Supreme Court Rules That Reasons Must Be Given For Rejecting The Highest Bidder In Bankruptcy Auction

In a recent landmark ruling, the Supreme Court of India emphasized that the highest bidder in an auction sale under the Insolvency and Bankruptcy Code, 2016 does not possess an indefeasible right to demand the acceptance of their bid. However, the court held that if the liquidator chooses to reject the highest bid, they must provide clear and justifiable reasons for their decision in the rejection order. This ruling comes in response to an appeal against the order of the National Company Law Appellate Tribunal that questioned the rights of the highest bidder in a liquidation sale.

A division bench comprising Justice B V Nagarathna and Justice Ujjal Bhuyan underlined that the mere expectation of the liquidator that a higher price may be obtained is not sufficient ground to cancel a valid auction. The liquidator’s discretion to cancel an auction should only be exercised in cases where fraud or collusion has tainted the process. The court stressed that the liquidator’s actions must adhere to the principles of the rule of law, and their discretion is not unfettered. While the highest bidder does not possess an absolute right to demand acceptance, the liquidator must apply their mind to relevant factors when deciding to reject a bid. This application of judgment should be evident in the rejection order itself. 

The case revolved around Punjab National Bank’s status as a financial creditor of the corporate debtor. The bank contested an order by the NCLT, Kolkata Bench, which directed the liquidator to proceed with the highest bidder, Eva Agro Feeds Private Limited. Both the bank and the liquidator argued that being the highest bidder did not guarantee the successful completion of the auction and did not grant the bidder an absolute legal right.

The NCLAT set aside the NCLT’s order and directed the liquidator to initiate a fresh auction process. Eva Agro Feeds Pvt. Ltd subsequently appealed this decision to the Supreme Court.

The Appellate Tribunal justified the cancellation of the auction by emphasizing that the appellant was the sole bidder, and their bid matched the reserve price. It referred to Clause 3(k) of the E-Auction Process Information Document, which granted the liquidator the authority to cancel the auction. The tribunal concluded that the liquidator had the right to cancel the auction at any point before the sale was completed.

The appellant argued that the liquidator’s order lacked clear reasons for the cancellation of the auction. Punjab National Bank contended that the liquidator possessed the power to cancel the auction under Clause 3(k) of the auction notice, and there was no requirement to provide reasons for this action. He highlighted that the appellant had accepted all the auction notice’s clauses, including Clause 3(k), when bidding. The liquidator, supported the bank’s argument, asserting that multiple rounds of auctions could be held to maximize financial creditor interests.

The Supreme Court rejected the argument that para 1(11A) of Schedule 1 of the Regulations, which mandates reasons for rejecting the highest bid, applied only prospectively. The court held that the requirement to furnish reasons was fundamental and not dependent on the date of the auction, emphasizing that transparency was necessary to prevent arbitrary exercise of power.

The court also dismissed the contention that the liquidator had absolute power to cancel the auction under Clause 3(k) of the E-Auction Process Information Document, asserting that the Code and Regulations took precedence over such clauses.

Regarding the rationale for the cancellation of the auction, the court found that there was no justification for rejecting the appellant’s bid and initiating another auction at the same reserve price. The liquidator’s actions lacked sound reasoning.

The court clarified that an auction sale was not complete simply because someone had been declared the highest bidder. A sale is only concluded upon full payment. Consequently, the liquidator could cancel the auction before the sale was complete, but this should occur only if there were statutory flaws or fraudulent activities.

Finally, the court ruled that the appellant was not a related party of the corporate debtor and that the sale to the appellant was valid. The Supreme Court’s ruling in this case underscores the importance of transparency and fairness in the auction process under the Insolvency and Bankruptcy Code 2016. While the highest bidder does not possess an absolute right to demand acceptance of their bid, the liquidator must provide clear and justifiable reasons for rejecting a bid. This decision upholds the principles of natural justice and ensures that the exercise of discretion by the liquidator remains within the bounds of the law. It also provides clarity on the hierarchy of legal provisions governing the auction process, making it a significant precedent in insolvency proceedings in India.