Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of V.S. Palanivel v. P. Sriram CS Liquidator etc  has held the Rule 12 under Schedule 1 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (IBBIR) is mandatory in nature and the liquidator cannot extent the time limit mentioned under the Rule under his discretion. 

What was the Background of the V.S. Palanivel v. P. Sriram CS Liquidator etc  Case? 

• In the present case, a company named Sri Lakshmi Hotels Private Limited (corporate Debtor (CD), herein after to be referred as company was held by the four members (Shareholders: Appellate, his wife, his and his daughter in law). 
• The company took a loan from the financial creditor in the year 2006. 
• A dispute arose between the two against which the financial creditor (FC) invoked the arbitration clause between the parties. 
• The Arbitrator passed an award in Favour of the FC and when appealed by the company before Madras High Court which got dismissed by the High Court. 
• The nonpayment of the awarded amount by the company to the FC resulted in filing of application by the FC before the Adjudicating Authority (AA) for initiating corporate insolvency resolution process (CIRP) against the company. 
• Respondent No.2 (Interim Resolution Professional [IRP], Resolution Professional [RP] and Liquidator) was appointed but no resolution plan was recommended by him for the revival of the company. 
• The Committee of creditors recommended the resolution plan for the liquidation of the company. 
• The valuation report was submitted, and the date of auction was fixed with a reserved price 
• It was alleged that the Liquidator requested the appellant to nominate a person in the Stakeholders Committee, which the appellant failed to do. 
• No bid was received in the first auction due to which the reserved price was reduced by 25% of the original reserved price. 
• M/s KMC Speciality Hospitals (India) Limited (Purchaser) emerged as a successful bidder by depositing the earnest amount. 
• The appellant argued that the balance amount to be paid within 90 days as per Rule 12 of Schedule-I under Regulation 33 of the IBBIR. 
• The letter demanding the balance amount was dispatched on 24th  December 2019 and received by the purchaser on 26th  December 2019. 
• It was argued that the day to be reckoned for counting 90 days is from 25th December. 
• While the purchaser argued that the date on which the letter came into its knowledge to be considered for reckoning 90 days limit i.e. 26th December 2019. 
• The appellant filed the application before AA for setting aside the auction proceedings which was dismissed. 
• While the purchaser filed an application before AA for extension of time for making payment of the balance sale consideration  
  • due to Covid-19 pandemic and 
  • Due to the order passed by the Income Tax Authority for attaching the auctioned property 
• The application by purchaser was accepted by the AA and the time granted for depositing the balance sale consideration was deferred till the lockdown was lifted by the Central Government/State Government, respectively. 
• However, the purchaser paid the balance amount on 24th August 2020 and the sale deed was executed on 28th August 2020. 
• After one month of the sale deed the appellant challenged the order of the AA for extension of time and challenged the execution of sale deed. 
• The AA dismissed the application of the appellant for setting aside the execution sale deed. 
• Aggrieved by the decision of the AA the company filed Company Appeal which got rejected by the tribunal. 
• The appellant then filed the present appeal before the Supreme Court on the following grounds: 
  • For recalling the order passed by the AA in regards to the setting aside the auction proceeding. 
  • for extension of time to deposit the balance sale consideration after the Central/State lockdown was lifted. 

What were the Court’s Observations? 

• The Supreme Court observed that Regulation 47A of the IBBIR was inserted for computation of the timeline for completing any task in connection with a liquidation process that could not be completed on account of declaration of the lockdown. 
  • Therefore, the Supreme Court dismissed the contention of the appellate that the AA not to have accepted that Covid-19 lockdown was a valid reason for extension of time to deposit the balance sale consideration. 
• The Supreme Court observed that: 
  • The first proviso to Rule 12 of IBBIR stipulates that if the payment is made after 30 days, then the successful bidder would have to pay interest on the amount payable at the rate of 12 per cent.  
  • The second proviso to Rule 12 of IBBIR stipulates the outer limit for payment and states that if the payment is not received within 90 days, then the sale shall stand cancelled. 
  • The Supreme Court stressed on the use of word ‘may’ and ‘shall’, the court pointed out the intention of the statute that 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. 
  • The Supreme Court further added that the AA exercised statutory powers under Section 35 of the Indian Bankruptcy Code, 2016(IBC) read with its inherent powers under Rule 11 of the National Company Law Tribunal 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 Covid19 pandemic. 
• The Supreme Court further stated that there was a default on the part of the Auction Purchaser in making deposit of the balance sale consideration even after permission was granted by the AA to lift the attachment order by the Income Tax. 
  • The court further stated that considering the developments of hospital on the land by the purchaser it would be too harsh to set aside the sale deed as the appellate also failed to file the application in a reasonable time (he file the application after 19 months of execution of sale deed) 
  • Therefore, the Supreme Court ordered the purchaser to pay an additional amount to the appellate. 

What is Rule 12 of IBBIR? 

• It is given under Schedule 1 of the IBBIR which states the rules regarding Mode of Sale. 
• Regulation 33 of IBBIR states the process of Mode of Sale. 
• Rule 12 to be read with regulation 33 of IBBIR under which: 
  • Clause (1) states that the liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified in Schedule I. 
  • Clause (2) states that the liquidator may sell the assets of the corporate debtor by means of private sale only after prior consultation with the consultation committee under regulation 31A, in the manner specified in Schedule I when 
    • the asset is perishable; 
    • the asset is likely to deteriorate in value significantly if not sold immediately 
    • the prior permission of the Adjudicating Authority has been obtained for such sale: 
  • Provided that the liquidator shall not sell the assets, without prior permission of the Adjudicating Authority, by way of private sale to- 
    • a related party of the corporate debtor; 
    • his related party; or 
    • any professional appointed by him. 
  • Clause (3) states that the liquidator shall not proceed with the sale of an asset if he has reason to believe that there is any collusion between the buyers, or the corporate debtor’s related parties and buyers, or the creditors and the buyer, and shall submit a report to the Adjudicating Authority in this regard, seeking appropriate orders against the colluding parties. 
•  Rule 12 of the IBBIR reads as follows: 
  • Clause (1) states that on the close of the auction, the highest bidder shall be invited to provide balance sale consideration within ninety days or such period as mentioned in the auction notice under clause 3, of the date of such demand 
  • It is provided that payments made after thirty days shall attract interest at the rate of twelve per cent. 
  • It is provided further that the sale shall be cancelled if the payment is not received within the period provided under this clause. 
• Prior to the amendment of 2024 clause (1) of this rule used to read as “On the close of the auction, the highest bidder shall be invited to provide balance sale consideration within ninety days of the date of such demand”.