The Supreme Court, vide its judgement dated 06th September 2023 in Eva Agro Feeds Pvt. Ltd versus Punjab National Bank, [Civil Appeal No.7906 of 2021] while explaining the powers of a Liquidator held that merely because the Liquidator has the discretion to carry out multiple auctions 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. 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.

Background of the Dispute
The present matter involved an appeal filed under Section 62¹ of the Insolvency and Bankruptcy Code, 2016 against an order issued by the National Company Law Appellate Tribunal (“NCLAT”). The dispute was centered on the cancellation of an auction and whether it was lawful under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and IBBI (Liquidation Process) Regulations, 2016 (“Regulations”).

An application under Section 9 of the IBC² was filed against M/s Amrit Feeds Limited (“Corporate Debtor”), leading to the initiation of the insolvency resolution process. After the Corporate Debtor went into liquidation, a liquidator was appointed, and an auction for the assets of the Corporate Debtor was announced. Eva Agro Feeds Private Limited (“Appellant”) submitted a bid and was declared the winner, but the liquidator cancelled the auction and scheduled a new one.

The Appellant approached the National Company Law Tribunal, Kolkata Bench (“NCLT”) against the cancellation of the auction by the Liquidator and 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 a better price for the assets in question. The NCLT directed the liquidator to send a communication to the Appellant requiring him to deposit the balance sale consideration which the Appellant complied with. One of the financial creditors, Punjab National Bank (Respondent No.1) preferred an appeal against the decision to the NCLAT and argued that even if the bid of some bidder is the 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. NCLAT set aside the order of the NCLT and directed the Liquidator to initiate a fresh process of auction. The Appellant, dissatisfied with NCLAT's decision, subsequently approached the Supreme Court against this order.

Analysis
While analyzing the dispute, the Supreme Court rejected the argument of the Respondents that in terms 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 and reiterated that furnishing of reasons is an important aspect rather than a check on the arbitrary exercise of power. Furnishing of reasons presupposes the 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 an inference that the decision-making process was arbitrary. The Court further held that in case of a conflict between the E-Auction Process Information Document and the IBC or the Regulations, the provisions of the IBC or the Regulations will always prevail.

The Supreme Court also noted that there was no rationale behind the cancellation of the auction. The liquidator 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 Court noted that in the subsequent sale notice as well, the 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.

The Supreme Court further held that 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 corrode the credibility of the auction process itself. It is not open to the Liquidator post-auction to cancel an auction unless it is found that fraud or collusion had vitiated the auction.

The Supreme Court further observed 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, 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.

Conclusion
Therefore, the Supreme Court held that merely because the Liquidator has the discretion to carry out multiple auctions, 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, the NCLT had rightly held that there were no objective materials before the Liquidator to cancel the auction process and opt for another round of auction. Accordingly, the Court set aside the order of the NCLAT and restored the order of the NCLT.

By - Prachi Pandey