~ This post has been authored by Amartya Sahastanshu Singh.
In Eva Agro Feeds Private Limited v. Punjab National Bank and Another, the Supreme Court of India, on September 6, 2023, held that a liquidator does not possess unlimited discretion to cancel a valid auction solely based on an expectation of receiving higher bids. The Court emphasized that Paragraph 1(11A) of Schedule I under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, mandates that a liquidator must provide valid reasons for rejecting the highest bid in line with the provisions of the Regulations. This ruling serves to restrict arbitrary actions by liquidators in the liquidation process and reinforces transparency in auction procedures.
At this point, one might wonder why such a seemingly simple issue has become a matter for the courts. The answer lies in the nature of the Insolvency and Bankruptcy Code (IBC). The IBC is, at its core, a creditor-centric law. Its primary aim is to reduce credit friction in the country and enhance the ‘Ease of Doing Business’. As a result, the Code grants significant rights and privileges to creditors, especially financial creditors, in both the Corporate Insolvency Resolution Process (CIRP) and liquidation, owing to their commercial wisdom coupled with the desire for damage minimization.
However, a recurring question in the jurisprudence of the IBC is: How ‘absolute’ are these rights of the creditors? Can they take any action in the guise of ‘commercial wisdom’ and betterment of stakeholders? Well, this is essentially the question the court addressed in this case as well.
In this case, Huvepharma Sea (Pune) Private Limited had filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016, seeking to initiate the corporate insolvency resolution process against Amrit Feeds Limited. Consequently, the Tribunal issued a liquidation order on February 19, 2021, appointing the second respondent as the Liquidator to oversee the process.
An auction notice was issued to sell the assets of the corporate debtor. Eva Agro Feeds Private Limited (the appellant) submitted its bid on July 19, 2021, a day before the scheduled due date of July 20, 2021. The appellant also deposited Rs. 1 crore as earnest money for the property being auctioned. On July 20, 2021, the appellant was issued an E-auction certificate, confirming its successful bid.
Following this, the appellant requested an allotment letter for the property. However, on the next day, the appellant was informed that the E-auction had been cancelled under Clause 3(k) of the Disclaimer Clause in the E-Auction Process Information Document. Instead, a new auction was to be held.
Aggrieved by this cancellation, the appellant filed an application before the Tribunal, seeking an order directing the Liquidator (Respondent 2) to communicate the balance sale consideration to the appellant. Upon depositing the full amount, the Liquidator issued a sale certificate for the property. However, Punjab National Bank (Respondent 1), a financial creditor, appealed the order. The Appellate Tribunal ruled in favour of the Bank, overturning the original order and instructing the Liquidator to conduct a fresh auction. Dissatisfied, the appellant escalated the matter in the present appeal.
Respondent 1, Punjab National Bank, argued for the dismissal of the appeal, citing Clause 3(k) of the Disclaimer Clause in the E-Auction Process Information Document, which grants the Liquidator the absolute right to accept or reject bids or cancel the auction at any stage without providing reasons. The Bank further argued that, under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, an auction sale is considered complete only once full payment is made, not when the highest bidder is identified. They also referred to Clause 5(m) of the auction notice, which states that the highest bidder has no automatic right to demand acceptance of their bid.
The appellant contended that the Liquidator’s decision to cancel the E-auction lacked sufficient grounds and was in violation of Para 1(11A) of Schedule I of the Regulations. They argued that the Liquidator’s action was arbitrary and without justification, especially after the appellant had already been informed of their winning bid. The appellant further pointed out that the Liquidator had complied with the Tribunal’s original order and had not appealed against it, indicating the cancellation was unjustified.
After hearing both sides, the Supreme Court reiterated that administrative authorities performing judicial or quasi-judicial functions must provide reasons for their decisions, unless exceptions are expressly stated. The Court acknowledged that Clause 3(k) grants the Liquidator broad authority to cancel auctions without justification but clarified that this clause must be read in harmony with the Insolvency and Bankruptcy Code, 2016, and the associated Regulations. In case of conflict, the Code and Regulations take precedence. The Court emphasized that while the Liquidator has discretion in auction matters, rejecting the highest bid requires a clear rationale.
The Court further noted that, generally, the highest bid should be accepted unless there are statutory irregularities, collusion, or fraud in the bidding process.