Liability of Auction Purchasers Under IBC and SARFAESI: Insights from Tarun International Ltd. v. Vikram Bajaj

Introduction

The case of Tarun International Ltd. v. Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors. adjudicated by the National Company Law Appellate Tribunal (NCLAT) on March 3, 2021, addresses pivotal issues concerning the liability of auction purchasers under the Insolvency and Bankruptcy Code, 2016 (IBC) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The appellant, Tarun International Ltd., acquired Unit No.1 of Anil Special Steel Industries Ltd. (the Corporate Debtor) through an auction conducted by Allahabad Bank under the SARFAESI Act. The sale was executed on an "as is where is, as is what is, whatever is basis," indicating potential transfer of existing liabilities to the purchaser.

Subsequently, during the Corporate Insolvency Resolution Process (CIRP) initiated against the Corporate Debtor, the Resolution Professional sought determination on whether existing liabilities pertaining to the sold unit would continue to be admissible against the Corporate Debtor or shift to the purchaser. The Appellant contested the order making them liable for these claims, leading to this comprehensive judicial examination.

Summary of the Judgment

The NCLAT upheld the Adjudicating Authority's impugned order, determining that Tarun International Ltd. (the Appellant), as the auction purchaser of Unit No.1, bears liability for claims arising from workmen and employee dues of the Corporate Debtor. The Tribunal concluded that Allahabad Bank explicitly communicated that the acquisition was subject to existing liabilities, thereby transferring responsibility to the purchaser.

The Appellant's appeal was dismissed based on the Tribunal's jurisdiction to determine liabilities under Section 60(5) of the IBC, despite the sale occurring prior to the commencement of CIRP.

The judgment underscores the binding nature of auction terms, especially "as is where is" clauses, and emphasizes the NCLT's authority to adjudicate liabilities even when transactions precede CIRP initiation.

Analysis

Precedents Cited

The judgment references key precedents that shape the interpretation of liability transfer in asset auctions:

Punjab Urban Planning and Development Authority & Ors. v. Raghu Nath Gupta and Ors. (2012) 8 SCC 197: Affirmed that bidders in public auctions are bound by the terms and conditions of the auction notice, especially "as is where is" clauses.
Maharashtra State Co-Operative Bank Ltd. v. Babulal Lade (CA No. 232 of 2016): Held that auctions under the SARFAESI Act are governed strictly by the sale terms, and auction purchasers bear liabilities disclosed therein, regardless of subsequent insolvency proceedings.
Embassy Property Developments (P) Ltd. v. the State of Karnataka (2020) 13 SCC 308: Emphasized that NCLT does not possess jurisdiction over pre-CIRP transactions unless they fall within specific provisions like Sections 44 and 45 of the IBC.

These precedents collectively reinforce the sanctity of auction terms and delineate the boundaries of NCLT's jurisdiction concerning asset sales prior to CIRP.

Legal Reasoning

The Tribunal's legal reasoning hinges on the interpretation of both the IBC and the SARFAESI Act:

Jurisdiction of NCLT: Emphasized that Section 60(5) of the IBC confers jurisdiction to NCLT to entertain claims against the Corporate Debtor but does not extend to adjudicate the liabilities of third-party purchasers involved in transactions completed before CIRP commencement.
Interpretation of Auction Terms: Recognized that the "as is where is, as is what is, whatever is" language in the auction notice explicitly transfers known liabilities to the purchaser. The Tribunal found that the Appellant was adequately informed and consented to these terms.
Separation of Transactions: Clarified that since the sale under SARFAESI Act was concluded prior to CIRP initiation, the transaction remains separate, and the Appellant, as an independent entity, assumes responsibility for existing encumbrances.
Exclusion of Certain Assets: Highlighted that specific assets under contractual arrangements, as per Section 18(1)(f)(vi) of the IBC, are excluded from the definition of "assets," limiting the scope of NCLT's adjudicatory powers.

The Tribunal meticulously analyzed statutory provisions to affirm that the Adjudicating Authority acted within its permissible jurisdiction, thereby legitimizing the transfer of liabilities to the auction purchaser.

Impact

The judgment sets a significant precedent on the liabilities of auction purchasers, particularly in transactions intersecting with insolvency proceedings:

Clarification on Jurisdiction: Reinforces the understanding that NCLT's jurisdiction under the IBC does not retroactively affect transactions completed before CIRP initiation, safeguarding auction purchasers from unexpected liabilities.
Emphasis on Auction Terms: Highlights the necessity for purchasers to diligently examine and comprehend auction terms, as explicit clauses regarding liability transfer are legally binding.
Separation of Transactions: Underscores the importance of temporal separation between asset sales and insolvency proceedings, ensuring that independent transactions remain unaffected by subsequent insolvency resolutions.
Guidance for Secured Creditors: Provides clarity to secured creditors on structuring auction terms to effectively transfer liabilities, aligning with statutory frameworks.

Future cases involving asset auctions and insolvency will likely reference this judgment to delineate the responsibilities of purchasers and the extent of NCLT's jurisdiction.

Complex Concepts Simplified

SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 allows secured creditors to enforce security interests without court intervention upon borrower default. Under this Act, creditors can auction off assets to recover dues.

Insolvency and Bankruptcy Code (IBC)

The Insolvency and Bankruptcy Code, 2016 provides a framework for resolving insolvency for individuals and businesses. It establishes the National Company Law Tribunal (NCLT) as the adjudicating authority for corporate insolvency proceedings.

Corporate Insolvency Resolution Process (CIRP)

Defined under the IBC, CIRP is a process initiated by creditors to restructure a distressed company's debts, aiming to revive the business or to facilitate an orderly liquidation if revival isn't feasible.

National Company Law Tribunal (NCLT)

NCLT is the adjudicating authority under the IBC, responsible for overseeing insolvency resolutions and liquidations of corporate entities. Its jurisdiction is primarily over proceedings initiated under the IBC.

As Is Where Is Basis

This term in auction notices indicates that the property is sold in its current state, and the purchaser accepts all existing liabilities and encumbrances associated with it.

Conclusion

The Tarun International Ltd. v. Vikram Bajaj case delineates the boundaries of liability transfer in asset auctions intersecting with insolvency proceedings. By affirming that auction purchasers bear existing liabilities when explicitly stated in auction terms, the Tribunal reinforces the sanctity of contractual agreements in secured asset sales.

Furthermore, the judgment clarifies the jurisdictional limits of the NCLT under the IBC, ensuring that transactions concluded prior to CIRP initiation remain insulated from subsequent insolvency adjudications. This enhances certainty for entities engaging in asset acquisitions and underscores the importance of meticulous scrutiny of auction terms.

Overall, this decision contributes to a more predictable legal environment for secured asset transactions, balancing the interests of creditors, purchasers, and indebted entities within the framework of Indian insolvency law.