The Properties Sold in Auction Sale Before Declaration of Moratorium Can’t Be Treated as Liquidation Assets of the Corporate Debtor: Supreme Court

Haldiram Incorporation Pvt. Ltd. v. Amrit Hatcheries Pvt. Ltd., Civil Appeal No. 1733 Of 2022, Decided on 6^th December 2023.

Summary:

The Supreme Court has observed that the properties of a defaulting borrower sold in an auction sale could not be treated as liquidation assets if the sale was concluded before the declaration of a moratorium under the Insolvency and Bankruptcy Code 2016.

Facts:

Appellant was the purchaser in an auction sale of certain properties of a defaulting borrower. A sale certificate was issued on 19th August 2019 under the provisions of the
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) in relation to the immovable properties in respect of which auction sale
was done. The auction sale took place in respect of properties mortgaged by the borrower for availing credit facilities. The latter had defaulted in repayment of the same. It is the case of the appellant that payment was completed on 16.08.2019.

An operational creditor filed a petition under Section 9 of the 2016 Code before the National Company Law Tribunal (NCLT) and consequently on 20.08.2019 moratorium was declared, initiating the Corporate Insolvency Resolution Process (CIRP). An erstwhile Director of the Corporate Debtor had taken out a notice of motion resisting the sale of the said properties. The NCLT, by an order passed on 25.02.2020 found issue of sale certificate and handing over of the property to be illegal and hence held that the subject-property shall continue to be assets of the Corporate Debtor.

Issue:

Whether the properties sold in auction sale before the declaration of moratorium is liquidation assets of the corporate debtor?

Judgement:

The court relied on the judgement of Esjaypee Impex Private Limited -vs- Assistant General Manager and Authorised Officer, Canara Bank [(2021) 11 SCC 537], it has been held, Section 17(2)(xii) read with Section 89(4) of the Registration Act, 1908 only required the authorised officer of the bank under the SARFAESI Act to hand over the duly validated sale certificate to the auction-purchaser with a copy forwarded to the registering authorities to be filed in Book-I as per Section 89 of the Registration Act.

The court also observed that erstwhile director and the liquidator have filed counter-affidavits contesting the auction sale under the SARFAESI Act, 2002, at the time of hearing, the learned counsel representing them conceded the legitimacy of the transaction resulting from sale of the subject property through auction, and both of them agreed that the auction sale stood concluded before declaration of moratorium. Court stated that no reason was cited before it to demonstrate as to why the sale certificate would be held illegal. In light of these factual matrix, Court allowed the appeal to the extent the properties in question are concerned. It observed that these properties cannot be treated to be liquidation assets of the Corporate Debtor for the purpose of further steps to be taken in the liquidation proceeding.

Analysis:

In this judgement, the court rightly referred to the judgement ofEsjaypee Impex Private Limited -vs- Assistant General Manager and Authorised Officer, Canara Bank [(2021) 11 SCC 537] for establishing that the sale was not illegal. The NCLT had deemed the sale certificate and property handover illegal, asserting that the property should remain an asset of the Corporate Debtor. This decision was upheld by the NCLAT. The Supreme Court overruled the order of NCLAT as it premised its decision on the wrong assumption that the sale was not concluded and while commencing the resolution process, directed the Liquidator to take possession of the subject properties.