Restrictions on discretion of Liquidator in cancelling a valid auction in order to fetch a higher price

Eva Agro Feeds Private Limited vs Punjab National Bank and Anr

The Division Bench of Supreme Court in Eva Agro Feeds Private Limited vs Punjab National Bank and Anr.[1] has held that- a liquidator does not have absolute and unfettered powers to cancel a valid auction and opt for another round of auction on an expectation of fetching higher price simply because the liquidator has discretion of carrying out multiple auctions. Post auction, the highest bid has to be accepted by the liquidator unless there are (i) statutory infirmities in the bidding or (ii) the bidding is collusive in nature or (iii) there is an element of fraud in the bidding process.

• M/s Amrit Feeds Limited (Corporate Debtor) was admitted to corporate insolvency resolution process by an order of NCLT dated October 22, 2019 passed in a petition filed under section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC).
• On February 19, 2021, NCLT passed an order for liquidation of the Corporate Debtor.
• The Liquidator (Respondent No. 2) issued a sale notice dated June 2, 2021 for sale of assets of the Corporate Debtor and the auction date was fixed as June 23, 2021. Since the auction did not materialize, the Liquidator issued another similar sale notice dated June 28, 2021 and auction was scheduled onJuly 20, 2021.
• Eva Agro Feeds Private Limited (Appellant) was the sole bidder which submitted its bid on July 16, 2021 to the Liquidator for an amount of INR 10 crores equivalent to the reserve price as notified in the bid which ended on July 20, 2021.
• On July 20, 2021 the Appellant received an e-auction certificate from the Liquidator certifying that it has won the auction for assets of Corporate Debtor.
• Thereafter, on July 21, 2021, the Appellant received an email from Liquidator where it was informed that the Liquidator has cancelled the e-auction under Clause 3(k) of the Disclaimer Clause in the E-auction Process Information Document. Clause 3(k) of E-auction Process Information Document provides that the Liquidator has absolute right to accept or reject any or all bids or adjourn/postpone/cancel the e-auction or withdraw any asset/property or portion thereof from e-auction at any stage without assigning any reason thereof.
• NCLT: The Appellant being aggrieved by the rejection of his bid, filed an application before NCLT under section 60 of IBC. The NCLT vide its order dated August 12, 2021 dismissed the application and directed the Liquidator to send communication to Appellant for depositing the balance sale consideration.
• The Liquidator complied with the order of NCLT and subsequently, the Appellant deposited the entire sum on September 10, 2021 following which the Liquidator issued a sale certificate dated September 15, 2021.
• NCLAT: One financial creditor of Corporate Debtor, Punjab National Bank filed an appeal against NCLT’s order under section 61 of IBC. The NCLAT vide its impugned order dated November 30, 2021 allowed the appeal and set aside NCLT’s order. Consequently, the steps taken pursuant to NCLT’s order were also reversed and the Liquidator was given liberty to initiate fresh process of auction.
• Being aggrieved, the Appellant filed an appeal before the Supreme Court.

• Powers and duties of the Liquidator while conducting an auction under the liquidation process.
• The prospective or retrospective nature of para 1(11A) inserted in Schedule I of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Regulations) vide notification dated September 30, 2021 – which requires the Liquidator to provide reasons for rejecting the highest bid in auction process.
• Discretion of Liquidator in cancelling a valid auction sale in liquidation process.
• Ineligibility of retired/ex-director of Corporate Debtor to be an auction purchaser and the time period to attract ineligibility under section 29A of IBC.

In the liquidation process, the Liquidator virtually steps into the shoes of the management of the corporate debtor and holds the liquidation estate as a fiduciary for benefit of the creditors. The Liquidator has the mandate to sell all movable and immovable properties and actionable claims of the corporate debtor in liquidation by way of either public auction or by private contract. The Liquidator however cannot sell such property or claims to any person who is not eligible to be a resolution applicant.

The Liquidator is empowered under para 1(11) of Schedule I of Regulations to conduct multiple rounds of auction to maximize the realization from the sale of the assets and to promote the best interest of the creditors. At the same time, para 1(11A) provides that the Liquidator is required to provide reasons to the highest bidder in case he rejects the highest bid in an auction process. However, in this matter, while rejecting the bid of the Appellant, no reasons were assigned by the Liquidator for cancellation of e-auction.

It was contended that para 1(11A) was inserted in Schedule I vide notification dated 30 September 2021 and hence, applies prospectively by virtue of which the Liquidator was not required to provide any reasons. The Court while dismissing the argument clarified that it is trite law that furnishing of reasons is an important aspect and in fact is  a check on the arbitrary exercise of power.  Therefore, para 1(11A) has given statutory recognition to the requirement for furnishing reasons being an integral facet of principles of natural justice, in case the Liquidator wishes to reject the bid of the highest bidder. It has made explicit what was implicit and thereby, applicable to the present case.

As noted above, reliance was placed on Clause 3(k) of the E-Auction Process Information Document which gives the Liquidator absolute powers to cancel an e-auction without reasons. In this regard, the Court referred to other clauses of the E-Auction Process Information Document viz. Clause 2(m) which provides that information in E-Auction Process Information Document should be read with IBC and Regulations, and in the event of conflict, the provisions of IBC and Regulations shall always prevail. That apart, Clause 3(i) clarifies that the E-Auction Process Information Document is neither an agreement nor an offer by the Liquidator to the prospective bidders or any other person. Further, as per Clause 5(n), the bidder with the highest offer/bid does not get any right to demand acceptance of his bid. A conjoint reading of the aforesaid provisions makes it clear that 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 relevant factors.

Additionally, as per para 1(12) of Schedule I, the Liquidator has to invite the highest bidder to provide balance sale consideration within 90 days of the date of such a demand. If payments are made after 30 days, it attracts interest @ 12% and further, the sale stands cancelled, if the payment is not received within 90 days. Para 1(13) says that on payment of the full amount, the sale shall stand completed and the Liquidator shall execute the certificate of sale. In view thereof, the Liquidator is ordinarily required to accept the highest bid 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.

After a systematic analysis of powers of the Liquidator stipulated in IBC and Schedule I of the Regulations, the Court held that “there can be no absolute or unfettered discretion on the part of the Liquidator to cancel an auction which is otherwise valid. 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”.

One of the arguments put forth before the Court was also that a director and principal shareholder of the Appellant was also the promotor director and principal shareholder of the Corporate Debtor and hence, the Appellant is not eligible to participate in the auction of subject property of the Corporate Debtor. The Court referring to various landmark judgments on the expression ‘related party’ held 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.  More particularly, the related party was not in charge of the Corporate Debtor when the Appellant had made its bid pursuant to the auction sale notice.

The primary goal of the Insolvency and Bankruptcy Code (IBC) is to maximize value within a specific timeframe. In pursuit of this objective, the Supreme Court has taken measures to curtail any unjustified and arbitrary authority vested in the liquidator when it comes to cancelling a valid auction sale without providing adequate reasons. In an insolvency and/or liquidation process, time is of the essence as the assets of the Corporate Debtor loses its value on account of prolonged delays. Similarly, it cannot be left open for the Liquidator to exercise unfettered discretion since IBC is an administrative framework governed by rule of law. In this regard, the Court rightly recognised that if arbitrary cancellation of auction is allowed, it would lead to unavoidable expenses and also erode the credibility of the auction process.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Shailesh Poria, Partner – Email – shaileshporia@elp-in.com
Dhruvee Patel, Associate – Email – dhruveepatel@elp-in.com

[1] 2023 SCC OnLine SC 1138