NCLAT Affirms Absolute Extinguishment of Residual Liabilities Post Going Concern Sale Under IBC

NCLAT has affirmed the absolute extinguishment of residual liabilities following the sale of a corporate debtor as a going concern under the IBC.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra and Mr. Arun Baroka (Technical Members), reviewed an appeal and held that once a Corporate Debtor is sold as a going concern under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016, and the sale proceeds are distributed in accordance with Section 53 of the Insolvency and Bankruptcy Code (IBC), all remaining liabilities existing as on the liquidation commencement date stand extinguished without requiring individual notice, provided the claims were duly filed and addressed during the liquidation process.

The National Company Law Appellate Tribunal (NCLAT) delivered its decision in the appeal filed by Southern Power Distribution Company of Andhra Pradesh Ltd., challenging the order dated 14.06.2024 passed by the National Company Law Tribunal (NCLT), New Delhi Bench, Court-2, in I.A. No. 3446/ND/2022 and I.A. No. 5137/ND/2023. The appeal arose following a split decision by two members of the NCLT, resulting in a reference to a third member who ultimately concurred with the view of the Technical Member. The appellant sought to set aside the impugned order, particularly objecting to the blanket extinguishment of liabilities of the Corporate Debtor without being afforded a hearing.

The impugned order recorded a conclusive finding that, upon sale of the Corporate Debtor as a going concern under Regulation 32(e) of the IBBI (Liquidation Process) Regulations, 2016, and distribution of proceeds under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016, any remaining unpaid liabilities of the Corporate Debtor stand extinguished, without requiring notice to individual stakeholders or authorities. However, the extinguishment applies strictly to the Corporate Debtor and does not absolve individuals who may be otherwise liable under law.

The appellant’s concern was that such extinguishment, if applied broadly, could affect liabilities related to CIRP and liquidation costs. However, the Appellate Tribunal observed that the liquidation process, including claim submissions and distributions, was carried out in accordance with Section 53, and that the appellant had itself participated in the proceedings and had its claims addressed. The NCLAT affirmed that extinguishment would only apply to those liabilities existing on the liquidation commencement date and which had been duly submitted and processed in the liquidation.

Further, the Tribunal noted that the appellant had not provided any specific basis in the appeal to establish what claims, if any, had been improperly extinguished to its prejudice. As the appellant’s claims had been considered during liquidation and there was no procedural irregularity shown in the extinguishment of residual liabilities, the Tribunal found no ground to interfere.

Accordingly, the appeal was dismissed with a clarification that the extinguishment of liabilities shall apply only to those claims existing on the liquidation commencement date, which had been dealt with in the liquidation proceedings.

Mr. Rakesh K. Sharma and Mr. Nishant Sharma, Advocates, represented the Appellant.

Mr. Akshay Sharma, Advocate, appeared for the Respondent No. 3.

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