Supreme Court Overrules NCLAT: Liquidator’s Auction Cancellation Declared Invalid

The Supreme Court has delivered a significant ruling in the case of Eva Agro Feeds Private Limited vs. Punjab National Bank & Anr., holding that the cancellation of an auction sale by the Liquidator, without providing proper reasons, was legally unsustainable. This decision overturns the National Company Law Appellate Tribunal (NCLAT)’s ruling and reinstates the earlier order of the National Company Law Tribunal (NCLT), ensuring that the highest bidder, Eva Agro Feeds, retains its rights to the auctioned assets.

Background of the Case

The case revolves around the liquidation process of Amrit Feeds Limited, which was undergoing corporate insolvency resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). Punjab National Bank, one of the creditors, challenged the Liquidator’s decision to proceed with the sale after it was initially canceled.

The key events leading to the Supreme Court ruling are as follows:

On July 9, 2021, Eva Agro Feeds Private Limited was incorporated and participated in an auction held on July 20, 2021, for purchasing the assets of Amrit Feeds Limited.
The company emerged as the highest bidder with a bid of ₹10 crores, matching the reserve price.
On July 21, 2021, the Liquidator initially confirmed Eva Agro Feeds as the winner but later canceled the auction citing Clause 3(k) of the E-Auction Process Information Document.
Eva Agro Feeds moved the NCLT, which ruled in its favor on August 12, 2021, directing the Liquidator to complete the sale.
Punjab National Bank challenged this order before the NCLAT, which overturned NCLT’s ruling on November 30, 2021, allowing the Liquidator to conduct a fresh auction.
Eva Agro Feeds appealed to the Supreme Court, leading to this final judgment on September 6, 2023.

Petitioner’s Arguments (Eva Agro Feeds)

Eva Agro Feeds contended that:

The Liquidator arbitrarily canceled the auction without assigning any valid reason, violating principles of transparency and fairness.
The auction was conducted lawfully, and Eva Agro Feeds was formally declared the winner before the cancellation.
Section 5(24) of the IBC, which defines ‘related party’, was misinterpreted as the petitioner’s alleged link to the corporate debtor was severed over a decade ago.
The NCLT’s ruling was correct, as it emphasized that there was no justification for canceling the auction and restarting the process.

Respondents’ Arguments (Punjab National Bank & Liquidator)

The respondents, Punjab National Bank and the Liquidator, countered:

The Liquidator has the absolute right to cancel an auction sale under Clause 3(k) of the E-Auction Process Information Document.
The sale was not finalized as the full payment was not made, and the Liquidator retains discretion in the best interest of creditors.
The alleged connection between Eva Agro Feeds and Amrit Feeds Limited disqualified it from acquiring the assets under Section 29A of the IBC.
The NCLAT correctly held that the Liquidator acted within his authority to cancel the auction and seek a higher bid.

Supreme Court’s Observations

The Supreme Court, in a bench comprising Justices B.V. Nagarathna and Ujjal Bhuyan, made the following key observations:

1. Auction Cancellation Must Be Reasoned

The Court noted that the Liquidator’s cancellation was arbitrary and without justification. It emphasized that even though Clause 3(k) grants discretionary power to cancel an auction, such discretion must be exercised reasonably and transparently.

2. No Indefinite Cancellation for Higher Prices

The Court rejected the argument that the Liquidator could cancel auctions indefinitely in search of a higher bid. It held:

“Merely expecting a higher price in a future auction cannot justify canceling a legitimate auction.”

3. Liquidator’s Power is Not Absolute

The judgment reiterated that the Liquidator’s power to cancel an auction must align with the broader objectives of the IBC:

“The Liquidator is not an absolute authority; all decisions must be fair, justifiable, and in the interest of creditors.”

4. NCLT’s Order Was Correct

The Supreme Court upheld the NCLT’s decision, which had rightly directed the Liquidator to complete the sale as Eva Agro Feeds had fulfilled all bidding conditions.

Final Verdict

The Supreme Court ruled:

NCLAT’s order was set aside, restoring the NCLT’s directive.
The auction sale to Eva Agro Feeds was confirmed, and the Liquidator was ordered to proceed with the transfer of assets.
The petition against the sale by Punjab National Bank was dismissed.

Implications of the Judgment

This ruling has significant implications for liquidation proceedings under the IBC:

Ensures Fair Auction Practices: Liquidators must provide valid reasons for canceling auctions.
Limits Arbitrary Liquidator Powers: The decision restricts Liquidators from indefinitely canceling auctions in search of higher bids.
Strengthens Creditor Rights: Creditors cannot unreasonably intervene in confirmed sales unless fraud or misrepresentation is proven.
Clarifies ‘Related Party’ Interpretation: Past associations do not automatically disqualify bidders unless they hold current control.

Conclusion

The Supreme Court’s judgment in Eva Agro Feeds Private Limited vs. Punjab National Bank & Anr. sets a crucial precedent in insolvency law, reinforcing transparency, accountability, and the principle that discretion cannot be exercised arbitrarily. This landmark ruling ensures that once an auction is validly conducted and confirmed, it cannot be undone on baseless grounds. It is a major win for fair liquidation processes in India.

Petitioner Name: Eva Agro Feeds Private Limited.
Respondent Name: Punjab National Bank and Anr..
Judgment By: Justice B.V. Nagarathna, Justice Ujjal Bhuyan.
Place Of Incident: Kolkata, West Bengal.
Judgment Date: 06-09-2023.

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