NCLAT overturns asset sale approval finding liquidator violated Regulation 33 by conducting unauthorized private sale at undervalued rates

NCLAT set aside NCLT's approval of private sale of corporate debtor's assets to related party at undervalued rates. Court found liquidator violated mandatory Regulation 33 of IBBI Liquidation Regulations by conducting private sale without prior permission and proper justification. Sale at Rs 58.59 crores was grossly undervalued against Rs 68.01 crores valuation. NCLAT directed appointment of new liquidator within 15 days to restart liquidation process through proper auction procedures, emphasizing transparency and maximization of recovery in liquidation proceedings.

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The core legal questions considered by the Tribunal in this matter include:

(i) Whether the Liquidator complied with the mandatory provisions of Regulation 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Liquidation Regulations") while conducting the sale of the Corporate Debtor's assets by way of private sale to a related party;

(ii) Whether the private sale was conducted in a transparent manner and in the interest of maximizing the value of the Corporate Debtor's assets for the benefit of all stakeholders;

(iii) Whether prior permission of the Adjudicating Authority was obtained before initiating negotiations and concluding the private sale, especially given that the buyer was a related party;

(iv) Whether the sale price was fair and reflective of the true market value, considering competing higher offers and valuations;

(v) Whether there was any collusion between the Liquidator, the buyer, and financial creditors, and whether such alleged collusion vitiated the sale process;

(vi) Whether the Liquidator acted in accordance with his duties under the Insolvency and Bankruptcy Code, 2016 ("IBC") and the Liquidation Regulations, including consultation with the Stakeholders Consultation Committee ("SCC");

(vii) Whether the Appellant, as a significant shareholder and stakeholder, had locus standi to challenge the private sale and raise objections;

(viii) Whether the impugned orders passed by the Adjudicating Authority dismissing objections and allowing the private sale were legally sustainable;

(ix) Whether the Liquidator's conduct warranted investigation or replacement on grounds of professional misconduct and breach of statutory duties.

Issue-wise detailed analysis:

1. Compliance with Regulation 33 of the Liquidation Regulations and prior permission for private sale to related party

The Liquidation Regulations mandate that the Liquidator shall ordinarily sell assets through auction (Regulation 33(1)) and may resort to private sale only under limited conditions (Regulation 33(2)), including obtaining prior permission from the Adjudicating Authority before approaching buyers for private sale. A stricter bar exists for sale to related parties, requiring prior permission before negotiation or acceptance of any offer. Regulation 33(3) prohibits sales where collusion is suspected.

The Appellant contended that the Liquidator failed to obtain prior permission before negotiating and accepting an offer from Leisure Enterprises LLP, a related party, thereby violating Regulation 33. The Liquidator contended that permission was sought and the sale was subject to approval of the Adjudicating Authority, and that the buyer was not barred under Section 29A of the IBC.

The Tribunal noted that the Liquidator filed IA No. 1577/2021 only after agreeing to the price and accepting the earnest money deposit (EMD) from the related party, effectively presenting a fait accompli. This conduct is inconsistent with the mandatory requirement of prior permission before initiating private sale negotiations with a related party. The Tribunal held that the Liquidator's application was an empty formality and that the process was not compliant with Regulation 33, which is mandatory and designed to protect the interests of all stakeholders.

2. Transparency, consultation with stakeholders, and conduct of auctions

The Appellant argued that the Liquidator failed to hold proper SCC meetings and did not inform stakeholders about the private sale, breaching Regulation 31A and the duty of transparency. It was also contended that the auctions conducted were flawed, with inadequate publicity, limited circulation of auction notices, and auctions conducted during the COVID-19 pandemic under questionable circumstances.

The Liquidator contended that the SCC provisions were not applicable retrospectively as the liquidation commenced before the relevant amendments, and that auction notices were published in widely circulated newspapers as per Regulation 12(3). The Liquidator also claimed that auctions were suspended in 2020 due to the pandemic and resumed promptly thereafter.

The Tribunal observed that the Liquidator conducted only two SCC meetings and refused to provide information or respond to queries regarding the private sale. The auction notices in 2021 were published in only two newspapers with limited circulation, contrary to the requirements of Regulation 12(3), which mandates publication in an English and vernacular daily at the place of the registered office. The Tribunal found these deviations significant and indicative of a biased liquidation process lacking transparency and stakeholder consultation.

3. Valuation of assets and adequacy of sale price

The Appellant submitted multiple valuations, including a 2018 resolution plan valuing the property at Rs. 103 crores, expert valuations, government valuation at Rs. 70.31 crores, and offers exceeding Rs. 72 crores from reputed developers, demonstrating that the private sale price of Rs. 58.51 crores was grossly undervalued.

The Liquidator countered that the price was in line with valuations conducted in February 2021, with the highest valuation at Rs. 68.01 crores, and that the sale price exceeded the reserve price of the last auction. The Liquidator also noted that competing bidders failed to deposit EMDs, rendering their offers non-bonafide.

The Tribunal found that the private sale price was significantly lower than all valuations and competing offers. It noted the Liquidator's failure to adopt a strategy to maximize realization as required under Schedule I of the Liquidation Regulations for private sales. The Tribunal concluded that the sale was undervalued and the Liquidator failed in his statutory duty to maximize asset value.

4. Allegations of collusion and conduct of the Liquidator

The Appellant alleged collusion between the Liquidator, the buyer (Leisure Enterprises LLP), and the financial creditor UITL, all controlled by the same promoter group, resulting in a circular transaction that defrauded the Corporate Debtor and its stakeholders. It was contended that the Liquidator appointed directors affiliated with UITL to subsidiaries, changed registered addresses to those controlled by UITL, and suppressed information, evidencing bias and misconduct.

The Liquidator denied collusion, stating no adverse material was found by the Adjudicating Authority. The Tribunal refrained from adjudicating on criminal or fraud allegations but emphasized that procedural non-compliance and lack of transparency vitiated the liquidation process and cast doubt on the Liquidator's impartiality.

5. Locus of the Appellant and participation in the sale process

The Appellant is a 60% shareholder and recognized stakeholder of the Corporate Debtor, with a direct interest in maximizing sale proceeds. The Tribunal acknowledged the Appellant's locus to challenge the private sale and noted that the Appellant actively participated in proceedings and brought forth higher offers, which were not adequately considered.

The Liquidator contended that the Appellant did not participate in auctions or provide details of buyers in a timely manner. The Tribunal found that the Appellant was given multiple opportunities to present better offers but also noted that the Liquidator did not encourage or facilitate these offers effectively.

6. Legal precedents and interpretation of sale procedure

The Appellant relied on the judgment in State Bank of India vs Bhuvee Stenovate (2023), which requires the Liquidator to prepare a strategy to approach interested buyers in private sales to maximize realizations, and on Indian Bank vs Charu Desai, which permits consideration of better valuations.

The Liquidator and Leisure Enterprises LLP cited Supreme Court judgments in R.K. Industries vs HR Commercials (2024), Navalkha & Sons vs Ramanya Das (1969), and Vedica Procon Pvt. Ltd. vs Balleshwar Greens Pvt. Ltd. (2015), emphasizing that once the adjudicating authority approves a sale price as adequate, subsequent higher offers are not grounds to reopen or refuse confirmation of the sale. They also argued that the appellate authority's jurisdiction is limited and cannot override commercial decisions of the Liquidator supported by stakeholders.

The Tribunal distinguished these precedents as primarily relating to public auctions, not private sales, and emphasized that Regulation 33 of the Liquidation Regulations imposes mandatory procedural safeguards for private sales, especially to related parties, which were not followed here. The Tribunal held that the Liquidator's failure to comply with these mandatory provisions invalidated the sale process.

7. Conclusion on the legality and propriety of the private sale

The Tribunal concluded that the private sale to Leisure Enterprises LLP was conducted in violation of Regulation 33, without prior permission, without proper stakeholder consultation, and at an undervalued price. The Liquidator's conduct was found to lack impartiality, transparency, and adherence to statutory duties. The sale process was tainted by procedural irregularities and possible collusion, undermining the interests of creditors and stakeholders.

The Tribunal set aside the impugned order approving the private sale and directed the Adjudicating Authority to appoint a new Liquidator within 15 days to restart the liquidation process afresh, including conducting a public auction or private sale in accordance with law and regulations to ensure maximum realization.

Significant holdings and core principles established:

"Regulation 33(1) mandates that the Liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified in Schedule I. A private sale is meant to be an exception, allowed only in specific circumstances enumerated in Regulation 33(2). Prior permission for private sale from the Adjudicating Authority implies prior to approaching and negotiating with buyers. Further prior permission is all the more required in case sale of assets is intended to be made to a related party."

"Permitting an application seeking prior permission for private sale is not a mere formality and the NCLT ought to have considered the mandatory parameters of Regulation 33 before permitting such sale, which is missing in the Impugned Order."

"The Liquidator has failed to prepare a strategy to approach interested buyers and maximize realization as required under Schedule I of the Liquidation Regulations for private sale. The sale price fixed is grossly undervalued compared to all expert and government valuations and competing offers."

"The Liquidator's conduct in accepting an offer and EMD from a related party before obtaining prior permission of the Adjudicating Authority amounts to procedural non-compliance and vitiates the liquidation process."

"The Appellant, as a significant shareholder and stakeholder, has locus standi to challenge the private sale and raise objections."

"The principles laid down in judgments relating to public auctions cannot be mechanically applied to private sales, which are governed by distinct mandatory provisions under Regulation 33 of the Liquidation Regulations."

"The Adjudicating Authority and Liquidator must ensure transparency, fairness, and value maximization in liquidation sales, and non-compliance with mandatory regulations warrants setting aside of orders approving such sales."

"The Adjudicating Authority is directed to appoint a new Liquidator to conduct the liquidation afresh, ensuring compliance with statutory provisions and maximization of asset value."

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