Introduction
The Supreme Court’s judgment in V.S. Palanivel v. P. Sriram, Liquidator & Ors. (2024 INSC 659) settles significant questions surrounding the interpretation of timelines under the Insolvency and Bankruptcy Code, 2016 (IBC), especially concerning e-auctions during liquidation and the effect of COVID-19-related extensions. The verdict reaffirms the directory nature of certain procedural rules and upholds judicial discretion in extending timelines during extraordinary situations like the pandemic.
1. Factual Background and Procedural History
M/s Sri Lakshmi Hotel Private Limited, a family-run enterprise, defaulted on a loan and was subject to an arbitral award of ₹2.21 crores. After the failure of a Section 34 challenge to the award, the financial creditor initiated corporate insolvency proceedings under Section 7 of the IBC, culminating in a liquidation order on 17 July 2019.
The liquidator conducted two e-auctions. The first received no bids. In the second, held on 23 December 2019, KMC Speciality Hospitals (India) Ltd. emerged as the successful bidder, with a 25% reduced reserve price. The appellant, V.S. Palanivel, a shareholder and former director, challenged the process and the extension granted to the auction purchaser to deposit the balance consideration, arguing the extension violated Rule 12 of Schedule I under Regulation 33 of the IBBI (Liquidation Process) Regulations, 2016.
The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) dismissed his objections. Palanivel then approached the Supreme Court.
2. Identification of Legal Issues
The Court considered several interlinked legal issues:
- Whether the 90-day timeline under Rule 12 of Schedule I of the IBBI Regulations for payment of balance auction consideration is mandatory or directory.
- Whether COVID-19 lockdown extensions under Regulation 47A and judicial orders applied to auction purchasers.
- Whether non-constitution of the Stakeholders’ Consultation Committee (SCC) rendered the auction void.
- Whether the Liquidator undervalued the auction property.
- Whether the auction purchaser could validly rely on Income Tax Department attachments to delay payment.
3. Arguments of the Parties
Appellant (V.S. Palanivel):
- Argued the 90-day payment period under Rule 12 is mandatory and cannot be relaxed.
- Cited C.N. Paramasivam and Sharif-ud-din to support that where rules prescribe consequences, they are mandatory.
- Challenged the validity of the Liquidator’s decision to reduce the reserve price and failure to constitute an SCC.
- Asserted that the auction purchaser could not rely on COVID-19 extensions, as they were meant for litigants—not third-party bidders.
Respondents:
- Auction Purchaser argued timelines were directory, invoking Standard Surfa Chem and Prakash Chandra Kapoor.
- Invoked the Supreme Court’s suo motu order in WP(C) 3/2020 and Regulation 47A to justify delay.
- Liquidator defended the reserve price, asserting compliance with Rule 4A of Schedule I.
- Argued SCC formation was not mandatory retrospectively and that the Liquidator repeatedly asked Palanivel to nominate a stakeholder representative, which he failed to do.
4. Court’s Analysis and Reasoning
a) Timelines: Mandatory or Directory?
The Court held that the 90-day period under Rule 12 is directory. It observed that:
- The second proviso to Rule 12 permits payment after 30 days with 12% interest, suggesting flexibility.
- No provision states that failure to pay within 90 days automatically nullifies the sale.
- Regulation 47A, introduced in April 2020, clearly excluded the lockdown period from liquidation timelines.
b) Effect of COVID-19 and Judicial Orders
The Court gave a wide construction to the word “litigants” used in the Supreme Court’s suo motu order dated 23 March 2020. It held:
- The benefit extended to all procedural acts, including payment obligations in liquidation.
- Auction purchasers, although not “litigants” in a strict sense, were within the sweep of the order and Regulation 47A.
c) Income Tax Attachments
The Court accepted the respondent’s argument that IT attachments created genuine legal impediments. The auction purchaser delayed payment pending clearance from IT authorities and ultimately paid the balance just before formal detachment.
d) Valuation and Auction Price
The Court found the auction price legitimate. Rule 4A allows a 25% reserve price reduction after a failed auction. The Liquidator had acted within statutory authority, and no better bid was presented.
e) Stakeholders’ Consultation Committee
The Court rejected the argument that failure to constitute an SCC rendered the process illegal. It cited R.K. Industries LLP v. H.R. Commercials Pvt. Ltd. (2024) 4 SCC 166, confirming that:
- SCC’s role is advisory.
- The regulation requiring its formation was not in effect when liquidation commenced.
5. Final Conclusion and Holding
The Supreme Court upheld the decisions of the NCLT and NCLAT, reaffirming that:
- Procedural timelines under Rule 12 are directory, not mandatory.
- COVID-19 relief measures and Regulation 47A applied to liquidation proceedings and auction purchasers.
- No illegality or prejudice arose from the Liquidator’s conduct.
The appeals were dismissed.
FAQs:
1. Is the 90-day deadline for payment in liquidation auctions under IBC mandatory?
No. The Supreme Court has clarified that the 90-day period under Rule 12 of Schedule I is directory. Delay may be condoned in exceptional circumstances, such as the COVID-19 pandemic.
2. Can COVID-19 lockdown orders extend payment deadlines under IBC?
Yes. The Supreme Court’s suo motu order and IBBI’s Regulation 47A excluded the lockdown period from liquidation timelines, benefitting even auction purchasers.
3. Is the Liquidator required to form a Stakeholders’ Consultation Committee in all cases?
No. Formation of an SCC is mandatory only for liquidation proceedings initiated after 25 July 2019. In earlier cases, failure to form the SCC does not invalidate the process.
4. Can a property be auctioned below its valuation during liquidation?
Yes. Under Rule 4A of Schedule I, if the first auction fails, the Liquidator may reduce the reserve price by 25% for subsequent auctions.
5. Are auction sales in liquidation invalid if payment is delayed?
Not automatically. The Supreme Court held that procedural delays, especially during COVID-19 or due to IT attachments, can be excused if justifiable and approved by the adjudicating authority.
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