The Punjab and Haryana High Court, in CWP-22367-2021 (Central Bank of India v. Union of India) and CWP-11117-2022 (M/s Kaur Sain Spinners Ltd. v. Additional District Magistrate, Khanna), decided on 24.05.2024, disposed of both writ petitions and directed the Recovery Officer, DRT-III, Chandigarh, to release the entire bid amount deposited by the auction purchaser. The Court held that Section 14 of the Insolvency and Bankruptcy Code, 2016 does not bar the release of such amount, as the corporate debtor has no legal right or beneficial interest in money deposited by a third-party bidder in respect of an auction that has already been set aside.
Background
M/s Kaur Sain Spinners Ltd. (the corporate debtor) had availed financial facilities from a consortium of banks led by Punjab National Bank (successor of Oriental Bank of Commerce), along with Allahabad Bank and Central Bank of India. The account was classified as a Non-Performing Asset, and proceedings under the SARFAESI Act, 2002 and the Recovery of Debts and Bankruptcy Act were initiated. Central Bank of India filed OA-3000/2018, which was allowed, and a recovery certificate for Rs.49,44,65,248 was issued and forwarded to the Recovery Officer, DRT-III, Chandigarh.
An auction of the corporate debtor’s properties was held on 05.11.2021 pursuant to orders of the Recovery Officer. Respondent No. 9, M/s Nahar Spinning Mills Limited, was declared the highest bidder for property Lot Nos. 2 and 4 (land and machinery at the Samrala unit) for Rs.37.60 crores. The bidder deposited 15% of the amount (Rs.5.65 crores) along with poundage fee, and the remaining 75% was deposited on 16.11.2021.
The Recovery Officer’s Orders and Their Consequences
The Recovery Officer, vide orders dated 25.10.2021 and 28.10.2021, put the auction proceedings on hold and cancelled the proclamation of sale. Central Bank of India challenged these orders in CWP-22361-2021. The High Court directed that auction proceedings could continue but that no final order confirming the sale would be passed. Subsequently, the Recovery Officer, vide order dated 24.04.2023, concluded that the Proclamation of Sale dated 07.09.2019 was illegal and set aside the auction. The order specifically directed the bidder to furnish account details for refund of the bid amount.
During the pendency of these writ petitions, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was filed by Punjab National Bank and admitted by the NCLT, Chandigarh, vide order dated 14.05.2024. An Interim Resolution Professional was appointed, and both writ petitions were rendered infructuous on the main relief. However, Respondent No. 9 (the auction purchaser) filed an application seeking refund of the entire bid amount along with poundage fee and interest at 12%.
The IRP’s Objection and the Court’s Analysis
The IRP raised an objection to the release of the bid amount, invoking Section 14 of the IBC, 2016, contending that once moratorium has been declared, the jurisdiction to direct release of any sum lies with the NCLT alone. The Court examined Section 14(1) of the IBC, which prohibits the institution or continuation of suits, transfer of assets, enforcement of security interests, and recovery of property against the corporate debtor during moratorium.
The Court observed that the bid amount deposited by the auction purchaser cannot, by any stretch of imagination, be treated as money in which the corporate debtor has any legal right or beneficial interest. The sale had been set aside by an unchallenged order dated 24.04.2023, with refund already directed thereunder. Possession of the property was never handed over to Respondent No. 9, and no right over the same vested in the bidder. Conversely, neither the corporate debtor nor the Bank had any right to claim money deposited towards the bid amount lying with the Recovery Officer.
The Court held that merely because the matter remained pending on account of the writ petitions, the IRP could not use the moratorium to block the refund. The bid amount was not for the benefit of the corporate debtor, and insisting that Respondent No. 9 file a fresh application before the NCLT would be “imminently unjust.”
Direction
The Court directed the Recovery Officer to release the bid amount deposited by Respondent No. 9 expeditiously in terms of the order dated 24.04.2023. Both writ petitions were disposed of as infructuous, without expression of opinion on the merits, and parties were given liberty to pursue remedies before the appropriate forum.
Mrs. Munisha Gandhi, Senior Advocate, with Ms. Salina Chalana, Advocate, appeared for the applicants in CM-8700-01-CWP-2024 in CWP-22367-2021.