The National Company Law Appellate Tribunal, New Delhi (“NCLAT”), by way of a common judgment dated July 4, 2023, in the matter of Naren Seth v. Sunrise Industries and Others [Company Appeal (AT) (Insolvency) No. 401 of 2023] and Marine Electricals (India) Limited v. Sunrise Industries and Others [Company Appeal (AT) (Insolvency) No. 695 of 2023], has upheld the order dated March 2, 2023 passed by the National Company Law Tribunal, Mumbai (“NCLT”), whereby E-Auction conducted by the liquidator of Ciemme Jewels Limited (“Corporate Debtor”) was set aside (“Impugned Order”). Further, NCLAT observed that notice period of 30 days ought to have been given by the liquidator between the date of issuance of public notice of E-Auction and the date of conducting E-Auction.

Facts

Vijisan Exports Private Limited (“Operational Creditor”) filed an application under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the NCLT and the Corporate Debtor was admitted into corporate insolvency resolution process. In view of no resolution plan being received to revive the Corporate Debtor, the NCLT allowed liquidation commencement of the Corporate Debtor by way of order dated March 25, 2019 and appointed Mr. Naren Seth as the liquidator (“Liquidator”).

Prior to conducting E-Auction on April 8, 2022, the Liquidator had previously made two attempts to sell the asset (being factory premises situated in Mumbai consisting of land and building) by conducting the first E-Auction on December 4, 2019 and the second E-Auction on March 1, 2021. However, both the previous auctions were unsuccessful as no bid was received.

In furtherance of the third auction, the Liquidator published an E-Auction notice on April 2, 2022 which was a bank holiday (“Notice”). As per the Notice, the last date to submit Expression of Interest (“EOI”) and KYC documents was April 4, 2022 (Monday). The Notice was issued on Saturday, which was succeeded by Sunday and the only working day was Monday to submit the EOI and KYC documents. Further, the last date for submitting the Earnest Money Deposit (“EMD”)/ bid amount was April 7, 2022 (Thursday). There was insufficient time to conduct due diligence of the asset including conducting site visit. Further, the scheduled date of the E-Auction was April 8, 2022 (Friday) from 2.00 P.M. to 4.00 P.M. Additionally, due to a typographical error in the Notice, it was also erroneously stated that the last date for submission of EOI was April 15, 2022 (5.00 P.M.) which was a bank holiday and the last date for payment of EMD is April 16, 2022 (5.00 P.M.) which was after the day of E-Auction.

Thereafter, upon realizing the aforesaid typographical error, the Liquidator issued corrigendum to rectify the mistake on April 8, 2022 on the website of the Insolvency and Bankruptcy Board of India (“IBBI”) and in the newspapers on April 9, 2022, that is, after the E-Auction was already concluded. The aforesaid corrigendum stated that the last date for submission of EOI was April 4, 2022 and the last day for submission of EMD and other documents was April 7, 2022.

In the meanwhile, Sunrise Industries (“Sunrise”) filed an application [Company Appeal (AT) (Insolvency) No. 695 of 2023] in NCLT thereby challenging the E-Auction, stating that it had furnished the EMD along with EOI and KYC documents. However, the Liquidator informed Sunrise that the last date for submission of EOI was over.

This led to filing of the application bearing number I.A. 947 of 2022 by Sunrise before the NCLT, thereby inter alia seeking prayer to quash and set aside the sale notice dated April 2, 2022 and all consequent actions thereof. NCLT disposed of the aforesaid application by passing the Impugned Order and directed the Liquidator to conduct fresh auction by maintaining at least 30 days’ time gap between the E-Auction notice publication and date of E-Auction to enable more bidders to participate in the auction for fetching high value of the property.

Aggrieved by the Impugned Order, the Liquidator preferred Company Appeal (AT) (Insolvency) No. 401 of 2023 and the Successful Bidder preferred Company Appeal (AT) (Insolvency) No. 695 of 2023 in respect of the asset of the Corporate Debtor.

Issues

• Whether sufficient time/ notice period ought to have been given by the Liquidator between the date of issuance of public notice of E-Auction and the date of conducting E-Auction in the absence of any timeline specified in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).
• Whether the auction process, conducted in haste within a span of 5 days without giving adequate opportunity to all interested bidders for participating in the auction process, is in the interest of value maximization of the asset of the Corporate Debtor.

Arguments

Contentions raised by Liquidator:

The Liquidator assailed the Impugned Order and submitted that NCLT has failed to appreciate that he had followed due procedure in conducting the E-Auction. It was further contended that NCLT has erroneously held that the E-Auction conducted by the Liquidator is bad in law and imposed cost of conducting the fresh E-Auction on the Liquidator.

The Liquidator alleged that Sunrise took undue advantage of the aforesaid typographical error despite the same having been rectified subsequently.

The Liquidator further submitted that the bid submitted by the successful bidder, namely, Marine Electricals (India) Limited (“Successful Bidder”) was above the liquidation value as well as above the reserve price. More particularly, the Successful Bidder submitted a bid for INR 11.6 Crores inclusive of EMD amounting to INR 1.15 Crores as against the reserve price of INR 11.5 Crores. The Liquidator further submitted that he was discharging his duties to maximize the value of the assets of the Corporate Debtor. Further, the Liquidator contended that NCLT failed to appreciate that the Liquidator acting in his official capacity has the right to accept or reject any bid as per the terms and conditions of the E-Auction process. The Liquidator further submitted that due to some adverse influence by a few individuals/entities in the market, it was felt prudent to proceed with the Successful Bidder and conclude the sale transaction at the earliest.

The Liquidator further submitted that Sunrise submitted their EOI on April 6, 2022, whereas the last date for submission of the EOI was April 4, 2022. Additionally, Sunrise did not submit audited financial statements along with EOI and was declared to be disqualified.

Further, the Liquidator relied upon the judgment dated September 5, 2019, pronounced by NCLAT in the matter of Manjit Commercial LLP v. SPM Auto Private Limited and Others [Company Appeal (AT) Insolvency No. 732 of 2019] whereby, inter alia, it was observed that no time limit was prescribed under IBC and Liquidation Regulations in respect of conducting the E-Auction process.

The Liquidator concluded his arguments by submitting that he had acted in a bona fide manner and in the interest to obtain maximum value for the asset of the Corporate Debtor.

Contentions raised by Successful Bidder:

The Successful Bidder contended that it has duly followed the requisite timelines as proposed by the Liquidator and paid the bid amount of INR 11.6 Crores. After due compliance of all requisite formalities, the Successful Bidder has obtained a sale certificate dated May 11, 2022.

In view of the above-mentioned, the Successful Bidder assailed the Impugned Order as bad in law. Further, the Successful Bidder submitted that Sunrise, who was an ineligible participant in view of delayed submission of EOI, has no locus to challenge the successfully conducted E-Auction process.

In view of the above, the Successful Bidder submitted that the Impugned Order deserves to be set aside and the E-Auction conducted on April 8, 2022 as well as issuance of sale certificate on May 11, 2022 be declared as valid.

Contentions raised by Sunrise:

Sunrise emphasized on the typographical error in the Notice and questioned the wrongful intention of the Liquidator behind issuance of the Notice with vital errors. Further, Sunrise contended that it had acted within the timelines as set out in the Notice.

Further, Sunrise questioned the conduct of the Liquidator who concluded the auction process within a time span of 5 days including Saturday and Sunday without giving reasonable time to the interested bidders. Further, insufficient time was provided for submission of documents and arranging funds and no time was provided for due diligence of the premises include site visit. It was further alleged that no time period for inspection of the premises was provided in the Notice and the sale process was concluded without any inspection of the asset. Further, it was pointed out that the corrigendum was issued on the website of IBBI and newspapers belatedly, that is, after conducting the E-Auction process.

Further, Sunrise relied upon the judgment dated September 30, 2022, pronounced by NCLAT in the matter of Raj Singhania v. Chinar Steel Segment Centre Private Limited [(2002) SCC OnLine NCLAT 225], whereby a concluded sale of the corporate debtor as a going concern was set aside by the Hon’ble National Company Law Tribunal, Kolkata on the ground of material irregularity on part of the Liquidator in conducting the auction process and the aforesaid decision was upheld by the NCLAT.

Observations of the NCLAT

NCLAT observed that it needs to be ascertained whether correct procedure was followed by the Liquidator in conducting the E-Auction and whether the E-Auction was conducted in a haste without giving adequate opportunity to all participants. NCLAT observed that the entire E-Auction process was conducted in a hurried manner and the NCLT has rightly observed that there was insufficient time gap between vital stages of the E-Auction process. In fact, the entire E-Auction process was completed within a time span of 5 days including Saturday and Sunday. It was further observed that no time frame was provided in the Notice for inspection of the asset to be sold. Further, it was observed that issuance of corrigendum at a subsequent point in time post conducting the E-Auction was a futile exercise.

Further, NCLAT was not convinced with the submission made by the Liquidator that certain individual/entities were trying to wrongfully influence the auction process and in fact observed, from the conduct of the Liquidator, suspicion regarding his true intentions.

Further, NCLAT observed that even though no specific timelines have been provided in the Liquidation Regulations, normally a notice period of 30 days is provided in the interest of value maximization of the asset. In this regard, as a referring point only, NCLAT referred to sub-rule (6) of Rule 8 of Security Interest (Enforcement) Rules, 2002 under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which provides that the borrower shall be served with a notice of 30 days for sale of immovable secured assets.

Further, NCLAT observed that the errors in the Notice were not merely typographical errors as claimed by the Liquidator and the conflicting dates were sufficient to cause confusion to any interested bidder.

In light of the typographical errors in the Notice and the corrigendum being issued belatedly, NCLAT observed that the Liquidator ought to have examined the bid submitted by Sunshine on merits.

Decision of the NCLAT

In view of the material irregularities on part of the Liquidator in conducting the E-Auction process, NCLAT dismissed both the appeals with concluding observation that there is no error in the Impugned Order and further directed him to bear the costs to be incurred in conducting a fresh auction.

VA View:

Prior to amendment in the Liquidation Regulations (effective from September 16, 2022), there was no timeline provided in law for conducting the E-Auction process. Post the amendment, the liquidator shall provide at least 14 days from issue of public notice for submission of eligibility documents by prospective bidder, at least 7 days to qualified bidder for inspection or due diligence of assets under auction, from the date of declaration of qualified bidder and a prospective bidder in an auction process shall deposit earnest money deposit at least up to 2 days before the date of auction.

This judgment still holds utmost importance even in those situations wherein an exact timeline or specific time gap between two stages of an auction process is not provided under law and yet a sufficient, reasonable and prudent timeline has to be maintained by the liquidator. Pertinently, no statute or rules and regulations can be exhaustive to cover all possible scenarios which can exist. However, even in such situations, reasonableness and prudence, which are well established and time-tested principles of common law, must prevail. However, it is clear that one cannot propose or act upon unreasonable timelines whilst conducting an auction process, which defeats the very purpose of value maximization of assets and make the entire auction process prone to being set aside/vitiated upon being challenged before the adjudicating authority.

For any query, please write to Mr. Bomi Daruwala at [email protected]

DOWNLOAD NEWSLETTER