V.S. Palanivel v. P. Sriram, CS, Liquidator, Etc.

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35.7 In State of Bihar v. Bihar Rajya Bhumi Vikas Bank Samiti,52 referring to Section 34(5) of the Arbitration and Conciliation Act, 1996, this Court has held that the absence of any consequences for infraction of a procedural provision implies that such a provision ought to be interpreted to be directory and not mandatory. Following are the observations made in the captioned decision : “19. It will thus be seen that Section 34(5) does not deal with the power of the Court to condone the non-compliance thereof. It is imperative to note that the provision is procedural, the object behind which is to dispose of applications under Section 34 expeditiously. One must remember the wise observation contained in Kailash [Kailash v. Nanhku, (2005) 4 SCC 480], where the object of such a provision is only to expedite the hearing and not to scuttle the same. All rules of procedure are the handmaids of justice and if, in advancing the cause of justice, it is made clear that such provision should be construed as directory, then so be it. xxxx

21. Section 80, though a procedural provision, has been held to be mandatory as it is conceived in public interest, the public purpose underlying it being the advancement of justice by giving the Government the opportunity to scrutinise and take immediate action to settle a just claim without driving the person who has issued a notice having to institute a suit involving considerable expenditure and delay. This is to be contrasted with Section 34(5), also a procedural provision, the infraction of which leads to no consequence. To construe such a provision as being mandatory would defeat the advancement of justice as it would provide the consequence of dismissing an application filed without adhering to the

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requirements of Section 34(5), thereby scuttling the process of justice by burying the element of fairness.” (emphasis added) 35.8 It can be discerned from the aforesaid discussion that when the law prescribes that a certain act has to be done in a particular manner for a party to acquire a right, then it ought to be treated as mandatory in character more so, when the Statute prescribes a consequence for failure to comply with the requirements laid down. 35.9 The words “may” and “shall” used in different provisions of Schedule I of the IBBI Regulations, 2016 go to show that the legislature intended to ascribe different meanings to the said words depending on the steps required to be taken by the Liquidator for the sale of the assets of a Corporate Debtor. A perusal of the Rules under Schedule I demonstrate that a play in the joints has been given to the Liquidator only in particular circumstances relating to the sale of an asset through auction. Wherever the underlying intention is to maximize realization from the sale of assets, discretion has been vested in the Liquidator to sell the asset through auction in the best interest of the creditors, but not otherwise. For the rest of the steps towards sale of an asset, the mandate of the Statute is in the affirmative. In other words, a particular step if prescribed, is necessarily required to be taken by the Liquidator in the manner prescribed in the Rules under Schedule I. He is not left with any discretion to condone the delay. 35.10 When broken down, Rule 12 states that (a) the highest bidder in an auction shall be called upon to provide the balance sale consideration within 90 days from the date of such a demand; (b) any payments made after 30 days from such a demand shall attract interest at the rate of 12 per cent; (c) if the payment is not received within the period of 90 days, the sale shall be cancelled. The word ‘shall’ has been used thrice in Rule 12. Coming next to Rule 13, the same states that (a) the sale shall stand completed on the payment of the full amount; (b) the Liquidator shall execute a sale certificate/ sale deed to transfer such an asset(s); (c) the asset(s) shall be delivered in the manner prescribed in terms of the sale.

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The word “shall” has again been used thrice in Rule 13. It is noticed that except for Rules 4A, 4B, 8 and Rule 11A where the word “may” has been used and it vests a discretion in the Liquidator to reduce the reserve price more than once and conduct multiple rounds of auctions with the purpose of maximizing realization from the sale of assets in the best interest of the creditors, in the remaining Rules, the word “shall” features prominently and without an exception. But that is not to say that wherever the word “shall” has been used in the Rules under Schedule I, it attains a mandatory nature. The Rule could still be construed as purely procedural if its infraction does not entail any serious or prejudicial consequence. Much will depend on the connotation and the textual context of the Rule. 35.11 In view of the analysis undertaken above, Rule 12 would have to be treated as mandatory in character for the reason that it contemplates a consequence in the event of non-payment of the balance sale consideration by the highest bidder within the stipulated timeline of 90 days, which is cancellation of the sale by the Liquidator. To that extent, there is substance in the submission made on behalf of the appellant that since the second proviso under Rule 12 contemplates a consequence of cancellation of the auction on non-payment of the balance sale consideration within 90 days, the Liquidator was not empowered to extend the timeline. 35.12 Reliance placed by learned counsel for the Liquidator on the decision in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others53 to contend that the timeline prescribed under Schedule 1 of the IBBI Regulations 2016 are directory and not mandatory in character, is misplaced. The said decision holds that timelines available to operational creditors under the IBC are directory and not mandatory because no consequence is provided if the period is not extended or after the extension expires and it is in this context that the following observations have been made: “58. This Court, while dealing with timelines provided qua operational creditors, in Surendra Trading Co.

53 [2019] 10 SCR 381 : (2019) 8 SCC 416

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[Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Co. Ltd., (2017) 16 SCC 143 : (2018) 2 SCC (Civ) 730], held that the timelines contained in the provisos to Sections 7(5), 9(5) and 10(4) of the Code are all directory and not mandatory. This is for the obvious reason that no consequence is provided if the periods so mentioned are exceeded. Though this decision is not in the context of the 14-day period provided by Section 7(4), we are of the view that this judgment would apply squarely on all fours so that the period of 14 days given to NCLT for decision under Section 7(4) would be directory. We are conscious of the fact that under Section 64(1) of the Code, NCLT President or the Chairperson of Nclat may, after taking into account reasons by NCLT or Nclat for exceeding the period mentioned by statute, extend the period of 14 days by a period not exceeding 10 days. We may note that even this provision is directory, in that no consequence is provided either if the period is not extended, or after the extension expires. This is also for the good reason that an act of the court cannot harm the litigant before it. Unfortunately, both NCLT and Nclat do not have sufficient members to deal with the flood of applications and appeals that is before them. The time taken in the queue by applicants who knock at their doors cannot, for no fault of theirs, be put against them.” 35.13 Nor can the decisions of the Tribunal in Standard Surfa Chem India Private Limited (supra) and Prakash Chandra Kapoor (supra) referred to by learned senior counsel for the Liquidator, be read in favour of the respondents. A sweeping observation that all the timelines prescribed in Regulation 47 are directory, is impermissible. The consequences of non- compliance of the specific rule would have to be individually examined to decide as to whether the said rule has a directory flavour or is mandatory in character. 35.14 In the present case, records reveal that when the Auction Purchaser had approached the Liquidator seeking extension of time to deposit the balance sale consideration. The Liquidator had rightly expressed his inability to do so and

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indicated that such a power vests only in the Adjudicating Authority. On receiving the aforesaid response, the Auction Purchaser did take steps to move the Adjudicating Authority for seeking extension of time for making the payments. It is a matter of record that the said application was allowed by the Adjudicating Authority on 5th May, 2020 and time was granted to the Auction Purchaser to pay the balance sale consideration on the Central Government/State Government lifting the lockdown. The aforesaid order dated 5th May, 2020, was passed by the Adjudicating Authority in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016 which states as follows : “Rule 11 of NCLT Rules, 2016 Inherent Powers - Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.” 35.15 The aforesaid Rule is not to be read in isolation but in conjunction with Section 35 of the IBC that deals with the powers and duties of the Liquidator and states that the Liquidator shall have the powers and duties specified in clauses (a) to (o) of sub-section 1 including the power to sell an immovable/movable property of the Corporate Debtor in liquation by public auction/private sale as per clause (f), subject to the directions of the NCLT. Pertinently, it has been observed in Arun Kumar Jagatramka v. Jindal Steel and Power Limited 54 that “the Liquidator exercises several functions which are quasi-judicial in nature and character. Section 35(1) itself enunciated that the powers and duties which are entrusted to the Liquidator are “subject to the directions of the Adjudicating Authority”. The Liquidator, in other words, exercises functions which have been made amenable to the jurisdiction of NCLT, acting as the Adjudicating Authority…..”. 35.16 In the facts of the present case, the Adjudicating Authority exercised statutory powers under Section 35 of the IBC read

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with its inherent powers under Rule 11 of the NCLT Rules, 2016 for extending the time to deposit the balance sale consideration on sufficient cause being shown, i.e., in view of the countrywide lockdown due to the Covid-19 pandemic. This latitude that was given in the aforesaid extraordinary circumstances to meet the ends of justice, cannot be faulted.

36Copy pinpoint36. IMPACT OF THE ATTACHMENT ORDER BY THE INCOME TAX AUTHORITIES ON THE SALE OF THE AUCTIONED PROPERTY 36.1 All things even, having held that there was sufficient reason to grant extension of time to the Auction Purchaser to deposit the balance sale consideration in terms of orders passed by this Court in the Suo Moto Writ Petition read with the provisions of Regulation 47A of the IBBI Regulations, 2016, and having regard to the view expressed above that the Adjudicating Authority was empowered in law to extend the time on sufficient cause being shown, the matter ought to have rested there. But there is something more to be said in this case that revolves around the arguments advanced by learned counsel for the appellant regarding the import of the order of attachment issued by the Income Tax Authorities in respect of the auctioned property and its effect. 36.2 It has been strenuously argued by learned senior counsel for the appellant that the attachment order could not be used as an excuse by the Auction Purchaser for belatedly depositing the balance sale consideration. The terms and conditions of the Notice of Sale as extracted in this judgement go to show that the Liquidator had declared that e-auction of the subject property was being conducted on an “AS IS WHERE IS”, “AS IS WHAT IS” and “WHATEVER THERE IS” basis. It was further clarified that the intending bidders must undertake their own independent inquiries, inspect the subject property and satisfy themselves before submitting their bids. 36.3 The fact that the Auction Purchaser was aware of the income tax attachment order in respect of the subject property is borne out from the correspondence exchanged by it with the Liquidator, that forms a part of the records. On certain queries being raised by the Auction Purchaser, the Liquidator had replied, vide letter dated 9th December, 2019 and stated that :

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“if the property is sold under IBC, income tax will not have any priority claim and the property can be registered with NCLT order, apart from this the Income tax dues are very less hence it can also be paid out of the proceeds and no objection can be taken.” In a subsequent letter dated 17 th December, 2019 addressed by the Auction Purchaser to the Liquidator, which was well before the date the auction was scheduled, among other issues raised, one of the requests made to the Liquidator was to ensure that the income tax attachment/ prohibitory order on the subject property is lifted by the Income Tax Department. In his reply dated 19th December, 2019 to the aforesaid letter, the Liquidator had informed the Auction Purchaser that: “3. As regards to the Income Tax attachment/ prohibitory order passed. I would like to clarify that Income tax already filed claim before me and shall be paid in order of priority as provided under Insolvency & Bankruptcy Code 2016 and the registration of property on successful bidding has no relevance to the same. In case of any objection from the SRO the same shall be brought before the Tribunal and suitable order shall be obtained by the Liquidator so as to proceed with the registration.” 36.4 It can be seen from the two clarifications given by the Liquidator to the Auction Purchaser that registration of the subject property in favour of the successful bidder was not to be linked with the income tax attachment order for the reason that the Income Tax Department had already lodged a claim before the Liquidator and payment was to be released to the Department in the order of priority, as stipulated under the IBC. Despite that, the Auction Purchaser did not proceed further. 36.5 In the light of the Notice for sale and the replies furnished to the Auction Purchaser well before the bidding process had commenced, we are of the considered view that it was for the Auction Purchaser as an intending bidder to have conducted a due diligence at its own end, gather all the relevant information pertaining to the subject property which included the status

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of the property and the liabilities attached to it, weigh all the pros and cons and only thereafter participate in the auction process. After having participated in the e-auction with its eyes wide open, the Auction Purchaser cannot be heard to state that payment of the balance sale consideration was linked with the lifting of the attachment order passed by the Income Tax Department when it knew all along that the auction was being conducted on an “AS IS WHERE IS”, “AS IS WHAT IS” and “WHATEVER THERE IS” basis. 36.6 To fortify the submission that the sale transaction could not have been completed on account of the embargo placed under the IT Act, learned counsel for the Auction Purchaser has referred to Sections 222 and 281 of the IT Act read with Rule 48 Part III, Schedule 2 of the IT Act. Section 222 of the IT Act, empowers the Tax Recovery Officer to draw up a statement specifying the amount of arrears due from an assessee who has defaulted in payment of tax and thereafter proceed to recover the said arrears by attaching and selling the assessee’s movable/immovable properties. Section 281 of the IT Act declares that if an assessee creates a charge or parts with the possession of any of his assets, such charge/ transfer would be treated as void against a claim in respect of tax payable by the assessee. However, the second proviso to Section 281 clarifies that such a charge/transfer will not be void if it is made with the previous permission of the assessing officer. As for Rule 48 falling under Part III Schedule 2 of the IT Act, it contemplates attachment of an immovable property of the defaulter, prohibiting the defaulter from transferring/ charging the property and prohibiting all other persons from taking benefit from such a transfer/charge. 36.7 The sequence of the events as unravelled from the records reveal that the Income Tax Department had already filed a claim before the Liquidator who had in turn moved the Adjudicating Authority for appropriate directions relating to the subject property that was under the attachment order passed by the Income Tax Authorities. The said application was disposed of by the Adjudicating Authority vide order dated 10th February, 2020 wherein, directions were issued to lift the attachment order subject to the conditions that may be specified in an Escrow

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account where the sale consideration would be deposited by the Liquidator. The said order passed in open Court was duly conveyed by the Liquidator to the Auction Purchaser, though it is the stand of the latter that a physical copy of the said order passed on 10th February, 2020, was received by it much later, in the month of May, 2020. The escrow account55 was created on 3rd August, 2020 and the entire tax arrears amounting to ₹2,44,01,603/- (Rupees Two crore forty four lakhs one thousand six hundred and three only) were deposited in the escrow account on 24th August, 2020, though the income tax department lifted the attachment order three days later, on 27th August, 2020. This was duly conveyed to the office of the Sub-Registrar at Trichy on the same date. The second proviso to Section 281 of the IT Act did provide a window to the Auction Purchaser to approach the assessing officer for prior permission to transfer the subject property. But that option was exercised when the Liquidator moved an application for appropriate permission before the Adjudicating Authority which was granted on 10th February, 2020 under intimation to the Auction Purchaser. 36.8 The contention of the learned counsel for the Auction Purchaser is that Rule 13, Schedule I of the IBBI Regulation, 2016 must be read in conjunction with Rule 12 and only on payment of the full amount, could the sale transaction be treated to have been completed in all respects. Since the full amount could not be paid till the attachment order was lifted, the Liquidator could not have executed a certificate for sale/sale deed to transfer the subject property in favour of the Auction Purchaser. 36.9 We are afraid, such an assumption does not stand to reason. Rule 12 is not interlinked with Rule 13. Both the Rules cover different situations. The first proviso to Rule 12 gives a leeway to the successful bidder to make payment of the balance sale consideration after thirty days subject to paying interest at the rate of 12%. However, the second proviso to Rule 12 is unequivocal and declares that the sale itself will be treated as

55 Escrow Account No. 50200050623451

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cancelled if the payment is not received within the outer limit of 90 days. It is only on completion of the steps contemplated in Rule12 that Rule 13 can come in. Reference to Rule 13 that starts with the expression “on payment of the full amount” would naturally be understood to mean on payment of the full amount within the period prescribed in Rule 12. We have already held Rule 12 to be mandatory in character because non-payment within the timeline has consequences attached to it. However, in contrast thereto, there are no adverse consequences spelt out in Rule 13 for it to be treated as mandatory. The said Rule lays down the procedure for completion of the sale and would have to be treated as directory since some procedural steps have been set out for purposes of completion of the sale process, but nothing beyond that. We are therefore not inclined to accept the submissions made by the respondents that none of the activities as contemplated in Rule 12 could have been completed unless and until the attachment order passed by the Income Tax Authorities was lifted or that the Liquidator was not in a position to complete the sale under Rule13 on that count. 36.10 In any event, the Liquidator had taken timely steps to move the Adjudicating Authority for appropriate permission which was obtained as long back as on 10th February, 2020, i.e. about a month and a half before the nationwide lockdown was declared. Moreover, the Auction Purchaser was well aware of the fact that the entire tax arrears amounted to ₹2,44,01,603/- (Rupees Two crore forty four lakh one thousand six hundred and three only), which could have easily been paid out of the earnest money of ₹2,95,59,638/- (Rupees Two crore ninety five lakh fifty nine thousand six hundred and thirty eight only) deposited by it, still leaving some surplus funds. The Liquidator had also taken steps to apprise the Auction Purchaser of the said position and the order of priority that was to be given to the claim of the Income Tax Department. Yet the Auction Purchaser did not deposit the balance sale consideration. In view of the above, the plea taken by the Auction Purchaser that the income tax attachment order was a serious and an insurmountable impediment in completion of the sale and the subject property could not have been validly transferred in its favour by the Liquidator, is rather tenuous and not persuasive

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36.11 The anxiety of the Auction Purchaser was adequately addressed on the Adjudicating Authority passing an order on 10th February, 2020, lifting the attachment order. This order was communicated by the Liquidator to the Auction Purchaser well in time. Mere not receipt of a copy of the said order cannot be a ground for the Auction Purchaser to have delayed deposit of the entire balance sale consideration. The spectre of Covid-19 was nowhere on the horizon at that time. It spiralled only in the last week of March, 2020. If the Auction Purchaser was serious, it could have easily deposited at least some amount out of the balance sale consideration of ₹26,60,36,677/- (Rupees Twenty six crore sixty lakh thirty six thousand six hundred and seventy seven only) much earlier, but it elected not to deposit a penny till the end of August,

2020. When the first proviso to Rule 12, Schedule I of the IBBI Regulations, 2016 permits payment of sale consideration after expiry of 30 days from the date of demand subject to payment of interest @ 12% p.a., there was no question of the Auction Purchaser going scot free, when its conduct has not been blemishless. 36.12 On an overall conspectus of the facts of the present case which brings out the glaring default on the part of the Auction Purchaser in making deposit of the balance sale consideration even after permission was granted by the Adjudicating Authority on 10th February, 2020 to lift the attachment order, the only question that needs to be answered is as to whether this Court should proceed to set aside the auction and as a sequence thereto, declare as null and void, the sale certificate issued by the Liquidator in favour of the Auction Purchaser, as has been pleaded by the appellant. 36.13 In our opinion, such an order would be too harsh. Much water has flown under the bridge by now. The subject land has been utilized by the Auction Purchaser to build a 200-bed Mother and Child hospital which is operational. Huge amounts have been pumped into the project by the Auction Purchaser. The hospital is fully functional providing medical facilities to seven surrounding districts. In contrast, the appellant has not been a vigilant litigant. His conduct shows that he has dragged his

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feet at every stage. Records reveal that belated applications have been filed by him for seeking recall of the orders passed by the Adjudicating Authority granting extension of time to the Auction Purchaser. For reasons best known to him, it took 19 months for the appellant to prefer an appeal before the Tribunal against the order passed by the Adjudicating Authority, as provided for in the IBC. Furthermore, the appellant resisted handing over possession of the subject property to the respondents thereby causing more delay. 36.14 This Court must underscore the well settled legal position that once an auction is confirmed, it ought to be interfered with on fairly limited grounds. (Refer: Valji Khimji and Co. v. Hindustan Nitro Product (Gujarat) Ltd. (Official Liquidator)56 and Celir LLP v. Bafna Motors (Mumbai) Private Limited and others57). Repeated interferences in public auction also results in causing uncertainty and frustrates the very purpose of holding auctions. (Refer : K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple and others58). Unless there are some serious flaws in the conduct of the auction as for example perpetration of a fraud/collusion, grave irregularities that go to the root of such an auction, courts must ordinarily refrain from setting them aside keeping in mind the domino effect such an order would have. Given the facts noted above, we shall refrain from cancelling the sale or declaring the Sale Deed as void. Instead, it is deemed appropriate to balance the equities by directing the Auction Purchaser to pay an additional amount in respect of the subject property. CONCLUSION 36.15 For arriving at a just and fair figure, we propose to take into consideration the estimated value of the subject property in terms of the Reports submitted by the Registered Valuers appointed by the Liquidator. Based on their Reports, the Liquidator had fixed ₹39,41,28,800/- (Rupees Thirty nine

56 [2008] 12 SCR 1 : (2008) 9 SCC 299 57 [2023] 13 SCR 53 : (2024) 2 SCC 1 58 [2022] 8 SCR 968 : (2022) 5 SCC 710

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crore forty one lakh twenty eight thousand and eight hundred only) as the average liquidation value of the subject property for the purpose of e-auction. This figure was brought down by 25% in the second round of auction which came to ₹29,55,96,375/- (Rupees Twenty nine crore fifty five lakh ninety six thousand three hundred and seventy five only). The difference in the two figures mentioned above comes to ₹10,00,00,000/- (Rupees Ten crore only) approximately. Keeping in mind the fact that the Auction Purchaser managed to retain the balance sale consideration for over six months reckoned from 10th February, 2020 and about five months reckoned from 25th March, 2020, we deem it appropriate to direct it to deposit 50% of the differential figure, i.e., an additional sum of ₹5,00,00,000/- (Rupees Five crore only) with the Liquidator along interest @ 9 % p.a. reckoned from 26th March, 2020 till date of actual payment. The said amount shall be deposited by the Auction Purchaser with the Liquidator within eight weeks from today. Thereafter, the Liquidator shall disburse the amount received in terms of the orders passed/may be passed by the Adjudicating Authority, as contemplated under the IBC. 36.16 The appeals are partly allowed on the above terms. Parties shall bear their own expenses.

Result of the case: Appeals Partly allowed.

† Headnotes prepared by: Ankit Gyan