2025 (11) TMI 1349 - AT - IBC

Appellate tribunal restores auction buyer's right to decide corporate debtor share capital under IBC clean slate principle

Abhay Kumar Jitendra Shah Versus Sanjay B. Shah, Liquidator of Accent Packaging Private Limited, Rajkot

The appellate tribunal allowed the appeal, holding that the Adjudicating Authority exceeded its jurisdiction by unilaterally modifying the successful ... Rejection of request of appellant for restructuring of shareholding of the CD - non-grant of the relief and concession as sought by the Appellant and supplanting of the capital structure by the Adjudicating Authority as per its own wisdom without any prior notice or any issue having been raised in relation to the same either by the Appellant or by the respondent - HELD THAT:- The tribunal in the impugned order has recorded that the corporate debtor was sold as a going concern. Some assets were excluded from the liquidation estate and sold separately. It has been recorded in para no. 22 of the impugned order that the Corporate Debtor was sold “As is where is basis', 'As is what is basis', 'Whatever there is basis' and therefore the successful bidder or the corporate debtor cannot claim or be allowed all the reliefs and concessions. However, all the reliefs and concessions have been analysed by the Tribunal and only those reliefs which according to the tribunal were consistent with the “clean slate theory” were allowed which will enable the successful bidder to run the corporate debtor as a going concern in good faith. The reliefs and concessions allowed, as discussed by the tribunal were not meant to allow any unintended benefits not allowed under the IBC Code, 2016 or under any law. Thereafter the tribunal granted the relief with regard to many concessions and prayers of the appellant in a tabular form, modifying the relief with regard to restructuring of shareholding of the Company. It is worthwhile to record here that the respondent liquidator has stated categorically in his reply that the impugned order was discussed in the 21st meeting of SCC held on 08.09.2025 and the Liquidator has communicated the SCC that no objection to the reliefs and concessions as claimed by the Appellant was raised by him before the Adjudicating Authority. Thus the SCC or the Liquidator was not having any objection to the restructuring of the shareholding/ share capital of the company as proposed by the appellant. It is to be recalled that the IBC is a complete code designed for expeditious resolution and maximisation of value, with liquidation as a measure of last resort. Sale as a going concern of the CD under Section 35(1)(f) of the Code prioritises business continuity over piecemeal asset sales, fostering revival/resolution which is one of the object of Code. 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 - after the auction sale and deposit of whole consideration unless there is nothing specific in the information memorandum the purchaser receives the CD as a concern free from any liability and the purchaser is free to run it as per its preferences and it is also free to keep the shareholding structure of its choice unless it is not contravening any law and in this regard the adjudicating authority could not control the wisdom of the purchaser. 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. Moreover, no opportunity appears to have been given to the parties to address the tribunal on the modifications incorporated by it. It is to be recalled 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 back to the adjudicating authority to adjudicate the prayer of the applicant/ appellant - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority had jurisdiction under the Insolvency and Bankruptcy Code, 2016 and the liquidation regulations to modify the commercial terms (specifically the proposed share capital/shareholding structure) of an auction purchaser who acquired a corporate debtor as a going concern after issuance of the sale certificate. 2. Whether the principle of 'clean slate' and the supervisory limits of the Adjudicating Authority under Section 35 of the Code preclude post-sale imposition of commercial restructuring conditions on the successful auction purchaser absent legal infirmity or objection by the liquidator/SCC. 3. Whether the Adjudicating Authority was required to afford opportunity of being heard before altering the purchaser's proposed capital structure and whether failure to do so vitiates the modification. 4. The proper remedy where the Adjudicating Authority has purportedly exceeded its supervisory jurisdiction by altering commercial terms: validity of the modification, and whether remand for fresh adjudication is required. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction to modify commercial terms post-sale Legal framework: The Code contemplates sale of a corporate debtor as a going concern (Section 35(1)(f)); the Adjudicating Authority's role during liquidation is supervisory and circumscribed to ensure compliance, sale confirmation and distribution under Section 53. Once the sale is confirmed and sale certificate issued, title vests in purchaser and the 'clean slate' doctrine applies. Precedent treatment: The tribunal relied on the limitation on judicial interference in commercial decisions articulated in higher authority (referenced ratio restricting interference with commercial aspects of resolution plans). That ratio was applied by analogy to auction purchasers. Interpretation and reasoning: The Court held that the Adjudicating Authority's powers cannot be extended to engraft ex post facto commercial conditions on a purchaser's operational autonomy when those conditions do not conflict with law. Modification of the purchaser's proposed shareholding structure, in absence of any statutory prohibition or objection from the liquidator/SCC, prima facie exceeded the supervisory powers under the Code. Ratio vs. Obiter: Ratio - Adjudicating Authority lacks jurisdiction to alter the commercial capital structure of an auction purchaser post confirmation, unless the proposed structure contravenes law or was otherwise challenged within statutory processes. Obiter - observations on the general policy importance of going-concern sales and business continuity. Conclusion: The impugned modification of the share capital/shareholding structure constituted an overreach of the Adjudicating Authority's supervisory jurisdiction. Issue 2 - Application of the 'clean slate' principle and limits on interference Legal framework: The Code's objectives include expeditious resolution and maximisation of value; sale as a going concern aims to preserve business continuity. The purchaser, having acquired the corporate debtor free from liabilities (subject to assets included in the auction memorandum), is entitled to run the business and adopt its preferred capital structure so long as it does not violate law. Precedent treatment: The Court treated the restriction on judicial substitution of commercial judgment (as applied to resolution plans) to be equally applicable to auction purchasers of going concerns. Interpretation and reasoning: The Court emphasised that once consideration is paid and distributed under Section 53, liabilities are deemed settled and purchaser receives unencumbered title; consequently, imposing post hoc capital structuring stultifies the clean slate object and substitutes judicial/comparative commercial assessment for purchaser's business judgment. Ratio vs. Obiter: Ratio - Clean slate protects purchaser's commercial autonomy post confirmed sale; Adjudicating Authority cannot impose new commercial burdens absent legal infirmity. Obiter - discussion of the practical consequences for business revival if purchasers' commercial decisions are second-guessed. Conclusion: The clean slate principle restrains the Adjudicating Authority from rewriting shareholding/capital structure of an auction purchaser except where contravention of law or properly raised objections justify interference. Issue 3 - Requirement of opportunity to be heard before modifying purchaser's proposal Legal framework: Fundamental procedural fairness and statutory adjudicatory norms require that affected parties be heard before imposition of conditions; the Adjudicating Authority's administrative actions in liquidation are subject to natural justice where rights and obligations are altered. Precedent treatment: The Court treated the absence of prior notice or invitation to address the tribunal on the specific modification as material, particularly when the modification materially affected the purchaser's proposed terms. Interpretation and reasoning: The tribunal's unilateral modification without asking parties to address the modification or without any objection being raised by SCC/liquidator undermined procedural fairness and contributed to manifest illegality; this procedural lapse independently vitiated the modification. Ratio vs. Obiter: Ratio - Where an Adjudicating Authority proposes to alter commercial terms affecting rights of a purchaser, it must provide opportunity to be heard; failure to do so renders such alteration susceptible to being set aside. Obiter - none beyond procedural fairness observations. Conclusion: The Adjudicating Authority's failure to afford opportunity of being heard compounded the lack of jurisdiction and rendered the modification procedurally infirm. Issue 4 - Remedy: validity of modification and remand for fresh adjudication Legal framework: Relief from orders passed without jurisdiction or contrary to principles of natural justice is obtained by setting aside the impugned portion and remanding for fresh consideration consistent with law. Precedent treatment: The Court followed the remedial approach of quashing only the specific impugned modification while leaving intact other concessions that were lawfully granted and consistent with the clean slate theory. Interpretation and reasoning: Given that (a) the purchaser had paid full consideration and obtained sale certificate, (b) SCC/liquidator had not objected to the proposed capital structure (and liquidator later indicated no objection), and (c) the modification was made without hearing, the appropriate course was to set aside only the portion of the impugned order altering shareholding and remand that discrete issue to the Adjudicating Authority for fresh adjudication after hearing the parties and in accordance with law. Ratio vs. Obiter: Ratio - Specific unlawful modifications of purchaser's commercial terms should be set aside and remitted for fresh decision with opportunity to be heard; other lawful concessions need not be disturbed. Obiter - broader policy remarks on balancing supervisory oversight with commercial autonomy. Conclusion: The modification of the shareholding/capital structure was set aside as manifestly illegal; the matter was remanded for fresh adjudication limited to that prayer, with directions to afford parties an opportunity to be heard and to act strictly in accordance with law. Cross-references and concluding operative points 1. Cross-reference: Issues 1 and 2 interlock - jurisdictional limits derive from the clean slate principle applied to going-concern sales; Issue 3 (procedural fairness) independently supports setting aside the modification. 2. Operative outcome: The Court allowed the appeal solely insofar as the Adjudicating Authority modified the purchaser's proposed shareholding (the specific column/entry was quashed); the matter was remitted for fresh adjudication on that discrete issue with a direction to hear parties. Other concessions in the impugned order were left undisturbed.