Supreme Court Allows Extensions for Mandatory Timelines for Payment of Balance Sale Consideration in Liquidation Auctions Due to Extraordinary Circumstances
- REEDLAW
- Sep 9, 2024
- 3 min read
The Supreme Court allowed extensions for mandatory timelines for the payment of balance sale consideration in liquidation auctions due to extraordinary circumstances.
The Supreme Court Bench of Justice Hima Kohli and Justice Ahsanuddin Amanullah recently reviewed a bunch of three appeals and observed that the timeline for paying the balance sale consideration in auction sales during insolvency proceedings is generally mandatory; however, extensions for payment deadlines can be justified under extraordinary circumstances like the COVID-19 pandemic.
The Supreme Court reviewed the National Company Law Appellate Tribunal’s (NCLAT) dismissal of the appellant’s appeals concerning the liquidation of the company. The appeals were filed following the liquidation of the company under the Insolvency and Bankruptcy Code (IBC), which was triggered by a financial creditor’s claim. The core of the dispute centred on the execution and extension of the sale process for a property that was auctioned as part of the liquidation proceedings.
The appellant, a former Managing Director and shareholder of Sri Lakshmi Hotels Private Limited contended that the auction process was flawed. He alleged that there were violations of the Insolvency and Bankruptcy Board of India (IBBI) Regulations, specifically regarding the composition of the Stakeholders’ Consultation Committee and the auction process. Additionally, he argued that the Tribunal erred in allowing extensions for the payment of the balance sale consideration due to the COVID-19 lockdown and the Income Tax attachment of the property. The appellant maintained that the auction purchaser should not have received such an extension and that the delay was unjustified.
In contrast, the Auction Purchaser, represented by Mr. Arvind Datar, argued that the extensions were appropriate given the unprecedented circumstances of the COVID-19 pandemic, which necessitated legal adjustments. The Auction Purchaser's counsel emphasized that the delay was partly due to an Income Tax attachment and asserted that the Tribunal and Adjudicating Authority acted correctly by allowing the extension. The Senior Counsel for the Liquidator, Mr. C.U. Singh, defended the auction’s validity, highlighting that the reserve price set by the Liquidator was based on professional valuations and that the appellant’s claims about undervaluation and procedural violations were unfounded.
The Supreme Court evaluated the appellant’s claims, particularly focusing on whether the timelines stipulated in the IBBI Regulations were mandatory or directory. It noted that although "shall" generally indicates a mandatory provision, the context and specific circumstances of the case, including the COVID-19 lockdown, influenced the interpretation of the regulations. The Court determined that the extensions granted under these extraordinary conditions were justifiable and aligned with the principles of ensuring fairness in the auction process.
Furthermore, the Court addressed the issue of the Income Tax Authorities' attachment order, finding that while it was an impediment, it did not invalidate the auction process. The Court noted that the property’s subsequent use for establishing a hospital was a significant factor against overturning the sale. Consequently, the Court decided not to cancel the sale or void the Sale Deed. However, it did impose a financial penalty on the Auction Purchaser for the delay, ordering an additional sum of ₹5,00,00,000 with interest to be deposited with the Liquidator. The appeals were partly allowed, with each party bearing its own costs.
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