V. S. PALANIVEL VS. P. SRIRAM,CS, LIQUIDATOR : TIME LINE PRESCRIBED UNDER RULE 12 OF SCHEDULE I OF LIIQUIDATION PROCESS REGULATION IS MANDATORY
The Supreme Court in V. S. Palanivel Vs. P. Sriram, CS, Liquidator (Civil Appeal No. 9059- 9061 of 2022 ) has held that time lime prescribed under Rule 12 of Schedule I of IBBI (Liquidation Process) Regulations, 2016 is mandatory in nature.
FACTS OF THE CASE
Sri Lakshmi Hotels Pvt. Ltd. purchased an immovable property at Tiruchirapalli measuring 67, 533 sq feet. Lakshmi Hotels had four shareholders i.e. the appellant, his wife, son and daughter-in-law. The company started running a bar and hotel from that premise. In 2006, the company took a loan of Rs. 1,57,25,000/- from a Financial Creditor. Dispute arose between the Financial Creditor and the arbitration was invoked. The Arbitral Tribunal awarded a sum of Rs. 2,21,08,244/- in favour of Financial Creditor alongwith interest at the rate of 24% per annum from date of claim petition till date of realization. The company challenged the award before the High Court which was dismissed.
On non-payment of award amount, the Financial Creditor filed application under Section 7 IBC which was admitted and Respondent No. 2 was appointed as Interim Resolution Professional. CIRP was not successful and Liquidation order was passed and Respondent No. 2 was appointed as Liquidator.
The Liquidation appointed two registered valuers who gave tax value and liquidation value of the Corporate Debtor. The average of Liquidation Value was Rs. 39, 41,28,500/-. Auction was scheduled on 25th November, 2019 where reserve price was kept at Rs. 39,41,28,500/-. The appellant objected to fixation of reserve price which was rejected by the Liquidator.
When the Liquidator did not receive any bid, he reduced the reserve price by 25% to Rs. 29,55,96,375/- and initiated second auction. KMC Speciality Hospitals (India) Ltd. was the sole bidder in the second auction process and on depositing and earnest amount of Rs. 2,95,59,698/- it emerged as the successful bidder. As per Liquidation Process Regulations the successful bidder was to pay the balance sale consideration within 90 days of demand. Balance sale consideration was not paid by the auction purchaser within the period of 90 days.
The Appellant filed Application before the Adjudicating Authority for setting aside the auction proceedings which was dismissed. Auction purchaser also filed an application before the adjudicating authority for extension of time for payment of balance amount on grounds including COVID 19 pandemic which was allowed by the Hon’ble Adjudicating Authority. The balance amount was paid on 24th August, 2020 and sale deed was executed on 28th August, 2020. One month after completion of sale transaction the Appellant filed an application for recalling the order of the Adjudicating Authority dated 5th May, 2020. By common order dated 17th November, 2021, the Adjudicating Authority dismissed both applications i.e. application for recall as well application for stalling e-auction. Appeals before the NCLAT were also dismissed.
FINDINGS OF THE SUPREME COURT
Impact of COVID 19 on Limitation
The Supreme Court observed that period for payment of balance sale consideration was to expire after 23rd March, 2020 when the lockdown was imposed. Auction purchaser was eligible to take benefit of suo motu extension of limitation by the Supreme Court as well as Regulation 47A of Liquidation Process Regulations whereby period of lock down has been excluded from time line for every task. The Supreme Court held that suo motu extension cannot be narrowly interpreted to exclude a party like auction purchaser.
Allegations regarding under-valuation
The Supreme Court did not find fault with fixing the reserve value at average of liquidation value determined by two registered valuers. The Supreme Court also did not find any fault in reducing the reserve price by 25% in the second auction. The Supreme Court observed that Liquidator was empowered to reduce the reserve price by 25% under Rule 4A of Schedule I under Regulation 33 of the IBBI Regulations, 2016.
Non-Constitution of Stakeholders Consultation Committee
The Supreme Court also rejected the argument that the Liquidator has violated Regulation 31A of the Liquidation Process Regulations by not constituting Stakeholders Consultation Committee. The Supreme Court noted that Regulation 31A was introduced by amending Liquidation Process Regulations vide notification dated 25th July, 2019. By virtue of notification dated 28th April, 2022 an explanation was appended at the foot of Regulation 31A that provided that constitution of SCC was required only in those cases where liquidation proceedings have initiated after date of amending notification. In the present case Liquidation Proceedings was initiated on 19th December, 2019.
Violation of Regulation 33
The Supreme Court observed that time period given under Rule 12 of Schedule I of Liquidation Process Regulations are mandatory in nature 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 time line of 90 days, which is cancellation of the sale by Liquidator. But in the present case, the Adjudicating Authority exercised statutory powers under Section 35 of the IBC read with its inherent powers under Rule 11 of the NCLT Rules, 2016 for extending the time to deposit the balance sale consideration on sufficient cause being shown i.e. in view of the countrywide extraordinary circumstances to meet the ends of justice, cannot be faulted.
Attachment Order of Income Tax
The Supreme Court rejected the plea taken by auction purchaser that the income tax attachment order was insurmountable impediment in completion of the sale and subject property could not have been validly transferred in its favor by the Liquidator. The anxiety of the Auction Purchase was adequately addressed on the Adjudicating Authority passing an order on 10th February, 2020 lifting the attachment order despite the same Auction Purchaser delayed in payment of balance amount. COVID -19 was nowhere on horizon then. Thus, there has been glaring default in payment of balance sale consideration by the auction purchaser.
The Supreme Court observed that setting aside the auction will be harsh and directed the auction purchaser to deposit Rs. 5,00,00,000/- (50% of differential figure between the average of liquidation value and the price at which auction was done) with the Liquidator.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
