V.S. PALANIVEL versus P. SRIRAM, CS, LIQUIDATOR, ETC. (28/08/2024) — Supreme Court headnote

AI-generated headnote. Verify against the judgment before relying on it. Paragraph numbers refer to the judgment.

Summary

In a liquidation auction under the IBC, the Supreme Court held Rule 12 of Schedule I to the Liquidation Regulations mandatory, so a liquidator cannot extend the 90 days for paying the balance price. The NCLT's extension during the Covid-19 lockdown was upheld under Section 35 IBC, Rule 11 of the NCLT Rules, the Court's suo motu limitation orders and Regulation 47A. The income-tax attachment did not excuse the purchaser's delay, but the sale was not set aside: the purchaser was directed to pay an additional Rs. 5 crore with interest.

Issues

Whether the 90-day period for payment of the balance sale consideration under Rule 12 of Schedule I to the IBBI (Liquidation Process) Regulations, 2016 is mandatory, and who, if anyone, can extend it.
Whether an auction purchaser, though not a litigant, could benefit from the Supreme Court's suo motu Covid-19 limitation orders and Regulation 47A for paying the balance consideration.
Whether the liquidator acted unlawfully in reducing the reserve price by 25% after a failed auction and in not constituting a Stakeholders' Consultation Committee under Regulation 31A.
Whether an income-tax attachment on the property justified the purchaser's delay in payment, and whether the confirmed sale should be set aside.

Provisions considered

Regulation 33, Schedule I, Rules 12 and 13, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016Rule 12 is mandatory because its second proviso cancels the sale if payment is not made within 90 days, so the liquidator cannot extend time. Rule 13, which sets out the steps for completing the sale and attaches no consequence, is directory and operates only after payment within Rule 12's period. (¶¶ 35.1, 35.2, 35.8, 35.9, 35.10, 35.11, 36.9)
Regulation 47A, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016Excludes the Covid-19 lockdown period from the timeline for any task in a liquidation process that could not be completed due to the lockdown; read with the suo motu order, it covered the auction purchaser's payment. (¶¶ 32.5, 32.6, 32.9)
Schedule I, Rules 4A and 4B; Regulation 35, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016The reserve price was the average of two registered valuers' liquidation values under Regulation 35; Rule 4A allowed the liquidator to reduce it by up to 25% after the first auction drew no bid. (¶¶ 33.2, 33.3)
Regulation 31A, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016The advice of a Stakeholders' Consultation Committee does not bind the liquidator; the objection failed on the Explanation to the Regulation, the appellant's own failure to nominate a representative, and its being raised only after the sale was complete. (¶¶ 34.1, 34.2, 34.3)
Section 35(1), Insolvency and Bankruptcy Code, 2016The liquidator's powers, including sale by auction, are subject to the directions of the Adjudicating Authority; read with Rule 11 of the NCLT Rules, this empowered the NCLT to extend time for payment on sufficient cause. (¶¶ 35.15, 35.16)
Rule 11, National Company Law Tribunal Rules, 2016The NCLT's inherent power to make orders for the ends of justice, read with Section 35 IBC, supported its order extending time during the lockdown. (¶¶ 35.14, 35.16)
Sections 222 and 281; Rule 48 of Part III of the Second Schedule, Income Tax Act, 1961The attachment did not justify delay: the second proviso to Section 281 allows transfer with prior permission, and the NCLT had directed lifting of the attachment well before the lockdown, with the tax arrears payable from the purchaser's earnest money. (¶¶ 36.6, 36.7, 36.10, 36.11)
Articles 141 and 142 (suo motu order of 23.03.2020 extending limitation), Constitution of IndiaThe order, made under these Articles, is not to be read narrowly as confined to litigants filing proceedings; in its spirit it extended to actions required in a liquidation process. (¶¶ 32.3, 32.6, 32.9)

Held

Use of 'shall' is not conclusive; a provision requiring an act to be done in a particular manner to acquire a right, with a specified consequence for non-compliance, is mandatory. Schedule I gives the liquidator discretion only where it says 'may', to maximise realisation; Rule 12 is mandatory because its second proviso cancels the sale if payment is not received within 90 days, and the liquidator cannot extend that period. (¶¶ 35.4, 35.8, 35.9, 35.10, 35.11)
Decisions holding IBC timelines directory, such as Pioneer Urban Land, rest on the absence of any consequence and do not apply to Rule 12; a sweeping view that all timelines in Regulation 47 are directory is impermissible, and each rule's consequences must be examined individually. (¶¶ 35.12, 35.13)
The Adjudicating Authority, exercising its powers under Section 35 IBC read with its inherent powers under Rule 11 of the NCLT Rules, could extend the time for payment on sufficient cause; extending it because of the nationwide Covid-19 lockdown could not be faulted. (¶¶ 35.14, 35.15, 35.16)
A judgment is not to be read like a statute. The suo motu order of 23.03.2020 extending limitation is not confined to litigants filing proceedings; read with Regulation 47A it extends to tasks in a liquidation process, so the auction purchaser, whose 90 days expired just after the lockdown began, was entitled to its benefit. Sagufa Ahmed and Rajat Infrastructure were distinguished on facts. (¶¶ 32.6, 32.9, 32.10, 32.11, 32.12)
The liquidator could not be faulted for fixing the reserve price at the average of the registered valuers' liquidation values and reducing it by 25% under Rule 4A after the first auction failed, especially as the appellant was invited to bring higher bidders and did not. (¶¶ 33.2, 33.3)
The Regulation 31A objection failed. The Explanation confines the requirement to liquidations commencing after the stated date, the appellant never nominated a representative despite requests, and he raised the objection only after the sale was complete; in any case the committee's advice does not bind the liquidator. (¶¶ 34.2, 34.3)
A bidder in an 'as is where is' auction must do its own due diligence. Having bid knowing of the income-tax attachment and the liquidator's assurances, and with the NCLT having directed its lifting before the lockdown, the purchaser could not tie payment to the lifting of the attachment; its failure to pay anything until August 2020 was a default, which the interest under the first proviso to Rule 12 shows was not to go unremedied. (¶¶ 36.4, 36.5, 36.7, 36.10, 36.11)
A confirmed auction should be interfered with only on limited grounds such as fraud, collusion or grave irregularities going to its root. Since the purchaser had built a functioning 200-bed hospital and the appellant had not been vigilant, setting aside the sale would be too harsh; equities were balanced by directing an additional payment. (¶¶ 36.12, 36.13, 36.14, 36.15)

Result

Civil Appeal No. 9059 of 2022 held not to survive; Civil Appeal Nos. 9060 and 9061 of 2022 partly allowed: sale not set aside, but the auction purchaser directed to deposit an additional Rs. 5 crore with the Liquidator, with 9% interest a year from 26.03.2020 till payment, within eight weeks, for distribution as the Adjudicating Authority directs; parties to bear their own costs.