NCLAT Sets Aside NCLT Order, Upholds Auction Sale Confirmed Before CIRP, Says Moratorium Not Applicable

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has recently set aside an order of the National Company Law Tribunal (NCLT), Kolkata, which had declared the confirmation of an auction sale and the sale certificate in respect of the corporate debtor's share in a mortgaged property as null and void, holding that the same had been issued after commencement of the corporate insolvency resolution process (CIRP) and during the moratorium.

The appellate tribunal held that since the sale had already been confirmed before the CIRP began, the moratorium under the Insolvency and Bankruptcy Code (IBC) did not affect the transaction, and the later issuance of the sale certificate did not postpone the passing of title.

The tribunal allowed appeals filed by IDFC First Bank Ltd. and Quest Queen Vista LLP against the NCLT order declaring void the confirmation of sale and the sale certificate in respect of the corporate debtor's 1/6th share in the mortgaged immovable property.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra observed,

“The subject properties having already been sold and sale confirmation has been made in favour of the Auction Purchaser on 20.11.2023, i.e. much before commencement of the CIRP on 01.01.2024, moratorium had no effect on the sale having already become absolute. The order dated 24.04.2024 passed by Adjudicating Authority is unsustainable.”

Background

IDFC First Bank Ltd. had sanctioned a term loan of Rs. 25 crore to Monotona Tyres Ltd. Jai Gokul Towers Private Limited, the corporate debtor, stood as one of the guarantors for the facility and had mortgaged its 1/6th share in an immovable property as security.

A consent decree was later passed by the Bombay High Court in favour of the bank. The execution proceedings were thereafter transferred to the Debt Recovery Tribunal (DRT), Mumbai, which issued a Recovery Certificate on February 19, 2021.

Pursuant to the recovery proceedings, the Recovery Officer issued a sale proclamation on September 8, 2023. The property was put to auction on October 11, 2023, where Quest Queen Vista LLP was declared the successful bidder. After the bidder deposited the full sale consideration, the Recovery Officer confirmed the sale on November 20, 2023, and directed issuance of ITCP-18 and ITCP-20 in favour of the auction purchaser.

The sale certificate, however, could not be issued immediately. An interim order of the Calcutta High Court restrained its issuance, and the Recovery Officer kept the process in abeyance. Once the interim order was recalled, the sale certificate came to be issued on March 14, 2024.

In the meantime, the corporate insolvency resolution process against the corporate debtor had already been admitted on January 1, 2024, resulting in the moratorium under Section 14 of the Insolvency and Bankruptcy Code coming into force.

The resolution professional then moved the NCLT, seeking a declaration that the confirmation of sale as well as the sale certificate were invalid, on the ground that the certificate had been issued after the commencement of CIRP and during the subsistence of the moratorium.

Accepting the plea, the NCLT held that the confirmation of sale and the sale certificate violated the moratorium and were therefore void and directed that the corporate debtor's share in the property be restored to the Resolution Professional.

Findings of the Appellate Tribunal

The appellate tribunal examined Rule 63 of the Second Schedule to the Income-tax Act, which applies to recovery proceedings under the Recovery of Debts and Bankruptcy Act, and noted that once the Recovery Officer confirms the sale and no application to set aside the sale is pending, the sale becomes absolute on the date of confirmation.

Relying on the Supreme Court decision in B. Arvind Kumar vs Government of India, the tribunal held that when a sale is confirmed in a public auction conducted under statutory authority, title vests in the purchaser upon confirmation of sale and the sale certificate only evidences the title already acquired.

The tribunal also relied on State of Punjab vs Ferrous Alloy Forgings Pvt. Ltd. and Municipal Corporation of Delhi vs Pramod Kumar Gupta, to reiterate that issuance of a sale certificate is only a formal declaration of a completed sale and does not create title.

The bench observed,

“It is clear that on confirmation of sale on 20.11.2023, title passed to the auction purchaser, and issuance of sale certificate, which was kept in abeyance on account of the interim order passed by the Calcutta High Court, cannot postpone the passing of the title on the date of confirmation of the sale, i.e. 20.11.2023.”

The tribunal further held that the NCLT erred in relying on Indian Overseas Bank vs RCM Infrastructure Ltd., noting that the said judgment concerned the SARFAESI Rules, whereas the present case arose out of recovery proceedings governed by the statutory scheme under the Income-tax Act.

Holding that the sale had become absolute prior to commencement of CIRP, the appellate tribunal set aside the NCLT order dated April 24, 2024, and allowed the appeals.