NCLAT Delhi: CIRP U/s 7 Of IBC Can Be Initiated Against An Auction Purchaser In Proceedings Under SARFAESI Act, 2002
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that Corporate Insolvency Resolution Process ('CIRP') can be initiated under Section 7 of Insolvency and Bankruptcy Code, 2016 ('IBC') against an Auction Purchaser in proceedings under the Securitisation and Reconstruction of...
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that Corporate Insolvency Resolution Process ('CIRP') can be initiated under Section 7 of Insolvency and Bankruptcy Code, 2016 ('IBC') against an Auction Purchaser in proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act').
Background Facts:
YES Bank initiated the proceedings under the SARFAESI Act against Akme Projects Ltd. on the default of a loan. On 02.04.2016, an auction sale notice was issued.
Grandstar Realty Pvt. Ltd., (Corporate Debtor) took part in the auction and offered a bid of Rs.40.75 Crores. YES Bank issued a Sale Confirmation Advice/Sale Certificate on 17.06.2016 and 19.07.2016 respectively, following the receipt of the full payment. Akme Projects Ltd. filed a Writ Petition challenging the auction sale proceedings. On 05.10.2016, the Delhi High Court directed to maintain the status quo regarding the sale in favor of Grandstar Realty Pvt. Ltd. (Corporate Debtor)
On 25.09.2020, the Home Allottees ('Respondent') initiated CIRP against the Corporate Debtor (who is an auction purchaser in proceedings under the SARFAESI Act, 2002) for default of Rs. 78.09 crores.
Aggrieved by the NCLT Order, Anjani Kumar Prashar ('Appellant') Suspended Director of the Corporate Debtor has filed an appeal against the Order dated 26.09.2023 challenging the admission of the CIRP application under Section 7 of IBC.
NCLAT Verdict:
The NCLAT Delhi dismissed the appeal and held that CIRP under Section 7 of IBC can be initiated against an Auction Purchaser in proceedings under the SARFAESI Act, 2002.
The Appellate Tribunal noted that the Sale Confirmation Advice explicitly states that the rights of lawful allottees regarding their respective flats remain unchanged in the auction process, and the successful bidder must honor and acknowledge all lawful allotments, being entitled to receive any outstanding payments from the allotted flats.
It also noted that according to the terms of the Flat Buyer's Agreement, successors, executors, administrators, and assignees are to be treated as the Company for the agreement. Corporate Debtor, as the successful bidder in the auction conducted under the SARFAESI Act, 2002, has acquired the assets. The Sale Confirmation Advice dated 17.06.2016 explicitly states that the rights of lawful allottees regarding their respective flats remain unchanged in the auction process, and the successful bidder must honor and acknowledge all lawful allotments. This indicates that Corporate Debtor is obligated to honor and acknowledge all lawful agreements made with the Respondent.
Therefore, Akme's obligations towards the allottees continue and are transferred to the purchaser of the assets, Grandstar Realty Pvt. Ltd. This aligns with the definition of a Financial Creditor, as anyone owed a financial debt, including through legal assignment or transfer.
NCLAT also referred to the definition of Financial Creditor in IBC which means that any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. It noted that the crucial word in the definition is “any person to whom a financial debt is owed” becomes a Financial Creditor. Further, the expression “includes a person to whom such debt is legally assigned or transferred to” is only incidence of further elaboration of person to whom the financial debt is owed.
It observed that presently, the debt owed to the Respondent by Akme cannot be denied which has is now being owed by the Corporate Debtor. Thus, the Corporate Debtor fulfills the the definition of Financial Creditor under Section 5(7) of IBC.
The Appellate Tribunal highlighted that financial debt can be incurred through various means, including assignment or transfers, as explicitly defined. In instances where amalgamation or demerger occurs under the Companies Act, 2013, resulting in the transfer or vesting of assets and liabilities to the amalgamated or transferee company, the transferee company cannot evade the obligations set forth in the insolvency code by claiming that disbursements were not directly made to it. Presently, the Corporate Debtor acquired the project under the SARFAESI Act, it cannot circumvent the provisions of the IBC and deprive the Respondent of their rights. Given the existence of a financial debt, the filing of the application by the allottees under Section 7 cannot be faulted on this basis.
In conclusion, NCLAT observed that the Corporate Debtor has defaulted on the debt owed to the Respondent and thus, the CIRP application can be admitted under Section 7 of IBC.
Case Title: Anjani Kumar Prashar (Suspended Director of Grandstar Realty Pvt. Limited) vs. Manab Datta & Ors.
Case No.: Company Appeal (AT) (Insolvency) No.1366 of 2023
Counsel for Appellant: Mr. Arun Kathpalia, Sr. Advocate, Ms. Shivani Kher, Mr. Rakesh Lakra, Ms. Bhavya Sharma, Advocates.
Counsel for Respondents: Ms. Pooja Mahajan, Ms. Arveena Sharma, Ms. Shreya Mahalwan, Advocates. Mr. Abhishek Anand, Mr. Karan Kohli, Mr. Abhishek Sinha, Ms. Jasleen Singh Sandha, Advocates for IRP.