India’s bankruptcy rule maker recently proposed to drop the clause that allows keeping a company in liquidation as a going concern—essentially, a business that can operate and meet its obligations. While the provision intended to save jobs and preserve value, it merely encouraged lawsuits, attracted tainted owners, delayed liquidation and depressed asset values, lawyers said.
“The proposed change will bring down costs by eliminating both the largely futile attempt of keeping the corporate debtor as a going concern and the process of finding a buyer, thereby positively impacting creditor recoveries,” said Manmeet Singh, a partner at Cyril Amarchand Mangaldas.
The option of sale as a going concern during liquidation was introduced in 2018. However, in a discussion paper on 4 February, the Insolvency and Bankruptcy Board of India (IBBI) proposed its removal, stating it contradicts the IBC’s intent and may delay liquidation.
The IBBI discussion paper followed the Parliament Standing Committee on Finance’s recommendation in FY21 to eliminate the rule. IBBI data shows that such sales under regulation 32A resulted in lower recoveries—2.4% of creditors’ claims (75% of the liquidation value) compared to 3.7% (101% of liquidation value) through regular dissolution.
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For every company resolved under IBC, 1.32 firms were liquidated in FY25 compared with 5.06 in FY18. Despite the improvement in the liquidation-to-resolution ratio, delays persist.
“Often, efforts to maintain a company as a going concern at the liquidation stage lead to asset deterioration or suboptimal recoveries,” said Sushmita Gandhi, a partner at IndusLaw. “This lowers the reserve price in subsequent auctions, ultimately delaying and reducing creditor recoveries.”
About 33.1% of insolvency cases end in liquidation, mostly involving legacy defunct firms under the Board for Industrial and Financial Reconstruction, according to a Care Ratings analysis of IBBI statistics. Only 13.8% of the companies under IBC see successful resolutions, while 24.3% remain unresolved. The remaining were either closed at various stages or withdrawn due to out-of-court settlements or other reasons.
Creditors have faced an average haircut of 70% under IBC, with an overall recovery falling to 31.4% in Q3FY25 from 43% in Q1FY20. The total admitted claims reached ₹11.39 trillion, while the liquidation value stood at ₹2.19 trillion.
Rule contradicts IBC intent
A sale as a going concern allows a bankrupt company’s assets and business operations to be transferred to a new owner, preserving jobs and contracts instead of dismantling the business and selling the assets separately.
The IBBI contends that continuing revival attempts after liquidation orders are passed undermines the time-bound Corporate Insolvency Resolution Process. The Standing Committee on Finance also pointed out that allowing post-liquidation sales contradicts the IBC’s goal of dissolving failed businesses.
The move to drop the ‘sale as a going concern’ clause is expected to improve creditor recoveries in asset-heavy sectors like aviation, real estate, and manufacturing, according to Ritesh Kumar Adatiya, director, NPV Insolvency Professionals Private Ltd. Selling assets individually, such as aircraft, properties, and machinery, could attract higher bids and maximize value through piecemeal sales, he said.
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The discussion paper also flags practical issues, including higher costs, prolonged legal disputes, and bidders delaying participation to acquire assets at lower prices.
“Liquidation as a going concern was a legal fiction that added costs and compliances without creating real value for stakeholders,” said Bikash Jhawar, senior partner at Saraf and Partners.
Provision misused
Some promoters misused the provision to repurchase businesses at lower valuations, bypassing creditors, lawyers said.
A key example was Kanti Mohan Rustagi vs. Redbrick Consulting Pvt. Ltd (6 February 2023). The appellate tribunal cancelled the sale after finding that Redbrick’s director was also a suspended director of bankrupt UTM Engineering, violating Section 29A of the IBC that bars defaulting promoters from regaining control of their businesses.
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“Removing this option will ensure transparent bidding and prevent insider influence,” said Adatiya of NPV Insolvency Professionals. “Selling assets individually through competitive bidding discourages related parties from regaining control at undervalued prices.”
Some sectors may not benefit
Not everyone agrees. Some lawyers believe that selling a company’s assets, instead of putting it on the block as a whole, may reduce overall value in certain sectors.
“Businesses often fetch higher prices when sold as functioning units,” said Raheel Patel, partner at Gandhi Law Associates. “This is especially concerning for sectors like aviation and real estate, where operational continuity is crucial.”
Sushmita Gandhi from IndusLaw cautioned that industries like power plants, which rely on large machinery that cannot be easily dismantled, may struggle to find buyers for individual components.
Removing the option would take away creditors’ and liquidators’ discretion, potentially leading to lower recoveries, warned Amir Bavani, founder of AB Legal, Hyderabad. “Regulation 32A grants this power when selling as a going concern is expected to yield higher value.”
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