Supreme Court: No absolute or unfettered discretion on the part of liquidator to cancel an auction which is otherwise valid October 20, 2023
Published in: Between The Lines
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The Hon’ble Supreme Court of India (“SC”) has, by its judgment dated September 6, 2023, in the matter of Eva Agro Feeds Private Limited v. Punjab National Bank and Another, held that the mere expectation of the liquidator, that a higher price can be attained, can be no good ground to cancel an otherwise valid auction and go for another round of auction.
Huvepharma Sea (Pune) Private Limited filed an application against M/s. Amrit Feeds Limited (“Corporate Debtor”) under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“Code”). The National Company Law Tribunal, Kolkata Bench (“NCLT”) approved the application, allowing the corporate insolvency resolution process to begin. Eva Agro Feeds Private Limited (“Appellant”) submitted a bid for the subject property of the Corporate Debtor, which included lands measuring total of 105,250.40 sq. ft. (“Subject Property”).
The Appellant who was the successful auction purchaser received an E-auction certificate on July 20, 2021 from the liquidator of the Corporate Debtor (“Respondent No. 2”) certifying that the Appellant had won the auction for the Subject Property. Further, Mr. Vijay Kumar Ghidia, a director and principal shareholder of the Appellant, is also the maternal uncle of Mr. Harish Bagla who is the director of Appellant. He was also an ex-managing director of the Corporate Debtor.
On July 21, 2021, the Appellant received another e-mail from Respondent No. 2 regarding the cancellation of the E-auction certificate dated July 20, 2021 under clause 3(k) of the disclaimer clause of the E-auction – Process Information Document (“E-auction Sale Notice”) thereby informing that the auction of the Subject Property will be done by a fresh E-auction. Aggrieved by the cancellation of the E-auction, the Appellant filed an application with NCLT under Section 60 (Adjudicating Authority for corporate persons) and related provisions of the Code and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Regulations”). On August 12, 2021, NCLT disposed of the application by directing Respondent No. 2 to send a communication to the Appellant requiring them to deposit the balance sale consideration within the specified time.
The Appellant deposited the balance of consideration money with Respondent No. 2 and received a sale certificate from Respondent No. 2. Pursuant to which Punjab National Bank (“Respondent No. 1”) filed an appeal before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) under Section 61 (Appeals and Appellate Authority) of Code against the order dated August 12, 2021 passed by the NCLT.
NCLAT, vide its order dated November 20, 2021, set aside the order dated August 12, 2021 passed by the NCLT and gave liberty to Respondent No. 2 to initiate the fresh E-auction process (“Impugned Order”).
Aggrieved by the Impugned Order, the Appellant filed an appeal before the SC under Section 62 (Appeal to Supreme Court) of the Code.
Contentions of the Appellant:
The Appellant submitted that Respondent No. 2 had cancelled the auction sale without giving any proper reasoning or justification, which is arbitrary. The Appellant was the sole and the highest bidder and its bid amount matched the reserve price mentioned in the E-auction Sale Notice. Respondent No. 2 cannot go for a fresh auction keeping the reserve price at the same amount of INR 10 crores which was the bid offered by the Appellant and accepted by Respondent No. 2.
The Appellant further submitted that Respondent No. 1 construed clause 3(k) of the E-auction Sale Notice to suggest that because the full amount had not been paid, it was entitled to use the clause and terminate the offer. Given the entire structure of the Regulations, such a claim is completely implausible. Respondent No. 2 provided no explanation for cancelling the auction procedure.
Further, the promoter of the Appellant retired from the Corporate Debtor in the year 2011 and was no longer connected or associated with the Corporate Debtor or involved in the affairs of the Corporate Debtor and therefore does not fall within the definition of the ‘related party’ as defined under the Code. The Appellant has placed reliance on the judgement of Swiss Ribbons Private Limited and Another v. Union of India and Others, [(2019) 4 SCC 17] in which the court had held that in order to attract disqualification under Section 29A (Persons not eligible to be resolution applicant) of the Code, the relationship must be proximate. Therefore, the Appellant is not disqualified under Section 29A of the Code.
Contentions of the Respondents:
The contention of the Respondent No. 1 was that as per Clause 3(k) of the E-auction Sale Notice, the Respondent No. 2 has the absolute right to accept, reject, adjourn, postpone, or cancel any bids at any stage without assigning any reason. There has been no bar under the Code or the Regulations which restrains the Respondent No. 2 from cancelling an auction sale before the completion of the actual sale.
Respondent No. 2 decided to cancel the E-auction certificate in order to explore the possibility of further price enhancement of Subject Property. It was also submitted by the Respondent No.1 that the promoter of the Appellant was also the founding promoter of the Corporate Debtor so the sale of the Subject Property could not be conducted in favour of a related party of the Corporate Debtor as per Section 29A of the Code.
Observations of SC
SC held that a mere expectation of the Respondent No. 2, that a still higher price may be obtained, can be no good ground to cancel an otherwise valid auction and go for another round of auction. SC observed that as per the provisions of Schedule-I, more particularly paras 1(11) to (13) of the Regulations, a view may be taken that ordinarily the highest bid may be accepted by the Respondent No. 2 unless there are statutory infirmities in the bidding or the bidding is collusive in nature or there is an element of fraud in the bidding process.
Respondent No. 2 must apply his mind to the relevant factors if he does not want to accept the bid of the highest bidder and such application of mind must be visible or manifest in the rejection order itself. SC emphasized the importance and necessity of furnishing reasons while taking a decision affecting the rights of parties, since it is incomprehensible that an administrative authority can take a decision without disclosing the reasons for taking such a decision.
Furthermore, after considering Sections 5(24) (Definitions) and 29A(g) of the Code, SC stated that it is obvious that a person who is a relative of the individual or a relative of the individual’s spouse would be a ‘related party’ in relation to that individual. Aside from that, a ‘related party’ in respect of an individual is a private or public firm in which the individual is a director and possesses more than 2% of its share capital or paid-up share capital with relatives. Furthermore, according to the explanation, both maternal and paternal uncles would fall within the concept of ‘related party’.
While relying on the judgement in Swiss Ribbons Private Limited and Another v. Union of India and Others, [(2019) 4 SCC 17], the SC further held that the terms ‘related party’ and ‘relative’ in the defining sections must be understood in conjunction with the groups of people stated in Explanation I under Section 29A of the Code. As a result, it would only contain those associated with the resolution applicant’s firm. As a result, the term ‘connected person’ would also include someone who manages or controls the Corporate Debtor’s business during the resolution plan’s implementation.
Thus, SC also observed that the disqualification sought to be attached to the Appellant is without any substance as the promoter of the Appellant had ceased to be at the helm of affairs of the Corporate Debtor more than a decade ago and he was not in charge of the Corporate Debtor or an influential member of the Corporate Debtor when the Appellant had made its bid pursuant to the E-auction Sale Notice.
Decision of SC
It was held that NCLAT was not justified in setting aside the order of the NCLT dated August 12, 2021. Consequently, SC set aside the Impugned Order and restored the order of NCLT dated August 12, 2021. The appeal was accordingly allowed.
SC has upheld the order of the NCLT and further held that there were no objective materials before the Liquidator to cancel the auction process and to opt for another round of auction.
It is in an administrative framework governed by the rule of law that there can be no absolute or unfettered discretion of the Liquidator to cancel an auction which is otherwise valid. Further, as the Liquidator is vested with a host of duties, functions, and powers to oversee the liquidation process in which he is not to act in any adversarial manner, while ensuring that the auction process is carried out in accordance with law and to the benefit of all the stakeholders. Merely because the Liquidator has the discretion of carrying out multiple auctions, it does not necessarily imply that he would abandon or cancel a valid auction fetching a reasonable price and opt for another round of auction process with the expectation of a better price.
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