absolute or unfettered discretion

Supreme Court: In an appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) against the order passed by the National Company Law Appellate Tribunal (‘NCLAT’) allowing the appeal of Punjab National Bank (‘PNB’)/financial creditor and upholding the decision of the Liquidator to cancel the auction sale, the division bench of BV Nagarathna and Ujjal Bhuyan*, JJ. held that it that though para 1(11A) has been inserted in Schedule I to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. (‘Regulations’) w.e.f. 30-9-20221, it only recognizes the need and necessity for giving reasons in the event of rejecting the highest bid. It is an acknowledgment of the fundamental principle. Thus, intimation of the reasons for rejection of the highest bid would also be the requirement prior to 30-09-2021. Thus, it set aside the order passed by the Appellate Tribunal and restored the order of the Tribunal.


After noting the Bid Application Form, the Court said that as per Clause 7 of the Bid Application Form, the applicant/ bidder was required to adhere to the terms and conditions mentioned in the E-Auction Process Information Document. Clause-9 provided that the applicant would participate in the E-auction for the sale of assets on ‘as is where is basis, as is what is basis, whatever there is basis and no recourse basis’. Further, if selected as the highest bidder, the bid amount would be unconditionally binding on the applicant.

The Court also took note of the E-Auction Process Information Document, that was issued by the Liquidator for regulating the E-auction of the subject property of the corporate debtor. Further, it noted that on 21-07-2021, the appellant received a congratulatory e-mail from Liquidator, informing them that it had won the auction for the subject property. After perusing the same, the Court find that no reasons were assigned by the Liquidator for cancellation of the E-auction held on 20-07-2021. Appellant was simply informed that the E-auction was cancelled in terms of Clause 3(k) of the E-Auction Process Information Document, that only declares that the Liquidator has the absolute right to accept or reject any or all bids or adjourn/postpone/cancel the E-auction etc., at any stage without assigning any reason.

The Court said that the language employed by the Liquidator at the end of the bidding process. vide the e-mail dated 21-07-2021 informing the appellant that it had won the auction and that its winning order had been prepared, clearly indicates the finality of the decision made by the Liquidator.

The Court noted that Liquidator invoked Clause 3(k) of the E-Auction Process Information Document and decided to cancel the auction. There was no concluded contract till that point of time; it is only after the total amount is paid that the sale is concluded. Before the sale can be successfully concluded, Liquidator has the right to cancel the sale. Successful bidder in the auction sale does not acquire any vested right in law to enforce the auction. Therefore, the Court held that the Tribunal was not justified in setting aside cancellation of auction by the Liquidator. Further, the Tribunal had further failed to notice 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.

The Court, while discussing the powers and duties of a Liquidator, said that it is evident that the Liquidator virtually steps into the shoes of the management of the corporate debtor and oversees the liquidation process. In this process, he holds the liquidation estate of the corporate debtor as a fiduciary for the benefit of all the creditors. While overseeing the liquidation process, he 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, though he cannot sell such property or claims to any person who is not eligible to be a resolution applicant.

After taking note of Paras 1(11), (11A) of Schedule-I to the Regulations, the Court said that where the Liquidator rejects the highest bid in an auction process, he shall intimate the reasons for such rejection to the highest bidder and mention it in the next progress report. Further, it said that, 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.

The Court reiterated that furnishing of reasons is an important aspect rather than a check on the arbitrary exercise of power. Furnishing of reasons presupposes application of mind to the relevant factors and consideration by the authority before passing an order. The absence of reasons may be a good reason to draw inference that the decision-making process was arbitrary. Therefore, para 1(11A) has just given a statutory recognition to the requirement for furnishing reasons, if the Liquidator wishes to reject the bid of the highest bidder.

Further, the Court said that in the event of a conflict between the E-Auction Process Information Document and the Code or the Regulations, the provisions of the Code or the Regulations, as the case may be, shall always prevail. 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. The objective of the E-Auction Process Information Document is to provide information to the interested party to enable it to offer its bid. As per Clause 5(n) the bidder with the highest offer/bid does not get any right to demand acceptance of his bid. Thus. 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. Further, it is incomprehensible that an administrative authority can take a decision without disclosing the reasons for taking such a decision.

After taking a conjoint note of the provisions of Schedule-I, more particularly paras 1(11) to (13) the Court said 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. Even after cancelling the highest bid of the appellant, in the subsequent sale notice , the Liquidator had again 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. Thus, the Court found no rationale or justification in rejecting the bid of the appellant and going for another round of auction at the same reserve price.

Further, it said that the 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 avoidable expenses but also erode the credibility of the auction process itself. 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 Court said that as it is in an administrative framework governed by the rule of law there can be no absolute or unfettered discretion of the Liquidator. 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 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. Thus, as per the Court, the 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.

Moreover, after taking note of the Section 5(24) and Section 29-A(g) of the Code, the Court said that it is evident that a person who is a relative of the individual or a relative of the spouse of the individual would be a ‘related party’ in relation to that individual. That apart, a private company or a public company in which the individual is a director and holds along with relatives more than two percent of its share capital or paid-up share capital, as the case may be, would be a ‘related party’ in relation to an individual. Further, as per the explanation, both maternal and paternal uncles would be covered within the definition of ‘related party’.

The Court also opined that the expressions ‘related party’ and ‘relative’ contained in the definition sections must be read noscitur a sociis with the categories of person mentioned in Explanation I. Thus, it would include only persons who are connected with the business activity of the resolution applicant. Thus, the expression ‘connected person’ would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan.

Thus, the Court said 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.

Therefore, the Court held that the Appellate Tribunal was not justified in setting aside the order of the Tribunal dated 12-08-2021.

[Eva Agro Feeds Pvt. Ltd v Punjab National Bank, 2023 SCC OnLine SC 1138, decided on 06-09-2023]

*Judgment Authored by: Justice Ujjal Bhuyan

Know Thy Newly Appointed Supreme Court Judge: Justice Ujjal Bhuyan

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