NCLAT (30.11.2021) in Punjab National Bank Vs. EVA Agro Feeds Pvt. Ltd. [Company Appeal(AT) (Insolvency) No. 757 of 2021] held that;.
It is well settled that so long as the bid has not been accepted, the highest bidder acquires no vested right to have the auction concluded in his favour
We are of the considered opinion that there was no right acquired and no vested right accrued in favour of the plaintiff merely because his bid amount was highest and had deposited 10% of the bid amount.
that tender conditions are not open to judicial scrutiny unless the action of tendering Authority is found to be malicious and misuse of statutory powers. Bidders participating in the tender process have no other right except the right to equality and fair treatment.
The terms of the invitation to tender are not open to judicial scrutiny as they lie in the realm of contract. No bidder is entitled as a matter of right to insist the Authority inviting tenders to enter into further negotiations unless the terms and conditions of notice are provided for such negotiation.
Public auctions are held to get the best possible price. Once those aspects are recognised, there appears to be no basis for contending that the owner who had offered to sell them cannot decline to accept the highest bid if he thinks that the price offered is inadequate.
that the successful bidder in the auction sale does not acquire any vested right in law to enforce the auction, more particularly, when the auction notice confers power on the Authority conducting the auction to cancel the auction in its discretion.
that the terms of auction sale notice that provides absolute right to accept or reject any or all bids or adjourn/postpone/cancel the E-Auction or withdraw any asset/property or portion thereof from the E-Auction at any stage without assigning any reason thereof cannot be considered as in violation of the Schedule I of the Liquidation Process Regulations.
Excerpts of the Order;
# 1. The Appeal has been filed under Section 61 of the Insolvency and Bankruptcy Code (IBC in short) against the Impugned Order dated 12th August, 2021 in I.A. (IB) No. 663/KB/2021 in CP(IB) 440/KB/2018 passed by NCLT, Kolkata Bench (Adjudicating Authority).
# 2. The Appellant being the Financial Creditor and has security interest in the Mirzapur Asset of the Corporate Debtor which is the subject matter of the Appeal, has filed this Appeal and is seeking relief as stated below:
“a) Set aside the order against the impugned order dated 12.08.2021 in I.A.(IB) No. 663/KB/2021 in CP(IB) 440/KB/2018 passed by the Ld. NCLT Kolkata Bench (Adjudicating Authority) at Kolkata; and/or
b) Call for record from the Ld. Adjudicating Authority, Kolkata Bench at Kolkata in I.A (IB) No. 663/KB/2021 in CP(IB) 440/KB/2018; etc.”
# 3. The Adjudicating Authority has allowed the I.A. filed by Respondent No. 1-EVA Agro Feeds Pvt. Ltd. observing the followings:
a. He has not found irregularity in the e-auction process in terms of Regulation 33 and Schedule 1 of the IBBI (Liquidation Process) Regulations, 2016.
b. He has also observed that there is no whiff of any short of collusion between the highest bidder and other bidders.
c. There is no material in record to sustain the perception of the Liquidator that cancelling the present auction would have resulted in a better price for the assets in question.
d. There cannot be endless wait to get the best price for assets especially when there is no material to support a conjecture that there may be a better price for the assets etc.
Based on above observations, the Adjudicating Authority has asked the liquidator to send communication to the successful bidder requiring him to deposit the balance sale consideration within the time specified in the e-auction notice.
# 4. The Appellant-Bank has raised the issue that even if some bidder is highest, it does not amount to that the auction has successfully been completed. They have also raised the issue that sale may not be completed to the highest bidder even if full amount is received. The bidding terms and conditions has given absolute authority to the liquidator to accept or reject any or all bids or cancel the e-auction at any stage. The Highest bidder does not get a vested or acquired right in law.
# 5. The learned Counsel for the Appellant liquidator placed reliance on the following rulings;
Hon’ble Supreme Court in case of Purxotoma Ramanata Quenim v. Makan Kalyan Tandel, (1974) 2 SCC 169 at page 175 wherein it is held that;
“11. . . . . . “One of the contentions taken on behalf of the writ petitioners was that the power retained by the Government ‘to accept or to reject any bid without assigning any reason therefor’ in clause (6) of the Order made by the Government on 6 January, 1971, in exercise of its powers under Section 29(2) of the Act was an arbitrary power and therefore it is violative of Articles 14 and 19(1)(g). . . . . . . The Government is the guardian of the finances of the State. It is expected to protect the financial interest of the State. Hence quite naturally, the legislature has empowered the Government to see that there is no leakage in its revenue. It is for the Government to decide whether the price offered in an auction-sale is adequate. While accepting or rejecting a bid, it is merely performing an executive function. The correctness of its conclusion is not open to judicial review. We fail to see how the plea of contravention of Article 19(1)(g) or Article 14 can arise in these cases. The Government’s power to sell the exclusive privilege set out in Section 22 was not denied. It was also not disputed that those privileges could be sold by pubic auction. Public auctions are held to get the best possible price. Once those aspects are recognised, there appears to be no basis for contending that the owner of the privileges in question who had offered to sell them cannot decline to accept the highest bid if he thinks that the price offered is inadequate. There is no concluded contract till the bid is accepted. Before there was a concluded contract, it was open to the bidders to withdraw their bids — see Union of India v. Bhimsen Walaiti Ram [(1969) 3 SCC 146: (1970) 2 SCR 594]. By merely giving bids, the bidders had not acquired any vested rights. The fact that the Government was the seller does not change the legal position once its exclusive right to deal with those privileges is conceded. If the Government is the exclusive owner of those privileges, reliance on Article 19(1)(g) or Article 14 becomes irrelevant.”
Hon’ble Supreme Court in case of State of Jharkhand v. CWE-SOMA Consortium, (2016) 14 SCC 172: 2016 SCC OnLine SC 690 at page 177 wherein it is held that;
“13. In case of a tender, there is no obligation on the part of the person issuing tender notice to accept any of the tenders or even the lowest tender. After a tender is called for and on seeing the rates or the status of the contractors who have given tenders that there is no competition, the person issuing tender may decide not to enter into any contract and thereby cancel the tender. It is well settled that so long as the bid has not been accepted, the highest bidder acquires no vested right to have the auction concluded in his favour (vide Laxmikant v. Satyawan [Laxmikant v. Satyawan, (1996) 4 SCC 208], Rajasthan Housing Board v. G.S. Investments [Rajasthan Housing Board v. G.S. Investments, (2007) 1 SCC 477] and U.P. Avas Evam Vikash Parishad v. Om Prakash Sharma [U.P. Avas Evam Vikas Parishad v. Om Prakash Sharma, (2013) 5 SCC 182 : (2013) 2 SCC (Civ) 737] ).”
Further, in case of HUDA v. Orchid Infrastructure Developers (P) Ltd., (2017) 4 SCC 243: (2017) 2 SCC (Civ) 545 : 2017 SCC OnLine SC 64 at page 255 Hon’ble Supreme Court has held that;
13. It is a settled law that the highest bidder has no vested right to have the auction concluded in his favour. The Government or its Authority could validly retain power to accept or reject the highest bid in the interest of public revenue. We are of the considered opinion that there was no right acquired and no vested right accrued in favour of the plaintiff merely because his bid amount was highest and had deposited 10% of the bid amount. . . . . .
# 6. Hon’ble Supreme Court in case of Meerut Development Authority Vs. Association of Management Studies (2009) 6 SCC 171 has held that tender conditions are not open to judicial scrutiny unless the action of tendering Authority is found to be malicious and misuse of statutory powers. Bidders participating in the tender process have no other right except the right to equality and fair treatment. The terms of the invitation to tender are not open to judicial scrutiny as they lie in the realm of contract. No bidder is entitled as a matter of right to insist the Authority inviting tenders to enter into further negotiations unless the terms and conditions of notice are provided for such negotiation.
# 7. The Appellant has also stated that Liquidator is suppose to conduct multiple rounds of auction to maximise the realization from the sale of assets and merely on account of a person or party having been declared as highest bidder the sale cannot be awarded to the bidder. The highest bidder can also participate in multiple rounds of auctions.
# 8. The Respondent No.2-Liquidator of the corporate debtor has submitted that the reserve price for the CD (Corporate Debtor) Mirzapur Asset was Rs. 10 Crores against the capital cost of Rs. 17.30 Crores and written down the book value of Rs. 8.59 Crores. He has also stated that CDs Lucknow Asset with a capital cost of Rs. 9.28 Crores and written down book value of Rs. 2.45 crores were sold at Rs. 14.79 Crores against reserve price of Rs. 8.5 Crores. While Mirzapur Assets is getting sold only at Reserve Price instead of a higher value which may be more than the Lucknow assets. So, he has decided to cancel the auction and go for another auction. He has also reiterated that the bidder with the highest bid does not get any right to demand for acceptance of his bid. He has also stated that Liquidator is the final authority to take decisions pertaining to the auction sale and stakeholders’ consultation committee constituted under Regulation 31A of IBBI (Liquidation Process) Regulations, 2016.
# 9. The Liquidator, R-2, contends that the auction was not closed by declaring R-2 as the highest and successful bidder and confirming the sale in its favour. There is no provision in IBC or the Liquidation Regulations that prohibits the Liquidator from cancelling an auction. Sub-clause (11) of Clause 1 of Schedule 1 of the Liquidation Process Regulations expressly recognises the Liquidator’s absolute right to cancel an auction and hold multiple further auctions for maximisation of the value of the assets. Sub-clause (11) of Clause 1 of Schedule 1 of the Liquidation Process Regulations is given below for ready reference:
Clause 3(f), 3(k) and 5(m) in the sale auction notice specifies that;
“i) Clause 3(f) at pg. 49 – The Applicant accepts the terms of the disclaimer, which forms an integral part of the E-Auction Process information Document and part of all the other terms and conditions of this E-Auction Process information Document.
ii) Clause 3(k) at pg. 49 – The Liquidator has absolute right to accept or reject any or all bids or adjourn / postpone / cancel the E-Auction or withdraw any asset / property or portion thereof from the E-Auction at any stage without assigning any reason thereof.
iii) Clause 5(m) at pg. 51 of the Appeal Paper book – The Bidder with the highest offer / bid does not get any right to demand for acceptance of his bid.”
# 10. It is necessary to go through Regulation 31A, 33 of the Liquidation Process Regulations and Schedule 1 of the Liquidation Process Regulations, given below for ready reference:
# 11. Regulation 33(3) of the Liquidation Process Regulation casts a duty upon the Liquidator not to proceed with the sale in the circumstances mentioned therein. Regulation 33(3) is not an exhaustive provision applicable only in the specific circumstances stated therein. Thus, it cannot be said that the Liquidator can cancel an auction only if Regulation 33(3) is attracted. Clause 1(11) of Schedule-I specifically authorises a Liquidator to conduct multiple rounds of auctions to maximise the realisation from the sale of assets. Multiple rounds of auctions can be conducted because the Liquidator is competent to hold successive auctions. In the instant case, R-2 have issued the certificate of sale in favour of R-1 in compliance with the directions of the Learned Adjudicating Authority. All steps taken by the Liquidator in compliance with the impugned Order will stand reversed subject to the outcome of this Appeal.
# 12. There is no concluded contract till the bid is accepted. Before there was a concluded contract, it was open to the bidders to withdraw their bids. Public auctions are held to get the best possible price. Once those aspects are recognised, there appears to be no basis for contending that the owner who had offered to sell them cannot decline to accept the highest bid if he thinks that the price offered is inadequate.
# 13. In the instant case, Respondent No 1, the sole bidder on 20 July 2021, had placed its bid at the reserve price. For the reasons as stated supra, the learned Liquidator invoked the provisions contained in Clause 3(k) of the sale auction notice dated 28 June 2021 and decided to cancel the auction. However, the learned Adjudicating Authority failed to consider Clause 13 of the Schedule 1, to IBBI (liquidation process) Regulation 2016, which provides that on payment of the total amount, the sale shall stand completed, the Liquidator shall execute the certificate of sale deed to transfer such assets. The assets shall be delivered to him in the manner specified in terms of sale.
# 14. Therefore, it is clear that the learned Adjudicating Authority proceeded on the wrong assumption, i.e. the sale was successfully concluded; therefore, arriving at the wrong conclusion that the sale has been successfully concluded; could not have been cancelled by the learned Liquidator.
# 15. It is well-settled law laid down by Hon’ble Supreme Court in the catena of decisions that the successful bidder in the auction sale does not acquire any vested right in law to enforce the auction, more particularly, when the auction notice confers power on the Authority conducting the auction to cancel the auction in its discretion. Therefore Respondent No. 1, being the highest bidder (sole) that too at the reserve price, had no vested right in law.
# 16. The learned Adjudicating Authority in the impugned judgement and Order dated 12 August 2021 has only relied upon clause 12 of Schedule 1 of the Regulations 2016 to hold that clause 12 does not vest any discretion in the learned Liquidator to cancel the auction. However, while arriving at the above conclusion, the Learned Adjudicating Authority has failed to consider that clause 11 of the Schedule 1 authorises the Liquidator to conduct multiple rounds of the auction to maximise the realisation from the sale of assets and promote the creditors’ best interest. Therefore, unless the power to cancel the auction is read into the conjoint reading of clauses 11, 12 and 13, the provisions in Clause 11 cannot be implemented.
# 17. An auction sale is not completed under Clause 12 merely because the person has been declared the highest bidder. Instead, the sale is concluded only on full payment of the amount envisaged under Clause 13 of Schedule 1.
# 18. Therefore, given the settled position in law as stated above, the learned Liquidator in a stage between Clause 12 and Clause 13 of Schedule 1, and given the provisions contained in Clause 3(K) of the sale auction notice, was entitled to cancel the auction.
# 19. Thus, it is clear that the learned Adjudicating Authority has committed an error in reading the provisions contained in Clause 12 of Schedule 1, in isolation and considering the provisions contained in Clause 13 and 11 of Schedule 1 of the Liquidation Process Regulations 2016 and the law laid down Hon’ble Supreme Court as referred above.
# 20. Based on the above, it is clear that the auction bidder has no vested right to claim the auction in its favour in a liquidation sale.
# 21. It is also clear that the terms of auction sale notice that provides absolute right to accept or reject any or all bids or adjourn/postpone/cancel the E-Auction or withdraw any asset/property or portion thereof from the E-Auction at any stage without assigning any reason thereof cannot be considered as in violation of the Schedule I of the Liquidation Process Regulations.
# 22. In fine, Appeal deserves to be allowed, and impugned Judgement/Order deserves to be set aside and accordingly, the Appeal is allowed by setting aside the impugned order. Steps taken in compliance with the said Order during the pendency of this Appeal is reversed. The Liquidator may initiate the fresh process of Auction in accordance with laid down provisions of I&B Code, 2016 read with IBBI (Liquidation Process) Regulation, 2016. No order as to costs.
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