Failure To Pay Consideration In 90 Days, NCLAT Delhi Cancels The Sale Of Corporate Debtor To The Auction Purchaser In Liquidation Proceedings.

Background Facts

In 2018, ICICI Bank Ltd. had filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before NCLT New Delhi, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against Apex Buildsys Ltd. ("Corporate Debtor"). The CIRP was initiated by the NCLT, New Delhi ("Adjudicating Authority") vide an order dated 20.09.2018 and subsequently, an order for liquidation of the Corporate Debtor was passed on 09.01.2020.

Relevant Law

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Regulations")- Clause 1(12) of Schedule I.

"1 Auction.

(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."

Liquidation Proceedings

The Liquidator had invited bids for the E-auction of the Corporate Debtor as a going concern. Potens Transmissions & Power Pvt. Ltd. ("Appellant/Successful Bidder") became the successful bidder in the E-auction of the Corporate Debtor conducted on 03.06.2021. The bid amount was Rs. 73.01 Crores and an earnest money amounting to Rs. 7.3 Crores was paid by the Appellant on 31.05.2021.

In view of Clause 1(12) of Schedule I under the Regulations, the sale consideration was to be paid by the Appellant within a period of 30 days, failing which an interest @12% would be liable to be paid. The total period for depositing the sale consideration was 90 days otherwise such sale would be terminated.

Accordingly, the Liquidator asked the Appellant to deposit the sale consideration by 10.06.2021, i.e. within 30 days from 31.05.2021. The Appellant had deposited Rs. 10,95,25,000/- till 10^th-11^th June, 2021. A term sheet was executed between the Appellant and the Liquidator, as per which 03.07.2021 was fixed as timeline for payment of balance amount of Rs. 54,75,75,000/-, on failure of which an interest at the rate of 12% would be applicable 03.07.2021 onwards. The total payment was to be made on or before 01.09.2021, i.e within 90 days.

In July 2021, the Appellant filed an application bearing I.A. No. 3153 of 2021 before the Adjudicating Authority seeking permission to:

"(a) allow the Applicant to pay/adjust the Sale consideration in the following matter (i) INR 50 Crore/- by way of investment into the equity shares of the Corporate Debtor; and (ii) the balance amount of INR 23 Crore/- in the form of Optionally Convertible Debentures;"

Another application bearing I.A. No. 4317 of 2021 was filed by the Appellant seeking extension of time to pay the balance consideration amount. While these applications were pending adjudication, the Liquidator moved an application bearing I.A. No. 5255 of 2021 before the Adjudicating Authority, seeking permission to:

1. Cancel the sale of the Corporate Debtor as a going concern to the Appellant, in view of the latter's failure to make payment in terms of 2nd proviso to Clause 1(12) under Schedule I of the Liquidation Process Regulations, 2016; and
2. Grant of further time to conduct a fresh E-Auction of the Corporate Debtor as a going concern.

On 25.04.2022 the Adjudicating Authority allowed the application filed by the Liquidator and granted permission for cancellation of the sale of Corporate Debtor, as payments were not made by the Appellant within the stipulated time, and also permitted the Liquidator to conduct a fresh E-auction. The applications of the Appellant were disposed off in terms of the order.

Proceedings Before NCLAT

The Appellant challenged the Order dated 25.04.2022 passed by the Adjudicating Authority in I.A. No. 3153 of 2021, I.A. No. 5255 of 2021 and I.A. No. 4317 of 2021 filed in ICICI Bank v Apex Buildsys Ltd., IB-706(PB)/2018.

Appellant contended that its applications were kept pending by the Adjudicating Authority and the prayers made in I.A. No. 3153 of 2021 were granted in certain other cases. It also requested for further time to deposit the balance amount, as a substantial part of the total payment was already paid.

The Liquidator argued that the Adjudicating Authority had granted sufficient latitude and extension of time to the Appellant, but when the Appellant failed to deposit the amount, the Adjudicating Authority was left with no option except to allow the Application filed by the Liquidator.

Decision Of The NCLAT

The NCLAT Bench observed that 90 days' period provided in the Liquidation Process Regulation is the maximum period for the Auction Purchaser to deposit the consideration amount, failing which the Regulation expressly mentions that the sale shall be cancelled. It was held that "when the Consequence of non-compliance of the provision is provided in the statute itself, the provision is necessary to be held to be mandatory."

The NCLAT opined that the Adjudicating Authority had no option except to allow the Application filed by the Liquidator for cancellation of the sale and such action is in accordance with the statutory provisions. Further, the prayer made by the Appellant in I.A. No. 3153 of 2021, indicates that Appellant was never interested in making the payment and wanted to prolong the proceedings.

The NCLAT Bench upheld the order of the Adjudicating Authority and cancelled the sale of the Corporate Debtor to the Appellant and also upheld the conducting of fresh E-auction of the Corporate Debtor.

Case Title: Potens Transmissions & Power Pvt. Ltd v Gian Chand Narang, Company Appeal (AT) (Insolvency) No. 532 of 2022.

Counsel for Appellant: Mr. Amit George, Mr. Manan Batra, Mr. Raaydurgam Bharat, Advocates

Counsel for Respondent: Mr. Abhishek Anand, Mr. Tarun Gulati, Mr. Karan Kohli, Mr. Sahil Bhatia, Mr. Pathik Choudhury, Advocates.

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