Answer By law4u team
Liquidation typically signifies the end of a business, involving the sale of assets to repay creditors. However, in certain cases, the business can be sold as a going concern—meaning the company continues to operate, with its assets, employees, and operations transferred to a new owner. This approach can help preserve jobs, maximize value for creditors, and ensure the continuity of goods or services.
When Can a Company Be Sold As a Going Concern During Liquidation?
Under the Insolvency and Bankruptcy Code (IBC), 2016 (India)
The liquidator may sell the business or its parts as a going concern if it fetches a better value than selling assets individually.
This method must be approved by the Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT).
Types of Going Concern Sale
Company Sale: The legal entity (company) is sold along with its assets and liabilities.
Business Unit Sale: Only the business operations (without liabilities) are sold to a buyer, but not the legal entity.
Criteria for Going Concern Sale
The business must still have operational capability.
It should be possible to transfer employees, licenses, and contracts.
There must be buyer interest and approval from the adjudicating authority.
Preservation of Employment and Contracts
Employees may be retained under the new management.
Contracts, leases, and licenses may be transferred or novated.
Advantages of Going Concern Sale
Higher realization value for creditors
Continuation of services or manufacturing
Reduced economic disruption
Job protection
Legal and Financial Implications
Creditor Implications
Secured creditors usually get priority over sale proceeds.
Sale must comply with liquidation waterfall provisions under Section 53 of IBC.
Taxation and Liabilities
The buyer may not assume past liabilities unless contractually agreed.
Tax implications vary depending on structure (asset sale vs. company sale).
Role of the Liquidator
The liquidator must seek approval, conduct valuation, invite bids, and ensure transparent sale procedures.
Regulatory Approvals
Sale may require sectoral approvals (e.g., SEBI, RBI, FDI clearance) depending on industry.
Challenges in Going Concern Sale
Valuation Disputes: Determining fair value is complex.
Regulatory Hurdles: Transferring licenses, registrations can be time-consuming.
Employee Consent: Transition terms must often be negotiated.
Buyer Risk: Buyers are wary of hidden liabilities or pending litigations.
Consumer Safety Tips (for investors and stakeholders)
Study the Information Memorandum released by the liquidator.
Verify whether liabilities are included in the sale.
Consult legal counsel before acquisition.
Check past financials and compliance history.
Ensure employment contracts and assets are transferrable.
Example
A textile manufacturing company enters liquidation due to unsustainable debt but still operates a fully functional factory with orders in the pipeline. The liquidator, with NCLT's permission, auctions the business as a going concern.
Steps taken:
The liquidator prepares an Information Memorandum describing the business, assets, and liabilities.
Bids are invited from potential buyers for the entire business.
A buyer purchases the company with employees, contracts, and assets intact.
The sale proceeds are distributed among creditors as per IBC’s priority waterfall.
The buyer rebrands the business but continues operations seamlessly, saving 500+ jobs.
