The Hyderabad bench of the National Company Law Tribunal (NCLT) has ruled as invalid the sale of company assets under the Andhra Pradesh Revenue Recovery Act, 1861, when a moratorium had been declared under the Insolvency and Bankruptcy Code 2016 (IBC).

The NCLT’s recent ruling in the case of NCS Sugars in Bobilli mandal of Andhra Pradesh’s Vizianagaram district is the first-of-its-kind involving the Revenue Recovery Act after IBC came into force. 

The ruling came on a petition filed by K Sivalingam, who was appointed as the resolution professional in the Corporate Insolvency Resolution Process (CIRP) of  NCS Sugars, after the district collector sold properties of the company.  The sugar firm came under the CIRP process after Punjab National Bank (erstwhile Oriental Bank of Commerce) sought it.

Sale notices

The resolution professional was appointed in June 2022, whereas the tehsildars of Bobilli and Seethanagaram issued two notices to sell the sugar company’s immovable properties of 26 acres in these two mandals on January 4, 2022. 

The district authorities issued notices to sell the immovable properties under AP Sugarcane Act as NCS Sugars had failed to make payments to farmers for the sugarcane they supplied to it. Due to this, the authorities attached its properties and began proceedings to recover the dues to farmers. 

Following the sale notice, a public auction was held on February 9 in which the highest bidder — Dhatri Real Estate — offered ₹20.05 crore. The highest bidder paid an earnest money deposit of ₹3,00,75,000 on February 14. Once NCS Sugars was brought under CIRP on June 29, the resolution professional wrote to the district collector on July 13 on the commencement of insolvency proceedings. 

Restrain on authorities

Despite the CIRP proceedings, Dhatri Real Estate paid the balance amount of ₹17,04,25,000 on November 18 and sale certificates were issued on December 3. However, on December 5, NCLT restrained the district authorities from proceeding further with disbursement of the amount deposited by the real estate firm. The authorities did not inform the tribunal that they had issued the sale certificates.

On January 2, 2023, the resolution professional got the information of the sale certificates being issued in a response filed by the authorities with the tribunal. Following this, Sivalingam sought that the sale be declared invalid. 

Earlier on September 8, 2022, the resolution professional had asked the district authorities what action they had taken under the provisions of the Recovery Act to sell the sugar firm’s immovable property to clear the dues to farmers. On October 17, Sivalingam wrote to the collector to refrain from selling the company’s properties as there was a moratorium under CIRP. Another letter was sent on November 6 and November 10, the resolution professional’s representative held a meeting with the district collector and stressed the need to honour the moratorium.

Sale despite CIRP

Sivalingam also sought details on October 21 from the State cane commissioner on the proceeds received from the real estate firm. The collector on November 30, 2022, recorded in an order that Dhatri Real Estate had paid ₹10.05 crore and allowed the tehsildars to disperse the amount to “certain” farmers. 

Following these developments, Sivalingam moved NLCT against the district authorities. His counsel Y Suryanarayana argued that the district authorities had gone ahead with the sale despite knowing that the company had come under provisions of IBC. The district authorities argued that NCS Sugars owed farmers ₹16,84,88,385 and hence they had initiated action under the Recovery Act on January 2, 2022. They said that on expiry of 30 days from the date of auction, the title and interest ceased to exist in the company’s name. Thus, when the sugar firm came under CIRP, its property was not an asset. 

NCLT, in its order, said since the sale under the Recovery Act had not been concluded when the CIPR commenced, the district authorities should not have proceeded further with the sale. 

Establishing sanctity

It said the highest bidder had not paid the rest of the amount within 30 days. Thus, the sale had not taken place though the bidder had deposited 25 per cent of the total amount after winning the bid. The remaining amount was paid post-CIRP and it is prohibited via a Supreme Court order in a case relating to Indian Overseas Bank. 

Terming the sale invalid, NCLT asked the real estate firm to give physical possession of the property of NCS Sugars to the resolution professional. 

S Badri Narayanan, a Delhi-based Insolvency and Restructuring Specialist, said, “The order will establish the sanctity of CIRP and help achieve the objective of IBC for revival of companies.” 

Y Suryanarayana, the counsel representing Sivalingam, expects the order to help protect such assets from alienation during moratorium. 

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