Imagine a sinking ship that has already been declared beyond repair. The crew has tried everything – patching leaks, bailing out water, even calling for outside help – but the vessel remains doomed. The logical step is to salvage what remains and move on. Yet, instead of dismantling the ship for reusable materials, the authorities insist on keeping it afloat – spending resources on maintenance, assigning new captains and hoping against reason that someone will miraculously chart a profitable course.
This is precisely the fallacy of ‘sale as a going concern’ in liquidation – an attempt to preserve what the market has already abandoned. A company that fails to find a resolution under the Insolvency and Bankruptcy Code, 2016 (IBC) has, by definition, exhausted its chances of revival. Yet, instead of swiftly liquidating its assets and maximising recovery for creditors, India’s current framework allows liquidators to keep the entity artificially alive, creating unnecessary delays, legal uncertainties, and financial inefficiencies.
The Insolvency and Bankruptcy Board of India (IBBI)’s recent discussion paper of February 4 has taken a decisive step in that direction, proposing to remove the sale as a going concern option from Liquidation Regulations. If implemented, this reform could ensure that liquidation serves its intended purpose.
The IBC was designed with a clear, sequential process – first, the Corporate Insolvency Resolution Process (CIRP) attempts to revive the corporate debtor. If that fails, liquidation ensures a swift and conclusive dissolution. However, the concept of ‘sale as a going concern’ in liquidation contradicts this framework, effectively keeping failed businesses on artificial life support. The Insolvency Law Committee (ILC) in its 2020 report explicitly stated that liquidation marks the end of an entity’s viability, and the Standing Committee on Finance (2021) recommended deleting Regulation 32(e) of the Liquidation Regulations for precisely this reason.
Empirical data highlights the failure of ‘going concern’ sales in liquidation. These sales take just as long as regular dissolution – over 1.5 years versus 1.6 years – yet deliver worse outcomes. Creditors recover only about 2.4% of claims (75% of liquidation value) compared to 3.7% (101% of liquidation value) in standard dissolutions. Instead of expediting asset distribution, this process fuels legal disputes, inflates costs and enables bidders to game the system by waiting for price reduction. Worse, liquidators frequently seek National Company Law Tribunal (NCLT) intervention for such sales, despite no clear basis under the IBC, further deepening uncertainty.
More dangerously, allowing post-liquidation revival undermines CIRP itself. Creditors, knowing they have a second chance at revival, may become complacent in securing a resolution plan, defeating CIRP’s time-bound nature. The ILC (2020) explicitly warned that such an approach would weaken the effectiveness of the resolution process, as liquidation was never intended to function as an alternative rescue mechanism. In that sense, Regulation 32(e) was a well-intentioned but ultimately flawed experiment. It has created a perverse incentive structure that contradicts the IBC’s core principles.
The argument that ‘sale as a going concern’ preserves value in liquidation is a classic case of the sunk cost fallacy – the mistaken belief that past investments justify further commitment, even when logic dictates otherwise. If a corporate debtor was unviable during CIRP, expecting it to generate value in liquidation defies economic reasoning. This is well established by the above data. Instead of preserving value, this process of ‘sale as a going concern’ in liquidation merely prolongs the inevitable, at the creditors’ expense.
Time is the hidden killer in liquidation. The time value of money principle dictates that a rupee recovered today is worth more than the one recovered years later. Going concern sales stretch the liquidation process much beyond the statutory timeline, burdening creditors with escalating operational costs and legal disputes. The longer an entity clings to life, the more its residual value erodes. By the time a buyer arrives, what remains is a shell of the original business, saddled with administrative expenses and depreciating assets.
Worse still, market dynamics work against going concern sales. The public disclosure of reserve prices incentivises bidders to wait for successive markdowns, leading to strategic delays and lower realisation. The Jet Airways liquidation is a cautionary tale – multiple failed auctions, prolonged disputes and a final sale price far below initial estimate. Instead of facilitating efficient asset recovery, going concern sales distort price discovery, rewarding patience over fair valuation.
In the context of liquidation proceedings, the public disclosure of reserve prices – the minimum acceptable bid – can inadvertently lead to strategic bidding behaviours that undermine asset recovery efforts. When bidders are aware of the reserve price from the outset, they may deliberately delay their participation, anticipating that successive auction rounds will offer reduced prices. This anticipation stems from the common practice where, if an auction fails to attract buyers, liquidators are permitted to lower the reserve price by up to 25% in the subsequent attempts.
Such strategic delays can result in assets remaining unsold over extended periods, leading to ‘fire sales’ where assets are eventually sold at significantly reduced values. Empirical evidence underscores this concern; a study by the IBBI revealed direct correlation between prolonged resolution processes and diminished resolved within 30 days. However, this recovery rate plummeted to 36% for cases extending beyond 330 days, and further to 26% for those exceeding 600 days.
Real-world instances further illustrate the pitfalls of extended liquidation timelines. In several high-profile insolvency cases in India, protracted legal battles and delayed auction processes have culminated in assets being sold at steep discounts, often below their assessed liquidation value. These scenarios not only erode creditor confidence, but also highlight the inefficiencies introduced by allowing sales as a going concern during liquidation.
Liquidation is not a hospital ward for terminally ill companies; it is a scrapyard where assets are repurposed for more productive use. The IBC already provides a clear structured path for revival through CIRP, where viable businesses are given a fair chance to attract new investors. The moment a company enters liquidation, it is because the market has deemed it beyond rescue. Allowing ‘sale as a going concern’ at this stage only creates an illusion of continuity, while in reality, it prolongs financial distress, delays creditor recoveries and inflates costs without improving outcomes.
The notion that liquidation can still preserve jobs and business continuity is wishful thinking at best and economic mismanagement at worst. If an enterprise had genuine long-term viability, it would have been rescued under CIRP. Instead, liquidation-stage buyers exploit regulatory ambiguities, delay payments and engage in strategic bidding to force price reductions. Meanwhile, assets deteriorate, legal disputes multiply and liquidation costs rise – all to sustain a failing entity that should have been swiftly dismantled. The more pragmatic approach is to expedite liquidation through streamlined asset sales, stricter bidding timelines and reserve price optimisation that prevent fire-sale outcomes.
The deletion of Regulations 32(e) and (f) will not only restore the integrity of liquidation, but also ensure that capital, labour and financial resources are reallocated to enterprises that can actually create value, rather than being trapped in futile resuscitation efforts.
Debarshi Chakraborty is an advocate practicing before the Delhi High Court.