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  • Anmol Aggarwal, Akshat Verma

Flexible Resolution Plans: An Egress from the Trap of Going Concern Sales

[Anmol and Akshat are students at Rajiv Gandhi National University of Law, Patiala.]

Liquidation as a going concern or a going concern sale (GCS) was introduced as an antithesis to the typical view surrounding liquidation being the company’s formal "corporate death" following a sale of the assets in a piecemeal fashion. A GCS facilitated under Regulation 39C of Corporate Insolvency Resolution Process Regulations 2016 (CIRP Regulations) provides for the Committee of Creditors (CoC) to recommend the liquidator to explore in the first place the avenue of sale of a corporate debtor (CD) / business as a going concern during the liquidation process. This enables prospective resolution applicants (PRAs) to bypass the formal process of submitting a resolution plan and instead make a backdoor entry. However, GCS, which is a form of liquidation, was not an objective of the Insolvency and Bankruptcy Code 2016 (Code), as evidenced by having a glance at the preamble of the Code, which entails resolution followed by maximization of value as its primary objective. Tribunals and courts have interpreted the preamble to interpret that it has a pecking order of goals, with resolution succeeded by maximization of value as also reasoned by the Appellate Tribunal in Binani Industries v. Bank of Baroda. Furthermore, the court in Arcelor Mittal v. Satish Gupta opined that the tribunals must consider liquidation as a last resort.

The Standing Committee on Finance on Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions recommended the inclusion of ‘flexible resolution plan/framework’ in the Code. It works on the principle of restructuring the viable/profit-making assets and sale of unviable/loss-making assets at the stage of CIRP. Such a framework can provide flexibility in the resolution framework as a middle ground between resolution and liquidation to incentivize PRAs for making the bidding process more competitive and increase the realization value when compared to a GCS.

This article attempts to present flexible resolution approach as a way forward to curb the menace of the problems borne by virtue of inclusion of GCS in the insolvency resolution framework.

Uncovering the Disguised Pitfalls in the GCS Framework

There has been much debate around the GCS recently, which has created a gamut of problems and uncertainties pertaining to this concept. Under the insolvency law, the conventional route for a defaulting company is through the CIRP. The acquiescence of GCS has provided the PRAs with means to potentially circumvent the conventional resolution process. This enables them to escape from the innate binding obligations in the CIRP, which is diametrically opposite to the cases involving buyers within the GCS framework who are not bound by law once the purchase is complete. The resolution process usually involves a series of negotiations and making complex resolution plans, involving requisites such as specifying the manner of write-off of extant capital, preferential allotment and issuance of shares, and apprising the Registrar of Companies with all the corporate compliances.

Additionally, purchasing assets through a liquidation enables PRAs to engage in ring-fencing of third-party claims or for ring-fencing of past liabilities and legacy matters at the time of CIRP. These complexities can be avoided in the case of GCS, which further encourages the companies to avoid going for the resolution process and adopting the GCS method. The GCS also leads to exploitation and unwanted consequences to the detriment of the creditors. For instance, a recent study found that only 3.12% (average) of the admitted claims were realised during GCS compared to 27% (average) when the admitted claims were realised through CIRP. The figure in GCS is even lower than the standard liquidation process in which 4% (average) of the admitted claims were realised. This recent data demonstrates how the companies exploit the GCS to bypass the law and complex negotiations involved in the resolution process.

However, with the rising popularity and acceptance of GCS, it is not a viable solution to eliminate it completely. A more viable solution is for the relevant lawmakers to find a midway between CIRP and the GCS and carve out a flexible resolution plan.

Flexible Resolution Plans: The Way Forward

This problem associated with GCS can be solved by amending the Code to provide flexibility in the resolution approach, which will authorise the CoC to move forward with the resolution of functional parts of the insolvent company and liquidation for non-functional/unviable aspects separately through single or multiple resolution plans for any number of assets of the insolvent company.

Regulation 37 of the CIRP Regulations makes some headway in this direction by allowing multiple resolution plans for different assets of the failing CD. However, this does not provide enough flexibility as even in such a scenario there is a chance that PRAs might not submit a resolution plan and wait for the CIRP to fail and the CD to go into liquidation. The proposed flexible resolution approach can even remedy the situation by allowing the PRAs to submit a plan which provides for a combination of resolution and liquidation and hence, there is no need for the CIRP to fail for liquidation of assets which will further save time and preserve the market value of the asset. Furthermore, since regulations are a form of delegated legislation, there is a need to introduce provisions relating to flexible resolution plan/framework in the Code to guide the stakeholders involved in the whole process.  

The flexible resolution model can be better understood through an illustration:

Let us assume there is a company ‘X’, a ‘conglomerate’ constituted of numerous unrelated business units operating in multiple industries such as fashion and retail, metals, cement and chemicals. X is a legacy company and, due to its traditional business model, was slow to embrace technological advancements. As a result, many of its business ventures started reporting net losses that led to its insolvency and the process of CIRP was initiated against it. As per the Code, the RP floated a form for invitation for expression of interest (EoI) for submitting a resolution plan.

‘Y’ is a company which is involved in the business of salt processing and is carefully following all the developments of X’s CIRP. ‘Y’ is interested in acquiring two of X’s salt processing plants located on the outskirts of Mumbai as it is strategically important to them to supplement their supply concerning the demand for their iodised salt packets. However, it will prefer not to move forward with the submission of the EoI as the current framework of the Code does not allow cherry-picking of assets and mandates the contents of the resolution plan to deal with all the assets of ‘X’ and, satisfying the same is not commercially viable for ‘Y’. Thus, it can be assumed that it will prefer not to submit a resolution plan and instead wait for ‘X’ to go into liquidation and, subsequently proceed to purchase the assets according to their viability. Hence, introducing an alternative in the form of a flexible resolution plan would increase the probability of ‘Y’ opting for the submission of a resolution plan.

The viability of assets of a failing CD will vary across different PRAs, so what is viable for one might be unviable for others. It would be prudent to assume that a PRA’s interest in an insolvent company primarily hinges on the business units or assets which will prove viable or profitable to it as opposed to the entire business of the insolvent company. This approach is more economically practical as PRAs would be more interested in undergoing the complex process of submitting a resolution plan as they have a much better prospect of acquiring an asset which can be strategically important for them and can lead to potential profits for them in the long run without having to carry the deadweight of unviable assets from their perspective acquired through the CIRP process which has traditionally been the case with resolution plans. This flexible approach option will make the bidding process with the CIRP much more competitive and increase the chance of a successful resolution of the CD. If a resolution plan is not submitted for a particular asset, then there is always an option of liquidation.


The liquidation of a company was traditionally meant as the death of a company. The introduction of GCS was meant to be a way out for the same and to keep a company alive even in the case of liquidation. GCS, brought as a solution, soon became a tool for PRAs to bypass the law, often leading to the creditors’ detriment.

GCS was meant to find a middle-ground between liquidation and the resolution process, which did not prove to be as beneficial as intended. It becomes imperative to find an alternative to the GCS, which is the adoption of a flexible resolution plan as proposed above. A flexible resolution plan will achieve the motives of keeping a company alive, maximising the realisation of the admitted claims and, at the same time, upholding the spirit of the Code. Thus, a flexible resolution plan would fare much better than the current GCS framework in upholding the original intent of the Code while mitigating possible drawbacks simultaneously.

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