TaxTMI 
TaxTMI 
2021 (3) TMI 1310
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.... Rajendra Sharma with allied and ancillary directions after recording a finding that Respondent No. 3-Allahabad Bank had made it very clear to the Appellant to acquire the Unit No. 1 of the Corporate Debtor on 'as is where is basis, as is what is basis, whatever there is basis' which implied that it shall also acquire all the liabilities thereon. Feeling aggrieved, the Appellant has assailed the impugned order through the medium of instant appeal on grounds set out in the memo of appeal to which we shall be adverting to as we proceed further. 2. The brief facts which are required to be noticed for understanding the controversy involved at the bottom of the matter may be summarised as under: Company Petition No. (IB)35(ND)/2018 came to be filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("I & B Code" for short) on behalf of the Operational Creditor for initiating Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor-'Anil Special Steel Industries Ltd.'. During the course of CIRP, Interim Resolution Professional (IRP) was replaced by Resolution Professional (RP) who, upon noticing that one of the assets i.e. Unit No. 1 of the Corp....
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....nt is the auction purchaser of the property in question owned by the Corporate Debtor prior to initiation of CIRP against the Corporate Debtor. The property was sold by Respondent No. 3 under provisions of Act, 2002. Since the Corporate Debtor had committed default in respect of financial debt, Allahabad Bank issued notice under Section 13(4) of the Act, 2002 which tantamounts to transfer. It is, therefore, contended that as on 01.11.2017, the Corporate Debtor had no right, title or interest in the said property. It is further submitted that the Allahabad Bank which issued the notice of sale of property on AS IS WHERE IS BASIS, AS IS WHAT IS BASIS, WHATEVER THERE IS BASIS, specifically made it clear that the property was free of encumbrances other than those specifically mentioned therein. It is further submitted that the Appellant submitted the bid along with earnest money deposit of Rs. 2.74 Crores for participating in e-auction. It happened on 15.12.2017. Allahabad Bank informed the Appellant about the demand letters from PF department, Income Tax Department and Employees. However, Allahabad Bank clarified that the claims/dues are yet to be crystallised by the Competent Authorit....
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.... Chief Metropolitan Magistrate, Jaipur Mahanagar, the possession of the property has been handed over to the Appellant free from all encumbrances. Subsequently, it is submitted, CIRP commenced on 05.03.2018 and the Adjudicating Authority, admitted the Company Petition filed by the Operational Creditor against the Corporate Debtor. It is further submitted that on 10.09.2018, the IRP admitted the liabilities of the workers and employees and other liabilities pertaining to Unit No. 1 of the Corporate Debtor sold under the Act, 2002 prior to commencement of CIRP as liability of the Corporate Debtor. However, on instructions of Committee of Creditors (COC), RP filed application under Section 60(5) of the 'I & B Code' being IA 32/60 of 2018 before the Adjudicating Authority for determination whether it was the liability of Corporate Debtor or the Appellant/auction purchaser. This led to passing of the impugned order which is assailed by the Appellant herein. 4. Learned counsel for Appellant laid emphasis on the fact that the Adjudicating Authority had no jurisdiction as it could not pass orders in relation to prior transaction except in so far provided under Sections 44-45 of th....
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....ke own independent inquiry regarding the encumbrances/claim/liabilities. It is further submitted that the Appellant participated in the bid process being fully aware and conscious of the liabilities and encumbrances. With reference to correspondence between the Allahabad Bank and Appellant, it is pointed out that the Appellant, instead of backing out of the bid process after being fully aware of the liabilities and encumbrances unconditionally accepted the terms of the sale and it cannot be permitted to wriggle out of the liability notwithstanding the fact that it has unilaterally tried to resile from the terms and conditions of the sale. It is lastly pointed out that under Employees Provident Fund and Miscellaneous Provisions Act, 1952, the dues of EPF are an encumbrance on the 'establishment' and become first charge thereupon. Thus, it is submitted, the dues of EPF over Unit No. 1 were first charge over the unit only and same are an encumbrance on the said unit rendering the auction purchaser (Appellant) liable. 7. The sole issue for consideration in this appeal is whether the liability in respect of the workers and employees and other liabilities pertaining to Unit No. ....
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....bruary, 2018 free from all encumbrances under the Act, 2002, it being submitted that the transaction of sale was complete and all earlier communications subsumed and culminated in the Registered Sale Certificate. Reference in this regard is made to Page 447 of the appeal paper book which is the Sale Certificate with following stipulations:- "..........The sale of the scheduled property was made free from all encumbrances known to the secured creditor listed below on deposit of the money demanded by the undersigned." 10. It is further submitted on behalf of the Appellant that the possession of the property was handed over to the Appellant on the same day free from all encumbrances in pursuance of order of Senior Civil Judge Court and Chief Metropolitan Magistrate, Jaipur Mahanagar dated 8th February, 2018. Reference in this regard is made to Page 450 of the appeal paper book which reveals that the Allahabad Bank, on behalf of consortium of four Banks, including the lender Allahabad Bank handed over possession to Appellant in pursuance of the court orders free from all encumbrances known to the secured creditors, on deposit of the money. This happened before the commencement of CI....
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....ed' which is the largest Financial Creditor of COC holding approx. 74.31% of the voting share refuted the contention of Appellant by submitting that both Allahabad Bank as well as the Appellant-auction purchaser were aware of the 'I & B Code' provisions having been enforced when the auction/sale was undertaken and the Appellant as made aware of the liabilities of Corporate Debtor before the issuance of Sale Certificate. Thus the sale proceeds were liable to be distributed in accordance with Section 53 of the 'I & B Code'. Reference is made to Page 388 of the appeal paper book to demonstrate that notice under Section 8 of the 'I & B Code' had been served upon the Corporate Debtor by the workers on 12th December, 2017 i.e. a week before the bid which was scheduled for 20th December, 2017. It is further pointed out that even prior to issuance of Sale Certificate on 9th February, 2018, the Corporate Debtor had admitted its dues before the Adjudicating Authority on 31st January, 2018 and both Appellant and Allahabad Bank being parties before the Adjudicating Authority were aware of the same. It is, therefore, contended on behalf of Respondent No. 4-'Prude....
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....terms and conditions of sale, obviously to wriggle out of the liabilities that it was liable to pay in terms of acceptance of offer purchase letter dated 21st December, 2017. This was sought to be done unilaterally on the pretext that in the event of Appellant having backed out, the EMD would have been forfeited. This explanation was neither realistic nor plausible. By proceeding to accept the offer purchase Appellant unconditionally accepted the terms of sale. Reliance placed by Appellant on the letters dated 30th December, 2017, 23rd January, 2018 and 29th January, 2019 that it was only informed of the liabilities, it being specifically stated that the same were not demanded by the Bank, would be of no consequence as such liabilities passed on to Appellant in terms of the acceptance of offer purchase and sale letter with no demand put up by the Bank for its recovery from Appellant-auction purchaser. In the face of bulk of evidence staring in the face of the Appellant assigning the liabilities to it, the Appellant could not be permitted to unilaterally back out of such liability. With express stipulation in auction notice and all relevant documents connected with auction and sale ....
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....in the contention raised by Respondent No. 4 that dues of EPF are an encumbrance on the establishment and become first charge thereupon within the purview of Section 11(2) of the Employee's Provident Funds and Miscellaneous Provisions Act, 1952. Though the sale in auction proceeding was limited to Unit No. 1 while the Corporate Debtor owned two units, mere fact of common ownership of two units by the Corporate Debtor would not make it one establishment. The two units were separate and independent units treated so by EPFO with separate registration numbers allotted to these units. Therefore, EPFO dues over Unit No. 1 which was the subject of auction or sale under the Act, 2002 were the first charge over the unit only and the sale proceeds thereof could not be utilised by the Allahabad Bank without discharging the same. We are told that the Allahabad Bank has not joined issue in regard to this position and even made a part payment of about Rs. 17.51 lakhs as reflected at Page 456 of the appeal paper book. 18. Having dealt with the issue raised in this appeal in the context of material on record, respective contentions of parties, arguments advanced and the case law cited at the ....
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....IL'. The property was sold to the Appellant by Allahabad Bank, Respondent, No. 3 under the provision of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), vide sale certificate (under Rule 9(6) of Security Interest (Enforcement) Rules 2002) dated 9 February 2018, which was duly registered in the office of Sub Registrar, Jaipur on the same day. 21. The corporate Debtor owned two units, and the Appellant is the auction purchaser of Unit-1 of ASSIL. After the Sale of Assets of Unit-1 of the Corporate Debtor 'Anil Special Steel Industries Limited' under the SARFAESI Act by secured Creditor Allahabad Bank, the Application filed under Section 9 of the Insolvency and Bankruptcy Code 2016 was admitted by Order dated 5 March 2018 passed by the Adjudicating Authority. During the CIRP of the Corporate Debtor, the IRP, Mr. Brij Kishore Sharma, collated the claims and constituted the Committee of Creditors (in short, CoC). Later, on a resolution passed by the CoC, the Resolution Professional, Mr. Vikram Bajaj, replaced the IRP Mr. Brij Kishore Sharma vide Order dated 14 May 2018 passed by Adjudicating Authority. ....
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....mbrances" under SARFAESI Act, 2002 vide Sale Certificate dated 9 February 2018, which was duly registered in the Registrar's office Jaipur on 9 February 2018. The Sale of unit 1 to the Appellant was completed before the insolvency commencement date of ASSIL under the Code. On 5 March 2018, the Adjudicating Authority admitted Company Petition (IB)-35(ND)/2018 filed under Section 9 of the Code against the corporate Debtor ASSIL and appointed Mr. Brij Kishore Sharma as IRP. 26. The Appellant contends that it was never involved in the Insolvency Resolution Process initiated against ASSIL. The Appellant has not made any claim against ASSIL. Therefore, the Appellant cannot be considered a corporate person about the CIRP of ASSIL. The Appellant is entirely unaware of the details of the Resolution Process. 27. The Appellant further contends that IA was not maintainable as the directions being sought may affect the third party's fastening liability, which was not ever connected with the CIRP of ASSIL under the Code. The Adjudicating Authority cannot, u/s. 60(5) of the Code, determine the auction purchaser's liabilities, which had purchased the property belonged to ASSIL conduc....
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....er contended that Rs. 17,51,325/- has been paid by Respondent No. 3 Allahabad Bank from the Sale's proceeds. The Counsel for Respondent No. 4 also contends that having become aware of the said dues, Respondent No. 3 informed the intending purchaser, i.e. Appellant, vide letter dated 19 December 2017, i.e. before the intimation of the bidding process. The said letter mandated the bidder to analyse the situation and satisfy itself about the property dues prior to the bid. The relevant portion of the said letter is as under; "this has reference to a bid admitted on 15 December 2017 along with an EMD of Rs. 2.74 crores for participating in E-auction for account M/s. Anil Special Steel Industries Limited. In this regard, you being the intending buyer, we would like to inform you that we have received the following demand letters from the PF department and income tax department, which is as below; 1. The recovery of the PF department of Rs. 17,51,325 (current dues) and the disputed amount of Rs. 3,09,18,151. 2. Income tax dues of Rs. 4,15,59,150. 32. The Adjudicating Authority by the impugned Order directed that; a. The Respondent Number 2 shall bear all the claims of the ....
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....tends that upon default by ASSIL, Respondent No. 3-Allahabad Bank issued notices to ASSIL under section 13(2) of the SARFAESI Act on 1 November 2017, after that, on 15 November 2017, under Section 13(4) of the SARFAESI Act. By implication of Section 13(4) of the SARFAESI Act, once the Bank has taken over the possession, the Corporate Debtor loses its right to the property. 37. Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short 'SARFAESI Act') is mentioned below for ready reference; 13. Enforcement of security interest.--(1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. (2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performi....
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....ed asset: Provided that the right to transfer by way of lease, assignment or Sale shall be exercised only where the substantial Part of the business of the borrower is held as security for the debt: Provided further that where the management of whole of the business or Part of the business is severable, the secured creditor shall take over the management of such business of the borrower which is relatable to the security for the debt;] (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. (5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. (6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the ....
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....f the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the liquidator shall intimate the estimated amount or workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the liquidator: Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the liquidator: Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's dues, if any." 38. Undisputedly, the Appellant is the auction purchaser of the immovable property comprising industrial land, plant and machinery of Unit-1 owned by Anil Special Steel Industries Limited/ASSIL, i.e. Corporate Debtor. Before commencement of the Corporate Insolvency Resolution Process against ASSIL, the property was sold by Allahabad Bank under the SARFAESI Act's provisions, 2002. Given the d....
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....bout the outstanding dues against the Corporate Debtor, then the Appellant requested the Bank to either cancel the entire bid process and refund the security or start the bid process and issue a letter of acceptance to the successful bidder and accept the balance amount (25% of the bid amount). 43. However, the Bank conducted an e-auction on 20 December 2017, wherein the Appellant submitted the highest bid of Rs. 27,61,00,000. After that, on 21 December 2017, Allahabad Bank issued acceptance of the offer of purchase and informed that since claims/dues are yet to be crystallised by the Competent Authority/Court, the sale certificate will be issued after obtaining the necessary order/direction from the Competent Authority/Court/Tribunal. On 26 December 2017, in the Appellant's Reply to Allahabad bank's letter dated 21 December 2017, it is stated that the conditions regarding the auction, imposed after accepting the earnest money, are illegal and are not binding on the Appellant. 44. After that, on 30 December 2017, Allahabad Bank, in response to the Appellant's letter dated 26 December 2017, issued a letter to Appellant clarifying the position that its letter dated 21 D....
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....n 5 March 2018. The most important question that arises for our consideration is whether the Adjudicating Authority, while exercising its powers under the I & B Code, 2016 had any authority to fasten the liability of the Corporate Debtor on the auction purchaser whom the property was sold before the commencement of CIRP. 48. Hon'ble Supreme Court decision in case of Embassy Property Developments (P) Ltd. v. the State of Karnataka, (2020) 13 SCC 308 is very relevant. In this case, Hon'ble the Supreme Court has held; "32. In contrast, sub-sections (4) and (5) of Section 60 of the IBC, 2016 give an indication respectively about the powers and jurisdiction of the NCLT. Section 60 in entirety reads as follows: "60. Adjudicating authority for corporate persons.- (1) The adjudicating authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. (2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained i....
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....lready pending before NCLT.The object of sub-section (2) is to group together (A) the CIRP or liquidation proceeding of a corporate debtor, and (B) the insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor of the very same corporate Debtor, so that a single forum may deal with both. This is to ensure that the CIRP of a corporate debtor and the insolvency resolution of the individual guarantors of the very same corporate Debtor do not proceed on different tracks, before different fora, leading to conflict of interests, situations or decisions. 38. It was argued by all the learned Senior Counsel on the side of the appellants that an Interim Resolution Professional is duty-bound under Section 20(1) to preserve the value of the property of the corporate Debtor and that the word "property" is interpreted in Section 3(27) to include even actionable claims as well as every description of interest, present or future or vested or contingent interest arising out of or incidental to property and that therefore the Interim Resolution Professional is entitled to move the NCLT for appropriate orders, on the basis that lease is a property right and NC....
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....Section 20(1) uses the word "property" together with the word "value". Sections 18 and 25 do not use the expression "property". Another important aspect is that under Section 25(2)(b) of the IBC, 2016, the resolution professional is obliged to represent and act on behalf of the corporate Debtor with third parties and exercise rights for the benefit of the corporate Debtor in judicial, quasi-judicial and arbitration proceedings. Sections 25(1) and 25(2)(b) reads as follows: "25. Duties of resolution professional.--(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate Debtor, including the continued business operations of the corporate Debtor. (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions: (a) *** (b)represent and act on behalf of the corporate Debtor with third parties, exercise rights for the benefit of the corporate Debtor in judicial, quasi-judicial and arbitration proceedings;" (emphasis supplied) This shows that wherever the corporate Debtor has to exercise rights in judicial, quasi-judicial proceedings, the resolution professional cannot short-circuit t....
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....hority u/s. 60(5) of the I & B Code 2016. 51. It is contended by the Appellant that the property of the Corporate Debtor ASSIL was sold, and the sale process was completed before initiation of CIRP under the Code. Therefore, the Adjudicating Authority exercising powers under the I & B Code had no jurisdiction to pass an order to fasten the Corporate Debtors' liability on the Appellant. 52. It is pertinent to mention that proviso to Section 13 of the SARFAESI Act deals with the eventuality of a sale of secured assets where workmen dues remained a liability. The proviso to Section 13 reads as under; "Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such company, who opts to realise his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of Section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the liquidator in accordance with the provisions of Section 529-A of that Act: Provided also that liquidator referred to in the second proviso shall intimate the secu....
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....e the Sale is made under the SARFAESI Act, then after completing the sale process and issuance of the Sale Certificate, the Adjudicating Authority had no authority to pass an order U/s. 60(5) of the Code. 55. The Learned Counsel representing Prudent ARC contended that Section 238 of the Code and Section 60(5) also contains the non-obstante clause, which reads as "notwithstanding anything contrary to any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to decide any Application proceeding by the Corporate Debtor or Corporate persons or to entertain and dispose of any claim by or against the Corporate Debtor or Corporate persons. So the admissibility of the claims was the issue before the Learned Adjudicating Authority, who alone had the power and jurisdiction to determine the issue of whether the liabilities of the workmen/employees about the Unit-1 of the Corporate Debtor are payable by the Auction Purchaser of unit-1 or the same continued to be admissible against the Corporate Debtor'. It is further contended. Admission of a claim by IRP is irrelevant, as the IRP does not possess any adjudicating powers. 56. It is further conte....
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.... to bring a claim before the NCLT taking advantage of Section 60(5) of the Code. 60. Therefore in the light of the statutory scheme, as culled out from various provisions of the IBC 2016, it is clear that whenever the Corporate Debtor has to exercise a right that falls outside the purview of IBC 2016, especially in the realm of public law, they cannot, through the Resolution Professional, take a bypass and go before the NCLT for the enforcement of such a right. In the instant case if there was any grievance either against the Order of issuing notice under Section 13(2) or against the Act of taking possession of the secured assets under Section 13(4) or further in relation to the auction sale of the property of Unit-1 of the corporate Debtor the NCLT/Adjudicating Authority did not have the jurisdiction under the SARFAESI Act to pass any order in this regard. Given the law laid down by the Hon'ble Supreme Court in the Embassy property case, the Resolution Professional was not authorised to move an application under Section 60(5) of the Code. 61. Even otherwise, the property' land, plant and machinery has been sold to the Appellant free from all encumbrances. The Appellant h....