2020 (1) TMI 276 - Tri - Insolvency and Bankruptcy

Status of the appellant - Auction - Lien/ charge of the appellant on the goods sold and services rendered for the corporate debtor - security interest - whether appellant is a secured creditor or unsecured Operational Creditor? - cancellation of auction or not. Whether liquidator has complied with the order of the Tribunal? - HELD THAT - It is to be noted that in Form C both monetary claim and claim of security interest were made. Further, appeal filed by the appellant was allowed and in para I Il of the order, wherein it has been specifically directed that the liquidator was to pass an appropriate reasoned order by reiecting or allowing/ partly allowing the claim of the appellant as per Rules and to decide the claim within 30 days from the date of this order. The approach of liquidator in deciding the claim was also not approved. The directions given by the Tribunal clearly state that liquidator could reject or allow or partly allow the claim as per rules. Had the decision of liquidator been upheld then Tribunal would have not so directed and instead the appeal would have been dismissed. Thus, there is no iota of doubt that the appellant's monetary claim and claim of lien were to be decided afresh by the liquidator. The approach of the liquidator in forming such belief/ opinion is contrary to the factual position as evident from the grounds of appeal and findings of the Tribunal. It is a settled position that findings and prayers are intertwined and ultimate decisions is relevant. Hence, in the facts of the case as discussed above such presumption is not justified. Further the liquidator is obliged to work subject to the directions of the Adjudicating Authority as provided in Section 35(1) of IBC, 2016. It is further noteworthy that liquidator is a quasi judicial authority as against RP who is merely the administrative authority. As per section 40 of the IBC, 2016 the Liquidator can adjudicate upon claims made by the creditors whereas in case of CIRP this power exists only with the COC. It is also noteworthy that as far as secured creditor is concerned, the moratorium ends immediately after completion of CIRP so that such secured creditor if wishes so, then it can realise its security interest on its own and and not putting his secured as security into liquidation estate. The moratorium for other parties may continue as per the provisions of section 33 (5) of IBC, 2016. Thus, security interest becomes a central point in the liquidation proceedings - From the perusal of various discussion, it would be evident that CIRP is driven by Committee of Creditors, whereas liquidation is driven by liquidator. The liquidator has got immense powers. Although, he is subject to the direction by the Adjudicating Authority but normally no intervention/ monitoring of day to day functioning of liquidator is envisaged in the IBC,2016 or Regulations made thereunder. The liquidator is suppose to function as trustee of the creditors. He works as a fiduciary for the benefit of all the creditors. This is statutorily recognised in section 36(2) of the IBC, 2016. Having regard to the sequence of events, the claim of lien/charge had to be decided prior to issue of sale certificate. On this basis, it can safely be concluded that the action of the liquidator in issuing sale certificate before deciding the claim of security interest of appellant is not correct because on that date there was a possibility that there could be a security interest of the applicant and, if that would have become a reality, unless security interest was relinquished under section 52, such asset could not have formed part of liquidation estate at the very outset. Cancellation of auction and restitution - the applicant is aggrieved by the functioning and approach of the liquidator during the liquidation process - Whether there exists a case for cancellation of auction? - Whether restitution as claimed by the applicant can be made and any mechanism is prescribed for enforcement of such claim in IBC, 2016? - HELD THAT - The valuation has been challenged on all parameters. It has been pleaded both by the liquidator and auction purchaser that the role of judicial authorities was very limited since the valuation was an exercise which was to be taken by an experts and this could not be disturbed unless there were apparent mistakes. There cannot be any dispute with this proposition but on the face of it, we find that there exist inconsistencies and contradictions in various documents produced before us,hence, a case of improper valuation is made out. In the present case, as stated by the liquidator, the only criteria which has been fixed was that deposit of 10% of amount as earnest money deposit (EMD). In our view, when sale of such a huge plant at very large site is involved, the background of the bidder is very important and their past experience of participation in such kind of auction and completing the auction transaction in a smooth manner is of utmost importance. However, in the present case, this criteria has not been appeared to have been followed. The financials of the second bidder do not support the credential even for depositing of 10% EMD. The IBC,2016 has prescribed roles of it's different constituents. The roles of COC, RP and liquidator have already been discussed herein before, hence, not repeated. The jurisdiction of Adjudicating Authority has been prescribed in various specific sections. For example under section 19(2) of the IBC,2016, the Adjudicating Authority can direct the suspended Board of Directors to provide necessary cooperation to IRP/RP. Another example is approval of resolution plan under section 31 of the IBC,2016 which is circumscribed by the provisions of section 30(2) of the IBC, 2016 and it has been repeatedly held that commercial wisdom of COC is supreme and Adjudicating Authority cannot prevail over that - The Adjudicating Authority can decide the matters relating to preferential transactions, under-valued transaction, frauds etc. In addition to this under section 42, the Adjudicating Authority can decide an appeal filed by the aggrieved party by the decision of the liquidator as regard to its claim. The jurisdiction under section 60(5) of the IBC,2016 also exists which is undisputedly a residual jurisdiction. The residuary jurisdiction vested in Tribunal through clause(c) above is to be applied in the present case. This clause provides for decision by Tribunal on various matters relating to Insolvency resolution or liquidation proceedings and has got overriding effect over any contrary provisions contained in any other law for the time being in force, hence, this jurisdiction is subject to specific provisions of the IBC,2016. Thus, if any specific provisions/ mechanism exist in IBC,2016 and/or Regulations made thereunder for redressal of any grievance or any issue involving question of law or facts in relation to liquidation proceeding, then, such mechanism would have to be applied. The IBBI is empowered to impose penalty on Insolvency professional as per Section 220(3) of the IBC,2016. Section 2206), 220(5) and 220(6) of the IBC,2016 provide for determination of unlawful gain earned by a person, to order disgorgement of an amount equivalent to such unlawful gain and to provide restitution to the person who suffered the loss from the amount so disgorged. Once these specific provisions exist, in our considered view the proper forum to decide the question of restitution is IBBI and not this Adjudicating Authority. Thus, this contention of the applicant is rejected. Application disposed off.

Summary

Issues Involved:
1. Lien/charge of the appellant on goods sold and services rendered for the corporate debtor.
2. Action of the liquidator in selling goods/equipment through auction.
3. Determination of the appellant's status as a secured or unsecured operational creditor.
4. Compliance with the Tribunal's order dated 10.05.2019.
5. Validity and fairness of the auction process.
6. Possibility of cancellation of the auction and restitution.

Detailed Analysis:

1. Lien/Charge of the Appellant on Goods Sold and Services Rendered:
The appellant claimed a statutory charge/lien on the plant and machinery erected at the project site and on unused material. The liquidator provisionally admitted the monetary claim but rejected the claim of lien/charge, categorizing the appellant as an unsecured creditor. The appellant argued that the agreement between the appellant and the corporate debtor was an EPC contract, wherein the appellant retained custody of the material until it was consumed, erected, and successfully commissioned. The appellant also maintained insurance for all the supplied and erected material, indicating possession remained with the appellant.

2. Action of the Liquidator in Selling Goods/Equipment Through Auction:
The liquidator initiated the auction process despite the pending claim of the appellant regarding lien/charge. The appellant contended that the liquidator, as a custodian, held the assets in trust for the benefit of all creditors and should have disclosed these facts to the Tribunal. The liquidator argued that possession and ownership of goods/equipment had been transferred to the corporate debtor and formed part of the liquidation estate as per section 36(3)(a) of the IBC, 2016.

3. Determination of the Appellant's Status as a Secured or Unsecured Operational Creditor:
The Tribunal examined whether the appellant is a secured creditor or an unsecured operational creditor. The appellant claimed to be a secured operational creditor based on lien and charge under the Sale of Goods Act, 1930, and the Transfer of Property Act, 1882. The Tribunal analyzed the definitions of "secured creditor" and "security interest" under sections 3(30) and 3(31) of IBC, 2016, and concluded that the provisions of the Sale of Goods Act, 1930, and the Transfer of Property Act, 1882, were inconsistent with the specific provisions of IBC, 2016. Therefore, the appellant could not be considered a secured creditor.

4. Compliance with the Tribunal's Order Dated 10.05.2019:
The Tribunal had directed the liquidator to pass a reasoned order regarding the appellant's claim. The liquidator issued a sale certificate on 20.05.2019 and subsequently passed a reasoned order on 03.06.2019, rejecting the appellant's claim of lien/charge. The Tribunal found that the liquidator's approach was incorrect, as the claim of lien/charge should have been decided before issuing the sale certificate. The liquidator's assumption that only a reasoned order was required was not justified.

5. Validity and Fairness of the Auction Process:
The appellant challenged the valuation and auction process, alleging inconsistencies and undervaluation. The liquidator argued that the valuation was done as per norms by registered valuers and that the auction process was transparent. The Tribunal noted inconsistencies in the valuation reports and the classification of assets, indicating a case of improper valuation. The Tribunal also found that the eligibility criteria for bidders were inadequate, as only a 10% deposit of the bid amount was required without considering the bidders' financial credentials.

6. Possibility of Cancellation of the Auction and Restitution:
The Tribunal considered whether the auction could be canceled and restitution granted. It concluded that returning the plant and machinery was physically impossible, as the assets had been dismantled and sold as scrap. The Tribunal also noted that the appellant's conduct in executing the contract and waiving the LC provision without securing payment contributed to the situation. Therefore, the auction sale could not be canceled, and restitution was not feasible.

Conclusion:
The Tribunal held that the appellant could not be considered a secured creditor and rejected the claim of lien/charge. The liquidator's approach in issuing the sale certificate before deciding the appellant's claim was incorrect. The auction process had inconsistencies, but the auction sale could not be canceled, and restitution was not feasible. The liquidator was directed to allow the lifting of goods after giving due notice to the appellant, who would oversee the process. The appellant's other contentions were rejected, and both C.A.s were disposed of with no order as to costs.