Sneha Techno Equipments Private Limited vs Vinod Kumar Kothari, Liquidator

When this matter was last heard, it was stated by the Applicant that it is similar to I.A. (I.B.C) No. 930/KB/2020.

However, after going through the same we find that the facts of the present application appear to be different from those contained in I.A. (I.B.C) No. 930/KB/2020.

Post this matter for clarification on 27.03.2023.

Per: Rohit Kapoor, Member (Judicial)

This IA has been filed under section 60(5) of IBC Code 2016 read with Rule 11 of the NCLT Rules, 2016 by the applicant who was declared as the highest bidder in the e-auction held by the Respondent on 30^th July, 2020.

The Respondent vide a letter dated 30.07.2020 had confirmed the applicant as H1 bidder and also requested to remit the amount of sale consideration as follows:

There were serious disruptions of normal business for all the businesses, departments in the State of West Bengal and 7 days were complete lockdown in the month of August 2020.^{22.Annexure- A-6, Page 78-80 of the Interlocutory Application}

The Applicant paid 25% of sales consideration amounting to Rs. 6,18,25,000/- in the following manner: -^{33.Page 14 of the Interlocutory Application}

The Respondent vide an email dated 09.09.2020 confirmed the receipt of the above amount and further requested to remit the balance consideration including interest within 13.09.2020.^{44.Annexure- A-9, Page 87 of the Interlocutory Application}

The Applicant requested the Respondent to extend the timelines several times and lastly vide a letter dated 13.09.2020 requested that he will pay the balance consideration within the 90^th day from the date of demand. However, the Respondent vide a mail dated 14.09.2020 disregarded the said request and asked to clear the balance amount by close of banking hours on 16.09.2020.^{55.Annexure- A-13, Page 98 of the Interlocutory Application}

Submissions made by the Ld. Sr. Counsel appearing on behalf of the Applicant are summarised herein after:

The Ld. Counsel for the Applicant submits that the only question involved in this petition is whether the RP is entitled to forfeit the 25% part payment of Rs. 6.18 crores made by the petitioner towards price of the Shyamnagar Cable Manufacturing Unit of the company (in liquidation).

The Liquidator has contended that he is entitled to do so in view of clauses 12.18 and 12.19 of the EOI (pages 66 and 67). The said clauses are reproduced hereunder as follows:

In this context it is relevant to note that EOI was published on 8th July, 2020 after Item 1(12) of Schedule I of the IBBI (Liquidation Process) Regulations, 2016 had been substituted by a notification dated 25^th July, 2019 with effect from 25^th July, 2019. The amended Item 1(12) provides that –

The petitioner had made payment of 25% of the sale consideration within the time specified but had thereafter sought an extension of time to pay the balance within the 90 days’ period permitted by the substituted Regulation along with an offer to pay interest in terms thereof. The Liquidator, however, cancelled the sale in favour of the petitioner without granting it such time and thereafter proceeded to forfeit the 25% payment already made by it amounting to Rs.6.18 crores. In doing so the Liquidator relied on a Circular issued by the IBBI on 26^th August 2019 providing that the amended Regulations “apply only to liquidation processes commencing on or after 25^th July 2019”. are applicable to liquidation processes which commenced on or after 25^th July 2019.

In this context the petitioner submits as follows:

As will appear from the decisions reported in 1995 Supp (2) SCC 33, the Hon’ble Supreme Court came to the conclusion that the concerned party were seeking to wrongfully resile from the contract after having altered the possession of the land for which the contract had been entered upon. It as such treated the money paid as a guarantee for performance of the contract and allot forfeiture of the same in terms of the contract upon reaching the conclusion that the party concerned was not ready to perform the contract and had in fact, in the meantime, caused loss and damage to the other party. In the instant case, however, the petitioner was at all times ready to perform the contract within the statutory period available to it.

As will appear from para 15 of the decision reported in (2013) 1 SCC 345, in the same the Hon’ble Supreme Court held that “it is also the law that part payment of the purchase price cannot be forfeited unless it is a guarantee of the due performance of the contract. In other words, if the payment is made only towards part payment of consideration and not intended as earnest money than the forfeiture clause will not apply”. In the instant case the earnest money was adjusted towards part payment of the consideration. The statue did not require the petitioner to give any guarantee for due performance of the contract, as even the regulations did not provide for forfeiture in the event of non-payment of the entire purchase price within the 90 day time stipulated, and only provided for cancellation of the same in such event.

As will appear from the decision reported in (2014) 14 SCC 272, the same is the case of frustration of statutory contract which provided for certain consequences in the event of failure to make a deposit. In the instant case, however, the time to make the deposit had not expired. The said case can as such have no application in the facts and circumstances of the instant case.

It is submitted that the monies paid by the Applicant should be directed to be refunded by the liquidator together with interest.

Submissions made by the Ld. Sr. Counsel appearing on behalf of the Respondent are summarised herein after:

The Respondent submits that the Respondent is bound by the decisions/regulations/ circulars issued by the IBBI, and it is beyond the Respondent’s purview to make submissions regarding powers of IBBI. However, in view of the directions of the Hon’ble Bench the Respondent submits as under:

Section 196 of IBC vests certain powers and functions on IBBI, inter-alia, the power to “make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor” [Section196(1)(t)]. Again, section 240 of IBC also lays down specific provisions as regards power of the Board to make regulations. It states that–

It is submitted that the Liquidation Regulations have been specified by IBBI in pursuance of the powers conferred under sections 196 and 240 of IBC.

The Ld, Counsel for the Respondent further submits that the power to issue clarifications, by way of circulars or otherwise, with respect to regulations notified by a regulatory body, inter-alia IBBI, is an extension of the power to make regulations, whereby the regulator guides the subjects as to the intent and purport of the regulations so notified. Since the Liquidation Regulations were made by IBBI in terms of the power conferred upon vide Section 196 read with section 240, it would be counter intuitive to argue that the IBBI does not have the power to clarify w.r.t. the applicability of the amendments introduced by it.

The Hon’ble Supreme Court of India (‘SC’) in Union of India & Ors v. N.R. Parmar &Ors [2012 13 SCC 340] has stated that “Essentially, a clarification does not introduce anything new, to the already existing position. A clarification, only explains the true purport to fan existing instrument.”

Hence, power of the IBBI to notify and amend regulations as well as issue clarifications in that regard is well-recognised under the law as well as by the Hon’ble Supreme Court.

It is submitted that it is a matter of record that the liquidation order with respect to the Corporate Debtor was passed by this Hon’ble Bench on 17^th October, 2017, that is, much prior to the date of the Amendment Regulations, notified on 25^th July, 2019.

The IBBI, vide Circular dated 25^th August, 2019 clarified that

The Respondent states that the Amendments were not applicable in case of the Corporate Debtor, given the Liquidation Process of the Corporate Debtor commenced much prior to the date of Amendment, i.e., w.e.f. 17^th October, 2017. Hence, the contentions of the Applicant that the Applicant ought to have been provided time for payment of consideration in accordance with the Amendments do not stand any ground.

Further, the question of extending the benefit of the Amendment Regulation to an auction process conducted after such notification was also discussed by the Hon’ble NCLT, Ahmedabad Bench vide its order dated 2^nd December, 2020 in the matter of Sundaresh Bhat, Liquidator of ABG Shipyard [I.A. No. 698 of 2020 in C.P. (IB) No. 53 of 2017], wherein the Hon’ble NCLT, Ahmedabad Bench held that:

It is further submitted that the benefits, if any, of the Amendment Regulations could not be extended to the auction process in question since the liquidation process of the Corporate Debtor commenced much prior to 25^th July, 2019.

The Respondent submits that the terms of the auction were transparent and clear, and were well understood by the Applicant, the Applicant is estopped from denying the existence of such clear terms. The Applicant cannot be permitted to defend his own admitted and explicit failure to abide by the terms of the auction. It is clear that the failed auction has caused damage to the liquidation process, as the realisation in the next auction was considerably lower than the failed auction. As a result, the Applicant was responsible for causing a loss to the stakeholders in the liquidation process, including the workmen.

The Ld. Counsel submits that liquidator has the right to lay ‘terms and conditions’ providing for forfeiture if IBC/regulations thereunder do not explicitly mention ‘forfeiture’. Section 35(1)(f) of the Code empowers and enjoins upon the liquidator to sell the assets of the corporate debtor–

Further, Regulation 33 read with Schedules I specifies the manner in which the sale can be conducted. Para 1(3) states-

Thus, IBC read with the Liquidation Regulations empowers the Liquidator to lay down terms and conditions with respect of sale of assets of the Corporate Debtor and the power is inclusive, that is to say, the Liquidator is empowered to lay down such terms and conditions of sale of assets of the Corporate Debtor which are beneficial to the Liquidation Estate.

The Respondent submits that there have been several instances before the NCLTs and even NCLAT, where the forfeiture by liquidators was challenged however, the judicial authorities have all owed such forfeiture - Visisth Services Limited v. S. V. Ramani, [CA (AT) (Insolvency), No, 896 of 2020,Saboo Tor Private Limited vs. Sanjay Gupta, Liquidator, CA (AT) (Insolvency) No. 1098 of 2020, Sundaresh Bhat, Liquidator of ABG Shipyard [I.A.No.698 of 2020 in C.P.(IB) No.53of 2017], etc.

At the time of hearing, the Applicant had placed reliance on Supreme Court Judgment in Kailash Nath Associates vs Delhi Development Authority & Anr [Civil Appeal No. 193 OF2015]. However, it is important to note that the Hon’ble NCLAT in the matter of Saboo Tor(supra), where the same ruling was pressed into service by the applicant in that case, has disregarded the said ruling, based on facts of the case, and relied upon National Highways Authority of India v. Ganga Enterprises, (2003) 7 SCC 410, and State of Haryana v. Malik Traders, (2011) 13 SCC 200 (as below). Hence, the Applicant’s reliance on Kailash Nath Associates (supra) is misplaced.

It is submitted that –

a. tender/invitation documents constitute a contract, once accepted; and

b. The terms of forfeiture serve dual purpose -(i) it acts as a deterrence, and (ii) it compensates the aggrieved party.

The Respondent relies on various rulings of SC, High Courts, NCLAT and NCLT in support of the aforesaid, inter alia, National Highways Authority of India v. Ganga Enterprises &Anr,[(2003) 7 SCC 410], State Of Haryana &Ors vs M/S Malik Traders, Civil Appeal No. 7033 of2011, V. Lakhshmanan v. B. R. Mangalagiri & Others, Civil Appeal No. 4542 of 1984, Mary v. State of Kerala and Others, Civil Appeal No. 9466 of 2003, Veena Garg v. Delhi Development Authority, Visisth Services Limited v. S. V. Ramani, [CA (AT) (Insolvency), No, 896 of 2020,Sahoo Tor Private Limited vs. Sanjay Gupta, Liquidator, CA (AT) (Insolvency) No. 1098 of 2020,etc.

The NCLAT rulings cited herein, Visisth Services(supra) and Sahoo Tor(supra) have allowed forfeiture clause, which clearly substantiates the view that the liquidator is well within his powers to include terms as to forfeiture in the sale invitations.

The Respondent has also placed reference to various judgments passed by the Hon’ble Apex court as in National Highways Authority of India v. Ganga Enterprises & Anr,[(2003)7SCC410]; State Of Haryana & Ors vs M/S Malik Traders, Civil Appeal No. 7033 of 2011;V. Lakhshmanan v. B. R. Mangalagiri & Others, Civil Appeal No. 4542 of 1984; Mary v. State of Kerala and Others, Civil Appeal No. 9466 of 2003; In Veena Garg v. Delhi Development Authority, 19th April, 2022, the Hon’ble High Court of Delhi held as follows:

Thus, one can say that one cannot escape from the obligations and liabilities of the Invitation document, which was specifically agreed to be for e-participating in the auction, as the same will defeat the very purpose of the time bound process of the IBC. The stand taken by Hon’ble Supreme Court and NCLAT in the aforesaid rulings clearly substantiate the principle.

In the instant case, para 12.19 of the EOI clearly says as follows:

The Respondent submits that the Applicant accepted the terms and conditions of the Invitation vide Confirmation Statement dated 28^th July, 2020 (@Pg 75 of Reply Affidavit), as well as signed the Bid Form containing the terms as to forfeiture (@Pg 53 of Reply Affidavit). Also, the terms of payment of sale consideration, inter-alia the time-period and tranches, were duly reiterated and clarified in Confirmation and Demand Letter dated 30^th July, 2020 (@Pg 80 of the Reply Affidavit).

It must be noted that the Applicant herein had conveyed its acceptance to such terms in full and without any objection and/ or reservations. Hence, the fact that non-payment of the sale consideration within the timeline laid down in the Invitation would render forfeiture of all monies paid by the defaulting bidder was known to the Applicant at all times.

The clauses from the Invitation and the Bid Form as cited above sufficiently evidence that the Applicant had voluntarily subscribed to the risk of forfeiture of all monies paid, in case of any default in payment of full consideration. Thus, in view of the aforesaid rulings and facts, the Respondent’s right to forfeit the monies paid by the Applicant pursuant to the sale considerations stands substantiated.

The Respondent further submits that Supreme Court Judgment in the matter of Kailash Nath Associates v. Delhi Development Authority & Anr [CivilAppealNo.193OF2015], is not a precedent in this case. While placing his arguments, relied upon the Hon’ble Supreme Court Judgment in Kailash Nath Associates vs Delhi Development Authority & Anr [Civil Appeal No.193 OF 2015], however, the Hon’ble NCLAT in the matter of Saboo Tor (supra) , where the same ruling was pressed into service by the applicant in that case, has disregarded the said ruling, based on facts of the case, and held that, “forfeiture has no nexus with any consequential benefit gained/or loss suffered by the Respondent”.

Further, the Respondent humbly submits that the said judgement is clearly distinguishable and will not apply in the instant case for the reasons mentioned below:

In Kailash Nath Associates, the DDA had realised much higher amount in the subsequent auction of the same asset (Refer para 42 of the Order), however, in the instant case, the realisation in the next action was Rs. 23.33 Crs. (@pg 7 of the Reply Affidavit], which was Rs. 1.43 Crs. lower than the bid placed by the Applicant herein. Clearly, the next auction was adversely impacted. besides the present value loss of an in determinable amount, caused in the liquidation proceedings. It may be noted that the auction in which the Applicant participated was held on 30^th July, 2020, and the next (successful auction) happened on 5^th October, 2020.

In any case, the Respondent humbly submits that section 238 of the Insolvency and Bankruptcy Code, 2016 has an overriding effect over other laws, as the same reads as follows:

Heard the Ld. Counsel appearing for both the parties and perused the records.

Issue that arises for consideration is whether forfeiture of EMD by liquidator is bad in law?

For deciding the issue framed above, we may refer to the following factual position on record.

2nd proviso to Clause 1(12) under Schedule I of the Liquidation Process Regulations, 2016 after amendment on25^th July, 2019 stands as:

Whereas, prior to this amendment, period to make payment was 15 days.

According to Ld. Sr. Counsel for Liquidator, amendment as mentioned above is not applicable in case of the Applicant as Liquidation Process of the Corporate Debtor commenced on 17^th October, 2017, much prior to the date of Amendment on 25^th July, 2019. Hence, the contentions of the Applicant that the Applicant ought to have been provided ninety days’ time for payment in accordance with the amendment do not stand any ground.

Ld. Sr. Counsel for liquidator while laying emphasis on his argument has also relied on a circular dated 26-08-2019,

Now while examining the plea regarding period of 90 days for deposit of balance amount of consideration and effect of circular referred above, in the first instance we seek to place reliance on an order passed by Hon’ble NCLT New Delhi, in Company Appeal (AT) (Insolvency) No. 532 of 2022, Potens Transmissions & Power Pvt. Ltd Versus Gian Chand Narang has held:

Therefore, there is no doubt period of 90 days to make balance payment is mandatory and not left to the discretion of liquidator while laying down terms and conditions of auction notice.

Now, with a view to analyse argument of validity of circular, we have gone through:

Analysing the above position, we are of the view there is no power to issue such circular under Section 196 of IBC 2016.

Now, adverting to the plea of the Ld. Sr. Counsel appearing for the Respondent who has placed reliance on an order passed by the NCLT Ahmedabad Bench while arguing on the aspect when the amended regulation will apply. It is an admitted position that after the amendment of 25.07.2019, the period of 15 (fifteen) days that was prior to this amendment, was changed to 90(ninety) days. Probably, the law makers were of the view that 15 days period is too short to provide the balance sale consideration and therefore it was enlarged to 90 days by virtue of this amendment.

It is significant to note, Schedule I of the Insolvency and Bankruptcy Board of India (Liquidation Process Regulations), 2016 i.e., Mode of Sale deals with sale through auction by liquidator in the manner as specified therein. Thus, providing for balance sale consideration within 90 days from the date of demand, is the obligation created by law after amendment on 25.07.2019. Admittedly, in the present case, EOI was issued by the liquidator on 08.07.2020, i.e. after the date of amendment of period for payment of balance sale consideration to 90 days. In the EOI issued on 08.07.2020, the period was mentioned to be 15 days by the liquidator, whereas applicant sought extension up to 90 days from the date of demand in terms of the amendment dated 25.07.2019. Therefore, we are of the considered view that the liquidator was required to issue EOI in terms of the amendment that was in place on the date of issuance of EOI, thereby providing 90 days for payment of balance sale consideration from the date of demand.

Notwithstanding the fact, liquidation order was passed prior to this amendment, there is no provision for providing any period for payment of EOI at the time of passing the order of liquidation by Adjudicating Authority. It is only in the EOI, this period is/was required to be provided in terms of Schedule I under Regulation 33 of Insolvency and Bankruptcy Board of India Liquidation Process Regulations), 2016.

We, on the basis of law laid down, as referred above, hold that the circular dated 26.08.2019 as non-est in law. We therefore, with utmost regard to the order passed by the NCLT Ahmedabad Bench, are of the view, that the liquidator, after the amendment was required to grant 90 days for making payment of balance sale consideration in the EOI issued by him on 08.07.2020 and by not doing so in accordance 2nd proviso to Clause 1(12) under Schedule I of the Liquidation Process Regulations, 2016 after amendment on 25^th July, 2019 and subsequently forfeiting the EMD, has acted contrary to law.

In view of the above position, it is held that forfeiture of EMD by liquidator is contrary to law and the same is, therefore, liable to be set aside. We accordingly allow the present application by setting aside forfeiture of EMD and direct the liquidator: -

a. to refund the amount of EMD forfeited by him within 30 days the date of this order with an interest @ 4% from forfeiture date, failing which, liquidator will be liable to pay the forfeiture amount of EMD along with an interest of 7% till the actual payment is made to the applicant.

With these observations, the application is disposed of accordingly.