The Supreme Court while explaining the powers of a Liquidator in the auction process has observed that merely because a Liquidator has the power to carry out multiple auction, it would not mean that he can cancel or abandon a valid auction.

The Bench of Justice BV Nagarathna and Justice Ujjal Bhuyan in this context held, "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."

The Court further held that the cancellation of an auction by a liquidator in an insolvency proceeding must be based on valid and justifiable reasons. This case involved an appeal filed under Section 62 of The Insolvency and Bankruptcy Code, 2016 (Code) against an order issued by the National Company Law Appellate Tribunal (NCLAT). The case was centered on cancellation of an auction and whether it was lawful under the Insolvency and Bankruptcy Code.

A company filed for insolvency against another company, leading to the initiation of the insolvency resolution process. After the corporate debtor went into liquidation, a liquidator was appointed, and an auction for its assets was announced. The appellant submitted a bid and was declared the winner, but the liquidator canceled the auction and scheduled a new one. The appellant challenged the cancellation in the Tribunal, which directed the liquidator to communicate with the appellant about the balance payment. A bank (Respondent No.1) appealed this decision to the National Company Law Appellate Tribunal (NCLAT), which upheld the cancellation and ordered a fresh auction. The appellant, dissatisfied with NCLAT's decision, filed the instant appeal.

Senior Advocate Neeraj Kishan Kaul appeared for the Appellant, Advocate Rajesh Kumar Gautam appeared for the Respondent 1, Advocate Krishnaraj Thakker appeared for Respondent 2 and Senior Advocate Siddharth Bhatnagar appeared for the Intervenor.

Respondent No.1 argued that the cancellation was justified and that the appellant accepted the auction terms. The liquidator defended the cancellation, aiming to maximize asset value. The appellant claimed the cancellation was arbitrary and illegal as it had met the reserve price. An intervenor argued that the sale was invalid due to a related party's involvement.

The Supreme Court noted that the case involved the sale of assets of a corporate debtor undergoing insolvency proceedings. Initially, an e-auction was held with a reserve price of Rs. 12.69 crores, but it didn't attract any bidders. Subsequently, a second e-auction was conducted with a reduced reserve price of Rs. 10 crores.

Bidders were required to adhere to the terms and conditions outlined in the E-Auction Process Information Document. This Court emphasized that the auction was on an "as is where is" basis, and the bid amount would be binding on the bidder if selected as the highest bidder.

It was further noted that after the appellant submitted the sole bid, the Liquidator canceled the auction without providing any reasons, citing Clause 3(k) of the E-Auction Process Information Document, which granted the Liquidator the right to cancel the auction without explanation.

The Tribunal in the challenge ruled that there was no valid reason for the Liquidator to cancel the auction and directed the Liquidator to proceed with the sale. An appellate tribunal on the contrary upheld the Liquidator's right to cancel the auction under Clause 3(k) and stated that a successful bidder does not acquire a vested right to enforce the auction. The Tribunal set aside the previous orders and allowed the Liquidator to initiate a fresh auction.

The Court discussed relevant sections of the Insolvency and Bankruptcy Code (IBC), including the appointment and powers of the Liquidator, as well as the Regulations governing the sale of assets in the liquidation process.

The Court examined the powers and duties of the Liquidator, emphasizing that the Liquidator holds the assets in trust for the benefit of creditors. The Court also considered the relevant Regulations and Schedule, which specified the procedures for auction sales.

The Court highlighted the importance of Para 1(11A) of Schedule I, which required the Liquidator to provide reasons for rejecting the highest bid in an auction process. The intervenor argued that this provision should only apply to auctions conducted after its insertion on September 30, 2021, but the Court disagreed, stating that the requirement to furnish reasons is a fundamental aspect of natural justice.

“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.” the Court held.

Therefore, the Court held that the Liquidator was required to provide reasons for rejecting the bid even before the introduction of this provision.

The Court said that the language used by the Liquidator in their communication to the highest bidder indicated finality in the decision-making process.

The Court outlined the procedures for payment and completion of the sale as per Schedule I, including the timeline for payment, interest on delayed payments, and the issuance of certificates of sale or sale deeds. The Court suggested that the Liquidator should generally accept the highest bid unless there were statutory issues with the bidding process, collusion among bidders, or fraud involved.

The Court cited the case of K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple and Others, where the court held that auctioning of land belonging to a Devasthanam could only be set aside if there was evidence of material irregularity, illegality, fraud, or collusion in the auction process.

“If there is repeated interference in the auction process, the object and purpose of holding public auction and the sanctity of public auction would be frustrated.” the Court added.

Furthermore, the Court highlighted that the Liquidator, responsible for the auction, should not cancel a valid auction merely in anticipation of obtaining a higher price in subsequent rounds. The Liquidator's discretion should be exercised judiciously, and a valid auction should not be abandoned without valid reasons.

Regarding the issue of the appellant's eligibility as a related party, the Court clarified that the relevant person had ceased to be connected with the corporate debtor more than a decade ago, making the disqualification irrelevant.

In conclusion, the Court set aside the Appellate Tribunal's decision and reinstated the Tribunal's order, allowing the appellant's appeal with no costs awarded.

Cause Title: Eva Agro Feeds Private Limited v. Punjab National Bank & Anr., [2023INSC809]

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