IBC | 'Auction-Purchaser Entitled To Benefit Of COVID Limitation Extension' : Supreme Court Refuses To Cancel Sale Over Delayed Deposit

The Supreme Court recently refused to cancel an e-auction despite the Auction Purchaser making a glaring default in making a deposit of the balance sale consideration on grounds that the subject matter of the auction has been utilised and the appellant failed to approach the court on time.

A bench of Justices Hima Kohli and Ahsanuddin Amanullah noted: "Much water has flown under the bridge by now. The subject land has been utilized by the Auction Purchaser to build a 200-bed Mother and Child hospital which is operational. Huge amounts have been pumped into the project by the Auction Purchaser. The hospital is fully functional providing medical facilities to seven surrounding districts."

In contrast, it noted that the appellant who moved the court in appeal to cancel the auction has not been a vigilant litigation. It observed: "His conduct shows that he has dragged his feet at every stage. Records reveal that belated applications have been filed by him for seeking recall of the orders passed by the Adjudicating Authority granting extension of time to the Auction Purchaser. For reasons best known to him, it took 19 months for the appellant to prefer an appeal before the Tribunal against the order passed by the Adjudicating Authority, as provided for in the IBC. Furthermore, the appellant resisted handing over possession of the subject property to the respondents thereby causing more delay."

Brief facts

In this case, the appellant-V.S. Palanivel (shareholder/former Managing Director of Lakshmi Hotel Private Limited) has filed appeals against the judgment of the National Company Appellant Tribunal, Chennai Branch, dated September 16, 2022.

As per the facts, a Company, Sri Lakshmi Hotels Private Limited, purchased a loan from a financial creditor for Rs. 1,57, 25,000. A dispute arose between the Company and the financial creditor and the latter involved arbitration. On December 27, 2014, an arbitration award was given in favour of the financial creditor for a sum of Rs. 2,21,08,244 with 24 percent interest per annum from the date of the claim petition till the date of realisation.

The Company challenged the arbitration before the Madras High Court which was dismissed. On non-payment of the amount awarded under arbitration award, the financial creditor initiated a corporate insolvency resolution process against the Company before the Adjudicatory Authority under the Insolvency and Bankruptcy Code (IBC).

When no resolution plan for the revival of the Company was received, it was recommended that the Company be liquidated. The Adjudicating Authority vide order dated July 17, 2019 accepted the recommendation for liquidation. The liquidator appointed engaged two registered valuers for an estimated valuation of the property (hotel). 

An average value of Rs. 39,41,28,500 was made and an action was scheduled based on this reserved price. Valuer 1's liquidation value was Rs. 40,82,57,000. Whereas, valuer 2's was 38,00,00,000.

The appellant objected to the fixation of the reserve price and stated that the tax value of the subject property was estimated by the registered valuers at above Rs 48 crores. However, this objection was rejected. When no bid was received in the first auction, the second auction was scheduled by with a 25 percent reduction in the reserve price, which came down to Rs. 29,55,96,375.

KMC Speciality Hospitals (India) Limited was the sole bidder and deposited Rs. 2,95,59,698. KMC (Auction Purchaser) was required to pay the balance sale consideration within 90 days from the date of demand. However, KMC failed to pay the balance sale consideration within 90 days. It had applied to the COVID-19 pandemic seeking an extension of time to pay.

On May 5, 2020, the Adjudicatory Authority granted time to deposit the balance sale consideration till the lockdown was lifted by the Central Government. Dissatisfied with the order, the appellant filed a company appeal after 19 months. However, before this, the Auction Purchaser paid the balance sale consideration on August 24, 2020 and a sale deed was executed on August 28.

On September 25, 2020, the appellant sought recall of the May 5 order of the Adjudicating Authority and challenged the execution of sale deed. The Adjudicating Authority rejected all applications for stalling the e-auction and for setting aside the sale deed through a common order dated November 17, 2021. This dismissal was challenged by the appellant before the Tribunal, which was rejected on September 16, 2022. 

The September 16 order is the subject matter of present appeals.

Arguments of parties 

Appellant

Senior advocate P. Chidambaram, for the appellant, argued that the Tribunal failed to appreciate that the auction conducted by the Liquidator was in violation of the provisions of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (IBBI Regulations,2016) particularly, Regulation 31A which requires a Liquidator to constitute a Stakeholders' Consultation Committee and Regulation 33 that prescribes the mode of sale of the assets of the Corporate Debtor through an auction in the manner specified in Schedule I. It also argued that the Liquidator ought not to have auctioned the property by fixing a reserve price below the valuation submitted by the registered valuers. 

Relying on the decision in C.N. Paramsivam and Another v. Sunrise Plaza through Partner and Others (2013), it has been contended that Schedule I, Rule 12 of the IBBI Regulations, 2016 is mandatory and any non-compliance thereof should result in cancellation of the sale. It was also argued that the Auction Purchaser should not have been given extension to pay balance sale consideration because banks were functioning during the COVID-19 pandemic. By giving an extension, it violated Rule 12.

Moreover, the Auction Purchaser was under an obligation to comply with the terms of the auction and on failure to do so, the Liquidator ought to have cancelled the sale instead of accommodating the Auction Purchaser. 

It was also submitted by the Auction Purchaser that the sale deed could not be executed because there was an attachment order issued by the Income Tax authorities which was not uplifted.

Lastly, it was submitted that the order passed by this Court on 23rd March, 2020 in Suo Moto Writ Petition (Civil) No. 3/2020, was only intended for the benefit of vigilant litigants who were prevented from initiating proceedings within the period of limitation due to the pandemic and the lockdown. The Auction Purchaser was not a litigant before the Court and could not have availed of the said order. 

Auction Purchaser

Senior advocate Arvind Datar submitted that the time to complete all actions under the IBC stood extended from 15th March, 2020 onwards in view of the Covid-19 circulars and orders passed by this Court in the Suo Motu Writ Petition initiated by this Court read in conjunction with Regulation 47A of IBBI Regulations, 2016. Therefore, there was no default on the part of the Auction Purchaser.

Further, Datar argued that the extension orders were applied even to the submissions claims by creditors to the resolution professionals.

The arguments of the Auction Purchaser were supposed by the Liquidator through senior advocate C.U. Singh.

What did the Supreme Court say?

On limitiation

The Supreme Court first pointed out that the 90-day period to deposit the balance sale consideration would expire on March 25, 2020, because the letter of intent for the property was received from the Liquidator to the Auction Purchaser on December 29, 2019. However, the balance was paid on August 24, 2020.

The Auction Purchaser had sought an extension based on the March 23, 2020 order of the Supreme Court which extended the period of limitation in a suo moto petition. On March 8, 2021, the Court disposed of its March 23 order and stated that the period of limitation from March 15, 2020 to March 14, 2021 shall stand excluded.

During this time, Regulation 47A of the IBBI Regulations, 2016 was inserted by the Governing Board of the Insolvency and Bankruptcy Board of India and the provision became effective from April 17, 2020.

Regulation 47A provided: "47A. Subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.” 

Based on these considerations, the Court held: "It is evident from a perusal of Regulation 47A, that the benefit of the said regulation was made available not only for initiation of any litigation, but also for computation of the timeline for completing any task in connection with a liquidation process that could not be completed on account of declaration of the lockdown. We are not inclined to accept the submission made on behalf of the appellant that the word 'Litigants' used in the order dated 23rd March, 2020 passed in the Suo Moto Writ Petition ought to be given a narrow interpretation so as to exclude a party like the Auction Purchaser herein as stricto sensu, it was not a litigant who was required to file any petition/application/suit/appeal or other proceeding before any Court/Tribunal/Authority within the period of limitation prescribed under a general law of limitation or under the special laws.

The Court further emphasised that a judgment can neither be read like a Statute nor can the expressions used in a judgment be assigned a narrow meaning or curtailed. It stated: "In the larger contextual background of the Covid-19 breakout, a liberal interpretation would have to be adopted and the Auction Purchaser would be entitled to the benefit of the order dated 23rd March, 2020 read with Regulation 47A of the IBBI Regulations, 2016. The appellant cannot be heard to state that when the entire country was engulfed by the Covid-19 pandemic and a countrywide lockdown was imposed on 25th March, 2020 that was extended from time to time, the Auction Purchaser ought to have deposited the balance sale consideration within the stipulated 90 days."

Therefore, on the period of limitation, the court concluded: "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."

On under-valuation of property

The Court held that the Liquidator cannot be faulted for under-valuation of the property. This is because Regulation 35 of the IBBI Regulation, 2016 permits the Liquidator to appoint two registered valuers to determine the realisable value of the assets, which must submit an estimate of the realisable value the average of which is taken as the value.

The Court noted: "It was in the light of the said Regulations that the Liquidator herein had engaged two Registered Valuers to give an estimate of the valuation of the subject property and the average of the two estimates was fixed by him at ₹39,41,28,500/- (Rupees Thirty nine crore forty one lakh twenty eight thousand five hundred only) for purposes of conducting the e-auction."

Further, the Court reasoned that the liquidator slashing the reserve price to 25 percent was based on Rule 4A of Schedule I under Regulation 33 of the IBBI Regulation which reads: "(4A) Where an auction fails at the reserve price, the liquidator may reduce the reserve price by up to twenty-five percent of such value to conduct subsequent auction.”

Therefore, the court concluded: "Admittedly, in the first round of the Notice for sale through e-auction published by the Liquidator on 25th November, 2019, he did not receive any bid. As a result, the Liquidator reduced the reserve price of the subject property by 25 per cent to conduct a second auction on 23rd December, 2019 wherein the Auction Purchaser was declared as the successful bidder. In our view, the Liquidator cannot be faulted for having exercised the discretion vested in him under Rule 4A of Schedule I when the auction scheduled earlier, did not bear any positive result. In fact, Rule 4B empowers the Liquidator to reduce the reserve price fixed under Rule 4A for subsequent auctions with a rider that the price shall not be reduced to more than 10 per cent at a time. The said eventuality did not arise in the present case since the Auction Purchaser was declared as the successful bidder in the second round of auction."

Non-Constitution of a Stakeholder Consultation Committee 

On this, the Supreme Court explained that Regulation 31A which was inserted on the amendment of the IBBI Regulations, 2016 by virtue of the Notification dated 25th July, 2019, requires a Liquidator to constitute a Stakeholders' Consultation Committee within a period of sixty days from the date of commencement of the liquidation process. The purpose of constituting a Stakeholders' Consultation Committee is to advice the Liquidator on matters relating to appointment of professionals and their renumeration as also in relation to sale of assets under Regulation 32. However, the advice offered by the committee is not binding on the Liquidator.

In this regard, the Court noted: "By virtue of the Notification dated 28th April, 2022, an Explanation was appended at the foot of Regulation 31A which clarifies that the requirement of constituting a Stakeholders' Consultation Committee shall apply only to those liquidation processes that were to commence on/after the date of commencement of the IBBI Regulation, 2016. In the present case, the liquidation process in respect of the company had commenced on 17th July, 2019 and therefore, the submission made by the appellant that the Liquidator has breached Regulation 31A of the IBBI Regulations, 2016 by not constituting a Stakeholders' Consultation Committee, is devoid of merits."

In fact, the Court found that the Liquidator had sent a reply to the appellant stating that neither he nor the former Directors of the Company had responded to his request for calling a meeting of the committee. 

Violation of Regulation 33

Schedule I under Regulation 33 lays down the manner in which the assets of the Company (Corporate debtor) are to be sold by the Liquidator. Under Schedule I, Rule 12 & 13 reads: "(12) On the close of the auction, the highest bidder shall be invited to provide balance sale consideration within ninety days of the date of such demand: Provided that payments made after thirty days shall attract interest at the rate of 12%. Provided further that the sale shall be cancelled if the payment is not received within ninety days.

(13) On payment of the full amount, the sale shall stand completed, the liquidator shall execute certificate of sale or sale deed to transfer such assets and the assets shall be delivered to him in the manner specified in the terms of sale."

The appellant argued that Rule 12 is mandatory in nature, which is accepted by the Court. On this, the Court said: "Rule 12 would have to be treated as mandatory in character for the reason that it contemplates a consequence in the event of non-payment of the balance sale consideration by the highest bidder within the stipulated timeline of 90 days, which is cancellation of the sale by the Liquidator. To that extent, there is substance in the submission made on behalf of the appellant that since the second proviso under Rule 12 contemplates a consequence of cancellation of the auction on nonpayment of the balance sale consideration within 90 days, the Liquidator was not empowered to extend the timeline."

However, it pointed out that although Liquidator expressed its inability to extend the timeline and the Auction Purchaser accordingly approached the Adjudicating Authority, the latter exercised statutory powers vested under Section 35 of the IBC read with Rule 11 of the NCLT Rules, 2016 or extending view during the lockdown. This court observed was made during an "extraordinary circumstances to meet the ends of justice" and therefore, cannot be faulted.

Impact of the Attachment Order by Income Tax authorities 

On this, the Supreme Court noted that the e-auction was being conduction on "AS IS WHERE IS", "AS IS WHAT IS" and "WHATEVER THERE IS" basis and therefore, intending bidders must have undertaken their down independent inquiries to inspect the property before submitting their bids. 

The Auction Purchaser claimed it was not aware of the attachment order of the Income Tax before the same was borne out from the correspondence exchanged by it with the liquidator. However, the Court found that Auction Purchaser had sought clarification from the liquidator even before the auction and it was accordingly told that the Income Tax department had made already lodged a claim to the property from the liquidator. 

On this, the Court held the Auction Purchaser to be responsible for lack of due diligence. It said: "In the light of the Notice for sale and the replies furnished to the Auction Purchaser well before the bidding process had commenced, we are of the considered view that it was for the Auction Purchaser as an intending bidder to have conducted a due diligence at its own end, gather all the relevant information pertaining to the subject property which included the status of the property and the liabilities attached to it, weigh all the pros and cons and only thereafter participate in the auction process. After having participated in the e-auction with its eyes wide open, the Auction Purchaser cannot be heard to state that payment of the balance sale consideration was linked with the lifting of the attachment order passed by the Income Tax Department when it knew all along that the auction was being conducted on an "AS IS WHERE IS", "AS IS WHAT IS" and "WHATEVER THERE IS” basis."

It was also observed that there were directions to lift the attachment order subject to the conditions that may be specified in an Escrow account where the sale consideration would be deposited by the liquidator. This order was duly conveyed to the Auction Purchaser.

The court noted: "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. We are therefore not inclined to accept the submissions made by the respondents that none of the activities as contemplated in Rule 12 could have been completed unless and until the attachment order passed by the Income Tax Authorities was lifted or that the Liquidator was not in a position to complete the sale under Rule13 on that count."

Should the auction be cancelled?

The Court however found that the escrow account was created on 3rd August, 2020 and the entire tax arrears amounting to ₹2,44,01,603/ were deposited in the escrow account on 24th August, 2020, though the income tax department lifted the attachment order three days later, on 27th August, 2020.

It stated although the attachment order was lifted, the Auction Purchaser claimed it did not receive physical copy of the order. The Court noted 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. It held: "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."

The Court concluded that there was a glaring default on the part of the Auction Purchaser in making deposit of the balance sale considered. However, the settled position of law is that once an auction is confirmed, it ought to be interfered with on fairly limited grounds. These could be: perpetration of a fraud/collusion, or 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," the Court remarked.

To balance the equities, the Court deem it appropriate for the Auction Purchaser to deposit 50 percent of the differential figure of the first round of valuation and the second round of valuation. The different between the two was Rs. 10,00,00,000 and the Court ordered the Auction Purchaser to deposit an additional sum of Rs. 5,00,00,000 to the Liquidator along with 9 per cent interest per annum from March 25, 2020 till date of actual payment.

Case details: V.S. Palanivel v. P. Sriram CS Liquidator etc, Civil Appeal Nos. 9059-9061 of 2022

Citation : 2024 LiveLaw (SC) 662

Click Here To Read/Download Order