NCLT Cannot Alter Capital Structure Proposed By Successful Auction Purchaser If Legally Compliant: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently held that the adjudicating authority (NCLT) has no jurisdiction to modify the capital structure proposed by a successful auction purchaser, particularly when neither the stakeholders nor the liquidator objected and the proposal was not shown to violate any law.

In an order pronounced on November 20, Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Arun Baroka observed that the powers of the Adjudicating Authority in the liquidation process are supervisory in nature and do not extend to imposing conditions on the auction purchaser once the sale has been finalised.

It said, “Once the e-auction concludes, consideration is deposited, and the sale is confirmed with a sale certificate issued in favour of the auction purchaser, the transaction attains irrevocable finality, vesting unencumbered title in the purchaser.”

It added, "The Adjudicating Authority's powers under Section 35 of the Code are supervisory and circumscribed to ensure compliance during liquidation - including sale confirmation and distribution as per Section 53 of the Code and after the issuance of the sale certificate, its role extinguishes, and it cannot engraft ex post facto conditions on the purchaser's operational autonomy, if the commercial wisdom of the same is not in contradiction of any legal provision. ”

Accent Packaging Pvt. Ltd. was liquidated after the insolvency resolution process failed to approve a resolution plan in December 2023. The company was sold through an e-auction on a going concern basis for Rs 6.67 crore, and one Abhay Kumar Jitendra Shah was declared the successful bidder. After receiving the sale certificate, he approached the NCLT seeking operational concessions and proposed that Rs 2 lakh be treated as equity and the remaining amount as debt infusion.

He argued that the determination of capital structure is a commercial decision and cannot be changed by the NCLT without hearing the parties. The liquidator informs NCLAT that the Stakeholders Consultation Committee discussed the issue in its twenty-first meeting and that no objections were raised.

The NCLT, however, refused to accept the Shah's proposed split and directed that Rs 3.30 crore be treated as equity and Rs 3.37 crore as debt, stating that the purchaser should not burden the company with excessive debt.

The appellate tribunal rejected this finding and held, “the Adjudicating Authority has committed manifest illegality in modifying the proposal made by the appellant with regard to the share capital/ shareholding of the company as Going Concern and there was no jurisdiction vested in the adjudicating authority to impose his decision on the appellant, when no objection has been raised by the SCC on this structuring of share capital”

The tribunal also recorded that “on the principle of clean slate the commercial wisdom of the appellant should have been respected, unless it is not in violation of any law.”

The matter is remanded to the NCLT to be reconsidered afresh.

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