Alerts & Updates 30th Aug 2022

Recent landmark judgments of the Supreme Court under IBC

Authors

Mukesh Chand Senior Counsel | Mumbai

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Key Points to note:

  • IBC Prevails over the Provisions of Custom Act
  • Customs cannot claim title over the goods and issue notice to sell the goods in terms of the Custom Act when the liquidation process has been initiated
  • The Appellate Authority cannot don the mantle of a supervisory authority for overseeing the validity of the approach of the Liquidator in opting for a particular mode of sale of the assets of the Corporate Debtor

  • Background

    By way of its two landmark judgments delivered on August 26, 2022, in the matter of CIRP/Liquidation of ABG Shipyard, the Apex Court has settled two critical issues concerning:

    (i)powers of the Liquidator under Insolvency and Bankruptcy Code, 2016
    (ii)that of the Customs Department initiating recovery proceedings under Section 72(2) of the Customs Act
    (iii)private sale and conduct of sale process by the Liquidator.

    An analysis of the two judgments is provided below:

    Sundaresh Bhatt, Liquidator of ABG Shipyard Vs Central Board of Indirect Taxes and Customs[1]

    The three Judge Bench of the Supreme Court headed by the Hon’ble Chief Justice, answered critical issues concerning supremacy of the IBC over the Customs Act, 1962  (Customs Act) and powers of the Custom Authorities to sell goods during CIRP/Liquidation Process under IBC. The issues in question were:

    • Whether the provisions of the IBC would prevail over the Custom Act, and if so, to what extent?  

    The Supreme Court held that The IBC would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC, as the case may be, the respondent authority has a limited jurisdiction to assess/determine the quantum of custom duty and other levies. The respondent authority does not have the power to initiate recovery of the dues by means of sale/confiscation, as provided under Custom Act.” (Emphasis supplied)

    • Whether the respondent could claim title over the  goods and issue notice to sell the goods in terms of the Custom Act when the liquidation process has been initiated?

    The Supreme Court answered this in the negative.

    The Apex Court further clarified that “After such assessment, the respondent authority has to   submit   its   claims (concerning   customs dues/operational debt) in terms of the procedure laid down, in strict compliance of the time periods prescribed under the IBC, before the adjudicating authority”.

  • Welspun Steel Resources Pvt Ltd[2]

    In this Landmark Judgment, the Apex Court has applied the principal of “Commercial Wisdom” of Committee of Creditors (CoC) during Corporate Insolvency Resolution Process (CIRP) under IBC with respect to the decision taken by the Liquidator in consultation with the Stakeholder Committee (SHC). This would pave the way for sale of assets by way of private treaty and bring more clarity about the role and powers of the Liquidator with regards to liquidating the estate of the Corporate Debtor within the laid down time frame under the provisions of the Code.

    The Apex Court has laid down that:

    No doubt, a public auction entails the procedure of issuing public notices. But that is not the case with a Private Sale where the procedure prescribed permits the Liquidator to directly liaise with the potential buyer and conduct the negotiations. It may be emphasized that these are commercial transactions and purely business driven decisions, which are not amenable to judicial review. The insolvency regime introduced under the IBC has placed fetters on the power of interference by the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT).”

    At para 60 of the Judgment, the Apex Court put the powers of the liquidator on the lines of the powers being exercised by the Committee of Creditors during Corporate Insolvency Resolution Process as regards commercial matters. The Apex Court clarified that:

    “The powers vested, and the duties cast upon the Liquidator have been made subject to the directions of the Adjudicating Authority (NCLT) under Section 35 of the IBC. Once the Liquidator applies to the Adjudicating Authority (NCLT) for appropriate orders/directions, including the decision to sell the movable and immovable assets of the Corporate Debtor in liquidation by adopting a particular mode of sale and the Adjudicating Authority (NCLT) grants approval to such a decision, there is no provision in the IBC that empowers the Appellate Authority (NCLAT) to Suo motu conduct a judicial review of the said decision. The jurisdiction bestowed upon the Adjudicating Authority [NCLT] and the Appellate Authority [NCLAT] are circumscribed by the provisions of the IBC and borrowing a leaf from Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, they cannot act as a Court of equity or exercise plenary powers to unilaterally reverse the decision of the Liquidator based on commercial wisdom and supported by the stakeholders.

    The Court has also observed in the captioned case that “from the legislative history, there is contra-indication that the commercial or business decisions of the financial creditors are not open to any judicial review by the adjudicating authority or the appellate authority.’’ A similar reasoning has prevailed with Respondent in K. Sashidhar v. Indian Overseas Bank and Others , Committee of Creditors of Amtek Auto Limited v. Dinkar T. Venkatasubramanian and Others, Kalpraj Dharamshi and Another v. Kotak Investment Advisors Limited and Another., Ghanashyam Mishra And Sons Private Limited through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Limited through the Director and Others and Jaypee Kensington Boulevard Apartments Welfare Association and Others (Supra). The aforesaid view will apply with equal force to any commercial or business decision taken by the Liquidator for conducting the sale of the movable/immovable assets of the Corporate Debtor in liquidation. The Appellate Authority cannot don the mantle of a supervisory authority for overseeing the validity of the approach of the respondent No.2 – Liquidator in opting for a particular mode of sale of the assets of the Corporate Debtor.” (Emphasis supplied)

  • ELP Comments
    • These landmark judgments bring much needed clarity on the issue of rights and powers of statutory bodies to confiscate/sell assets of corporate debtor undergoing corporate resolution or liquidation process under the provisions of the Insolvency and Bankruptcy Code, 2016.
    • The Judgments also empower liquidators and the Stakeholders Committee to take commercial decisions with regards to realization of the liquidation estate of the corporate debtor within the framework of the Code. This will pave the way for faster realization of assets and conclusion of liquidation process.
    • Finally, the judgement also clears the way for conduct of sale by way of a private treaty if circumstances of the case so warrant. It is seen that the private sale process is seldom utilized by the liquidators on account of procedural issues on the method to be adopted for conclusion of such sale. With the Apex Court not interfering in the process adopted by the liquidator in the above case, the Liquidator(s) and Stakeholder Committee would now be more forthcoming in dealing with the sale process as per the need of the case in a clear, open, and transparent manner.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com

  • References

    [1] [CIVIL APPEAL No. 7667 of 2022]
    [2] R.K. INDUSTRIES (UNIT-II) LLP & WELSPUN STEEL RESOURCES PVT LTD .… APPELLANT Versus M/S. H.R. COMMERCIALS PRIVATE LIMITED AND OTHER …. RESPONDENTS AND CIVIL APPEAL NO. 7731 OF 2021 WELSPUN STEEL RESOURCES PRIVATE LIMITED .… APPELLANT Versus M/S R.K. INDUSTRIES (UNIT II) LLP AND OTHERS …..RESPONDENT (Civil Appeal No. 7722 OF 2020)

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.