2020 (8) TMI 915 - AT - Insolvency and Bankruptcy

Auction sale - Appellant s claim of having statutory lien and charge on the plant and machinery supplied by the Appellant rejected - valuation challenged - rejection on the ground that no security interest has been created as such - undue unexplained urgency in auction sale - inconsistencies and contradictions in valuation reports procured/relied upon by the Liquidator - case of improper valuation - Plant machinery sold to the auction purchaser is different from what was valued for auction - Assets advertised under the head land and building were sold as part of plant and machinery - Items sold to the auction purchaser are undervalued - shell company. Publication of sale notice - HELD THAT - It is not the case that Stakeholders agreed to shifting of items from Category of Building to Plant and Machinery after issue of Sale Notice (Annexure - 9). The Liquidator has not argued nor explained before us as to why there is such major difference between Annexure - V of Sale Notice compared with Annexure - V of the information document. Clearly what was sold as Plant and Machinery was different and much more than what was advertised in the Sale Notice. How can Reserve Price for Plant and Machinery remain same even after embedded huge structures were shifted from Block A to Block B in that category? They could not have and should not have been shifted. What was later taken away by the Respondent No. 2 was shocking and still worst. We will discuss that after sometime. Here we record that there is material difference between what was advertised in Public Notice and what was put in the information document and actually passed on by way of Sale Certificate. The above factors are themselves sufficient to set aside such auction which must be said to be vitiated as there is fundamental defect in putting up the articles for auction. Liquidator failed to prescribe pre-bid Qualifications - Defective Auction process - HELD THAT - The Regulations required the Liquidator to prescribe pre-bid qualifications. This does not appear to have been done in spite of value and volume of material and thus with practically one bidder the auction appears to have been completed of plant and machinery which was in Block B . When the credentials of second bidder did not support it to even deposit 10% EMD (which is returnable) even if it somehow on its own or on behest of someone deposits the EMD it does not make it genuine bidder. Liquidator failed to prescribe pre-bid qualifications as per Regulations to secure real competition and failed in his duty. This is yet another factor hitting at the auction process which has been conducted. It was defective Auction process with no genuine bidding. Improper Valuations relied on - HELD THAT - Going through the Valuation Reports although these are documents by experts it appears that the Valuers treated different items differently. Someone picked/left some items in building category and someone picked/left the same in plant and machinery category and vice versa. No clear instructions appear to have been given to Valuers by Liquidator (who was earlier RP even in CIRP) with regard to particulars and categories of the assets. The Liquidator appointed Valuers during liquidation but gave up on them midway after taking tentative valuation and jumped to the valuation got done in CIRP - What was the basis for such figure is also not clear. Section 18(1)(a) requires IRP to collect all information relating to the assets of Corporate Debtor. Section 18(1)(f) requires IRP to take control and custody of any asset over which Corporate Debtor has ownership rights. Section 36 of IBC shows how Liquidation Estate is formed. There could not be confusion relating to particulars of the assets. It does appear that there was confusion in Valuation Reports even for categorisation of items of assets in different Blocks and thus the Reports were improper and not comparable to arrive at liquidation value or to fix average for Reserve Price . Conduct of Liquidator - HELD THAT - It is immaterial here as to what were/are the merits of lien/charge or being Secured Creditor claimed by the Appellant. Material is that the Liquidator - a semi-judicial statutory authority behaved in a manner one would not expect such authority to behave. Incidents post issue of Sale Certificate - HELD THAT - On record we have Notice dated 28th May 2019 (Annexure - 14 - Page 429 @ 430) issued by the Appellant to both the Respondents sent by e-mail and courier reminding of its pending claims and details of the developments in litigation and how unknown persons claiming to be representatives of Respondent No. 2 had come to take away plant and machinery from project site claiming that there was Sale Certificate Schedule of which shows it included Plant and Machinery over which lien/charge is claimed; and that large quantity of Plant and Machinery is removed by them. Appellant claims to have then filed CA 684 of 2019 (Annexure - 15) against the auction on 3rd June 2019. No proper system put in place by Liquidator - HELD THAT - On 7th August 2019 this Tribunal had in Company Appeal (AT) (Ins) No. 802 of 2019 (Annexure - 22) directed the Adjudicating Authority to decide the Appeal of Appellant on an early date and in the meantime Liquidator was directed not to allow any person to remove the assets in question even if it is sold but if not yet removed. On that date of 07.08.2019 Counsel for Respondent No. 1 kept opposing the Appellant not telling us that on 05.08.2019 his representative visited the project site and found Respondent No. 2 had already removed items worth Rs. 20 Crores illegally and Respondent No. 1 had filed Police Complaint dated 06.08.2019 (see Annexure - 7 - Diary No. 17759). So after leaving the project site open for Respondent No. 2 (since Sale Certificate dated 20.05.2019) the Representative visits on 05.08.2019 which means none responsible was posted. Else before wrong/illegal lifting of such magnitude Respondent No. 1 would have known. Respondent No. 1 lacked information and control - HELD THAT - We do not find that the reasons recorded by the Adjudicating Authority in Paragraphs 91 to 101 of the Impugned Order can be maintained. When there were Orders dated 12th June 2019 (Annexure - 17) that movement of goods would be subject to outcome of proceedings the outcome cannot change only because there was movement of goods. Even if the plant and machinery had been dismantled that could not have been reason to deny the relief of return of material. The other reason that the Applicant/Appellant was only an Unsecured Creditor and higher proceeds would not go to the Applicant - Appellant was no reason not to cancel the auction. Appellant is admittedly Operational Creditor. Illegality in the process and illegal loss to Corporate Debtor is bound to affect the beneficiaries down the line of Section 53 of IBC. If the auction is illegal without proper valuation and there was also confusion with regard to what is lifted declining to take action would amount to rewarding the wrong done. The Appellant had not pursued the provision of Letter of Credit was also no reason to refuse to cancel the auction - There was no material before the Adjudicating Authority to refer to the Respondent No. 2 as bona fide purchaser . The reference was made in the passing. When Adjudicating Authority held that it was wrong on the part of Liquidator to first not decide question of lien/charge and Secured Creditor and could not have issued Sale Certificate clearly dispute was pending litigation. Respondent No. 2 who did not check up cannot claim to be bona fide purchaser. Similarly the Adjudicating Authority erred in not giving any restitution. It expressed helplessness claiming that disciplinary proceedings against a Resolution Professional can be taken only by IBBI and that if somebody has unlawfully gained and restitution is to be provided to the person who has suffered loss the same also can be done only by IBBI. Appellant cannot be treated as Secured Creditor under IBC - HELD THAT - Considering the provisions (as discussed in detail by the Adjudicating Authority) as found in Section 3(30) which defines Secured Creditor and Sections 3(31) 3(33) read with Section 238 of IBC if benefit is to be taken under the provisions of IBC it can be done if there was a contractual arrangement/transaction creating security interest in favour of the Creditor. It has to be a security interest which is created as such. IBC is complete Code in itself. The Appellant is claiming to be Secured Creditor on statutory basis. Admittedly the Appellant is not relying on any contractual provision or transaction creating security interest to claim benefits of lien/charge - the Appellant cannot be treated as Secured Creditor. Appeal allowed.

Summary

Issues Involved:
1. Improper valuation of assets.
2. Undue urgency in auction sale.
3. Inconsistencies and contradictions in valuation reports.
4. Discrepancies in the auction process.
5. Claim of statutory lien and charge by the appellant.
6. Classification of the appellant as an unsecured creditor.
7. Allegations of illegal removal of assets by the auction purchaser.
8. Liquidator’s compliance with the order of the Adjudicating Authority.
9. Restitution and cancellation of the auction sale.
10. Role and conduct of the Liquidator.
11. Bona fide status of the auction purchaser.

Detailed Analysis:

1. Improper Valuation of Assets:
The appellant argued that the valuation of the assets was inconsistent and contradictory. The Adjudicating Authority found that there were indeed inconsistencies and contradictions in the valuation reports, leading to improper valuation. The valuation reports were challenged on all parameters, and it was noted that some assets were undervalued, and there were discrepancies in the categorization of assets between different valuation reports.

2. Undue Urgency in Auction Sale:
The appellant claimed that the Liquidator showed undue urgency in conducting the auction sale without resolving the issue of the appellant's lien/charge. The Adjudicating Authority agreed that the Liquidator should have decided the claim of lien/charge before issuing the Sale Certificate. The Liquidator's action of issuing the Sale Certificate before deciding the appellant's claim was deemed incorrect.

3. Inconsistencies and Contradictions in Valuation Reports:
The Adjudicating Authority found that there were inconsistencies and contradictions in the valuation reports procured by the Liquidator. It was noted that different valuers approached the property in different manners, leading to confusion about what was valued and what was left out.

4. Discrepancies in the Auction Process:
The Adjudicating Authority observed several anomalies in the auction process, including the sale of plant and machinery that was different from what was valued for auction, assets advertised under different categories being sold under other categories, and the inclusion of items in the Sale Certificate that were not part of the original auction notice. The auction process was found to be defective, with no genuine bidding due to the lack of pre-bid qualifications and the presence of a dummy bidder.

5. Claim of Statutory Lien and Charge by the Appellant:
The appellant claimed to have a statutory lien and charge on the plant and machinery supplied to the Corporate Debtor. The Adjudicating Authority, however, held that the appellant could not be considered a Secured Creditor under the Insolvency and Bankruptcy Code (IBC) as there was no security interest "created" by a transaction between the parties.

6. Classification of the Appellant as an Unsecured Creditor:
The Liquidator classified the appellant as an Unsecured Creditor, which was upheld by the Adjudicating Authority. The appellant's claim of being a Secured Creditor based on statutory provisions was rejected as it did not meet the criteria under the IBC.

7. Allegations of Illegal Removal of Assets by the Auction Purchaser:
The appellant alleged that the auction purchaser, Respondent No. 2, illegally removed assets from the project site, including items not part of the Sale Certificate. The Liquidator's complaint to the police confirmed that Respondent No. 2 removed items worth approximately Rs. 20 crores without permission. The Adjudicating Authority directed the Liquidator to oversee the lifting of materials to avoid future disputes.

8. Liquidator’s Compliance with the Order of the Adjudicating Authority:
The Adjudicating Authority found that the Liquidator did not comply with its order to decide the appellant's claim of lien/charge before issuing the Sale Certificate. The Liquidator's action of issuing the Sale Certificate before resolving the appellant's claim was deemed incorrect.

9. Restitution and Cancellation of the Auction Sale:
The Adjudicating Authority acknowledged the anomalies in the auction process but expressed helplessness in canceling the auction sale and providing restitution. It cited physical impossibility and prolonged litigation as reasons for not granting the appellant's prayer for cancellation and return of materials.

10. Role and Conduct of the Liquidator:
The Liquidator's conduct was criticized for not taking timely action to resolve the appellant's claim and for the improper handling of the auction process. The Liquidator's failure to put in place a proper system for managing and protecting the assets of the Corporate Debtor was highlighted.

11. Bona Fide Status of the Auction Purchaser:
The Adjudicating Authority referred to Respondent No. 2 as a bona fide purchaser but did not record a finding as such. The auction purchaser's actions of forcibly removing materials and not adhering to the Sale Certificate were deemed illegal.

Final Order:
The Appellate Tribunal set aside the auction sale and the Sale Certificate issued to Respondent No. 2, directing the return of all materials removed from the project site. The Liquidator was instructed to recover possession of the assets, conduct a fresh valuation, and re-auction the assets following due process. The Tribunal also directed the police to investigate the complaints filed by the Liquidator regarding the illegal removal of assets. The appellant was to be treated as an Unsecured Creditor under Section 53(1)(f) of the IBC for its monetary claim.