Imp. Rulings - Section 36(4)(a)(iii); Provident fund, the Pension fund and the Gratuity fund.

 Imp. Rulings - Section 36(4)(a)(iii); Provident fund, the Pension fund and the Gratuity fund.

Index;

1. NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022]

2. NCLAT (30.09.2022) in Mr. B. Parameshwara Udpa RP of M/s. Easun Reyrolle Ltd. Vs. Assistant PF Commissioner EPFO [Company Appeal (AT) (CH) (Ins) No. 231 of 2021]

3. Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ]

4. NCLAT (11.03.2022) in Sikander Singh Jamuwal Vs. Vinay Talwar Resolution Professional. (Company Appeal(AT) (Ins)No. 483 of 2019)

5. NCLAT (11.02.2020) in Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019 ]

6. NCLAT (19.12.2019) in Regional Provident Fund Commissioner-I, Ahmedabad  Vs. Ramchandra D. Choudhary [Company Appeal (AT) (Insolvency) Nos. 354, 364, 404 & 1001 of 2019]

7. NCLAT (19.12.2019) in Tourism Finance Corporation of India Ltd. & Ors vs Rainbow Papers Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 354, 364, 404 & 1001  of 2019]

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Blogger’s Comments; There is a conflict between section 30(2)(e) & section 238. The Section 11 of the 1952 Act provides for priority of payment of contributions over other debts, which is in conflict with the arrangements proposed for distribution of funds during Resolution & Liquidation of the Company in the Code. Resolution of the CD can not be equated with recovery of dues of various stakeholders. 

 

As far Section 36(4)(a)(iii) of the Code, is concerned, Hon’ble Supreme Court in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ] held that;

• # 14(ii) considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.

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1. NCLAT (21.10.2022) in Jet Aircraft Maintenance Engineers Welfare Association Vs. Ashish Chhawchharia RP of Jet Airways (India) Ltd. & Ors.  [Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022] held that;

• # 72. Our answer to Question II and III is as follows:

(i) The workmen and employees are entitled to receive the amount of provident fund and gratuity in full since they are not part of the liquidation estate under Section 36(4)(b)(iii).

(ii) The workmen are entitled to receive their dues from the Corporate Debtor for period of 24 months as per provision of Section 53(1)(b) at least to minimum liquidation value envisaged under Section 30(2)(b) read with Section 53(1).

• # 80. As observed above, in admitted claim of workmen provident fund, gratuity and leave encashment was included, and payment proposed in plan partly satisfy above dues also. The workmen are entitled to full payment of provident fund and gratuity, hence, the balance of above dues are to be paid by the Successful Resolution Applicant, to satisfy statutory obligations. Non-payment of full provident fund and gratuity shall lead to violation of Section 30(2)(e), hence, to save the plan the above payments have to be made.

• # 119. The above judgment lays down that any amount due from employer appearing in sub-section (2) of Section 11 also covers the amount determined under Section 14B and there cannot be any quarrel to the preposition as laid down by the Hon’ble Supreme Court in the above case. The priority for payment of debt under Section 11 of the 1952 Act has to be looked into in view of the mechanism which is specifically provided under Section 53(1) of the Code. We have already dealt the provision of Section 36(4)(a)(iii) of the Code and held that provident fund dues are not subject to distribution under Section 53(1) of the Code. The issue is fully covered by three member bench judgment of this Tribunal in “Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd. & Ors.” (Supra). In view of foregoing discussion, we hold that provident fund dues were entitled to be paid in full. In view of the judgment of Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others” (Supra), the claim of Appellant was to be satisfied in full, otherwise breach of provision of Section 30(2)(e) would have occurred. We, thus, are inclined to issue direction to the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.

[ Link Synopsis ]

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2. NCLAT (30.09.2022) in Mr. B. Parameshwara Udpa RP of M/s. Easun Reyrolle Ltd. Vs. Assistant PF Commissioner EPFO [Company Appeal (AT) (CH) (Ins) No. 231 of 2021] held that;

• The `Provident Fund’ referred to Section 36(4)(a)(iii) of the I & B Code, 2016 applies to `Provident Fund Accounts’, maintained as per Section 16-A of the `Employees Provident Fund’ & `Miscellaneous Provisions Act, 1952’.

• If we read Section 14(1)(a), it can be inferred that there shall be complete embargo to continue any proceeding against the ‘Corporate Debtor’ by any `Authority’ till the ‘Corporate Insolvency Resolution Process’ is completed and `Moratorium’ is lifted by the ‘Adjudicating Authority’ or it result into `Liquidation’ on failure of the ‘Corporate Insolvency Resolution Process’.

• Thus, it can be presumed that `Attachment of Bank Account’ of the `Corporate Debtor’ by `EPFO’ cannot be continued when `Moratorium’ is declared under I & B Code, 2016 and proceedings are required to be kept in abeyance till lifting of moratorium.

• It is therefore evident that amount deducted for `Provident Fund’, purely belongs to an `Employee’ and not to be treated as an `Asset’ of the ‘Corporate Debtor’ and cannot be touched by an `Interim Resolution Professional’/`Resolution Professional’/ `Liquidator’ as the case may be.

• Therefore, it can be concluded that `Resolution Professional’ is right in seeking lifting of `Attachment Orders’ on `Bank Account’ of ‘Corporate Debtor’ and the ‘Adjudicating Authority’ should have done accordingly.

• The Provident Fund referred to Section 36(4)(a)(iii) I & B Code, 2016 applies to Provident Fund Accounts maintained as per Section 16-A of the Employees Provident Fund & Miscellaneous Provisions Act, 1952. 

• The Exclusion from the Liquidation Estate Assets as well as from Recovery in Liquidation, as stipulated in Section 36(4)(a)(iii) of I&B Code, 2016, applies in respect of sums due to any workman or employee from the Provident Fund, when the Corporate Debtor has maintained an Establishment fund in terms of Section 16-A of the Employees Provident Fund, Miscellaneous Provisions Act,1952.

• This `Tribunal’ gave clear verdict that where no fund is created by a Company, the `Liquidator’ should not have been directed to make provision for payment of Gratuity to the Workmen. 

• Based on this, the only inference which can be drawn is that Pension Fund, Gratuity Fund and Provident Fund cannot be utilised, attached or distributed by the liquidator, to satisfy the claim of other creditors. 

• Section 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate.

• In a case, where no fund is created by a company, in violation of the Statutory provision the Section 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate. 

• Therefore, the `Resolution Professional’ is not duty bound to make adequate provisions for ‘Provident Fund’ when the `Corporate Debtor’ did not have separate `Provident Fund Account’. 

• Further, in terms of Regulation 13, the ‘Resolution Professional’ is mandated to verify the `Claim’ and subsequently determine the amount of `Claim’ as per Regulation. 14. It is therefore, necessary that any person having `Claim’ over the ‘Corporate Debtor’ has to prefer `Claim’ as stipulated in such regulations.

[ Link Synopsis ]

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3. Supreme Court (19.04.2022) in Sunil Kumar Jain and others Vs. Sundaresh Bhatt and others.  [Civil Appeal  No. 5910 Of 2019 ] held that;

• The wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP.

• In such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern, shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code;

• Considering Section 36(4) of the IB code and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.

[ Link Synopsis ]

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4. NCLAT (11.03.2022) in Sikander Singh Jamuwal Vs. Vinay Talwar Resolution Professional. (Company Appeal(AT) (Ins)No. 483 of 2019) held that;

• However, as no provisions of the Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’

[ Link Synopsis ]

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5. NCLAT (11.02.2020) in Mr Savan Godiwala Vs. Mr. Apalla Siva Kumar [Company Appeal (AT) (Insolvency) No. 1229 of 2019 ] held that;

• Sec 36(2) of the I B Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. 

• In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate.

• In this case, we are not concerned with determination about the entitlement of Gratuity by the employees of the ‘Corporate Debtor‘. Payment of Gratuity to employees depends on their entitlement of Gratuity, subject to the fulfilment of the conditions laid down under the payment of Gratuity Act, 1972 and also on the availability of the fund in this regard. 

• The annual cash flow statement for the ending 31st March, 2017 show that Gratuity Fund was proposed. However, it is noticed that no such fund was created. In the circumstances, the Liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement. 

[ Link Synopsis ]

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6. NCLAT (19.12.2019) in Regional Provident Fund Commissioner-I, Ahmedabad  Vs. Ramchandra D. Choudhary [Company Appeal (AT) (Insolvency) Nos. 354, 364, 404 & 1001 of 2019] held that; - 

• However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section  36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise.

• Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions. No costs.

[ Link Synopsis ]

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7. NCLAT (19.12.2019) in Tourism Finance Corporation of India Ltd. & Ors vs Rainbow Papers Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 354, 364, 404 & 1001  of 2019] held that;.

• # 44. However, as no provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ is in conflict with any of the provisions of the ‘I&B Code’ and, on the other hand, in terms of Section 36 (4) (iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the ‘Corporate Debtor’, there being specific provisions, the application of Section 238 of the ‘I&B Code’ does not arise. 

• # 45. Therefore, we direct the ‘Successful Resolution Applicant’- 2nd Respondent (‘Kushal Limited’) to release full provident fund and interest thereof in terms of the provisions of the ‘Employees Provident Funds and Miscellaneous Provision Act, 1952’ immediately, as it does not include as an asset of the ‘Corporate Debtor’. The impugned order dated 27th February, 2019 approving the ‘Resolution Plan’ stands modified to the extent above. The appeal preferred by ‘Regional Provident Fund Commissioner’ is allowed with aforesaid observations and directions.

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Let’s look into the issues from a different angle.

Claims of EPFO have the following components;

1. Employee’s contribution (deducted from the wages of the employee)

2. Employer’s contribution.

3. Interest & penalties

a. Employee’s contribution towards PF (deducted from the wages of the employee)

The amount deducted from the salary of the workmen & employees for onward remittance to EPFO for credit to the PF account of the concerned workman or employee, are the trust funds in the hands of the employer (CD). As per section 18(1)(f) of the Code, IRP is required to take control and custody of any asset over which the CD has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets, with the exceptions as mentioned in the explanation in the section;

• Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

(b) assets of any Indian or foreign subsidiary of the corporate debtor; and

(c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

In my opinion IRP/RP cannot take possession of the amount deducted from the salary of workmen & employees, lying with CD, pending onward remittance to EPFO. The situation is similar to Section 36(4), which provides for the details of assets which do not form the part of the Liquidation Estate, and are required to be paid off prior the distribution as per Section 53. Similarly, Employee’s contribution towards PF, should be paid prior to distribution under resolution plan.

b & c. Employer’s contribution with Interest & penalties

Let’s look into the provisions of the Code & E.P.F & M.P. Act, 1952.

I & B Code, 2016

# Section 30. Submission of resolution plan. -

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

E.P.F & M.P. Act, 1952

# Section 11. Priority of payment of contributions over other debts.—

(1). Where any employer is adjudicated insolvent or, being a company, an order for winding up is made, the amount due. . . . . . . . .

(2) Without prejudice to the provisions of sub-section (1), if any amount is due from an employer whether in respect of the employee's contribution (deducted from the wages of the employee) or the. the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts.

Conjoint reading of the above two provisions, will reveal that provision of payment of Employer’s contribution with Interest & penalties is required to be made in priority as secured creditor in the resolution plan.

Registration of Charge on the Assets of CD;

SARFAESI - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

# Section 26B. Registration by secured creditors and other creditors.—(1) The Central Government may by notification, extend the provisions of Chapter IV relating to Central Registry to all creditors other than secured creditors as defined in clause (zd) of sub-section (1) of section 2, for creation, modification or satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower. (2) From the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed.

(3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under this Act.

(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.

(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed.

# Section 26E. Priority to secured creditors.—Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

Explanation.—For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.

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M/s. Lucky Holding Pvt. Ltd. Vs. Nitin Jain (Liquidator of PSL Ltd.) - The Liquidator cannot withhold the amount for an indefinite period till proceeding under PMLA Act, 2002 is concluded before the Hon’ble Delhi High Court.

NCLT Ahmedabad (02.11.2022) in M/s. Lucky Holding Pvt. Ltd. Vs. Nitin Jain (Liquidator of PSL Ltd.) [IA 240 of 2022 In CP(IB) 37 of 2017 ] held that;

• The stark facts on record are that the liquidator is not in a position to give the custody of assets of the corporate debtor to the applicant or give possession of the corporate debtor as a going concern to the applicant in spite of him being declared as a successful bidder and the applicant being deposited a sum of Rs. 30 crores with the liquidator. 

• The Liquidator cannot withhold the amount for an indefinite period till proceeding under PMLA Act, 2002 is concluded before the Hon’ble Delhi High Court.

Excerpts of the order;

# 1. This application under section 60(5)(C) of the Insolvency and Bankruptcy Code, 2016 (“IBC, 2016) read with Rule 11 of the National Company Law Tribunal Rules, 2016 is filed by M/s. Lucky Holdings Private Limited – Successful Auction Bidder of M/s. PSL Limited – the corporate debtor for permission to withdraw from the e-auction process being held by the respondent – the liquidator. 

 

# 2. The following facts need no elaboration as they are admitted by all parties to the proceeding of this application: 

I. The corporate debtor was admitted in Corporate Insolvency Resolution Process (“CIRP”) vide order dated 15.02.2019. One Mr. Nilesh Sharma was appointed as Interim Resolution Professional (“IRP”). Later on, he was replaced by another Insolvency Professional - Mr. Nitin Jain and he was appointed as the Resolution Professional (“RP”). 

II. On 11.09.2020, the order of liquidation of the corporate debtor was passed by this Adjudicating Authority because the RP and the CoC did not receive any resolution plan worth to be accepted. The RP was appointed as the liquidator. 

III. The process of liquidation of the corporate debtor proceeded as per the rules. On 05.01.2021, the liquidator published the sale notice for the eauction of the corporate debtor. 

IV. On 15.01.2021, the liquidator received the summons from the Enforcement Directorate (“ED”) informing him not to proceed with the sale of the assets of the corporate debtor as the ED was to attach the assets under the provisions of the Prevention of Money Laundering Act, 2002 (“PMLA Act, 2002”). 

V. The liquidator challenged the action of the ED by filing the writ petition in the Hon'ble Delhi High Court, bearing Writ Petition (Civil) No. 3261/2021. 

VI. The Hon'ble Delhi High Court allowed the writ petition vide its order dated 17.03.2021 and permitted the liquidator to proceed with the sale of the corporate debtor in accordance with the provisions of the IBC, 2016. 

VII. On 19.03.2021, the Stakeholders Consultation Committee (“SCC”) suggested the liquidator to sell the corporate debtor as a going concern, and if such sale is not possible then to sell as a slump sale or on a piecemeal basis. 

VIII. On 09.04.2021, the e-auction was held for selling the corporate debtor as a going concern. The applicant participated as one of the bidders. On 10.04.2021, the applicant was declared to be a successful bidder. 

IX. On 16.04.2021, the liquidator issued in favour of the applicant a Letter of Intent. 

X. On 23.04.2021, the applicant deposited with the liquidator amount of Rs. 30 crores as the first installment of the sale. 

XI. On 08.09.2021, this Adjudicating Authority approved the sale of the corporate debtor as a going concern. 

XII. On 05.10.2021, the applicant filed an application before this Adjudicating Authority for modification of the order confirming the sale, and it was allowed. 

XIII. On 08.10.2021, the applicant informed the liquidator that it will deposit a balance consideration of Rs. 390.5 crores plus a sum of Rs. 25 lakhs towards operational liabilities within thirty days. 

XIV. On 11.10.2021, the liquidator wrote a letter to the applicant informing it that the balance amount has to be paid within thirty days, and if it is not paid then the amount will carry interest at the rate of 12% per annum. 

 

# 3. There is some dispute in between the applicant and the liquidator as to from which date thirty days to be reckoned i.e., whether from 08.09.2021 when the order of confirming the sale was passed by this Adjudicating Authority or from 05.10.2021 whereby this Adjudicating Authority modified the order of confirmation of sale relating to some concession and relief claimed by the applicant. But the fact that remains in the record to be undisputed is that the first installment was paid in time. 

 

# 4. On 02.12.2021 when the dispute in between the liquidator and the applicant was pending as to from which date the period to be counted for purposes of the balance payment, the liquidator received the order passed by the ED whereby ED has passed an order of provisional attachment on the assets of the corporate debtor under section 5(1) of the PMLA Act, 2002 and the liquidator filed the second writ petition in Hon’ble Delhi High Court challenging the attachment order. 

 

# 5. On 08.12.2021, the applicant made an application in that writ petition requesting the Hon’ble Delhi High Court to direct the liquidator not to forfeit the EMD till the writ petition is being heard and decided on merit. The matter was also mentioned before this Adjudicating Authority. This Adjudicating Authority directed the liquidator not to disburse the amount to the creditors of the corporate debtor till the writ petition is finally decided. 

 

# 6. On 15.12.2021, the Hon’ble Single Judge of Hon'ble Delhi High Court allowed the writ petition directing for removal of the provisional attachment of the ED. 

 

# 7. On 17.12.2021, the liquidator filed before this Adjudicating Authority IA/8(AHM)2022 for directions to the applicant to deposit the balance sale consideration forthwith. 

 

# 8. On 21.12.2021, the ED challenged the order of the Hon’ble Single Judge of the Hon'ble Delhi High Court removing the attachment by filing an appeal before the Division Bench of the Hon’ble Delhi High Court. Hon’ble Division Bench passed the order directing parties to maintain the status quo. The appeal before the Hon’ble Division Bench is still pending.

 

# 9. On this background, the applicant has approached us with request to allow him to withdraw from the e-auction process and direct the liquidator to refund the EMD because the liquidator is not in a position to effect the sale and hand over possession of the assets of the corporate debtor in pursuant to the auction sale. It is also submitted that though the applicant has purchased the corporate debtor as a going concern, but, in fact, as on today the status of the corporate debtor has been changed from going concern as most of the plants of the corporate debtor are shut down. 

 

# 10. We called upon the liquidator to file the say to this application. Accordingly, the liquidator filed an affidavit in reply and opposed both prayers. 

 

# 11. The liquidator contended that the applicant has purchased the corporate debtor in e-auction as is where is basis. The applicant was well aware that proceedings under PMLA Act, 2002 were going on when the applicant took part in the bidding process. According to the liquidator, the applicant did not deposit the balance amount within the time framed and delayed the entire process. The applicant cannot be permitted to withdraw from the process on the above facts. There is no provision in the Insolvency and Bankruptcy Code, 2016 to allow such withdrawal by the successful bidder. In any event, the applicant cannot claim the EMD amount because the applicant has committed a breach of promises of the tender document by not paying the balance consideration in time. This application, being not maintainable, may be rejected. 

 

# 12. We heard the learned senior counsel Mr. Sourabh Soparkar for the applicant and learned senior counsel Mr. Rashesh Sanjanwala for the liquidator. Learned counsel Mr. Zoheb Hossain for the ED appeared after the application was reserved for order and requested to allow to make submissions. In our considered opinion, the ED is in no way concerned with the dispute in between the applicant and the liquidator which is pending before us in this application. Nonetheless, we permitted the learned counsel to submit written notes of submission. 

 

# 13. Learned senior counsel Mr. Sourabh Soparkar for the applicant submitted that the applicant participated in the bidding process in response to the sale notice dated 19.03.2021. By that time the ED has not issued provisional attachment order. The liquidator received the summons from ED on 15.01.2021. But by order dated 17.03.2021, the Hon’ble Delhi High Court allowed the liquidator to proceed with the e-auction of the corporate debtor which was completed on 10.04.2021. Learned senior counsel submitted that by that time there was no provisional attachment order passed by the ED. This fact shows that the applicant took part in the e-auction when there was no provisional attachment by the ED and the effect of summons issued by the ED to the liquidator had done away with by the order of Hon’ble Delhi High Court. Learned counsel also pointed out that the sale notice having terms and conditions is on record wherein the liquidator by reproducing the provisions of section 32A of the IBC, 2016, and by reproducing the ratio of Hon’ble Supreme Court judgment in the case of Manish Kumar vs. Union of India (Writ Petition (C) No. 26 of 2020) has given the impression to the applicant that applicant will get the custody of corporate debtor as a going concern. Learned senior counsel further submitted that as the applicant was given a clear understanding that the applicant’s rights as the purchaser would not get affected, he took part in the e-auction process. He deposited with the liquidator a sum of Rs. 30 crores. Meantime, the ED passed provisional attachment order on the assets of the corporate debtor. The liquidator filed a writ petition against the order of attachment. That writ petition was allowed. But the order of the Hon’ble Single Judge of Delhi High Court removing the attachment is a questioned in appeal before the Hon'ble Division Bench. The Hon'ble’ Division Bench passed the order to maintain the status quo. It is the say of the learned senior counsel that the applicant has purchased the corporate debtor as a going concern but during the last one year, the corporate debtor’s units and plants are closed down. Its status is now changed to a closed unit and not a unit as a going concern. The legal battle between the liquidator and ED may go on for a couple of years. In such a situation, the applicant is now not interested to proceed with the e-auction process. He may be permitted to withdraw from the e-auction and the liquidator may be directed to refund the EMD. 

 

# 14. Learned senior counsel further submitted that it is not the fault of the applicant for which the process of sale has been delayed. It is because the ED attached the assets, hence, the applicant is entitled to a refund EMD. Learned senior counsel to buttress his submissions, relied on the ruling reported in (2020) 19 SCC 241 in the case of Popatrao Vyankatrao Patil v. State of Maharashtra. 

 

# 15. As against this, learned senior counsel Mr. Rashesh Sanjanwala for the liquidator submitted that admitted facts on record would show that the applicant wants to withdraw from the e-auction process only because the matter relating to the attachment of the assets by ED is pending before the Hon’ble Delhi High Court. According to learned senior counsel, this cannot be the ground to permit withdrawal. Moreover, when the entire e-auction process is completed and the applicant has taken part therein with the knowledge that ED may attach the assets. The facts on record would show that the liquidator is making all efforts to get that attachment removed. According to learned senior counsel that, in fact, the applicant delayed the entire process of confirmation of sale by filing some application or the other. This Adjudicating Authority has already approved the e-auction. Meantime, the order of provisional attachment came to be passed. Now, the applicant cannot turn around and contend that he does not wish to pay the balance sale price. 

 

# 16. Learned senior counsel also submitted that in the proceeding before the Hon’ble Delhi High Court, the applicant had intervened and requested to permit the withdrawal from e-auction but the applicant failed and now the applicant is before this Adjudicating for the same relief. It is the submission of the learned senior counsel that this Adjudicating Authority by order dated 08.09.2021 confirmed the sale as a going concern. If this Adjudicating Authority allows the applicant to withdraw from the process then it will be amounting to review or recall its earlier order for which this Adjudicating Authority has no jurisdiction. According to learned senior counsel, the applicant now cannot be permitted to withdraw from the e-auction which is completed in all respect. This application is not maintainable. 

 

# 17. As noted above, the learned counsel for the ED appeared online and submitted the matter is reserved without him being heard in the proceeding. We again make it clear that the dispute which we seize is basically in between the applicant and the liquidator and ED has no say therein. Still, we permitted learned counsel to file written submissions but they are not filed. 

 

# 18. At the outset, we note the fact that as on today, the liquidator is not in a position to hand over the custody of the units of the corporate debtor for which the e-auction was held and the applicant has been declared as a successful bidder. The assets are under the attachment of the ED. The Hon’ble High Court vide order dated 24.12.2021 had directed parties to maintain the status quo relating to the assets till the second appeal is being disposed of. The applicant has already deposited a sum of Rs. 30 crores with the liquidator. 

 

# 19. In the case of Popatrao Vyankatrao Patil v. State of Maharashtra (supra) the Hon’ble Supreme Court dealt with similar controversy. In that case, the successful highest bidder had approached the Court with the request to refund the consideration on the ground that the contract stood frustrated. It would be useful to reproduce the facts and decisions of the Hon’ble Apex Court. It is as follows: 

• “.…12. It is undisputed, that the appellant was the highest bidder for the sand block in question. The appellant has deposited an amount of Rs.62,26,085/. The Panchnama prepared by the Circle Officer, Kale respondent No.5, clearly exhibited that neither possession of the sand block in question was given to the appellant nor excavation of sand was done from the said sand block. The said position is reiterated by the Tehsildar, Karad – respondent No.4 in his report submitted to the Collector respondent No.2 dated 9.8.2012. The SubDivisional Officer, Karad – respondent No.3 in his report dated 4.9.2012, addressed to the Collector, Satara also confirmed the said position. A perusal of the letter dated 3.10.2012, addressed by the Collector, Satara to the Tehsildar and SubDivisional Officer also does not dispute the said position. However, he directed his subordinates to submit original file of the appellant’s sand block with his office for refund of the amount deposited by the appellant. 

• 13. It appears, that subsequently after all the authorities including Circle Officer, Tehsildar, SubDivisional Officer and the Collector found that neither the possession of the sand block was handed over to the appellant nor the excavation of sand from the said sand block was done, at the instance of the Collector, the file for grant of refund was being processed. It further appears, that the file in transit was misplaced and on this ground the appellant was denied the refund. It could thus be seen, in these admitted facts, that the denial on the part of the respondents to refund the amount to the appellant can, by no stretch of imagination, be called as reasonable. The action of the respondents, in denying the refund of the amount of the appellant, when the respondents themselves had failed to give possession of the sand block and as a result of which the appellant could not excavate the sand, would smack of arbitrariness. In this premise, we find that the High Court was not justified in relegating the appellant to file a suit. 

• 15. In view of the undisputed position, that in spite of the appellant being the highest bidder and in spite of him depositing the entire amount of auction, since the possession of the sand block was not given to him for reasons not attributable to him and he could not excavate the sand, he will be entitled to get refund of the amount deposited by him….” 

 

In view of the above rulings, we have only to see whether the reasons for which the applicant approached us for withdrawal of e-auction and claiming refund of EMD are attributable to the applicant itself ? 

 

# 20. The facts are admitted. The applicant had offered to purchase the corporate debtor as a going concern as per the sale notice dated 08.04.2021. In the sale notice, it has been mentioned that “Option/Block A (Corporate Debtor as a going Concern)- All assets of the Corporate Debtor ass on a going concern basis as per Regulation 32A of IBBI (Liquidation Process) Regulations, 2016. Option/Block B (Slump Sale Basis)- 4 operational plants located at Kanchipuram-TN, Viskahakapatnam-AP, Varsana-GJ, Jaipur-RJ, and select operational financial assets pertaining to the 4 plants.” So, the applicant’s bid was for four operational plants of the corporate debtor. As on today, those plants which were in operation are closed down. The situation is not at all attributable to the applicant because the assets/plants are still in possession of the liquidator. 

 

# 21. Apart from the above, the liquidator was aware that proceeding under the PMLA Act, 2002 was initiated and the assets of the corporate debtor were likely to be attached, still, he held the e-auction. In para 4.2 (page 49) of the process document, the liquidator had mentioned that “The Liquidator received an email dated 25.01.2021 from the Directorate of Enforcement with respect to proceedings under Prevention of Money Laundering Act, 2002 requesting the Liquidator not to dispose of the assets of the Corporate Debtor. Thereafter, the Liquidator filed a Writ Petition (W.P. 3261/2020) before the Hon'ble High Court of Delhi, wherein the Court stated that “the impugned email and any other direction issued by the Respondent against the liquidator shall remain stayed. In order to maintain a balance and to ensure that there is no prejudice caused, the liquidator shall proceed in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter, ‘IBC’).” The liquidator has also quoted the provisions of section 32A of the IBC, 2016, and the explanation thereto. So, also the ratio of the ruling of the Hon’ble Supreme Court in the case of Manish Kumar vs. Union of India (Writ Petition (C) No. 26 of 2020) thereby gave the impression to all prospective bidders that the assets of the corporate debtor are immune to the proceeding that would be taken under the PMLA Act, 2002. 

 

# 22. It is also admitted fact on record that when the sale notice was published and bids were called, ED had not attached any assets then eauction was held on 09.04.2021 whereas provisional attachment came to be passed thereafter on 02.12.2021. So, this situation is also not attributable to the applicant who is the successful bidder herein. 

 

# 23. Learned senior counsel for the liquidator submitted that the applicant tried to withdraw from the process even before the Hon’ble Delhi High Court but having failed approached this Adjudicating Authority. However, it is clear from the record that, in fact, the Hon’ble High Court in its order dated 22.02.2022 permitted the applicant to take proper proceedings for withdrawal in the following words : “….Ms. Maneesha Dhir, learned counsel for the auction purchaser states that her client wishes to exit by withdrawing its bid from the e-auction process of the Corporate Debtor. The statement made by Ms. Dhir is taken on record and accepted by this Court. Further, the parties are given liberty to take action in accordance with law in pursuance thereto….”. In pursuance to that order of the Hon’ble Delhi High Court, this application is filed on 14.03.2022. 

 

# 24. It was a submission of learned senior counsel for the liquidator that this Adjudicating Authority vide order dated 08.09.2021 confirmed the sale. If this Adjudicating Authority now allows the applicant to withdraw from the eauction process then it would be amounting to recall or review earlier order by which the sale was confirmed. Such jurisdiction is not with this Adjudicating Authority. To support his submission, learned senior counsel relied on the order of Hon’ble NCLAT in the case of Agarwal Coal Corporation Pvt. Ltd. vs. Sun Paper Mill Ltd., in IA No. 265/2019 and Company Appeal (AT) (Ins) No. 412/2019. 

 

# 25. We have gone through that order. In that order, the applicant had filed the application before the Hon’ble NCLAT to recall its order dated 16.10.2019 invoking provisions under Rule 11 of the NCLAT Rules, 2016 on the ground that the earlier order was sought by fraud. That application was rejected by Hon’ble NCLAT holding that power to recall its own order is not with the Appellate Forum. The facts in this proceeding are altogether different. In this case, the applicant filed the application under section 60(5)(C) of the IBC, 2016 permitting him to withdraw from the e-auction process because the liquidator is not in a position to give possession of the corporate debtor as a going concern. 

 

# 26. Learned senior counsel also relied on the ruling of Hon’ble Apex Court in the case of Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited and Another (reported in 2021 SCC OnLine SC 707). However, the Hon’ble Supreme Court held that Adjudicating Authority has no power to permit the withdrawal of the resolution plan which was approved by the CoC and is pending for approval of Adjudicating Authority. That situation is not here. We are dealing with this application under section 60(5)(C) of the IBC, 2016 because it is a question of fact and the law relating to the process of liquidation of the corporate debtor. The stark facts on record are that the liquidator is not in a position to give the custody of assets of the corporate debtor to the applicant or give possession of the corporate debtor as a going concern to the applicant in spite of him being declared as a successful bidder and the applicant being deposited a sum of Rs. 30 crores with the liquidator. The Liquidator cannot withhold the amount for an indefinite period till proceeding under PMLA Act, 2002 is concluded before the Hon’ble Delhi High Court. In such a situation, we allow this application. We proceed to pass the following order: 

 

ORDER 

1. The applicant is permitted to withdraw from E-auction process held on 09/04/2021. 

2. The liquidator is directed to pay the applicant a sum of Rs. 30,00,00,000/- together with interest accrued thereon within two weeks from today. The liquidator is allowed to retain sum of Rs. 5,00,000/- towards process costs already incurred for E-auction on 09/04/2021. 

3. With the above directions, the application stands disposed of. 

4. Urgent certified copy of this order, if applied for, to be issued to all concerned parties upon compliance with all requisite formalities. 

 

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Blogger’s Comments; In the present case reliefs & concessions, including that under Section 32A, were given by the same bench.

NCLT Ahmedabad (08.09.2021) In Nitin Jain Liquidator of PSL Ltd. Vs. Lucky Holdings Pvt. Ltd [IA 391 (AHM)/2021 in CP (IB) 37 (AHM) 2017 ] Adjudicating Authority using residuary powers of NCLT under section 60(5) granted relief to Successful Auction Bidder in liquidation process beyond the provisions of section 32A;

• Thus, considering these findings of the Hon'ble Supreme Court, it is crystal clear that this Adjudicating Authority has got adequate jurisdiction as regard to most of the issues raised in this application, being issues arising out of or insolvency resolution as well as are in relation to liquidation proceedings of the Corporate Debtor.

• Thus, in our considered view, the reliefs and concessions on the parallel line of an approved resolution plan can be granted subject to one condition that such reliefs/concessions must be central issues and also in relation to or arising out of liquidation proceedings of a Corporate Debtor so as to confer jurisdiction on Adjudicating Authority under Section 60(5)(c) of the IBC, 2016.

• The Successful Auction Bidder shall not be liable for any action/responsibility of the Corporate Debtor or its erstwhile management as per provisions of Section 32A of IBC, 2016.

[ Link Synopsis ]

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Oriental Bank of Commerce (Now PNB) Vs. Anil Anchalia, Liquidator of M/s. Bala Techno Industries Ltd. - That when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled.

 NCLAT (26.05.2022) in Oriental Bank of Commerce (Now PNB) Vs. Anil Anchalia, Liquidator of M/s. Bala Techno Industries Ltd. [Comp. App. (AT) (Ins.) No. 547 of 2022] held that;

• That secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, they would be governed by the waterfall mechanism under Section 53.

• It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him.

• It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors.

• That when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled.

Excerpts of the order;

# 1. This Appeal has been filed against the order dated 04.03.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench, Kolkata, rejecting the I.A (I.B.C)/101(KB)2022 filed by the Appellant. The brief facts of the case necessary to be noticed are:-

• The Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor was initiated by order dated 15.10.2019. The Appellant has extended the financial assistance to the Corporate Debtor in the year 2014. There was exclusive charge over factory land, building and plots at Ramnagar, West Bengal. The Exclusive Charge of the Appellant- Bank was also registered with the Registrar of Companies, Kolkata. The liquidation order was passed on 15.02.2021. In the liquidation proceedings, the Appellant relinquished its security with regard to secured assets. The secured assets, thus, formed the part of the liquidation assets. The liquidator sold the assets for a sum of Rs.1,68,00,000/-. The Appellant sent an e-mail on 28.10.2021 informing that the Appellant being first and exclusive charge on the security is entitled to receive the amount. The Liquidator distributed the sale proceeds on the pro-rata basis under Section 53 of the Insolvency and Bankruptcy Code, 2016 (“Code” for short). Being aggrieved, the Appellant filed an I.A (I.B.C)/101(KB)2022. In the I.A, following prayers were made by the Appellant:-

• “a) Liquidator be directed to distribute the entire sale proceeds of the liquidation estate to Punjab National Bank (previously, Oriental Bank of Commerce) since the same has exclusive charge over the property of the corporate debtor which has been sold by the Liquidator.

• b) The delay in filing the present application may kindly be condoned.

• c) Any other order and/or orders as Your Honour may deem fit and proper.”

 

The Adjudicating Authority rejected the Application by impugned order.

 

# 2. Learned Counsel for the Appellant challenging the order contends that the Appellant having first charge over the assets, he was entitled to receive the payment realised from the secured assets. Learned Counsel submits that this Appellate Tribunal in Company Appeal (AT) (Ins.) No. 731 of 2020 “Technology Development Board vs. Mr. Anil Goel & Ors.” has taken the view that secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, they would be governed by the waterfall mechanism under Section 53. It is submitted that against the judgment of this Tribunal dated 05.04.2021, Appeal has been filed before the Hon’ble Supreme Court being Civil Appeal No. 11060 of 2021 where the Hon’ble Supreme Court has stayed the judgment of this Tribunal. It is submitted that the Appellant is entitled to receive the entire amount realised from its secured assets.

 

# 3. We have considered the submissions of the learned Counsel for the Appellant and perused the record.

 

# 4. The Appellant had opted to relinquish its security exercising its right under Section 52 of the Code. After it relinquished the security, the secured creditors are entitled for receiving payment as per Section 53. The issue is no more res integra in view of the judgment of the Hon’ble Supreme Court in “India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr.- 2021 SC OnLine SC 409”. In the case before Hon’ble Supreme Court, Appellant was Dissenting Financial Creditor and it challenged the distribution of the assets under the Resolution Plan. The argument was raised that the Dissenting Financial Creditor was entitled to receive the payment as per their secured interest. The argument was rejected and the Hon’ble Supreme Court in Paragraphs 17, 19, 20 & 21 laid down following:-

• “17. Thus, what amount is to be paid to different classes or subclasses of creditors in accordance with provisions of the Code and the related Regulations, is essentially the commercial wisdom of the Committee of Creditors; and a dissenting secured creditor like the appellant cannot suggest a higher amount to be paid to it with reference to the value of the security interest.

• 19. In Jaypee Kensington(supra), this Court repeatedly made it clear that a dissenting financial creditor would be receiving the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, to the extent of the value receivable by him. It has never been laid down that if a dissenting financial creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him. It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him.

• 20. The extent of value receivable by the appellant is distinctly given out in the resolution plan i.e., a sum of INR 2.026 crores which is in the same proportion and percentage as provided to the other secured financial creditors with reference to their respective admitted claims. Repeated reference on behalf of the appellant to the value of security at about INR 12 crores is wholly inapt and is rather ill-conceived.

• 21. The limitation on the extent of the amount receivable by a dissenting financial creditor is innate in Section 30(2)(b) of the Code and has been further exposited in the decisions aforesaid. It has not been the intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors.”

 

# 5. In a recent judgment delivered by this Appellate Tribunal in Company Appeal (AT) (Ins.) No. 644 of 2021 dated 06.05.2022 –“Indian Bank vs. Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr.”, a similar contention raised by the Indian Bank which was secured creditor who was Dissenting Financial Creditor was repelled. After relying the judgment of the Hon’ble Supreme Court in M/s. Amit Metaliks Ltd. (supra), this Tribunal in paragraphs 27 and 28 laid down following:-

• “27. The Judgment of the Hon’ble Supreme Court, in the above case, is that when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled.”

 

# 6. We thus, do not find any merit in the submissions of the Learned Counsel for the Appellant. The submission that earlier judgment of this Tribunal in “Technology Development Board” having been stayed by the Hon’ble Supreme Court on 29.06.2021, no reliance can be placed on the said judgment loses its importance in view of the subsequent judgment of the Hon’ble Supreme Court dated 13.05.2021 M/s. Amit Metaliks Ltd. (supra). The issue is no more res integra and no error is committed by the Adjudicating Authority in rejecting the Application filed by the Appellant. There is no merit in the Appeal. The Appeal is dismissed.

 

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