Introduction
The sanctity of a contract and the finality of property divestment represent the very soul of commercial stability, providing the certainty necessary for predictable business growth. These principles are frequently tested by the desperate measures of insolvency litigation, where technical flaws are used to challenge long-settled deals. In this context, the IBC1 serves as a vigilant guardian, protecting the market from attempts to claw back assets that were lawfully transferred in the past. By enforcing the doctrine of estoppel, the law prevents a debtor from reclaiming an asset after already enjoying the full financial benefits of its sale.
This central theme of “fiduciary overreach” versus “contractual finality” was the primary focus of Mr. Ramachander Rao Bikumalla (Liquidator for M/s Handum Industries Limited) v. M/s Splendid Metal Products Limited (SMPL)2, heard by the NCLT3 Hyderabad, Presided over by Shri Rajeev Bhardwaj (Member Judicial) and Shri Sanjay Puri (Member Technical), the court primarily held that a CD4 is stopped from claiming ownership over assets for which it has received full consideration, even if the transfer agreement remained unregistered. The issue before the court was whether property sold through a slump sale over a decade ago could be pulled back into the liquidation estate of the seller under Section 36 of the IBC.
The CD executed a Slump Sale Agreement to sell its manufacturing unit to the buyer/ Respondent for a certain sum, a consideration that included the buyer taking over the CD’s mortgage liability to a secured creditor. Following the sale, the buyer took possession and reflected the property in its own financial statements for years, while CD ceased to claim the asset in its books. Years later, after the CD entered liquidation, the Liquidator filed this application to recover the property, arguing that the transfer was legally void because the agreement was never registered. The Liquidator further claimed that a subsequent charge holder had relinquished rights, thereby making the property part of CD’s liquidation estate.
The Doctrine of Finality: Shielding Good-Faith Buyers from Technical Voids
The Appellant contended that since the Slump Sale Agreement was unregistered, the legal title never passed from CD to buyer under the Transfer of Property Act5. It was further argued that the property remained the asset of the CD and, following the relinquishment of security interest by subsequent chargeholder, the asset must be handed over to be sold for the benefit of the creditors.
The Respondent argued that the transaction was a concluded contract where full consideration had been paid and possession handed over more than a decade ago. They contended that CD’s own financial records for the past ten years showed they no longer owned the asset. Furthermore, the buyer was itself undergoing a resolution process where a plan had already been approved, and thus any claims against its assets from the period prior to plan approval stood extinguished by law.
The Tribunal based its analysis on the equitable principles of the Doctrine of Estoppel and the admissibility of unregistered documents for collateral purposes. The court scrutinized the Liquidator’s reliance on the charge, finding no specific evidence that such a charge ever attached to the scheduled property.
The Bench heavily analyzed the Supreme Court’s ruling in S. Kaladevi v. V.R. Somasundaram6, which states:
“An unregistered agreement to sell… remains admissible for collateral purposes, including proving the existence of the contract, the nature of possession, and the payment of consideration.”
Applying this to the IBC, the Tribunal analyzed that while Section 53A of the Transfer of Property Act might not offer full statutory protection to an unregistered buyer, the CD is “estopped, both in law and in equity” from asserting an adverse title after having “accepted the full benefits flowing from the contract.” The court found that the Liquidator’s attempt to use a technicality of non-registration was an attempt at “unjust enrichment.”
The Tribunal removed the dichotomy between the requirement for registered title deeds and the reality of commercial possession by invoking the principle that a party cannot “approbate and reprobate” one cannot enjoy the fruit of a sale while simultaneously repudiating the sale itself to reclaim the asset. The court observed that the Register of Charges showed the debt was discharged through this very sale. After hearing both contentions, the Bench reached the decision that the property did not belong to the CD at the commencement of liquidation. By prioritizing the factual divestment of the asset over the technical lack of registration, the Tribunal dismissed the application as “frivolous,” ensuring that the liquidation estate is not artificially inflated with assets that the debtor had long since sold.
Conclusion
The adjudication of Handum Industries Ltd (Supra) reinforces the boundary between the powers of a Liquidator and the vested rights of third-party purchasers. The NCLT has clearly established that a Liquidator cannot use the “shield” of the IBC to commit a “sword” like act of reclaiming properties sold in good faith years prior to the insolvency.
This will likely deter Liquidators from filing speculative applications to recover long-divested assets based purely on registration technicalities. It provides a layer of security to SRAs7 and buyers of distressed assets, ensuring that once a transaction is acted upon and consideration is paid, the threat of future clawbacks by a seller’s Liquidator is significantly minimized.
Will future courts strictly follow the requirements of the Registration Act, or will the “Equity of Possession” continue to prevail in the context of IBC value maximization? Should there be cost implications for Liquidators who file “frivolous” recovery applications that stall the resolution processes of other companies? It is suggested that the IBBI issue a circular advising Liquidators to conduct a thorough “Historical Audit” of financial statements for the ten years preceding insolvency to verify asset ownership before initiating recovery proceedings under Section 60(5).
Citations
Expositor(s): Adv. Shreya Mishra
