2024 (9) TMI 625 - SC - IBC

Validity of auction conducted by the Liquidator - COVID-19 pandemic and its impact on Limitation - Allegations of undervaluation of the auctioned property - Non-constitution of a Stakeholders' Consultation Committee - Allegation of violation of Regulation 33 of the IBBI Regulations, 2016 and its effect - Impact of attachment order by the Income Tax Authorities on the sale of the auctioned property - COVID-19 pandemic and its impact on Limitation - HELD THAT - In the present case the period of 90 days for depositing the balance sale consideration had expired just after the crucial date, i.e., 23rd March, 2020. There are no merit in the submission made by the appellant that the Tribunal ought not to have accepted the view taken by the Adjudicating Authority that Covid-19 lockdown was a valid reason for extension of time to deposit the balance sale consideration. Allegations of undervaluation of the auctioned property - HELD THAT - Admittedly, in the first round of the Notice for sale through e-auction published by the Liquidator on 25th November, 2019, he did not receive any bid. As a result, the Liquidator reduced the reserve price of the subject property by 25 per cent to conduct a second auction on 23rd December, 2019 wherein the Auction Purchaser was declared as the successful bidder. In our view, the Liquidator cannot be faulted for having exercised the discretion vested in him under Rule 4A of Schedule I when the auction scheduled earlier, did not bear any positive result. In fact, Rule 4B empowers the Liquidator to reduce the reserve price fixed under Rule 4A for subsequent auctions with a rider that the price shall not be reduced to more than 10 per cent at a time. The said eventuality did not arise in the present case since the Auction Purchaser was declared as the successful bidder in the second round of auction - If the appellant was so confident that the subject property would have fetched a much higher price, nothing precluded him from identifying a bidder who was willing to offer a better price. The Liquidator had stated that If you are confident enough that the property may fetch for more than Rs. 100.00 Crores you are at liberty to bring the proposed buyers and ask them to participate in the bidding process. Again, the Liquidator wrote a letter dated 27th November, 2019 to the appellant suggesting that ask eligible parties willing to offer a better price to participate in the auction process. The appellant did not follow up after that. The appellant cannot be permitted to argue that since the tax value of the subject property was estimated by the Registered Valuers at above ₹ 48 crores, the Liquidator ought not to have fixed the reserve price at ₹39,41,28,500/- (Rupees Thirty nine crore forty one lakh twenty eight thousand five hundred only) for the simple reason that though the reports of the Registered Valuers mentioned the tax value of the subject property at a little above ₹ 48 crores, but the liquidation value in both the reports was much lower and the Liquidator arrived at the average of the two estimated liquidation values to fix the reserve price of the subject property. Non-constitution of a Stakeholders' Consultation Committee - HELD THAT - By virtue of the Notification dated 28th April, 2022, an Explanation was appended at the foot of Regulation 31A which clarifies that the requirement of constituting a Stakeholders Consultation Committee shall apply only to those liquidation processes that were to commence on/after the date of commencement of the IBBI Regulation, 2016. In the present case, the liquidation process in respect of the company had commenced on 17th July, 2019 and therefore, the submission made by the appellant that the Liquidator has breached Regulation 31A of the IBBI Regulations, 2016 by not constituting a Stakeholders Consultation Committee, is devoid of merits - the objection taken by the appellant that the Liquidator has breached Regulation 31A, does not hold any water. Nor is the Court inclined to examine the submission made at the instance of the appellant that in the absence of any explanation appended to Regulation 31A as it stood before 25th July, 2019, it was incumbent for the Liquidator to have constituted a Stakeholders Consultation Committee in view of his own conduct. Further, such an objection was taken for the first time at the stage the appellant filed a recall application before Adjudicating Authority on 25th September, 2020 by which time the entire sale transaction was over. Allegation of violation of Regulation 33 of the IBBI Regulations, 2016 and its effect - HELD THAT - In THE STATE OF BIHAR ORS. VERSUS BIHAR RAJYA BHUMI VIKAS BANK SAMITI 2018 (8) TMI 34 - SUPREME COURT , referring to Section 34(5) of the Arbitration and Conciliation Act, 1996, this Court has held that the absence of any consequences for infraction of a procedural provision implies that such a provision ought to be interpreted to be directory and not mandatory. Rule 12 would have to be treated as mandatory in character 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 timeline of 90 days, which is cancellation of the sale by the Liquidator. To that extent, there is substance in the submission made on behalf of the appellant that since the second proviso under Rule 12 contemplates a consequence of cancellation of the auction on non- payment of the balance sale consideration within 90 days, the Liquidator was not empowered to extend the timeline. In the present case, records reveal that when the Auction Purchaser had approached the Liquidator seeking extension of time to deposit the balance sale consideration. The Liquidator had rightly expressed his inability to do so and indicated that such a power vests only in the Adjudicating Authority. On receiving the aforesaid response, the Auction Purchaser did take steps to move the Adjudicating Authority for seeking extension of time for making the payments. It is a matter of record that the said application was allowed by the Adjudicating Authority on 5th May, 2020 and time was granted to the Auction Purchaser to pay the balance sale consideration on the Central Government/State Government lifting the lockdown. In the facts of 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 lockdown due to the Covid- 19 pandemic. This latitude that was given in the aforesaid extraordinary circumstances to meet the ends of justice, cannot be faulted. Impact of attachment order by the Income Tax Authorities on the sale of the auctioned property - HELD THAT - It was for the Auction Purchaser as an intending bidder to have conducted a due diligence at its own end, gather all the relevant information pertaining to the subject property which included the status of the property and the liabilities attached to it, weigh all the pros and cons and only thereafter participate in the auction process. After having participated in the e-auction with its eyes wide open, the Auction Purchaser cannot be heard to state that payment of the balance sale consideration was linked with the lifting of the attachment order passed by the Income Tax Department when it knew all along that the auction was being conducted on an AS IS WHERE IS , AS IS WHAT IS and WHATEVER THERE IS basis. The subject land has been utilized by the Auction Purchaser to build a 200-bed Mother and Child hospital which is operational. Huge amounts have been pumped into the project by the Auction Purchaser. The hospital is fully functional providing medical facilities to seven surrounding districts. In contrast, the appellant has not been a vigilant litigant. His conduct shows that he has dragged his feet at every stage. Records reveal that belated applications have been filed by him for seeking recall of the orders passed by the Adjudicating Authority granting extension of time to the Auction Purchaser. For reasons best known to him, it took 19 months for the appellant to prefer an appeal before the Tribunal against the order passed by the Adjudicating Authority, as provided for in the IBC. Furthermore, the appellant resisted handing over possession of the subject property to the respondents thereby causing more delay. Given the facts noted, it is refrained from cancelling the sale or declaring the Sale Deed as void. Instead, it is deemed appropriate to balance the equities by directing the Auction Purchaser to pay an additional amount in respect of the subject property. Appeal partially allowed.

Summary

Issues Involved:
1. Validity of the auction conducted by the Liquidator.
2. Impact of COVID-19 pandemic on the extension of time for payment.
3. Allegations of undervaluation of the auctioned property.
4. Non-constitution of a Stakeholders' Consultation Committee.
5. Violation of Regulation 33 of the IBBI Regulations, 2016.
6. Impact of the Income Tax attachment order on the sale.

Detailed Analysis:

1. Validity of the Auction Conducted by the Liquidator
The appellant challenged the auction conducted by the Liquidator, arguing it violated the IBBI Regulations, 2016, particularly Regulation 31A regarding the constitution of a Stakeholders' Consultation Committee and Regulation 33 concerning the mode of sale. The Liquidator had reduced the reserve price by 25% for the second auction, which was permissible under Rule 4A of Schedule I of the IBBI Regulations, 2016. The Tribunal found no fault in the Liquidator's actions as he had followed the prescribed rules and had given the appellant opportunities to bring better bidders, which the appellant failed to do.

2. Impact of COVID-19 Pandemic on the Extension of Time for Payment
The Auction Purchaser failed to pay the balance sale consideration within the stipulated 90 days due to the COVID-19 pandemic. The Supreme Court, invoking Regulation 47A of the IBBI Regulations, 2016, and the order dated 23rd March 2020 in the Suo Moto Writ Petition, extended the limitation period due to the pandemic. The Court held that the Auction Purchaser was entitled to the benefit of these orders, and the Liquidator's discretion in extending the payment timeline was justified given the extraordinary circumstances.

3. Allegations of Undervaluation of the Auctioned Property
The appellant argued that the property was undervalued. The Liquidator had engaged two Registered Valuers who estimated the liquidation value of the property, and the average of these estimates was used as the reserve price. The Liquidator reduced the reserve price by 25% for the second auction as allowed under Rule 4A of Schedule I. The Court found that the Liquidator had acted within his powers and that the appellant had not brought any higher bidders despite being given the opportunity.

4. Non-Constitution of a Stakeholders' Consultation Committee
The appellant contended that the Liquidator failed to constitute a Stakeholders' Consultation Committee as required under Regulation 31A. The Court noted that the liquidation process had commenced before the amendment requiring the constitution of such a committee. Moreover, the appellant and other ex-Directors had not responded to the Liquidator's suggestion to call a meeting of the CoC, and thus, this objection was not tenable.

5. Violation of Regulation 33 of the IBBI Regulations, 2016
The appellant argued that the Liquidator violated Regulation 33 by not adhering to the mandatory timeline for payment of the balance sale consideration. The Court held that Rule 12 of Schedule I, which mandates cancellation of the sale if the payment is not received within 90 days, is mandatory. However, the Adjudicating Authority's extension of the timeline due to the COVID-19 pandemic was valid, given the extraordinary circumstances.

6. Impact of the Income Tax Attachment Order on the Sale
The Auction Purchaser argued that the Income Tax attachment order on the property prevented the completion of the sale. The Court noted that the Liquidator had informed the Auction Purchaser that the Income Tax dues would be paid from the sale proceeds and that the attachment order would not affect the registration of the property. The Auction Purchaser was aware of this before participating in the auction. The Court found that the attachment order was not a valid reason for delaying the payment.

Conclusion
The Court directed the Auction Purchaser to deposit an additional amount of Rs. 5,00,00,000/- with interest at 9% per annum from 26th March 2020 till the date of actual payment, to balance the equities. The appeals were partly allowed on these terms.