Interpretation of "going concern sale" under Regulation 32 of Liquidation Process Regulations must align with S.53 of IBC: Madras HC [Read Order]

Winwind Power Energy Private, the petitioner challenged the show cause notices issued by the first respondent alleging violation of certain provisions of the Companies Act, 2013 (the Act) and the intended prosecution that was sought to be launched against the petitioner.

The petitioner company is incorporated in the year 2007 under the Companies Act, 1956. It underwent corporate insolvency resolution process (CIRP) and liquidation process under the Insolvency and Bankruptcy Code, 2016 (the IBC) and came to be taken over as a going concern by one M/s.Agniti Industrial Parks Private Limited ( the new management) during the liquidation process under Regulation 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ( the Regulations).

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The petitioner company was originally engaged in the business of manufacturing wind turbine generators and had availed several financial facilities from banks and financial institutions. It underwent rough weather and pursuant to that, it defaulted in repayment obligations. Further, one of its operational creditors filed a petition before the National Company Law Tribunal (NCLT), Chennai for initiating CIRP against the petitioner company. In spite of best efforts, the petitioner company was not able to be revived under the CIRP and hence, it was ordered to be liquidated by the NCLT, Chennai vide order dated 08.8.2019 in M.A.No.695 of 2019 and a liquidator came to be appointed to complete the said process.

The petitioner company was brought to sale as a going concern post liquidation under Regulation 32A of the Regulations vide sale process memorandum dated 12.10.2019. A public auction was conducted on 22.1.2020 and the new management was declared as the successful bidder at the auction. On payment of the entire sale consideration, a sale deed dated 14.10.2020 was executed in favour of the successful bidder. Thereafter, the new management came to be appointed and became the new shareholder of the petitioner company and respondents 4 and 5 were appointed as the directors of the petitioner company.

The entire sale process was placed before the NCLT, Chennai for approval and by order dated 08.2.2021 in I.A.No.852 of 2020, the approval was granted. The new management also took office and the entire affairs of the petitioner company were handed over to them.

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The specific case of the petitioner is that the liquidator had no books with him, that no books were handed over to the new management also, that the liquidator informed the new management by letter dated 15.2.2021 that he had not received the books of accounts or any other documents of the petitioner company and that the Interim Resolution Professional (IRP), during the CIRP, did nothave the records of the petitioner company.

Subsequently, on 17.3.2023, the very same Joint Director issued another notice to the petitioner company alleging that there were certain violations of the provisions of the Act, which were identified during the inspection and directed the petitioner company to respond to the said notice. On receipt of the said notice dated 17.3.2023, the petitioner company again sent a reply through letter dated 13.4.2023 requesting the third respondent to drop the proceedings in view of the clarifications provided by the petitioner company.

Once again, the third respondent, through letter dated 20.10.2023, issued a notice to conduct inspection of the books of accounts and other records of the petitioner company and directed the petitioner company to keep a list of documents ready for inspection. On receipt of the same, the petitioner company, through letter dated 21.11.2023, submitted a detailed explanation along with supportive documents. The petitioner company apprised the third respondent regarding the liquidation proceedings against it under the IBC and as to how the new management had taken over the petitioner company post liquidation under Regulation 32A of the Regulations.

The petitioner company underwent a liquidation process under the Regulations and the liquidator decided to sell the petitioner company as a going concern to the new management. Thus, in the eye of law, the liquidation process operates as a civil death of the petitioner company and it was resurrected only with respect to its corporate identity when it was sold as a going concern to the new management.

The NCLT, Chennai also took into consideration the terms of the sale deed dated 14.10.2020 entered into between the Liquidator and the new management and the Clauses in the sale deed were taken into consideration while granting the above reliefs. It was a transition period and the petitioner company had continued with the statutory auditor as a stop gap arrangement.

Subsequently, it has been informed to thE Court that the petitioner company had appointed a statutory auditor for a period of five years as is required under the Act. This Court must keep in mind the fact that whatever applies to the CIRP under Section 32A of the IBC will equally apply, if not more, to a company, which was liquidated and its corporate identity alone was resurrected by virtue of the same being bought as a going concern.

In Kashvi Power & Steel P. Ltd. Vs. West Bengal State Electricity Distribution Co. Ltd., the Calcutta High Court had explained in detail the concept of sale of a company as a going concern in a liquidation process and it was ultimately held that the Regulations framed under the authority conferred by the IBC itself cannot be construed to override the provisions of the IBC itself and that therefore, no interpretation contrary to Section 53 of the IBC can be attributed to the expression 'going concern sale' as contemplated under Regulation 32 of theRegulations.

If criminal prosecutions are going to be permitted for those events, which took place prior to the approval granted by the NCLT, Chennai and after those consequences, which fell out of such purchase of the going concern, it will go against the very object of providing protection to the new management, which takes over charge after the purchase of the corporate debtor.

The language that has been used in the impugned show cause notices would show that the first respondent has already concluded that the petitioner company had committed violations and had to be prosecuted for the offences. Therefore, no useful purpose will be served even if the petitioner company is directed to give yet another reply to the first respondent.

A single bench of Justice N Anand Venkatesh viewed that the petitioner company need not undergo the process of giving reply to the impugned show cause notices since, in any case, it is going to result only in launching of a prosecution against the petitioner company and its new management. Just because there is a possibility of compounding the offences under Section 441 of the Act, that does not mean that the petitioner company has to compound the offences when they strongly feel that they have not committed any offence.

The upshot of the above discussions leads to the only conclusion that the impugned show cause notices issued by the first respondent in all the writ petitions are liable to be interfered by the Court.

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