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Case Brief on - Ayan Mallick v Pratime Bayal

Introduction

In the case of Ayan Mallick v. Pratime Bayal, the National Company Law Appellate Tribunal (NCLAT) Principal Bench, made up of Justice Ashok Bhushan and Ms. Shreesha Merla, upheld the NCLT's Kolkata decision that a joint auction permitted under the Insolvency and Bankruptcy Code, 2016 (IBC/Code) and SARFAESI, 2002 is necessary to maximize the value of the Corporate Debtor's assets.

The suspended director of the corporate debtor appealed the NCLT's order dated 01.02.2022, which authorized the sale of the corporate debtor's assets under IBC and the guarantor's assets under SARFAESI, before the NCLAT under Section 61 of the Code.

Facts/issues of the Case

In the circumstances of the current case, a joint auction under IBC and SARFAESI was conducted since the guarantors held a portion of the ground on which the factory was built and the liquidator was unable to sell the building without selling the neighboring land. Before the Honorable NCLT, the guarantors contested the combined auction notice and asked for a stay. The Guarantors' plea was denied by the Honorable NCLT. In upholding the NCLT's ruling, the Hon'ble Appellate Tribunal noted that a combined sale would maximize the corporate debtor's assets and that possession of the guarantors' properties had already been obtained under SARFAESI. There is no merit to the claim that the appellant will be adversely affected in any way because the land and factory must be sold together to maximise the value of the assets. The appeal was therefore denied.

Contentions of both the parties

Contentions of the suspended director

The Suspended Director argued that the joint e-auction notice was illegal because the guarantor's property was not the subject of any insolvency or liquidation proceedings. Additionally, it was argued that since the banks had already taken possession of the land under the SARFAESI Act, the liquidator was not permitted to publish a joint e-auction notice in accordance with IBC provisions for the assets of the suspended director, which were the subject of legal proceedings under a completely different act, the SARFASI Act.

The Suspended Director further argued that no differentiation had been established regarding his or her assets or those of the Corporate Debtor, and that a consolidated reserve price of INR 16.15 Crore had been quoted without separating their respective assets.

Contentions of the liquidator

On behalf of the liquidator, it was argued that Indian Bank and State Bank of India, two banks, had moved forward with the sale of the guarantor's land under the SARFAESI Act of 2002 and had estimated the reserve price at INR 3.65 crores, and that the liquidator had also estimated the price of the corporate debtor's factory at INR 12.50 crores. A joint auction of both assets has been created using these two reserve prices. The Liquidator also argued that no legal provisions are being broken, a joint auction of these two assets would net a greater price, and the plant and land must be sold together otherwise no one will buy them.

Decision of the Court

Although NCLT acknowledged that holding a combined auction may have violated some procedural rules, it maintained that selling these assets simultaneously can increase the value of the Corporate Debtor's assets. According to NCLT, the Suspended should not suffer any sort of discrimination because the guarantor will also receive a higher value at the combined auction. The NCLAT affirmed the NCLT's decision by stating that the suspended director cannot be adversely affected in any way when the NCLT is confident that a combined sale will maximize the assets of the Corporate Debtor and Guarantor.

What the law states?

SARFAESI Act, 2002

A central database of security interests based on property rights will be made possible by the amendment to this Act, which is "an act to regulate securitization and reconstruction of financial assets and enforcement of security interests, as well as to provide for matters connected therewith or incidental thereto." The Act covers the following topics:

1. The Reserve Bank of India registers and oversees Asset Reconstruction Companies (ARCs).

2. Enabling the securitization of banking and financial institutions' financial assets, either with or without the help of underlying securities.

3. Encouragement of the ARC's acquisition of financial assets from banks and financial institutions through the issuance of bonds, debentures, or any other instrument in the form of a debenture.

4. Using the Asset Reconstruction Companies to sell security receipts to qualified customers in order to raise money.

5. Enabling the reconstruction of financial assets that are obtained while using the banks' and financial institutions' proposed new authority to enforce securities, alter management, and other authority.

6. Presentation of any asset reconstruction or securitization company that is registered as a public financial institution with the Reserve Bank of India.

7. The term "security interest" is defined as any sort of security, including a mortgage and a change of title on real estate, issued in exchange for the timely return of financial assistance provided by any bank or financial organisation.

8. The borrower's account will be classified as a non-performing asset in accordance with any instructions or rules that may be periodically published by the Reserve Bank of India.

9. In accordance with the guidelines established by the Central Government, the authorised officers will exercise the rights of a secured creditor in this matter.

10. A second appeal to the Appellate Debts Recovery Tribunal and an appeal against any bank or financial institution's action to the relevant Debts Recovery Tribunal.

11. The establishment or imposition by the Central Government of a Central Registry for the purpose of recording securitization, asset reconstruction, and security interest creation transactions.

12. The proposed legislation will first apply to banks and other financial institutions, with the Central Government empowered to expand its scope to include other businesses and non-banking financial institutions.

13. The proposed regulation won't apply to security interests in agricultural lands, loans under Rs. 1 lakh, or situations where the borrower repays 80% of the loan.

Objectives of the SARFAESI Act, 2002

1. Efficient or quick recovery of the banks' and FIs' non-performing assets (NPAs).

2. Enables banks and other financial institutions to sell off assets (such commercial or residential buildings) at auction when a borrower is unable to make debt payments.

References

1. https://www.livelaw.in/ibc-cases/nclat-insolvency-and-bankruptcy-code-sarfaesi-nclt-suspended-director-corporate-debtor-joint-auction-199379

2. https://insolvencyandbankruptcy.in/landmark-judgments-by-the-honble-nclat-1st-may-to-15th-may-2022/

3. https://housing.com/news/sarfaesi-act/