Auction Purchaser Not Liable For Corporate Debtor's Pre-CIRP Dues: NCLT Allahabad

The Allahabad bench of the National Company Law Tribunal (NCLT) has ruled that pre-CIRP dues of a company cannot be recovered from an auction purchaser merely because the purchaser acquired its leasehold property through liquidation on an “as is where is” basis.

The bench comprising Judicial Member Praveen Gupta and Technical Member Ashish Verma observed, “In view of the above, the mere “as is where is” condition or the subsequent transfer of the leasehold interest cannot convert the pre-CIRP liability of the Corporate Debtor into an independent personal liability of the Applicant. The pre-CIRP dues of the Corporate Debtor were required to be dealt with through the liquidation process in accordance with Section 53 of the Code."

It further held that such dues had to be dealt with through the liquidation process under Section 53 of the Insolvency and Bankruptcy Code, particularly since UPSIDA had already lodged its claim in the liquidation proceedings.

The ruling came on a plea by Positron Biogenics Private Limited, which had purchased leasehold properties of L.M.L. Limited in a liquidation sale. Uttar Pradesh State Industrial Development Authority (UPSIDA) had demanded Rs 82.53 lakh from Positron before completing the transfer of the property.

The demand comprised maintenance charges, interest on maintenance charges, lease rent and GST on lease rent. The maintenance charges related to the period from July 2000 to March 2009, when L.M.L. was the lessee.

Positron disputed the liability and maintained that the dues were those of L.M.L. and had to be dealt with through the distribution mechanism under Section 53 of the IBC. It paid the amount under protest because the pending transfer was holding up its pharmaceutical project and approached the tribunal seeking a refund.

UPSIDA argued that the liquidation sale was on an “as is where is”, “as is what is”, “whatever there is” and “no recourse” basis. It relied on the lease covenants, as well as an affidavit and indemnity bond furnished by Positron, to contend that the purchaser was required to clear the past dues.

The tribunal rejected this position. It found that while the auction documents required the purchaser to conduct due diligence regarding claims, rights and dues affecting the property, they did not expressly make Positron liable for L.M.L.'s pre-CIRP debt.

The tribunal held that what Positron acquired was L.M.L.'s leasehold interest in the property and not, in express terms, its pre-CIRP liabilities. It also found that the affidavit and indemnity bond could not be treated as an independent undertaking to pay those liabilities, as they were furnished in the context of the payment made under protest.

UPSIDA had already lodged a claim of ₹2.77 crore against L.M.L. in the insolvency proceedings, and the claim had been admitted in full. The tribunal found that the liability had accrued against L.M.L. while it was the lessee and could not, merely because of the subsequent liquidation sale, be treated as a liability originally incurred by Positron.

Section 53 of the IBC sets out the “waterfall mechanism” for distributing money realised from the liquidation estate among different categories of creditors. The tribunal held that UPSIDA's admitted dues had to be dealt with through this mechanism rather than recovered separately from the auction purchaser.

The tribunal relied on the NCLAT's ruling in Bhatpara Municipality Through its Chairperson v. Nicco Eastern Pvt. Ltd., which held that outstanding dues relating to the period before confirmation of a liquidation sale are to be dealt with under Section 53 and cannot be recovered from the auction purchaser.

The tribunal accordingly held that Positron could not be made to bear the ₹82.53 lakh in pre-CIRP dues merely because it had acquired L.M.L.'s leasehold interest. It directed UPSIDA to refund ₹82,53,013.53 to Positron.

At the same time, UPSIDA remained entitled to receive its admitted claim from the liquidation estate in accordance with Section 53. The application was accordingly allowed.