NCLT Hyderabad: Moratorium U/s 14 Of IBC Imposes Legal 'Embargo' Not Only On Financial Creditors But On Any Other Person For Sale Of Assets In CIRP

Background Facts:

NCS Sugars Ltd. (Corporate Debtor) involved in the sugarcane business defaulted in payment of the price for the sugarcane supplied by farmers. Proceedings under the Andhra Pradesh Revenue Recovery Act, 1864 ('APRR Act') to sell the immovable property were initiated by Tahsildar, Bobbili (Respondent 2), and Tahsildar, Seethanagaram (Respondent 3) to pay the amounts due to farmers. Two Sale notices were also issued on 04.01.2022. A public auction was conducted with Dhatri Real Estate & Developers (Respondent 4) being declared as the highest bidder and an Earnest Money Deposit ('EMD') of Rs.3.75 Lakhs was deposited by it.

The Corporate Debtor was admitted into the Corporate Insolvency Resolution Process ('CIRP') initiated by Punjab National as per Order dated 24.06.2022. As of 19.11.2022, Respondent 4 deposited the total consideration of Rs. 20.05 crores minus EMD with the balance amount of Rs. 17.04 crores. A Sale Certificate was issued on 03.12.2022 in favor of Respondent 4, Punjab National Bank (Respondent 5), and Dharti Promoters (Respondent 6).

NCLT via its Order dated 05.12.2022 restrained Respondent 1 to 3 from further disbursement of amount as deposited by Respondent 4 as per the Two Sale notices.

The instant application has been filed by K. Sivalingam ('Applicant') Resolution Professional of the Corporate Debtor to annul the sale of the immovable property, declare the Sale certificate as invalid, declare the sale deed of the Immovable Property as invalid, declare the proclamation of sale dated 04.12.2022 as invalid and order and grant a permanent injunction restraining Respondent 4 and 6 from giving effect to the Sale certificate.

NCLT Verdict:

The NCLT Hyderabad allowed the application and held that the moratorium u/s 14 of IBC operates as a legal 'embargo' on the sale or alienation of the assets of the corporate debtor during the CIRP of the Corporate Debtor not only on the Financial Creditor but also on any person.

The Tribunal referred to Section 36 of the APRR Act which reads as follows:

36. Procedure in sale of immovable property: - In the sale of immovable property under this Act the following rules shall be observed.

First-Publication: - The sale shall be by public auction to the highest bidder. The time and place of sale shall be fixed by the Collector of the district in which the property is situated, or other officer empowered by the Collector in that behalf. The time may be either previous to or after the expiration of the fasli year.

Second-Notification one month before sale: - Previous to the sale the Collector, or other officer empowered by the Collector in that behalf, shall issue a notice thereof in English and in the language of the district, specifying the name of the defaulter; the position and extent of land of his buildings thereon ; the amount of revenue assessed on the land, or upon its different sections. The proportion of the public revenue due during the remainder of the current fasli ; and the time, place, and conditions of sale. This notice shall be fixed up one month at least before the sale in the Collector's office and in the Taluk cutcherry, in the nearest police station house, and on some conspicuous part of the land.

Third-Deposit by purchaser: - A sum of money equal to fifteen per cent of the price of the land shall be deposited by the purchaser in the hands of the Collector, or other officer empowered by the Collector in that behalf at the time of the purchase, and where the remainder of the purchase-money may not be paid within thirty days, the money so deposited shall be liable to forfeiture.

Fourth-Re-sale in default of payment: - When the purchaser may refuse or omit to deposit the said sum of money or to complete the payment of the remaining purchase money, the property shall be re-sold at the expense and hazard of such purchaser, and the amount of all loss or expenses which attend such refusal or omission shall be recoverable from such purchaser in the same manner as arrears of public revenue. Where the lands may, on the second sale, sell for a higher price than at the first sale, the difference shall be the property of him on whose account the said first sale was made.

Fifth-Agents to name principals: - All persons bidding at a sale may be required to state whether they are bidding on their own behalf or as agents, and, in the latter case, to deposit a written authority signed by their principals. If such requisition be not complied with, their bids may be rejected.

The Tribunal explained that as per Section 36 payment of the entire purchase money within 30 days is the sine qua non for completion of the sale and default in payment of the balance price shall result in forfeiture of the amount already deposited and resale of the said property. Further, Section 36(3) of the APRR Act provides that only upon receipt of the full sale price within 30 days or within the time extended, and if no application to set aside sale is made under Section 37A or Clause (1) of section 37 or if such application has been made and rejected, the Collector shall make an order confirming the sale. Thus, 'confirmation' of sale by the Collector shall be in respect of “the property sold'.

Moreover, as per Section 36(4) of APRR Act, a “sale” is liable to be cancelled if the purchaser fails to complete the payment of the remaining purchase money. The Tribunal observed that payment of full sale price, is the condition precedent for a 'Sale” to be 'confirmed' or 'concluded' and mere payment of 25% of the sale price will not result in completion of a sale.

Presently, the payment of balance purchase price was admittedly, post CIRP order. Further, it pointed out that presently, the sale like in Indian Overseas Bank vs. Dinakar T. Venkatsubramaniam Resolution Professional for Ambtek Auto Ltd. is governed by the provisions of a statute, namely APRR Act, and only a part of the sale price i.e 25% has been received by Respondents 1 to 3 since the CIRP admission and since the sale not complete is non-est, in the eye of law by the date of admission of the corporate debtor into CIRP, cannot be proceeded further as the order of moratorium expressly prohibits the Respondents from proceedings further. The property continues to remain as the property of the Corporate Debtor.

The Tribunal further observed that the moratorium order cannot be violated merely because the impugned sale was for the realization of the arrears of the amount due and payable by the Corporate debtor to the suppliers of sugarcane, who are farmers and were reportedly agitating, by resorting to Dharanas and Rasta Roko's, which allegedly resulted in Law & Order problem,

The NCLT declared the sale of immovable property of the Corporate Debtor held on 09.02.2022, as per the public auction under the provisions of the APRR Act to be as null and void. Further, it set aside the Sale certificate dated December 3, 2022, issued by Respondent 1 in favor of Respondent 4 and 6, Sale deed executed by and between Respondents 1, 4, and 6, Proclamation of sale dated December 4, 2022, published by Respondents 1 to 3.

In conclusion, it also directed Respondents 4 and 6 to deliver the physical possession of the property to the Applicant within 10 days of the Order and directed that Respondents 1 to 3 shall ensure smooth delivery of the subject property to the applicant, and in default, the Applicant may approach the Tribunal for any necessary directions.

Case Title: K. Sivalingam RP of NCS Sugars Ltd. vs. District Collector and Ors.

Case No.: IA (IBC) 410 & 1879/2023, IA (IBC) 1433/2022 in CP(IB) No.299/7/HDB/2018

Counsel for the Applicant: Shri Y. Suryanarayana, Advocate with Shri Yohaan Lunathwala, Advocate & J.Sagar Associates.

Counsel for respondents 1, 2, and 3: Shri. O. Manohar Reddy, Senior Advocate, for Shri O.P. Subash, and Shri K. Dilip Naik, Advocates.

Counsel for respondents 4 and 6: Shri D.V. Seetharam Murthy, Senior Advocate, for Shri Bendi Ravi Teja, Advocate.

Counsel for respondent 5: Shri M. Sunil Kumar, Advocate.

Click Here to Read/Download Order