Liquidator's Sale Of Corporate Debtor's Shell Entity Valid After Creditor Consultation: NCLAT New Delhi

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 14 June held that a liquidator can sell the shell legal entity of a corporate debtor through public auction during liquidation after consulting creditors, where all assets of the corporate debtor have already been realised and dissolution is the only remaining option.

Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha upheld the sale of Abhijeet MADC Nagpur Energy Pvt. Ltd.'s legal entity, holding that Maharashtra Airport Development Company (MADC) could not challenge the sale when dissolution was the only alternative after the sale of all assets. The Bench observed:

“Therefore, in our considered opinion, if liquidator after consultation with the creditors has also sold shell legal entity of the CD by public auction the same could not be questioned, as otherwise the fate of the CD was not more than worth dissolution after sale of all its assets.”

The appeals were filed by MADC against orders passed by the Mumbai Bench of the National Company Law Tribunal (NCLT). The respondent Vinod Kumar Kothari was the liquidator of the Corporate Debtor, Abhijeet MADC Nagpur Energy Pvt. Ltd. (AMNEPL).

MADC, a government company incorporated in 2002, was entrusted with developing airport projects across Maharashtra, including the Multi-modal International Cargo Hub and Airport at Nagpur (MIHAN). To ensure uninterrupted power supply for the project, MADC floated a tender in 2007 for setting up a coal-based thermal power plant.

Abhijeet Infrastructure Ltd. was selected as the successful bidder, following which AMNEPL was incorporated as a joint venture company, with MADC holding 26% equity and the Abhijeet Group holding the remaining 74%.

A concession agreement dated 7 November 2007 granted AMNEPL exclusive rights to design, finance, construct, operate and maintain the power plant for 33 years, after which the project was to revert to MADC. Lease deeds were subsequently executed in 2008 and 2010 for land located inside and outside the MIHAN Special Economic Zone (SEZ). A shareholders' agreement also secured MADC's rights in the joint venture.

AMNEPL was admitted into the Corporate Insolvency Resolution Process (CIRP) in October 2017, and the NCLT ordered its liquidation in August 2018. During liquidation, the liquidator sold the undertaking of the Corporate Debtor through a slump sale in October 2020 and subsequently sold the legal entity of AMNEPL in December 2020 to the auction purchaser.

After issuing sale certificates, the liquidator distributed the sale proceeds among creditors in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC), which provides the order of priority for distribution of liquidation proceeds. MADC challenged the sale before the NCLT. After the NCLT disposed of the application, MADC approached the NCLAT.

Before the NCLAT, MADC argued that it had only granted an exclusive licence to the Corporate Debtor to operate the project on a Build, Operate and Transfer (BOT) basis and that the project was required to be transferred back to MADC upon expiry of the concession period. It contended that leasehold land and BOT rights could not have been sold to a third party without its consent. It further submitted that the NCLT, while initiating CIRP, had specifically protected its rights and that the liquidator could not transfer the project rights in a manner that affected its interests.

The liquidator argued that the sale of the undertaking did not prejudice MADC's rights under the concession agreement, lease deeds or sale agreement. It was submitted that only the leasehold rights vested with the Corporate Debtor were sold, and these rights formed part of the liquidation estate.

The auction purchaser contended that MADC's objections were based on its 26% equity shareholding. It argued that under Section 53 of the IBC, equity shareholders fall at the bottom of the distribution waterfall and cannot challenge the sale merely on the basis of their shareholding after distribution of liquidation proceeds.

The Tribunal held that leasehold rights and BOT rights, although not ownership rights, constitute “assets” under the IBC and can form part of the liquidation estate of a corporate debtor. It observed:

“…we do not find force in the submissions of Ld. Counsel for the appellant in terms that leasehold rights occurred in favour of the CD for 33 years in the land owned by the appellant, could not be sold by auction in liquidation of the CD. In our considered opinion all those rights pertaining to the leasehold lands and project which were meant to be enjoyed by the CD are/were the assets of the CD and may legally be included in the liquidation estate of the CD and could also be sold by auction.”

The Bench also clarified that ownership of the land continued to remain with MADC and that only the leasehold and operational rights of the Corporate Debtor were transferred through the auction. It further held that MADC's rights under the BOT agreement remained protected and that the auction purchaser would have to transfer the facility back to MADC upon expiry of the concession period.

Accordingly, the NCLAT dismissed both appeals filed by MADC.

For Appellants: Advocates Tishampati Sen, Santosh Kumar, Manoj Mishra, Rupesh Kumar, Mukul Kulhari & Anurag Anand

For Respondents: Senior Advocate Arijit Prasad with Advocate Aman Malik For R2