2023 (9) TMI 414 - SC - Insolvency and Bankruptcy

E-auction of assets corporate debtors - who can participate - Scope of the term related party / relative - Sale of asset of the corporate debtorin favour of a related party of the corporate debtor - bar under Section 29A of I B Code - HELD THAT - The Liquidator virtually steps into the shoes of the management of the corporate debtor and oversees the liquidation process. In this process, he holds the liquidation estate of the corporate debtor as a fiduciary for the benefit of all the creditors. While overseeing the liquidation process, he has the mandate to sell all movable and immovable properties and actionable claims of the corporate debtor in liquidation by way of either public auction or by private contract, though he cannot sell such property or claims to any person who is not eligible to be a resolution applicant. 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(11A) has done is to give statutory recognition to this well-established principle. It has made explicit what was implicit. After a careful analysis, this Court opined that the expressions related party and relative contained in the definition sections must be read noscitur a sociis with the categories of person mentioned in Explanation I. So read, it would include only persons who are connected with the business activity of the resolution applicant. This Court further clarified that the expression connected person would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan. In PHOENIX ARC PRIVATE LIMITED VERSUS SPADE FINANCIAL SERVICES LIMITED OTHERS 2021 (2) TMI 91 - SUPREME COURT , this Court noted that the expression related party is defined in Section 5(24) in relation to a corporate debtor and Section 5(24A) provides a corresponding definition in relation to an individual. Thereafter, it has been observed An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. Thus, 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 the company or an influential member of the company i.e., the corporate debtor when the appellant had made its bid pursuant to the auction sale notice. There are no hesitation in coming to the conclusion that Appellate Tribunal was not justified in setting aside the order of the Tribunal dated 12.08.2021 - appeal allowed.

Issues Involved:
1. Justification of Liquidator's cancellation of the E-auction.
2. Validity of the Tribunal's order directing the Liquidator to accept the highest bid.
3. Financial creditor's right to appeal against the Tribunal's order.
4. Applicability of Section 29A of the Insolvency and Bankruptcy Code regarding related parties.

Summary:

1. Justification of Liquidator's cancellation of the E-auction:
The Supreme Court examined whether the Liquidator was justified in canceling the E-auction without assigning any reasons. The Liquidator had invoked Clause 3(k) of the E-Auction Process Information Document, which allowed the Liquidator to cancel the auction at any stage without assigning any reason. The Court emphasized that the power to cancel an auction must be exercised with due application of mind and should be supported by reasons, even if such reasons are not explicitly required by the clause. The Liquidator's decision to cancel the auction was found to be arbitrary as it lacked any rationale or justification, especially since the subsequent auction notice maintained the same reserve price.

2. Validity of the Tribunal's order directing the Liquidator to accept the highest bid:
The Tribunal had directed the Liquidator to accept the highest bid and proceed with the sale, noting that the Liquidator had canceled the auction without any objective material or reason. The Supreme Court upheld the Tribunal's decision, emphasizing that the Liquidator's discretion to cancel an auction is not absolute and must be exercised with proper justification. The Court highlighted that the highest bid should ordinarily be accepted unless there are statutory infirmities, collusion, or fraud in the bidding process.

3. Financial creditor's right to appeal against the Tribunal's order:
The Punjab National Bank, a financial creditor, had appealed against the Tribunal's order. The Supreme Court recognized the financial creditor's substantial interest in the auction sale of the corporate debtor's assets and held that there is no bar or prohibition restraining a financial creditor from appealing against an order of the Tribunal. The Court, however, found that the Appellate Tribunal erred in setting aside the Tribunal's order without properly considering the lack of reasons for the Liquidator's cancellation of the auction.

4. Applicability of Section 29A of the Insolvency and Bankruptcy Code regarding related parties:
The intervenor argued that the appellant was a related party of the corporate debtor and thus ineligible to participate in the auction under Section 29A of the Code. The Supreme Court examined the definition of 'related party' under Sections 5(24) and 5(24A) and found that the appellant's director, who was alleged to be a related party, had ceased to be associated with the corporate debtor more than a decade ago. The Court held that the disqualification under Section 29A did not apply as the relationship was not proximate to the time of the auction.

Conclusion:
The Supreme Court set aside the order of the Appellate Tribunal and restored the Tribunal's order, directing the Liquidator to proceed with the sale to the highest bidder. The appeal was allowed, and the Court emphasized the necessity of providing reasons for canceling an auction to ensure fairness and transparency in the liquidation process.

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