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Liquidator Cannot Simply Expect To Get A Higher Price And Cancel A Valid Auction

In the case of Eva Agro Feeds Private Limited v. Punjab National Bank & Anr., [Civil Appeal No. 7906/2021), the Respondent, a financial creditor of the corporate debtor, filed an appeal with the National Company Law Appellate Tribunal (NCLAT”). This appeal was made in response to the directive issued by the National Company Law Tribunal, Kolkata Bench (NCLT), instructing the Liquidator to proceed with the top bidder in the auction, who is the Appellant. The Respondent and the Liquidator had contended that even if one bidder placed the highest price, it did not mean the auction has been won, as the top bidder did not have a legally vested or acquired right. Despite upholding the validity and justification of the auction cancellation, the NCLAT granted permission for the liquidator to initiate a new auction process. The Appellate Tribunal noted that even though the Appellant was the sole bidder and their offer matched the reserve price, the liquidator had the authority to cancel the auction due to the deemed inadequacy of the bid amount. The NCLAT determined that the Liquidator had canceled the auction by using Clause 3(k) of the E-Auction Process Information Document. It found that the Appellant had agreed to the Liquidator’s unrestricted power to accept or reject any offer and to call off the auction without giving a reason and had reached the conclusion that the Liquidator has the power to call off the auction at any point before the deal is sealed. It was ruled that the sale is adequately completed only once the entire sum has been paid. Aggrieved by the decision of the NCLAT, the Appellant filed an appeal before the Supreme Court.

The Supreme Court observed that “While it is true that para 1(114) 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. Absence of reasons may be a good reason to draw inference that the decision making process was arbitrary. Therefore, what para 1(11A) has done is to give statutory recognition to the requirement for furnishing reasons, if the Liquidator wishes to reject the bid of the highest bidder. Furnishing of reasons, which is an integral facet of the principles of natural justice, is embedded in a provision or action, whereby the highest bid is rejected by the Liquidator. Thus, what para 1(114) has done is to give statutory recognition to this well-established principle. It has made explicit what was implicit.”

The Supreme Court further rejected the Respondent’s contention that the liquidator had the right to call off the auction without providing a reason under Clause 3(k) of the E-Auction Process Information Document since the bidder had agreed to the auction notice’s terms and conditions. Further, the Court ruled that the Code’s or the Regulations requirements shall always take precedence over the E-Auction Process Information Document in the event of a disagreement.

The Court also rejected the argument that the principal person in control of the Appellant was a related party, and hence, the asset of the corporate debtor could not be sold to him. It stated that “it is clearly manifest 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 t influential member of the company i.e., the corporate debtor when the appellant had made its bid pursuant to the auction sale notice.”

The Court held that “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.”

Thus, the Supreme Court allowed the appeal and set aside the order of the NCLAT.

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