Clarification of the “Pending Dues” position under the Insolvency Bankruptcy Code Regime

The Insolvency and Bankruptcy Code, 2016 ("the Code" & “IBC”) has been widely acclaimed as a transformative legislative framework in India, representing a significant departure from previous insolvency laws by emphasizing efficient resolution processes and the professionalization of insolvency services.

The Code's fundamental objective is to facilitate the timely reorganization of distressed businesses, prioritizing the preservation of their value and enabling equitable distribution among stakeholders. While hailed as a game-changing legislation, its efficacy has been subject to scrutiny amidst operational challenges and misinterpretations.

Despite its commendable intentions, the Code has been misappropriated in certain instances, primarily as a means of debt recovery rather than a tool for genuine corporate restructuring. This misuse has led to a proliferation of Section 9 and Section 7 Petitions, reflecting a misunderstanding of the Code's purpose.

However, the Adjudicating Authorities (“AA”), tasked with interpreting and applying the Code, have played a crucial role in refining its implementation. One such issue that has been addressed by the AA is the treatment of “pending dues” in liquidation scenarios.

The issue pertains to the liability for “pending dues” associated with properties acquired through liquidation auctions. While auction disclaimers typically absolve the liquidator from such liabilities, practical realities often present complexities, since such properties usually carry encumbrances or pending obligations, therefore even after the sale of such properties goes through, the same nevertheless becomes the subject matter of litigation. One of the most common examples of pending dues would be electricity charges, usually when an industrial unit is purchased in liquidation, more often than not, the unit has pending dues which haven’t been cleared by the corporate debtor for obvious reasons. Hence after the purchase of such property a very obvious question that surfaces is, which party will be responsible for those pending dues, are they to be considered as bad debts, or should they be recovered from the successful auction purchaser. The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) have clarified their stand on this proposition and have ruled in favour of the successful Auction Purchaser.

According to the NCLAT  in the matter of Paschimanchal Vidyut Vitran Nigam Ltd. Vs HSA Traders Through Sole Proprietor & Ors Company Appeal (AT) (Insolvency) No.527 of 2023, the position on this issue is clarified, basis the below-mentioned reasoning:

“The claims of the authority being the appellant in the abovementioned case are subject to the approval of the Resolution Professional and the right course of action would be that as and when the corporate debtor goes into CIRP, the Appellant should have filed its respective claim in the prescribed format with the RP or the liquidator, the appellant has no business in claiming its dues from the successful auction purchaser. In case the claims haven’t been filed with the RP or the Liquidator, then no belated claim can be raised against the successful auction purchaser, even though the auction is done on an “as is, where is, without any recourse” caveat, and although the implication of the same would be for the auction purchaser to have done due diligence of the property, it doesn’t automatically make him/her responsible for all accrued liabilities of the corporate debtor. Although that isn’t the case in every scenario, if a similar auction was done under the SARFESI act, then the caveat would have had a higher footing and in that scenario, the auction purchaser would be responsible for payment of prior pending dues. This position has been time and again reiterated by the Hon’ble Supreme Court in various judgments.”

The ruling in the aforementioned case highlights the positive impact of the Code, emphasizing its intention to preserve the asset value. The judgment referencing the case of Paschimanchal Vidyut Vitran Nigam Ltd. vs. Raman Ispat Private Ltd. & Ors, underscored the detrimental effects of forcing auction purchasers to shoulder the debts of the corporate debtor, which would not only diminish the property's value and interest but also lead to reduced recovery amounts resulting in—a lose-lose situation for all parties involved.

The key principal basis on which the NCLAT passed the captioned judgment is that parties like the Appellant must utilize the proper channels provided by the IBC to raise their claims before the Resolution Professional (RP) or liquidator at the appropriate stage. Failure to do so means that successful auction purchasers cannot be held accountable for the debts of the corporate debtor.

It's also important to note that comparisons to auctions conducted under different laws hold no weight in this context, as those statutes typically don't permit authorities/entities to raise their claims during proceedings. In contrast, the IBC provides a mechanism for such claims to be addressed.

Additionally, the NCLAT also addressed the supremacy of the IBC over the Electricity Act 2003. Despite arguments suggesting the primacy of the Electricity Act, the NCLAT ultimately ruled in favour of the IBC. This decision was supported by various precedents, emphasizing the IBC's precedence over other laws.

Anhad Law’s perspective

From our standpoint, the NCLAT's stance appears legally sound. While it may seem unfavourable to authorities with pending dues, this aspect shouldn't carry excessive weight. Under the IBC, the authority with pending dues has the option to file a claim before the Liquidator or the Resolution Professional (RP), which isn’t possible under legislations like SARFESI, etc. This interpretation is crucial for maintaining asset value; otherwise, assets under auction might be treated unfavourably, attracting no potential buyers. Importantly, this judgment aligns with the IBC's objective of timely resolution of debt. If every entity were allowed to file belated claims or harass auction purchasers, then the implementation of the code would stagnate, achieving no results. No exceptions should be granted, whether to a statutory/government body or a private entity.

Furthermore, this interpretation has been extended to cooperative housing societies[1], though its application is still evolving. Different cooperative bodies have distinct rules that require clarification, but nevertheless, the present rulings by NCLT and NCLAT are significant for clarity as they underscore that under the IBC, purchasers who legitimately acquire properties aren't obligated to settle any pending dues, providing a sense of relief to auction purchasers.

[1] Mr. Hitendra Vishanji Nagda & Ors. Vs Prime Plaza Premises Co-operative Society Ltd. in company petition (IB) No. 4302/MB/C-II/2018