Liquidator cannot cancel a legitimate auction solely based on the anticipation of obtaining a higher price : Supreme Court
The Hon’ble Supreme Court delivered a significant ruling regarding auction sales under the Insolvency and Bankruptcy Code 2016. The court clarified that the highest bidder in such auctions does not possess an absolute right to demand the acceptance of their bid. However, if the liquidator rejects the highest bid, they must provide clear reasons for their decision in the rejection order.
The court, consisting of Justice B V Nagarathna and Justice Ujjal Bhuyan, emphasized that a mere anticipation by the liquidator that a better price might be obtained is not sufficient grounds to cancel a valid auction. Furthermore, once an auction is completed, the liquidator's authority to cancel it is not absolute unless there is evidence of fraud or collusion tainting the process.
The Supreme Court stated, "While the highest bidder has no indefeasible right to demand acceptance of his bid, the Liquidator, if he does not want to accept the bid of the highest bidder, has to apply his mind to the relevant factors. Such application of mind must be visible or manifest in the rejection order itself."
This decision stemmed from an appeal against the National Company Law Appellate Tribunal's (NCLAT) ruling, which had asserted that the highest bidder does not possess an inherent right to claim the auction in their favor during a liquidation sale. The NCLAT had argued that the liquidator had the authority to cancel an auction if they deemed the offered price inadequate.
The Supreme Court, however, overturned the NCLAT's decision, stating that the liquidator's discretion to cancel an auction should not be exercised solely based on expectations of obtaining a higher price. Such actions would lead to unnecessary expenses and undermine the credibility of the auction process.
In the specific case at hand, Eva Agro Feeds Private Limited had challenged the liquidator's cancellation of the auction. The company argued that there was no concrete evidence to support the liquidator's belief that canceling the auction and conducting another round would yield a better price. The Supreme Court upheld the tribunal's decision and emphasized that the liquidator should not cancel a valid auction without sufficient cause.
Additionally, the court addressed arguments related to related parties and statutory changes in the Insolvency and Bankruptcy Code. It concluded that the sale could not be considered invalid based on related-party associations, and it affirmed the retrospective application of provisions requiring the liquidator to provide reasons for rejecting the highest bid.
In summary, the Supreme Court's ruling clarifies the conditions under which a liquidator can reject the highest bid in an auction sale under the Insolvency and Bankruptcy Code and underscores the importance of providing clear reasons for such rejections.