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The Mumbai Bench of NCLT has dismissed an application seeking to effectuate the sale of immovable property of a company facing moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC).
The Miscellaneous Application has been filed under Section 65 of the IBC by JM Financial Asset Reconstruction Company (JM Financial), in its capacity as a financial (secured) creditor of Quantum Ltd. The application by JM Financial alleges collusion between Quantum and Indus Ltd., the financial creditor that triggered insolvency against Quantum in May, 2017. Moratorium under Section 14 of the IBC was subsequently declared by NCLT, Mumbai.
In March 2013, JM Financial was assigned the debt owed by Quantum to Corporation Bank after the Bank had initiated (securitisation) proceedings under SARFAESI, 2002 before the Debt Recovery Tribunal (DRT), Pune. Quantum had defaulted in making repayment of the loan facility to Corporation Bank, availed on mortgage of property situated in Mulshi District, Pune.
While the DRT Pune ruled in favour of JM Financial, Quantum, aggrieved with this order, approached DRT, Mumbai where no relief was granted either. Soon after, in February 2017, JM Financial proceeded with the auction of the said property in the same month and received a confirmed offer from Omni Active Health Technologies (Omni), for a sale price of Rs. 19.2 crore. The auction was carried under Rule 9 of the Security (Enforcement) Rules, 2002 (Security Rules).
These Security Rules have been enforced by exercising power under Section 13 of the SARFAESI, which is earmarked for enforcement of security interest.
Among other clauses of the Security Rules, the purchaser of the property is required to deposit 25% of the sale price on the day of confirmation of sale price during auction, which Omni did. However, while the balance 75% was yet to be paid, Quantum itself approached the DRT, Mumbai seeking a stay against sale of its property, promising to pay the entire sum in return for redemption of the mortgaged security. Unable to deposit the initial promised sum of Rs. 5 crore (of the Rs. 19.2 crore), Indus Ltd, the financial creditor of Quantum which initiated its insolvency later, stepped in to pay the entire sum. However, the DRT did not agree with this proposal.
After a failed shot at redemption, JM Financial did what it had to and approached DRT, Mumbai for vacating the stay order. However, to its surprise, Indus intervened along with an order from NCLT, Mumbai declaring moratorium over the assets of Quantum.
JM Financial has vehemently argued before the NCLT that since 25% of the sale price has been deposited by Omni, the sale has been concluded and thus the moratorium order would not hit on a such a sale transaction. It was further argued that JM Financial, being the only secured creditor of Quantum, had the right to be heard before an order declaring moratorium passed.
Thus the main question, which arose before the NCLT under this Miscellaneous Application was, whether this sale (alleged confirmed) is hit by the moratorium declared.
In answering this question, the NCLT observed Rule 9 of the Security Rules, wherein the confirmation of sale has been categorised into two distinct parts:
1) Where the authorised officer who is conducting the auction confirms the sale price, followed by a deposit of the 25% on the same day and;
2) where the sale is confirmed upon payment of balance 75% on or before the 15th day of sale confirmation by the authorised officer above.
It was ruled by the Bench that failure to make the balance 75% results in forfeiture of 25% deposit and annulment of the sale, thus allowing property to be resold to someone else. This provision was observed to be para materia to the procedure laid under Order 21 of the Civil Procedure Code. The Bench further ruled that,
“It is true it is an established legal proposition that normally once sale is confirmed and made absolute then issuing of sale certificate has been connoted as administrative in nature. But as long as full payment has not been made and the same has not been confirmed by the secured creditor, it can’t be considered that the sale is complete. As long as sale is not complete, and made absolute, no interest can be construed as transferred to the purchaser as is the case herein.”
Since only 25% had been paid by Omni in this case, it could not have been said that the sale had been confirmed and thus the NCLT dismissed the application.
(Read the order)