IBC - Liquidator Can't Cancel Valid Auction On Mere Expectation Of Fetching Higher Price; No Unfettered Discretion : Supreme Court

The Supreme Court on Wednesday held that even though the highest bidder in an auction sale under the Insolvency and Bankruptcy Code 2016 has no indefeasible right to demand acceptance of his bid, the liquidator, if such a bid is rejected must furnish reasons for the same in the rejection order. 

A division bench of Justice B V Nagarathna and Justice Ujjal Bhuyan held that the mere expectation of the Liquidator that a higher price may be obtained is not a good ground to cancel an otherwise valid auction. The Court also held that once an auction is complete, the liquidator does not have absolute or unfettered discretion to cancel the auction, unless it is found that fraud or collusion had vitiated it.

“..while the highest bidder has no indefeasible right to demand acceptance of his bid, the Liquidator if he does not want to accept the bid of the highest bidder has to apply his mind to the relevant factors. Such application of mind must be visible or manifest in the rejection order itself.”

The Apex Court was considering an appeal against the order of the National Company Law Appellate Tribunal (NCLAT) that had held that the highest bidder had no vested right to claim the auction in its favour in a liquidation sale. The NCLAT had held that the liquidator had the power to cancel the auction in terms of the auction notice, if he thinks the price offered is inadequate. Setting aside the order of the NCLAT the Apex Court held:

“..mere expectation of the Liquidator 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. Such a cause of action would not only lead to incurring of avoidable expenses but also erode credibility of the auction process itself. That apart, post auction it is not open to the Liquidator to act on third party communication and cancel an auction, unless it is found that fraud or collusion had vitiated the auction. The necessary corollary that follows therefrom is that there can be no absolute or unfettered discretion on the part of the Liquidator to cancel an auction which is otherwise valid. As it is in an administrative framework governed by the rule of law there can be no absolute or unfettered discretion of the Liquidator.”

The Appellant (Eva Agro Feeds Private Limited) that had approached the NCLT, Kolkata bench, against the cancellation of the auction by the Liquidator, had contended that there was no material on record to support the perception of the Liquidator that cancelling the present auction and going for another round of auction would result in better price for the assets in question. The Tribunal had held that there cannot be an endless wait to obtain a better price. The Apex Court while restoring the order of the Tribunal said:

“Merely because the Liquidator has the discretion of carrying out multiple auction 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. Tribunal had rightly held that there were no objective materials before the Liquidator to cancel the auction process and to opt for another round of auction”

Background 

In the instant case, Punjab National Bank, being a financial creditor of the corporate debtor had approached the NCLAT against the order of the Adjudicating Authority of the NCLT, Kolkata Bench that had directed the Liquidator to proceed with the highest bidder in the auction, (Eva Agro Feeds Private Limited). The Bank and the Liquidator had argued that even if some bidder is highest, it does not amount to the auction being successfully completed and that the highest bidder does not get a vested or acquired right in law.

The NCLAT set aside the order of the adjudicating authority and directed the Liquidator to initiate a fresh process of auction. Eva Agro Feeds Pvt. Ltd, subsequently approached the Apex Court against this order.

Impugned Appellate Tribunal Order

Appellate Tribunal while holding the cancellation of auction to be valid and justified gave liberty to the Liquidator to initiate fresh process of auction. The Appellate Tribunal noted that the appellant was the sole bidder and its bid was equal to the reserve price, and hence the liquidator was justified in cancelling the auction finding the amount to be inadequate. The NCLAT held that the Liquidator invoked Clause 3(k) of the E-Auction Process Information Document which allowed him to cancel the auction. The Appellate Tribunal also held that the terms of the auction sale notice provided absolute right to the Liquidator to accept or reject any bid or to cancel the auction without assigning any reason, and the appellant at the time of auction had accepted the same. The Appellate Tribunal had concluded that the Liquidator has the right to cancel the auction any time before the sale is concluded. The sale is successfully concluded only after the total amount is paid, the NCLAT held. 

Arguments 

Sr. Adv. Neeraj Kishan Kaul appearing for the Appellant, the successful bidder in the first auction sale, argued that the order of the Liquidator cancelling the auction sale, did not give any reasons for the same.

Adv. Rajesh Kumar Gautam, appearing for Punjab National Bank (Respondent No1.), the financial creditor that had approached the NCLAT, argued that the appellant failed to point out any specific provision of the Insolvency and Bankruptcy Code, 2016 or in the IBBI (Liquidation Process) Regulations 2016 prohibiting the Liquidator from cancelling the auction sale after declaring the highest bidder but before completion of sale. He argued that the liquidator had the power to cancel the auction under Clause 3(k) of the auction notice and that no reason was required to be assigned for the same. The appellant had unconditionally accepted all the clauses of the auction notice, including Clause 3(k), while bidding, it was argued. Unless, the sale is complete, the highest bidder has no vested right for confirmation of sale in his favour, he argued.

It was also argued by the 1st Respondent that under Para 1(11) of Schedule I to the Regulations, the Liquidator has the discretion to hold multiple rounds of auctions to maximize realization in the sale of assets and to promote the best interest of the financial creditor. He argued that since the appellant was the sole bidder and since the bid amount was the same as the reserve price, the liquidator was justified in cancelling the auction to fetch a better price. Adv. Krishnaraj Thakker, appearing for the liquidator (Respondent No.2), adopted the submissions of the 1st Respondent. 

Sr. Adv. Siddharth Bhatnagar, appearing for the intervenor, Mr. Harish Bagla, argued that the principal person in control of the appellant was one Vijay Kumar Ghidia. Ghidia was also one of the promoter directors and principal shareholders of the corporate debtor and hence the sale of the asset of the corporate debtor could not be in favour of a related party of the corporate debtor due to the specific bar under Section 29A of the Code. Ghidia comes within the meaning of ‘related party’ under Sections 5(24) and 5(24A) of the Code and hence the sale would be bad in law, it was argued.

He also argued that para 1(11A) which requires the liquidator to give reasons for rejecting the highest bid, was inserted in Schedule I only on 30.09.2021 and will have no prospective effect and hence would not apply to the auction in question. 

Findings Of The Court 

The Apex Court rejected the argument that para 1(11A) of Schedule 1 of the Regulations that requires the liquidator to give reasons for rejecting the highest bid could only have prospective application since it was inserted in the Regulations only on 30.09.2021. The Apex Court made it clear that Para 1, 11(A) inserted on 30.09.2021, only gives statutory recognition to a fundamental principle and that this would be applicable prior to 30.09.2021 as well.

“While it is true that para 1(11A) came to be inserted in Schedule 1 to the Regulations with effect from 30.09.2021, it does not imply that an auction sale or the highest bid prior to the aforesaid date could be cancelled by the Liquidator exercising unfettered discretion and without furnishing any reason. It is trite law that furnishing of reasons is an important aspect rather a check on the arbitrary exercise of power. Furnishing of reasons presupposes application of mind to the relevant factors and consideration by the concerned authority before passing an order. Absence of reasons may be a good reason to draw inference that the decision making process was arbitrary. Therefore, what para 1(11A) has done is to give statutory recognition to the requirement for furnishing reasons, if the Liquidator wishes to reject the bid of the highest bidder. Furnishing of reasons, which is an integral facet of the principles of natural justice, is embedded in a provision or action, whereby the highest bid is rejected by the Liquidator. Thus, what para 1(11A) has done is to give statutory recognition to this well-established principle. It has made explicit what was implicit.”

The Apex Court also rejected the argument of the Respondents that in terms of Clause 3(k) of the E-Auction Process Information Document, the liquidator had the power to cancel the auction without assigning any reason, since the bidder had accepted the terms and conditions of the auction notice.

The Court held that in case of a conflict between the E-Auction Process Information Document and the Code or the Regulations, the provisions of the Code or the Regulations, will always prevail.

The Apex Court also noted that there was no rationale in cancellation of the auction. The liquidator had justified the cancellation by pointing out that the appellant was the sole bidder and the auction price was the same as the reserve price. However, the Apex Court noted that in the subsequent sale notice as well liquidator had fixed the reserve price of the subject property at Rs.10 crores which was the reserve price in the previous round of auction sale and which was also the bid value of the appellant. “If this is the position, we fail to find any rationale or justification in rejecting the bid of the appellant and going for another round of auction at the same reserve price.” The Apex Court said. 

According to para 1(12) of Schedule-I of the Regulations, on the close of the auction the highest bidder shall be invited to provide balance sale consideration within 90 days of the date of such demand. Para 1(13) says that on payment of the full amount the sale shall stand completed on payment of full amount. 

An auction sale is not completed under Clause 12 of the Schedule 1, only because a person has been declared the highest bidder. The auction sale is concluded only on full payment of the amount under Clause 13 of Schedule 1 and hence the liquidator could cancel the auction any time before the sale is complete, the NCLAT had observed. However, the Apex Court rejected this view of the Appellate Tribunal and held:

“Therefore, if we read the provisions of Schedule-I, more particularly paras 1(11) to (13) thereof, in a conjoint manner a view may reasonably be taken that ordinarily the highest bid may be accepted by the Liquidator 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.”

The Court also rejected the argument that the principal person in control of the Appellant was a related party and hence the asset of the corporate debtor could not be sold to him.  

“it is clearly manifest that the disqualification sought to be attached to the appellant is without any substance as the related party had ceased to be in the helm of affairs of the corporate debtor more than a decade ago. He was not in charge of the company or an influential member of the company i.e., the corporate debtor when the appellant had made its bid pursuant to the auction sale notice.” the Apex Court held. 

Case Title: Eva Agro Feeds Private Limited V. Punjab National Bank & Anr., Civil Appeal No(S). 7906/2021

Citation : 2023 LiveLaw (SC) 753

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