IBBI Regulations That Deal With Procedure For Completion Of Auction Sale Not To Be Treated As Mandatory: Supreme Court
The Supreme Court observed that Rule 12 of Schedule-I under Regulation 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (IBBI Regulations) is not interlinked with Rule 13 and there are no adverse consequences spelt out in Rule 13 for it to be treated as mandatory.
The Court noted that the Rule 13 lays down the procedure for completion of the sale and thus it should be treated as directory.
The Court observed thus in civil appeals preferred against the judgment of the National Company Law Appellate Tribunal (NCLAT), Chennai Bench by which it rejected an application seeking directions being issued to the Liquidator.
The two-Judge Bench comprising Justice Hima Kohli and Justice Ahsanuddin Amanullah held, “Rule 12 is not interlinked with Rule 13. Both the Rules cover different situations. The first proviso to Rule 12 gives a leeway to the successful bidder to make payment of the balance sale consideration after thirty days subject to paying interest at the rate of 12%. However, the second proviso to Rule 12 is unequivocal and declares that the sale itself will be treated as cancelled if the payment is not received within the outer limit of 90 days. It is only on completion of the steps contemplated in Rule12 that Rule 13 can come in. Reference to Rule 13 that starts with the expression “on payment of the full amount” would naturally be understood to mean on payment of the full amount within the period prescribed in Rule 12. We have already held Rule 12 to be mandatory in character because non-payment within the timeline has consequences attached to it. However, in contrast thereto, there are no adverse consequences spelt out in Rule 13 for it to be treated as mandatory...The said Rule lays down the procedure for completion of the sale and would have to be treated as directory since some procedural steps have been set out for purposes of completion of the sale process, but nothing beyond that."
Senior Advocate P. Chidambaram appeared for the appellant while Senior Advocates Arvind Datar and C.U. Singh appeared for the respondents.
Brief Facts -
The appellant was the shareholder and former Managing Director of M/s Sri Lakshmi Hotel Private Limited (company/Corporate Debtor). The company had four shareholders including the appellant, his wife, his son, and his daughter-in-law and it purchased an immovable property. The company started running a hotel and a bar from the said premises and in 2006, it took a loan of Rs. 1,57,25,000/- from a financial creditor. When disputes arose between the company and the financial creditor, the latter invoked the arbitration clause governing the parties. The Arbitral Tribunal passed an award in 2014, for a sum of Rs. 2,21,08,244/- in favour of the financial creditor along with interest at the rate of 24 % per annum from the date of claim petition till the date of realisation. The company challenged the said award under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), but the said petition was dismissed by the Madras High Court of Madras in 2017. On non-payment of the amounts awarded under the award, the financial creditor filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the Adjudicating Authority for initiating Corporate Insolvency Resolution Process (CIRP) against the company. The same was admitted and the respondent no.2 was appointed as Interim Resolution Professional (IRP).
Later on, he was confirmed as a Resolution Professional and finally, as a Liquidator and as per the records, no resolution plan for revival of the Corporate Debtor was received and the Committee of Creditors (COC) recommended that the company be liquidated. The said recommendations were accepted by the Adjudicating Authority. When the Liquidator did not receive any bid in the first auction, he published a notice scheduling a second auction and M/s KMC Speciality Hospitals (India) Limited was the sole bidder in the same. In terms of Rule 12 of Schedule-I under Regulation 33 of IBBI Regulations, the successful bidder was required to pay the balance sale consideration within 90 days from the date of demand. The appellant filed a Miscellaneous Application before the Adjudicating Authority for setting aside the auction proceedings but the same was dismissed. In 2021, the Adjudicating Authority dismissed both the applications filed by the appellant, one for stalling the e-auction and the other for setting aside the Sale Deed. The said orders were carried in appeal by the appellant before the Tribunal and vide common judgment and order, the Tribunal dismissed the appeals filed by the appellant, giving rise to the appeals before the Apex Court.
The Supreme Court in view of the above facts noted, “In GPR Power Solutions (supra), a case cited by learned counsel for the Auction Purchaser, the appellant therein was a creditor of the Corporate Debtor who filed a belated claim under Regulation 7of the IBBI Regulations, 2016 which was rejected by the Resolution Professional on the ground of delay. The said delay was neither condoned by the Adjudicating Authority nor by the Tribunal. Both the orders were overturned by this Court in the light of the orders passed in the Suo Moto Writ Petition. We decline to draw a distinction between the appellant in the captioned case and the Auction Purchaser herein on a plea that the Auction Purchaser was not required to file any petition/application/ suit/appeal or other proceeding that was circumscribed by period of limitation. The spirit of the order passed in the Suo Moto Writ Petition was to overcome the challenges thrown by the lockdown clamped down on account of the Covid-19 pandemic. In our opinion, such an order would also extend to any action required to be taken in respect of a liquidation process, as contemplated in Regulation 47A of the IBBI Regulations, 2016.”
The Court said that when the law prescribes that a certain act has to be done in a particular manner for a party to acquire a right, then it ought to be treated as mandatory in character more so, when the Statute prescribes a consequence for failure to comply with the requirements laid down.
“The second proviso to Section 281 of the IT Act did provide a window to the Auction Purchaser to approach the assessing officer for prior permission to transfer the subject property. But that option was exercised when the Liquidator moved an application for appropriate permission before the Adjudicating Authority which was granted on 10th February, 2020 under intimation to the Auction Purchaser”, it further noted.
The Court also observed that Schedule I of the IBBI Regulation, 2016 must be read in conjunction with Rule 12 and only on payment of the full amount, could the sale transaction be treated to have been completed in all respects and since the full amount could not be paid till the attachment order was lifted, the Liquidator could not have executed a certificate for sale/sale deed to transfer the subject property in favour of the Auction Purchaser.
“The anxiety of the Auction Purchaser was adequately addressed on the Adjudicating Authority passing an order on 10th February, 2020, lifting the attachment order. This order was communicated by the Liquidator to the Auction Purchaser well in time. Mere not receipt of a copy of the said order cannot be a ground for the Auction Purchaser to have delayed deposit of the entire balance sale consideration. The spectre of Covid-19 was nowhere on the horizon at that time. It spiralled only in the last week of March, 2020. If the Auction Purchaser was serious, it could have easily deposited at least some amount out of the balance sale consideration of ₹26,60,36,677/- (Rupees Twenty six crore sixty lakh thirty six thousand six hundred and seventy seven only) much earlier, but it elected not to deposit a penny till the end of August, 2020”, it remarked.
The Court added that much water has flown under the bridge by now and the subject land has been utilized by the Auction Purchaser to build a 200-bed Mother and Child hospital which is operational. It said that huge amounts have been pumped into the project by the Auction Purchaser and the hospital is fully functional providing medical facilities to seven surrounding districts.
“Unless there are some serious flaws in the conduct of the auction as for example perpetration of a fraud/collusion, grave irregularities that go to the root of such an auction, courts must ordinarily refrain from setting them aside keeping in mind the domino effect such an order would have. Given the facts noted above, we shall refrain from cancelling the sale or declaring the Sale Deed as void. Instead, it is deemed appropriate to balance the equities by directing the Auction Purchaser to pay an additional amount in respect of the subject property”, it enunciated.
Accordingly, the Apex Court partly allowed the appeals and directed the Liquidator to disburse the amount received in terms of the orders passed/may be passed by the Adjudicating Authority.
Cause Title- V.S. Palanivel v. P. Sriram, CS, Liquidator, Etc. (Neutral Citation: 2024 INSC 659)
Appearance:
Appellant: Senior Advocate P Chidambaram and AOR Sriram P.
Respondents: Senior Advocates C.U. Singh, Arvind Datar, AOR K. V. Vijayakumar, Advocates V Balachandran, Siddharth Naidu, and J Prithviraj.
