90-day period under IBBI Directory of Regulations Regulation 32A (liquidation process), non-compulsory: NCLT Hyderabad

The NCLT Hyderabad Bench composed of Dr. N. Venkata Ramakrishna Badarinath, Judicial Member and Veera Brahma Rao Arekapudi, Technical Member in Ekambareswara Rao Manne v. Mr. Gonugunta Madhusudhan Raodenied the request filed by the plaintiff, who was a member of the stakeholder consultation committee, filed u/s 60(5) of the IBC r/w rule 11, 13 and 32 of the NCLT rules in which he challenged the sale of the company Debtor by the liquidator on the grounds that the same was done at a reduced reserve price and after the expiry of the 90-day period, as provided for in Regulation 32A of the IBBI Regulation (process of liquidation), 2016, holding the 90-day period to be ‘directory’ and not ‘mandatory’.

The debtor company – Servomax India Private Ltd. was ordered to be liquidated by the NCLT on 04.02.2019, after which the liquidator was appointed. The Stakeholder Consultation Committee, at its first meeting, unanimously agreed to sell the debtor company as a going concern, in which the plaintiff also participated.

15 notices of sale were unsuccessful. Thus, the Liquidator took a 16and notice at a reduced reserve price, which came to fruition on 15.07.2021.

On 27.07.2019, Regulation 32A entered into force, clause 4 of which provided that the liquidation must be carried out within 90 days from the date of commencement of the liquidation.

On 26.08.2019, IBBI issued circular no. IBBI/LIQ/024/2019 stating that Regulation 32A will only apply prospectively and only to liquidations that commenced on or after the 25thand July 2019.

The question that arose for consideration was- Was the sale of the debtor company as a going concern in this case contrary to IBBI Regulation 32A (liquidation process)? If so, is the disputed sale subject to cancellation?

The plaintiff relied on the NCLAT judgment in the Sunderesh Bhat case and argued that IBBI Rule 32A should be treated as an open procedural law provision, which in no way states that it will not apply. to the current liquidation. It was argued that since in the present case the sale is made after 90 days from the start date of the liquidation, it violates Rule 32A of the Code and is therefore subject to reversal. In this regard, the plaintiff relied on the cases of Mr. Sundaresh Bhat Liquidator of ABG Shipyard Limited, M/s Sandoor Micro Circutes Ltd. v. Commissioner of Central Excise Belagam, Bengal Iron Corporation c. CTO and Madras Bar Association v. Union of India.

Plaintiff also argued that the Circular issued by IBBI which provided for the prospective application of Rule 32A was wrong in law on the ground that IBBI’s power under Section 196(1)(p) or ( t) cannot be extended to interpret the provisions made and that being a simple circular, it cannot have the force of law or sub-legislation.

Counsel for the liquidator argued that the intent of the legislation reflects the fact that the 90-day period for the sale of the debtor company as a going concern is only indicative and not mandatory. We relied on the case of Swiss Ribbons Pvt. ltd. vs. Union of India and it was argued that the time limit provided by IBBI Regulation 32A(4) does not meet the objectives of the IBC.

NCLT Decision

The Court observed that the Claimant was also a member of the Stakeholder Consultation Committee which unanimously accepted the sale of the Debtor Company as a going concern, although he was made aware of the 90-day deadline. by the Liquidator. Consequently, the Applicant is now estopped by his own conduct and his acquiescence in invoking the jurisdiction of this Tribunal. Thus, it is its very locus standi which is at stake.

The Court observed that the liquidation process started before the introduction of Regulation 32A, i.e. on 04.02.2019 and by the IBBI circular of 26and August 2019, said settlement only had prospective effect. Thus, the present liquidation would be exempt. She also relied on the Swiss Ribbons case and held that “shall” under Regulation 32A(4) must be read as “may” in order to achieve the purpose of the IBC – to maintain the business in business and protect it against liquidation.

Even in the case of Sundaresh, the NCLAT found that Rule 32A is only directive and not mandatory.

Reduced reserve price

Schedule I, Clause 4 of the IBBI Liquidation Process Regulations 2016 allows the liquidator to reduce the reserve price by up to 25% in the event of an auction failure. In this case, the liquidator only reduced the reserve price by 8%.

The Court observed that when an auction fails at a particular reserve price, it must be appropriately modified, otherwise there will be no new bids.

Thus, in order to sell the Debtor Company as a going concern, it was necessary to reduce the reserve price. Moreover, since the Claimant was part of the committee which agreed to reduce the reserve price, he cannot contest it now. An objection to this effect should have been raised by the applicant before the stakeholder consultation committee.

The Court therefore refused to cancel the sale and dismissed the request filed by the Applicant.

Claimant’s advice: Mr. VK Sajith, lawyer

Counsel for the Respondent: Mr. S. Ravi, Lead Counsel for the Liquidator

Comments are closed.