NCLAT struck down IBBI Circular on prospective application

[2021] 131 taxmann.com 109 (Article)

Under Insolvency and Bankruptcy Code, 2016, the Sale of the assets of the Corporate Debtor which is under Liquidation is done as per Regulation 33 of IBBI (Liquidation Process) Regulations, 2016 which provides various modes of sale of the assets of the Corporate Debtor by the Liquidator. As per the above regulation the liquidator should ordinarily sell the assets of the Corporate Debtor through an auction in the manner provided under Schedule-I of the said regulation. However, under the said regulation there are situations provided under which the assets of the Corporate Debtor may be sold by means of Private Sale. One such situation is that prior permission of the Adjudicating Authority has to be taken for such a Private sale.

Private Sale: Really Private?

Now the question arises as to what can be the possible situations under which the Adjudicating Authority may give such permission for sale of assets through a private sale?

Apart from this as mentioned in the previous paragraphs the sale through e-auction must be done as per Schedule -I of the said regulation. Clause-12 of the said schedule provides the time frame within which the successful bidder under e-auction must pay the balance sale consideration at the close of the auction. On 25-7-2019, clause 12 of the said regulation was amended as per which the time period provided to the successful bidder is 90 days to make payment of balance consideration. Prior to such an amendment, such a time frame was only 15 days.

Now the question arises as to whether the benefit of such amendment in the Schedule is applicable to the liquidation process which began after 25-7-2019 or is also applicable to those cases where the process had begun before 25-7-2019?

To discuss both the issues mentioned above we shall discuss the recent ruling of Hon’ble NCLT Ahmedabad Bench in the matter of “Sundaresh Bhatt v. Central Board of Indirect Taxes & Customs [2020] 117 taxmann.com 688 “.

In the above matter, ICICI Bank, the financial creditor initiated Corporate Insolvency against ABG Shipyard Ltd. As no resolution plan was approved in the matter, the Liquidation order was passed on 25-4-2019. The liquidator in the above matter stated that he had put the assets of the Corporate Debtor for sale through public auction but failed for four consecutive attempts for some of the other reasons even after reduction of the reserved price of the assets of Corporate Debtor. That after the failure of the four e-auctions and during the pendency of the fifth auction, the applicant attempted to understand the local market scenario and learned regarding the possibility of attracting few buyers. However, the time period of payment of balance sale consideration as per Schedule-1 which was fifteen days on conclusion of the e-auction was considered to be too short especially due to the quantum of sale consideration and ongoing economic slow down due to Covid-19 pandemic.

Now the questions that arose before Hon’ble NCLT was :

1. Whether the liquidator could be permitted to grant the benefit of the amendment regarding the payment of balance consideration within 90 days to the highest bidder instead of 15 days which was applicable to the liquidation process commenced before the date of amendment?

2. Whether the Liquidator could be permitted to sell or dispose of the assets of the Corporate Debtor through private sale after having failed to dispose of the said assets by way of e-auction?

To deal with the first issue, the NCLT discussed clause 12 of the Schedule-I before and after Amendment and the Circular passed by the Insolvency and Bankruptcy Board of India (IBBI) dated 20-8-2019 in respect of such amendment. The above circular stated that the provisions of Amendment regulations were not applicable to the Liquidation process which had commenced before coming into force of the Amended regulation and that the same was applicable to the liquidation process which was commenced on or after 25/07/2019. Hence, as per the above circular amended clause 12 which provided for 90 days’ time frame to make balance payment was not applicable to those liquidations which had commenced before 25-7-2019 and in those matters time period would only be 15 days.

Hence, considering the above Amendment date and Circular issued by IBBI the Hon’ble NCLT took on record that the Order of Liquidation of the Corporate Debtor was 25-4-2019 which was much prior to the date of the amendment. Further, the Hon’ble NCLT mentioned that the e-auction of the Corporate Debtor had commenced w.e.f 17-9-2019 and Covid-19 Pandemic and imposition of lockdown had taken effect from 25-3-2020. Hence taking on record that the Liquidation Process had become effective much before the said amendment and in light of the clarification issued by the IBBI the benefit of amended clause 12 was not applicable to the Corporate Debtor.

In respect of the second issue, it was stated by Hon’ble NCLT that as there was no other option left for the Corporate Debtor, hence Sale of assets of the Corporate Debtor through Private mode was allowed. Hence in the above matter, it was found that in certain circumstances the Adjudicating authority may allow the sale of assets of Corporate Debtor through private mode if no other option is available.The Hon’ble NCLT confirmed the circular passed by IBBI.

However, the above ruling was challenged by the Liquidator praying that the benefit of the amendment is made applicable retrospectively in the matter of “Sundaresh Bhatt, In re [Company Appeal (AT) (Insolvency No. 398 of 2021, dated 20-9-2021] before Hon’ble NCLAT-New Delhi.

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