An asset may be kept out of liquidation if said asset is pending in the High Court: NCLAT

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NCLAT in a bench consisting of Judge Jarat Kumar Jain (judicial member) and Dr Ashok Kumar Mishra (technical member) in Sun Pharmaceutical Industries Ltd. against Sumit Binani held that property may be kept out of liquidation if said property is pending in the High Court.

Factual background:

Gujarat debtor NRE Coke Ltd./Corporate has been classified as a Non-Performing Asset (NPA) by the State Bank of India (Respondent No. 2 herein). A proposal was made for the sale of non-core assets of the debtor company charged to the lending banks. The wind turbine assets were finalized for sale following which an auction was held and the appellants in this case (Sun Pharmaceutical Industries and Unimad Technologies Ltd.) were successful bidders.

They remitted the amount to the SBI and also advanced a bank guarantee for the balance. According to the Letter of Intent (LOI), the bank guarantees were to be invoked by the SBI in the event of non-compliance with the agreement by the buyer. This letter of intent was recognized by both parties and they subsequently entered into a sales agreement.

The corporate debtor was admitted to the corporate insolvency resolution process (CIRP) by the contracting authority after an application under Article 10 of the Code was filed by the corporate debtor.

The contracting authority authorized the sale of the wind turbine assets, but did not authorize the distribution of the sale proceeds at the relevant time since the debtor company was subject to a CIRP.

Proceedings in the High Court of Calcutta

After this sale was approved, the appellants withdrew from the sale transaction. They filed a civil suit in the Calcutta High Court seeking a declaration that they duly avoided the transaction with SBI (Respondent #2) and seeking reimbursement of the initial consideration amount and release of bank guarantees.

The appellants requested in summary proceedings the stay of invoking the bank guarantees, which was decided in their favor by the Single Chamber of the High Court. The divisional bench, however, rescinded the single bench order and allowed the SBI to invoke the safeguards. The bank cashed the guarantees and deposited the amount in the “No Lien Account”.

The liquidator followed the direction given by the NCLAT in Y. Shivram Prasad Vs. S. Dhanpal and Ors. in which it was held that failing to reach a plan of compromise or settlement with creditors in accordance with Section 230 of the Companies Act 2013, the liquidator must take steps to sell the business of the debtor company as a business operating ‘in its entirety with the employees’. However, in the present case, the liquidator faced the problem that all business units of the debtor company are not working for several reasons.

Stakeholders suggested that in case the liquidator decides to sell the debtor company as a going concern, he could do so without considering the assets of the wind turbine.

Procedure before the judicial authority

The liquidator filed a petition with the arbitration authority regarding this matter.

The arbitration authority issued an order in favor of the liquidator/respondent and authorized the maintenance of the assets of the wind turbine of the debtor company outside the scope of sale of Liquidation Estate, but refused to authorize the liquidator to disburse the amount of Rs. 180 crores (amount in the “No Lien Account”) while awaiting the lawsuit in the High Court of Calcutta. In its order, the Arbitration Authority also indicated that “at this stage, there is no need to order the distribution of the proceeds of the sale”, which it then removed by means of a corrigendum dated 23.03.2021.

The liquidator therefore appealed the decision of the contracting authority and the subsequent corrective order.

Issues and analysis

  • Whether title to the wind turbine passed to the appellants is pending in the Calcutta High Court?

The Court held that since the Appellant himself had argued before the contracting authority that the title to the wind turbine assets would be decided in the civil lawsuit pending in the High Court of Calcutta, the Court dismissed the appellant’s assertion that the contracting authority had wrongly concluded that the civil action serves to determine the rights of the parties to the assets of the wind turbine.

Thus, the Court held that the title of ownership of the wind turbine transmitted to the Appellant is pending before the High Court.

  • If the order to keep the wind turbine assets out of the liquidation estate is beyond the jurisdiction of the contracting authority?

Considering Sections 36(4)(a) and (e) of the IBC, the Court ordered that the assets of the wind turbine be kept outside the CIRP.

Section 36 (4) (a) provides that assets belonging to a third party which are in the possession of the debtor company shall not be included in the assets of the liquidation estate and shall not be used for recovery when liquidation. Clause (e) of the same section provides that all other assets which may be specified by the board, including assets which may be subject to set-off by reason of mutual dealings between the debtor company and any creditor, shall not should not be included in the liquidation estate.

Based on these, it was found that the contracting authority had not committed any illegality in authorizing the liquidator’s request to keep the wind turbine assets out of the liquidation estate.

  • Did the adjudicating authority exceed its jurisdiction by issuing an order allowing the liquidator to bring Civil Action No. 39 of 2019 pending in the High Court of Calcutta?

The liquidator has applied for leave to appear as a party to the lawsuit before the High Court in Calcutta.

Since the arbitration authority only allowed the liquidator to file the appropriate claim in the Calcutta High Court to be brought as a party, the arbitration authority cannot be said to have exceeded its skill.

  • Is the corrigendum of 23.03.2021 incompetent?

The contracting authority deleted the words “at this stage it is not appropriate to order the distribution of the proceeds of sale”, from the order it issued.

The appellants argued that by reviewing its own order, the adjudicating authority exceeded its jurisdiction under the BAC as this is not permitted under the provisions of the Code.

The NCLAT held that since the order had been varied and certain words had been deleted due to the fact that the appellants in their counter-affidavit had stated that they had no objection in the event that the contracting authority allowed the claim, but that the court should not allow the liquidator to distribute the amount of Rs. 180 crores, this does not amount to revising the order of the contracting authority.

This was an accidental error or omission and the contracting authority may rectify the error under Rule 154 of the NCLT Rules, 2016. Rule 154 provides that the Tribunal may correct an error resulting from an accidental error or omission at any time, on its own initiative or on any party’s Application.

Thus, the NCLT did not exceed its jurisdiction.

The Court therefore affirmed the order of the contracting authority and ordered that the terms and conditions concerning the assets of the wind turbine be decided within the framework of the civil lawsuit.

Case title: Sun Pharmaceutical Industries Ltd. against Sumit Binani

Quote: Appeal of Society (AT) (Ins) No. 334 of 2021

Counsel for the Appellant: Mr. Ravindra Shrivastava Sr. Advocate, Mr. Shyam Kumar, Ms. Nayan Gupta, Advocates

Solicitor for the Respondents: Mr. Sidharth Sharma, Mr. Arjun Asthana, Mr. Jishnu Chowdhury and Vjjaini Chatterjee, lawyers for R1.

Mr. Krishnan Venugopal, Sr. Advocate with Mr. VM Kannan, Mr. Sanjay Kapur, Mr. Lalit Rajput, Mr. Arjun Bhatia, Ms. Shubhra Kapur, Advocates for R-2. Mr. Jitendra Lohia, IRP

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