 'subsidiaries' of the Corporate Debtor will not be included in the liquidation estates and shall not be used for the purposes of recovery from liquidation estate. Similar were the observation, which was made under Regulation 21A, which also excludes the subsidiary or a holding company of the Corporate Debtor from constituting it to be as to be part of the liquidation estate."

The ruling came in a dispute arising from the liquidation of infrastructure company IVRCL Ltd. After the company entered insolvency proceedings and was later ordered into liquidation, the liquidator made multiple attempts to sell it as a going concern.

In the third e-auction held in December 2021, Raghava Square Pvt. Ltd. emerged as the successful bidder with an offer of about Rs 1,200 crore. The dispute centred on whether the sale extended beyond IVRCL itself to include subsidiaries, joint ventures, associate entities and certain related assets.

Raghava Square contended that its business plan formed an integral part of the transaction. It argued that the commercial basis of its bid was the understanding that several subsidiaries and related entities would come under its control.

Rejecting the bidder's case, the appellate tribunal held that the auction was expressly intended to transfer IVRCL as a going concern and not its subsidiaries or other independent entities.

It found that assets owned by subsidiaries did not form part of the liquidation estate. Consequently, such assets could not automatically pass to an auction purchaser. The tribunal also rejected the contention that earlier NCLT orders had approved the bidder's business plan. It held that those orders primarily dealt with the schedule for payment of the sale consideration.

The bench further drew a distinction between rights that may arise through an approved resolution plan during a corporate insolvency resolution process and those available in a liquidation sale.

It held that a successful bidder could not rely on a business plan to expand the scope of assets acquired in an auction. Such terms were never incorporated into the auction process or accepted by stakeholders.

The bench observed, “In either of the circumstances and under normal human prudence, a 'business plan' can never be a substitute to be read for a 'payment plan'. Since a business plan in itself, as already observed, is not a philosophy provided and was ever perceived of in the auction proceedings, the same cannot be permitted to be alternatively read as to be a payment plan.”

The tribunal noted that the Stakeholders' Consultation Committee had consistently disagreed with the bidder's interpretation of the transaction. It also found that there was never a complete meeting of minds between the bidder and stakeholders on the inclusion of subsidiaries and related entities.

Having participated in the auction on the notified terms, the successful bidder could not subsequently claim assets that neither formed part of the liquidation estate nor figured in the auction documents, the tribunal held.