Mandatory Timelines And Liquidator's Discretion Under IBC: Analysing The Supreme Court's Ruling In V.S. Palanivel v. P. Sriram, CS, Liquidator

Introduction

In the recent judgement in the case of V.S. Palanivel v. P. Sriram, CS, Liquidator¹, the Hon'ble Supreme Court of India has addressed several critical aspects of the liquidation process under the Insolvency and Bankruptcy Code, 2016 (IBC), particularly in relation to the sale of assets and the extension of time for payment by the successful bidder in an auction. The Court examined key provisions of the IBBI (Liquidation Process) Regulations, 2016, including Clause 12 of Schedule I under Regulation 33, which mandates that the highest bidder must deposit the balance sale consideration within 90 days, failing which the sale is cancelled. The Court also considered the advisory role of the Stakeholders' Consultation Committee (SCC), the valuation of the property, and the impact of the COVID-19 lockdown on the auction process.

A significant issue was whether the timelines prescribed under Clause 12 were mandatory or discretionary. The Court held that adherence to the 90-day period for depositing the balance sale consideration is mandatory, with non-compliance leading to the cancellation of the sale. However, the Court also noted that a certain "play in the joints" is provided to the liquidator in limited circumstances, such as determining the reserve price of assets, where discretion may be exercised. Further, it clarified that advice from the SCC is not binding on the liquidator, as established in R.K. Industries (Unit-II) LLP v. H.R. Commercials Pvt. Ltd. and Ors. (2022)².

Matter and Issues Involved

The matter primarily concerned the liquidation of Sri Lakshmi Hotels Pvt. Ltd. The corporate debtor had failed to repay a loan, leading to an arbitral award against it. When the company could not fulfill the award, a Section 7 application under the IBC was filed, initiating the Corporate Insolvency Resolution Process (CIRP). After the CIRP failed to revive the company, the National Company Law Tribunal (NCLT) ordered its liquidation.

Several issues were raised in the Supreme Court, including:

1. Whether the auction process was conducted correctly and in accordance with the law.
2. Whether the extension of time granted to the successful bidder for the payment of the balance sale consideration was legal.
3. Whether the liquidator had properly followed the mandatory provisions of the IBBI (Liquidation Process) Regulations, especially with regard to the constitution of the Stakeholders' Consultation Committee and adherence to the 90-day payment timeline.
4. Whether the liquidator's decision to reduce the reserve price by 25% was lawful and appropriate.

Contentions of the Parties

Appellant's Contentions:

1. Violation of IBBI Regulations: The appellant contended that the auction was conducted in violation of the IBBI Liquidation Process Regulations, 2016, particularly the timeline for payment of the balance consideration under Clause 12 of Schedule I. The appellant argued that the liquidator could not have extended the timeline for payment beyond 90 days and that such an extension would render the sale illegal.
2. Improper Auction Process: The appellant also argued that the reduction of the reserve price by 25% for the second auction was arbitrary and unjustified, given the higher valuation of the property in question. He contended that the liquidator did not follow the correct procedure in constituting a Stakeholders' Consultation Committee, which could have provided better guidance on the reserve price and auction process.
3. Attachment by the Income Tax Department: The appellant claimed that the auction purchaser failed to pay the balance consideration in time due to the attachment of the auctioned property by the Income Tax Department and that this should have invalidated the sale process.

Respondent's (Liquidator's) Contentions:

1. Compliance with IBBI Regulations: The liquidator argued that the auction was conducted according to the provisions of the IBC and the IBBI Regulations. He contended that he was empowered to reduce the reserve price by 25% when the first auction failed to attract any bids and that this was in line with the regulations governing liquidation sales.
2. Delay in Payment Due to Force Majeure: The successful bidder and liquidator contended that the delay in payment of the balance consideration was caused by the nationwide lockdown due to the COVID-19 pandemic, a force majeure event. The bidder relied on the Supreme Court's Suo Moto Writ Petition (Civil) No. 3 of 2020, which extended all statutory timelines, including those under IBC.
3. No Violation of the 90-Day Rule: The liquidator argued that the extension of time for the payment was validly granted by the Adjudicating Authority (NCLT) and that such an extension was within the powers conferred by the IBC and the inherent powers of the tribunal.

Judicial Analysis of the Legal Provisions by the Supreme Court

1. Clause 12 of the IBBI Liquidation Process Regulations (Mandatory or Directory): The Court examined whether Clause 12 of Schedule I, which mandates a 90-day timeline for payment of the balance sale consideration, was mandatory or directory. The Court held that the clause is mandatory in nature, as it prescribes a consequence—cancellation of the sale—if the payment is not made within the stipulated 90 days. The Court emphasized that when a statute provides a consequence for non-compliance, the provision must be treated as mandatory.
2. Extension of Payment Due to COVID-19: The Court acknowledged the unprecedented nature of the COVID-19 pandemic and the nationwide lockdown. It noted that the Supreme Court, in its Suo Moto Writ Petition (Civil) No. 3 of 2020, had extended statutory timelines for all proceedings, including liquidation processes. The Court held that the auction purchaser was entitled to the benefit of this order and Regulation 47A of the IBBI Liquidation Process Regulations, which provided for the exclusion of the lockdown period from the computation of timelines.
3. Reduction of Reserve Price: The Court found no fault with the liquidator's decision to reduce the reserve price by 25% after the first auction failed to attract bids. This action was taken in accordance with Clause 4A of Schedule I under Regulation 33, which permits the reduction of the reserve price by up to 25% in subsequent auctions.
4. Attachment by Income Tax Authorities: The Court rejected the auction purchaser's argument that the delay in payment was justified due to the Income Tax Department's attachment of the property. The Court held that the auction was conducted on an "as is where is" basis, and the purchaser was aware of the attachment before placing the bid. It was, therefore, the purchaser's responsibility to resolve such issues.

Final Outcome

The Supreme Court partially allowed the appeal. While it upheld the validity of the auction and did not set aside the sale, the Court directed the auction purchaser to pay an additional sum of ₹5 crore, representing 50% of the difference between the original liquidation value and the reserve price set for the second auction. The auction purchaser was also directed to pay interest at 9% per annum on this amount from March 26, 2020, until the date of payment.

List of Cases Referred

1. Vidarbha Industries Power Limited v. Axis Bank Limited³ (2022) – Supreme Court held that the use of the term "may" and "shall" in different sections of IBC indicates that some provisions are discretionary while others are mandatory.
2. C.N. Paramasivam and Another v. Sunrise Plaza Through Partner and Others⁴ (2013) – Emphasized that rules mandating timelines for auctions, particularly related to payment, are mandatory and non-compliance renders the auction void.
3. Suo Moto Writ Petition (Civil) No. 3 of 2020 – In Re: Cognizance for Extension of Limitation⁵ (2020) – The Supreme Court extended statutory timelines due to the COVID-19 pandemic, which the Court relied upon to justify the extension granted to the auction purchaser.
4. R.K. Industries (Unit-II) LLP v. H.R. Commercials Private Limited and Others (2022) – Clarified that the advice of the Stakeholders' Consultation Committee is not binding on the liquidator.

Observations and Views of the Court

1. Mandatory Nature of the 90-Day Period for Deposit of Balance Sale Consideration

The Court placed significant emphasis on the mandatory nature of the requirement under Clause 12 of Schedule I, Regulation 33, of the IBBI (Liquidation Process) Regulations, 2016, which mandates that the highest bidder in an auction must deposit the balance sale consideration within 90 days. Non-adherence to this timeline results in the automatic cancellation of the sale.

• Clause 12 of Schedule I, Regulation 33 of IBBI Regulations:
• • "(12) On the close of the auction, the highest bidder shall be invited to provide balance sale consideration within ninety days of the date of such demand:
  • • Provided that payments made after thirty days shall attract interest at the rate of 12%.
    • Provided further that the sale shall be cancelled if the payment is not received within ninety days."

The Supreme Court stated that the language of Clause 12 is unequivocal and leaves no room for discretion in extending the timeline without judicial intervention. The liquidator does not have the authority to condone delays beyond 90 days unless an order to this effect is passed by the Adjudicating Authority. In this case, the Court accepted that the COVID-19 pandemic was an extraordinary circumstance that justified an extension, as provided under Regulation 47A, inserted to account for disruptions caused by the pandemic.

2. Regulation 31A: Non-Binding Nature of the Stakeholders' Consultation Committee (SCC)

Another issue before the Court was whether the liquidator erred by not constituting an SCC as required under Regulation 31A, which mandates the formation of an SCC to advise the liquidator on critical matters. The Court reiterated that the advice of the SCC is not binding on the liquidator.

• Regulation 31A of the IBBI Liquidation Process Regulations:
• • "(10) The advice of the consultation committee shall not be binding on the liquidator: Provided that where the liquidator takes a decision different from the advice given by the consultation committee, he shall record the reasons for the same in writing."

The Court referred to its previous judgment in R.K. Industries (Unit-II) LLP v. H.R. Commercials Pvt. Ltd. and Ors. (2022), where it was observed that while the SCC's role is advisory, the liquidator must record reasons in writing if deviating from the advice provided. However, in this case, the liquidation process commenced prior to the amendment that made the formation of an SCC mandatory, rendering the appellant's argument moot.

3. Discretionary Powers of the Liquidator and "Play in the Joints"

The Court also highlighted that the IBBI Regulations provide some degree of flexibility or "play in the joints" for the liquidator when selling assets through auction, particularly concerning the reduction of the reserve price or conducting multiple rounds of auctions. However, such discretion is confined to specific areas where the underlying intention is to maximize realization from the sale of assets.

• Clause 4A of Schedule I, Regulation 33 of IBBI Regulations:
• • "Where an auction fails at the reserve price, the liquidator may reduce the reserve price by up to twenty-five percent of such value to conduct subsequent auctions."

In this case, the liquidator's decision to reduce the reserve price by 25% in the second round of auction was found to be within the scope of this discretion. The Court stated that where the statute prescribes a particular action to be taken in a specific manner, such as adhering to the 90-day timeline, it must be strictly followed. However, the liquidator retains discretion in certain procedural matters related to maximizing asset value for creditors.

Conclusion

The Supreme Court's decision in V.S. Palanivel v. P. Sriram, CS, Liquidator underscores the mandatory nature of the 90-day timeline under Clause 12 of Schedule I of the IBBI Regulations, 2016. The liquidator has no discretion to extend this period unless directed by the Adjudicating Authority. The Court balanced this strict interpretation with its recognition of the unprecedented disruption caused by the COVID-19 pandemic, allowing the auction purchaser the benefit of the extension under Regulation 47A.

The Court also clarified that the Stakeholders' Consultation Committee's advice is advisory and non-binding, aligning with the principles established in R.K. Industries (Unit-II) LLP v. H.R. Commercials Pvt. Ltd. and Ors. (2022). Additionally, while the liquidator enjoys limited discretion in auction-related matters, such as adjusting reserve prices, adherence to statutory timelines like the 90-day period for payment is mandatory and leaves no room for flexibility.

In balancing these considerations, the Court preserved the auction process while ensuring fairness by directing the auction purchaser to pay an additional sum, thereby emphasizing the importance of adhering to the statutory framework under the IBC.

Footnotes

1. Civil Appeal Nos. 9059-9061 of 2022- Decided on 28.08.2024

2. Civil Appeal Nos. 7722/2021 and 7731/2021

3. CIVIL APPEAL NO. 4633 OF 2021 Decided on 12.07.2022

4. CIVIL APPEAL NO. 154 OF 2013 Decided 0n 09.01.2013

5. Order dated March 08, 2021.

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