Tarun International Ltd. Vs Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors - Auction under SARFAESI prior to CIRP & dues of EPFO and employees.

NCLAT (03.03.2021) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors. [Majority judgement in Company Appeal (AT) (Insolvency) No.1194 of 2019] held that; - 

• we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

 

Facts of the case;

"Anil Special Steel Industries Ltd" (CD) is an industrial company. It defaults, prompting OCs  to initiate Sec. 9 application, which is allowed by NCLT.

Prior to initiation of CIRP, "Allahabad Bank" (AB) the Financial Creditor, took over CD’s (Unit -1, Anil Special Steel Industries Ltd) Industrial Undertaking and auctioned it under SARFAESI to recover dues on a "as is where is, as is what is and whatever there is" basis . Tarun International Ltd.(TI) emerged the successful auction purchaser.

RP approaches NCLT to determine who'd pay liabilities of Workmen and Employees. NCLT rules Tarun International Ltd.(TI) would be liable for dues as the purchase was on a AIWI basis.

NCLAT upholds NCLT's decision citing that the Auction notice had clarified this. Further, Tarun International Ltd.(TI) was aware of potential liabilities.

 

Excerpts of the order;

On an application being IA No.32/60/JPR/2018 filed in CP No.(IB)- 35(ND)/2018, TA No.118/2018 filed by the Resolution Professional, the Adjudicating Authority (National Company Law Tribunal), Jaipur Bench, in terms of impugned order dated 1st October, 2019 passed a slew of directions saddling the Appellant with liability to bear all the claims of Respondent No.2- ‘Rastriya Anil Steel Majdoor Sangh’ and Respondent No.5 - Mr. Rajendra Company Appeal (AT) (Insolvency) No. 1194 of 2019 Sharma with allied and ancillary directions after recording a finding that Respondent No.3- Allahabad Bank had made it very clear to the Appellant to acquire the Unit No.1 of the Corporate Debtor on ‘as is where is basis, as is what is basis, whatever there is basis’ which implied that it shall also acquire all the liabilities thereon. Feeling aggrieved, the Appellant has assailed the impugned order through the medium of instant appeal on grounds set out in the memo of appeal to which we shall be adverting to as we proceed further.

# 4. Learned counsel for Appellant laid emphasis on the fact that the Adjudicating Authority had no jurisdiction as it could not pass orders in relation to prior transactions except in so far provided under Sections 44-45 of the ‘I&B Code’. It is contended that the impugned order is without jurisdiction and after issuance of Sale Certificate and delivery of possession to Appellant auction purchaser the property in question no longer remained the property of the Corporate Debtor. It is further submitted that the terms and conditions of the sale of the property clearly stated that the purchaser would receive the property free from all encumbrances. It is further submitted that the Appellant acquired only the property and not the company, therefore, the liability of the Corporate Debtor has been wrongly fastened upon the Appellant.

# 7. The sole issue for consideration in this appeal is whether the liability in respect of the workers and employees and other liabilities pertaining to Unit No.1 of the Corporate Debtor sold under the Act, 2002 prior to commencement of CIRP are the liability of Corporate Debtor or the Appellant- auction purchaser.

# 13. It further emerges from record that the Appellant subsequently tried to resile from the terms and conditions of sale, obviously to wriggle out of the liabilities that it was liable to pay in terms of acceptance of offer purchase letter dated 21st December, 2017. This was sought to be done unilaterally on the pretext that in the event of Appellant having backed out, the EMD would have been forfeited. This explanation was neither realistic nor plausible. By proceeding to accept the offer purchase Appellant unconditionally accepted the terms of sale. Reliance placed by Appellant on the letters dated 30th December, 2017, 23rd January, 2018 and 29th January, 2019 that it was only informed of the liabilities, it being specifically stated that the same were not demanded by the Bank, would be of no consequence as such liabilities passed on to Appellant in terms of the acceptance of offer purchase and sale letter with no demand put up by the Bank for its recovery from Appellant- auction purchaser. In the face of bulk of evidence staring in the face of the Appellant assigning the liabilities to it, the Appellant could not be permitted to unilaterally back out of such liability. With express stipulation in auction notice and all relevant documents connected with auction and sale proceedings under the Act, 2002, it cannot be said that this being a sale in auction proceedings under the Act, 2002, the auction purchaser would not be saddled with the liabilities of Corporate Debtor as only assets had passed on to it and not the liabilities of the Corporate Debtor which was faced with the prospect of triggering of CIRP, regard being had to demand notice served upon it under Section 8 of the ‘I&B Code’ prior to issuance of sale certificate. Therefore, stipulation in the Sale Certificate that the sale was free from encumbrances is irrelevant when the information in regard to encumbrances known to the creditor was shared with the Appellant through the correspondences referred to hereinabove and such encumbrances were yet to be discharged.

# 14. Dealing with the aspect of public auction incorporating a condition in the nature of ‘as is where is’, the Hon’ble Apex Court in “Punjab Urban Planning and Development Authority & Ors. vs. Raghu Nath Gupta and Ors.- Reported in (2012) 8 SCC 197” observed as under:-

• “17. We are of the view that the judgment in Amarjeet Singh (supra) is a complete answer to the various contentions raised by the respondents. We may reiterate that after having accepted the offer of the commercial plots in a public auction with a super imposed condition i.e. on “as is where is” basis and after having accepted the terms and conditions of the allotment letter, including installment facility for payment, respondents cannot say that they are not bound by the terms and conditions of the auction notice, as well as that of the allotment letter. On facts also, we have found that there was no inordinate delay on the part of PUDA in providing those facilities.” 

# 15. This is a complete answer to refute the issue raised by Appellant that it cannot be saddled with liability towards workman and employees as also other liabilities pertaining to Corporate Debtor.

# 16. In “Maharashtra State Co-operative Bank Ltd. v. Babulal Lade- CA No. 232 of 2016 decided on 04.12.2019”, it was observed by the Hon’ble Apex Court that the sale under the Act, 2002 is to be governed by the terms of the sale.

# 17. Mentioning that it was free from encumbrances would be inconsequential as long as the liabilities known to the Allahabad Bank and brought to the notice of the auction purchaser remain undischarged. There is considerable force in the contention raised by Respondent No.4 that dues of EPF are an encumbrance on the establishment and become first charge thereupon within the purview of Section 11(2) of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. Though the sale in auction proceedings was limited to Unit No.1 while the Corporate Debtor owned two units, mere fact of common ownership of two units by the Corporate Debtor would not make it one establishment. The two units were separate and independent units treated so by EPFO with separate registration numbers allotted to these units. Therefore, EPFO dues over Unit No.1 which was the subject of auction or sale under the Act, 2002 were the first charge over the unit only and the sale proceeds thereof could not be utilised by the Allahabad Bank without discharging the same. We are told that the Allahabad Bank has not joined the issue in regard to this position and even made a part payment of about Rs.17.51 lakhs as reflected at Page 456 of the appeal paper book.

# 18. Having dealt with the issue raised in this appeal in the context of material on record, respective contentions of parties, arguments advanced and the case law cited at the Bar, we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

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Dissenting Judgement Per; V. P. Singh, Member (T) in the above case;

J U D G M E N T

I have gone through the detailed judgement authored by Hon'ble Acting Chairperson Justice B L Bhatt. Still, I cannot persuade myself to agree with the views expressed by Hon'ble Acting Chairperson Justice Bhatt; I would like to give my finding separately. 

The Appellant has preferred this Appeal against the Impugned Order dated 1 October 2019 passed in IA No. 32/60/JPR/2018 in CP No. (IB) 35 (ND)/2018 by the Adjudicating Authority/National Company Law Tribunal Jaipur Bench 2. By Order dated 1 October 2019, the Adjudicating Authority has issued directions on the Application filed by Resolution Professional fastening the liability on the Appellant Tarun International Ltd to bear all the claims of Respondent No. 2 'Rashtriya Anil Steel Mazdoor Sangh' and Respondent No.5, Mr Rajendra Sharma with a further clarification that the Corporate Debtor cannot be fastened with any of the liabilities of Unit-1 of Corporate Debtor which was sold under the SARFAESI Act. The parties in this Appeal are referred by their original status in the company Petition for the sake of convenience.

# 2. The brief facts of the case are as under;

The Appellant 'Tarun International Ltd' is a bona fide Auction Purchaser of immovable property comprising of industrial land along with the plant and machinery (the property) owned by 'Anil Special Steel Industries Limited', Corporate Debtor ("ASSIL"), from the time before the initiation of Corporate Insolvency Resolution Process ("CIRP") against corporate Debtor 'ASSIL'. The property was sold to the Appellant by Allahabad Bank, Respondent, No 3 under the provision of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), vide sale certificate (under Rule 9 (6) of Security Interest Enforcement) Rules 2002) dated 9 February 2018, which was duly registered  in the office of Sub Registrar, Jaipur on the same day. 

# 3. The corporate Debtor owned two units, and the Appellant is the auction purchaser of Unit-1 of ASSIL. After the Sale of Assets of Unit-1 of the Corporate Debtor 'Anil Special Steel Industries Limited' under the SARFAESI Act by secured Creditor Allahabad Bank, the Application filed under Section 9 of the Insolvency and Bankruptcy Code 2016 was admitted by Order dated 5 March 2018 passed by the Adjudicating Authority. During the CIRP of the Corporate Debtor, the IRP, Mr Brij Kishore Sharma, collated the claims and constituted the Committee of Creditors (in short, CoC). Later, on a resolution passed by the CoC, the Resolution Professional, Mr Vikram Bajaj, replaced the IRP Mr Brij Kishore Sharma vide Order dated 14 May 2018 passed by Adjudicating Authority.

# 4. During CIRP, the RP filed IA No. 32/60/J PR/2018 in CP. No. (IB) 35 (ND)/2018 before the Adjudicating Authority seeking the following relief: 

• "Allow the present application and determine as to whether liabilities pertaining to unit-1 which had been sold under SARFAESI prior to the insolvency commencement date are payable by the purchaser of unit -1, i.e. Tarun international Ltd or the same continued to be admissible against the corporate debtor."

# 6. The Appellant has not been connected with and has no right, interest or obligations concerning ASSIL either at present or from the time before purchasing the property. The Adjudicating Authority on an Application filed by the Resolution Professional (in short "RP") u/s 60 (5) (b) and (c) of the I&B Code 2016 vide Order dated 1 October 2019 has held that the Appellant is liable to pay workmen's dues and other charges on the property. The Appellant contends that such findings are without jurisdiction because;

• The Adjudicating Authority under the Code has jurisdiction only about triggering of proceedings under Part II of the Code. 

• Jurisdiction of the Adjudicating Authority in relation to prior transactions is limited to the extent as provided under section 44 and 45 of the Code.

# 14. The Adjudicating Authority by the impugned Order directed that;

• a. The Respondent Number 2 shall bear all the claims of the Respondent No. 1 and Respondent No. 5.

• b. In the event any money which has been deducted towards the statutory dues of EPF and is still lying with the corporate Debtor, the RP shall forthwith credit the same to the appropriate accounts of the concerned authority.

• c. For recovery of the claims of any statutory dues, it is open for the Respondent No 1 and 5 to proceed against the Respondent No. 2 and 3.

• d. So for, the Corporate Debtor is concerned it cannot be fastened with any of the liability of Unit number 1, which was sold under the SARFAESI Act, 2002 by the Respondent No. 3, except with regard to the statutory dues of EPF, in case if it is lying still with the corporate Debtor as stated before. 

• With these directions, IA number 32/60/J PR/2018 is disposed of."

# 15. Following issues arises for the determination of this Appeal;

• 1. Whether the Adjudicating Authority under the I&B Code 2016 has jurisdiction to determine a bona fide auction purchaser's liability under the SARFAESI Act's provision when the property had been sold, and sale certificate was issued before the commencement of CIRP of the Corporate Debtor?

• 2. Whether the Adjudicating Authority can decide the liabilities of a third party auction purchaser, which had no role in the Corporate Debtor's Resolution Process and did not fall under the ambit of avoidance transactions as outlined under Sec 44 &45, under Section 60 (5) of the Code?

• 3. Whether the Sale of only Part of the Assets of the Corporate Debtor under the SARFAESI Act can be considered the Sale of a Company (or Part thereof) as a going concern to make the purchaser liable for workmen's dues?

Issue No. 1 to 3;

# 20. Undisputedly, the Appellant is the auction purchaser of the immovable property comprising industrial land, plant and machinery of Unit-1 owned by Anil Special Steel Industries Limited/ ASSIL, i.e. Corporate Debtor. Before commencement of the Corporate Insolvency Resolution Process against ASSIL, the property was sold by Allahabad Bank under the SARFAESI Act's provisions, 2002. Given the default by ASSIL, notices were issued against ASSIL u/s13 (2) & 13(4) of the SARFAESI Act on 1 November 2017 and 15 November 2017, respectively and the Sale of the property was done on "as is where is the basis, as is the basis, whatever there is basis" with the stipulation that the property was free from encumbrances.

# 21. It is pertinent to mention that in Clause 20 of the sale notice (supra), it is stated that "to the best of knowledge and information of the authorised officer, there is no encumbrance on the properties other than mentioned above (if any). However, the intending bidders – should make their own independent inquiries regarding the encumbrances and claims/the rights/dues/affecting the property, prior to submitting their bid. The e-auction advertisement does not constitute and will not be deemed to constitute any commitment or any representation of the Bank. The authorised officer/secured creditor shall not be responsible in any way for any third-party claims/rights/dues other than mentioned above (if any)."

# 22. It is also important to mention that in the sale notice, in the column about the details of the secured creditor's encumbrances, no details of liabilities were mentioned. But it is only mentioned that "other liabilities (statutory/other dues, if any) of the property put under e-auction as mentioned in this notice will be borne by the prospective purchaser".

# 23. In compliance with the above-mentioned sale notice, the Appellant submitted its bid on 15 December 2017 along with the earnest money deposit of ₹ 2.74 crores for participating in E-auction. On 19 December 2017, Allahabad Bank informed the Appellant about the Income Tax Department's demand letter and about the Employees dues. Allahabad Bank, however, clarified that the claims/dues are yet to be crystallised by the Competent Authorities, and the sale certificate in favour of the highest bidder shall be issued after obtaining necessary orders /directions from the Competent Authority/Court/Tribunal.

# 25. However, the Bank conducted an e-auction on 20 December 2017, wherein the Appellant submitted the highest bid of ₹ 27,61,00,000. After that, on 21 December 2017, Allahabad Bank issued acceptance of the offer of purchase and informed that since claims/dues are yet to be crystallised by the Competent Authority/Court, the sale certificate will be issued after obtaining the necessary order/direction from the Competent Authority/Court/Tribunal. On 26 December 2017, in the Appellant's Reply to Allahabad bank's letter dated 21 December 2017, it is stated that the conditions regarding the auction, imposed after accepting the earnest money, are illegal and are not binding on the Appellant.

# 26. After that, on 30 December 2017, Allahabad Bank, in response to the Appellant's letter dated 26 December 2017, issued a letter to Appellant clarifying the position that its letter dated 21 December 2017 was to draw the attention concerning the various dues of ASSIL and not a demand of any amount by the Bank. This letter is annexed with the Appeal paper book on page number 421 (Relevant para 8 and 9). Further, on 9 February 2018 registered sale certificate about the property sold to the Appellant was issued. The sale Certificate shows that the property sold under the SARFAESI Act was free from all encumbrances. The relevant portion of the sale certificate (page 450 of Appeal paper book)is given below for ready reference;

• "In pursuance to Senior Civil Judge Court and Chief Metropolitan Magistrate, Jaipur Order Number Nearly Dated 8th Further 2018 we have on behalf of consortium of four banks, i.e. Allahabad bank (lender), Bank of Maharashtra, Indian Overseas Bank, State Bank of India handed over the possession to M/S Tarun international Ltd… of the schedule property listed below, free-form all encumbrances known to the secured creditors, on deposit of the money by the undersigned.

# 32. Therefore, in the instant case on 5 March 2018, when CIRP commenced against the Corporate Debtor ASSIL, the IRP was authorised to take over its assets. But the property, which was already sold/auctioned before initiation of the CIRP and Sale Certificate dated 9 February 2018, was finally issued in pursuance of the Order of the Senior Civil Judge Court and Chief Metropolitan Magistrate Court Jaipur, was not the property of the Corporate Debtor. The auction purchaser was a third party which had no concern with the Corporate Insolvency Resolution Process of the Corporate Debtor, ASSIL. Thus, the corporate Debtor's liability can't be fastened on the third party, which happens  to be a stranger to the CIRP of the Corporate Debtor and that too by exercising powers as an Adjudicating Authority u/s 60(5) of the I & B Code 2016.

# 33. It is contended by the Appellant that the property of the Corporate Debtor ASSIL was sold, and the sale process was completed before initiation of CIRP under the Code. Therefore, the Adjudicating Authority exercising powers under the I&B Code had no jurisdiction to pass an order to fasten the Corporate Debtors' liability on the Appellant.

# 35. The first provision to Section 13 of the SARFAESI Act provides that where the secured creditor of a company opts to realise security, he may retain the secured assets' sale proceeds after depositing the workmen's dues to Liquidator. The second proviso to Section 13 imposes a duty on the liquidator to intimate the secured creditor about the workmen's dues. In such cases where workmen's dues cannot be ascertained, the liquidator is obligated to intimate the estimated amount of workers dues to the secured creditor. In such a case, the secured creditor may retain the secured assets' sale proceeds after depositing the amount of such estimated dues with the liquidator. 4th proviso to Section 13 of SARFAESI Act imposes a duty on the secured creditor to give an undertaking to the liquidator to pay the balance of the workmen dues if any. Thus, it is clear that if a company is being wound up and the secured creditor of such a company opts to realise his security, then the secured creditor has authority to retain the secured assets' sale proceeds after depositing the workmen's dues.

# 36. In the instant case, Allahabad Bank is a secured creditor of ASSIL which has auctioned the secured assets of the Corporate Debtor. There is not an iota of doubt that the alleged auction sale was under SARFAESI Act. Therefore, the Adjudicating Authority/National Company Law Tribunal had no authority to fasten the Corporate Debtors liability on the auction purchaser. In the case where the Sale is made under the SARFAESI Act, then after completing the sale process and issuance of the Sale Certificate, the Adjudicating Authority had no authority to pass an order U/S 60(5) of the Code.

# 40. It is further argued that the Bank requested the auction purchaser to analyse the situation before bidding. The Allahabad Bank continued informing the receipt of the notice under Section 9 of the Code. Thus the said 'letter' became Part of the terms of Sale. Despite becoming aware of all the dues and the Sale's terms, the Appellant proceeded to participate in the auction held on 20 December 2017 and succeeded in being the sole bidder. It is further argued that a sale certificate was issued on 9 February 2018 stating that the property was "free from all encumbrances known to the secured creditor listed below". Therefore, Sale's notice and subsequent correspondence became the Sale's terms, and the liabilities formed Part of the Sale and are no longer admissible against the Corporate Debtor. Further, the dues of EPF are an encumbrance on the unit/establishment. Under section 11 (2) of The Employees Provident Fund Act, the dues of EPF are encumbrance on the establishment and becomes the first charge thereupon.

# 41. It is also pertinent to mention that in the instant case, the entire process of auction sale was completed before the commencement of the Corporate Insolvency Process against the Corporate Debtor ASSIL. Given the law laid down by the Hon'ble Supreme Court in Embassy property (supra), it is clear that Resolution Professional cannot short-circuit the process, to bring a claim before the NCLT taking advantage of Section 60 (5) of the Code.

# 42. Therefore in the light of the statutory scheme, as culled out from various provisions of the IBC 2016, it is clear that whenever the Corporate Debtor has to exercise a right that falls outside the purview of IBC 2016, especially in the realm of public law, they cannot, through the Resolution Professional, take a bypass and go before the NCLT for the enforcement of such a right. In the instant case if there was any grievance either against the Order of issuing notice under Section 13 (2) or against the Act of taking possession of the secured assets under Section 13 (4) or further in relation to the auction sale of the property of Unit -1 of the corporate Debtor the Audicating Authority did not have the jurisdiction under the SARFAESI Act to pass any order in this regard. Given the law laid down by the Hon'ble Supreme Court in the Embassy property case, the Resolution Professional was not authorised to move an application under Section 60 (5) of the Code.

# 43. Even otherwise, the property' land, plant and machinery has been sold to the Appellant free from all encumbrances. The Appellant had acquired only Part of the property/Assets of the Corporate Debtor and not the Company itself. Therefore, the liabilities of the Company ASSIL had been wrongly fastened upon the Appellant. 

# 44. Based on the above discussion, I hold that the Adjudicating Authority under the I&B Code 2016 had no jurisdiction to determine a bona fide auction purchaser's liability under the SARFAESI Act's provisions; the same has been purchased before the commencement of CIRP of the Corporate Debtor. 

# 45. I further hold that while exercising its power u/s 60(5) of the Code, the Adjudicating Authority has exceeded its jurisdiction in determining a third party's liabilities, which had no role in the Corporate Debtor's Insolvency Resolution Process.

# 46. I further hold that the Adjudicating Authority erroneously determined the Sale of assets, precisely land, plant and machinery of Unit-1 of the corporate debtor 'ASSIL' as the Sale of a Company as a going concern, thereby making the purchaser liable for workmen's dues.

# 47. Based on the above discussion, the Appeal deserves to be allowed by setting aside the impugned Order. However, the majority view authored by separate judgement brother Hon'ble Acting Chairperson Justice B.L. Bhatt shall prevail.

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