Auction Of Corporate Debtor's Assets Under Depositors Act During IBC Moratorium Void: NCLT Indore

On 8 April, the Indore Bench of the National Company Law Tribunal (NCLT) set aside the auction of Suvidha Farming Ltd.'s assets conducted under the Chhattisgarh Protection of Interest of Depositors Act, 2005, holding that the sale was void as it took place during the moratorium period under the Insolvency and Bankruptcy Code (IBC), 2016.

A Bench of Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta directed restoration of possession of the property to the Liquidator. It held:

“The statutory mandate of moratorium operates with full force notwithstanding the stage or nature of proceedings, and any action taken in violation thereof cannot be legitimized on the ground of finality of such order or absence of challenge before any higher forum.”

The proceedings arose from an application filed by CMA Shaikh Nafis Anjum, the Liquidator of Suvidha Farming, challenging the auction conducted by the Competent Authority under the Depositors Act pursuant to an order of the Special Court, Dhamtari dated 6 March 2021.

The Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor commenced on 21 September 2020, and an Interim Resolution Professional was appointed. During the CIRP, the Liquidator alleged that the Respondents issued an auction notice dated 10 August 2021 in respect of the Corporate Debtor's properties situated at Khasra Nos. 1032, 1038 and 1039 at Dhamtari.

The Liquidator filed an application before the NCLT seeking cancellation of the auction on the ground that it violated the moratorium under Section 14 of the IBC.

On 9 December 2021, the NCLT directed the Respondents not to proceed with the sale of the Corporate Debtor's properties during the subsistence of CIRP. Thereafter, the Corporate Debtor was admitted into liquidation on 16 December 2021 and the Liquidator issued communications seeking return of possession of the subject property, which formed part of the liquidation estate.

The Respondents, however, informed the Liquidator that the property had already been sold on 18 August 2021 pursuant to the order of the competent authority under the Chhattisgarh Protection of Interest of Depositors Act, 2005, and also stated that proceedings had been initiated much before the commencement of CIRP. They further contended that no appeal had been filed against the Special Court order dated 6 March 2021 and that it had attained finality, and that the auction proceeds had been kept in abeyance in compliance with NCLT directions.

The NCLT rejected these submissions and held that the CIRP had already commenced prior to the auction and the moratorium under Section 14 was in force, which bars transfer, alienation or creation of any interest in the assets of the Corporate Debtor. It held that any action taken in violation of the moratorium cannot be sustained in law, observing:

“Therefore, any action taken in furtherance of such proceedings, including auction or transfer of assets of the Corporate Debtor during the subsistence of moratorium, cannot be sustained in law and effect of such transaction in terms of section 14 IBC, 2016 is null and void”

The Tribunal further noted that no sale certificate had been issued, registration had not been completed, and possession continued to remain with the Corporate Debtor, showing that the auction had not attained finality and no rights had been created in favour of the auction purchaser.

It also rejected the argument based on proceedings under the Depositors Act, holding that the IBC has an overriding effect and no parallel proceedings affecting the assets of the Corporate Debtor can continue once CIRP is initiated. The Bench observed:

“Once CIRP is initiated, the assets of the Corporate Debtor come under the control and custody of the Resolution Professional / Liquidator, and no parallel proceedings affecting such assets can be permitted to continue”

Accordingly, the NCLT declared the auction null and void and directed restoration of possession of the property to the Liquidator.

For Applicants: Advocate Natasha Dhruman Shah

For Respondents: Advocate Meena Chaphekar