NCLAT Delhi on “Clean Slate” Purchases in Liquidation: Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs KTC Foods Private Limited

1. Overview of the Decision

In Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs KTC Foods Private Limited, the National Company Law Appellate Tribunal (NCLAT), New Delhi, examined whether a buyer who acquires a corporate debtor as a going concern during liquidation can be saddled with pre-existing dues and contingent liabilities that were never claimed in the insolvency process.

The appeal arose from an order dated 18/05/2020 of the National Company Law Tribunal (NCLT), Chandigarh Bench, passed in CA No. 1189/2019 in C.P. No. IB-136/Chd/Hry/2018. While the NCLT had approved closure of the liquidation process of K.T.C. Foods Private Limited without ordering its dissolution, it did not grant specific reliefs sought for:

  • Extinguishment of all remaining unpaid liabilities (including contingent liabilities) after distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016
  • Waiver of consequences of past non-compliances prior to the e-auction

NCLAT modified the impugned order and allowed these key reliefs, holding that the purchaser of a corporate debtor as a going concern at the liquidation stage is entitled to a “clean slate” in line with Supreme Court jurisprudence.

2. Background Facts

2.1 Initiation of CIRP

  • Corporate Debtor: K.T.C. Foods Private Limited
  • Operational Creditor: M/s Ashok Kumar & Brother
  • An application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed before the NCLT Chandigarh to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.
  • By order dated 29.08.2018, the application was admitted and CIRP commenced.
  • Mr. Mastram Chechi was appointed as Interim Resolution Professional on 07.09.2018.
  • In the second CoC meeting, Mr. Anup Kumar Singh was approved as the Resolution Professional.

2.2 Failure of Resolution and Liquidation

  • No resolution plan was received during CIRP.
  • In the CoC meeting held on 25.04.2019, the Committee of Creditors resolved with 100% voting share to liquidate the Corporate Debtor.
  • The NCLT passed a liquidation order and appointed the Resolution Professional as the Liquidator.

2.3 Invitation and Receipt of Claims

  • Post-liquidation, the Liquidator issued a public announcement inviting claims from stakeholders in the prescribed forms, with the last date as 30.06.2019.
  • Intimation was also given to the Insolvency and Bankruptcy Board of India (IBBI).
  • By the cut-off date:
    • One claim was received in Form D from Oriental Bank of Commerce, NCB Branch, Haryana (sole financial creditor).
    • Eight claims were received from operational creditors.
    • No claim was filed by Uttar Haryana Bijli Vitran Nigam (UHBVN) or any other electricity distribution entity for any amount, including Rs. 81,34,157/-.

2.4 Valuation of Assets

  • Two valuers submitted valuation reports, but the estimates varied significantly.
  • In line with Regulation 35(1)(b) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a third valuer, Crest Capital Group Private Limited, was appointed with CoC approval in its third meeting on 12.03.2019.
  • In compliance with Regulation 35(1), the average of the valuations was taken:
    • Fair value: 24.63 Crores
    • Liquidation value: 18.45 Crores

2.5 Formation of Liquidation Estate

  • The liquidation estate was formed after Oriental Bank of Commerce relinquished its security interest over the assets of the Corporate Debtor.

3. Sale of Corporate Debtor as a Going Concern

3.1 E-Auction Process

  • On 05.11.2019, the Liquidator issued a sale notice inviting expressions of interest for e-auction of K.T.C. Foods Private Limited as a going concern under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016.
  • Initially, the last date for submission of forms, affidavits, declarations and earnest money deposit (EMD) was 11.11.2019.
  • Owing to multiple enquiries, the last date was extended to 18.11.2019.
  • Between 11.11.2019 and 18.11.2019:
    • Four expressions of interest (EOI) were received.
    • All prospective bidders were found eligible under Section 29A of the IBC.
  • M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. (the Appellant) participated as one of the bidders and deposited EMD of Rs. 1 Crore along with its bid on 18.11.2019.

3.2 Successful Bid and Sale Certificate