SCI (06.09.2023) In Eva Agro Feeds Pvt. Ltd. Vs. Punjab National Bank and Anr. [Civil Appeal No.7906 of 2021, 2023INSC809] held that;
For the reasons aforesaid, it must be concluded that except in cases where the requirement has been dispensed with expressly or by necessary implication, an administrative authority exercising judicial or quasi-judicial functions is required to record the reasons for its decision.
Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out. The “inscrutable face of the sphinx” is ordinarily incongruous with a judicial or quasi-judicial performance.
Absence of reasons either in the order passed by the authority or in the record contemporaneously maintained is clearly suggestive of the order being arbitrary hence legally unsustainable.
In the event of a conflict between the E-Auction Process Information Document and the Code or the Regulations, the provisions of the Code or the Regulations, as the case may be, shall always prevail.
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.
It was clarified that the opening words of Section 29(A) stating “a person shall not be eligible to submit a resolution plan…..” clearly indicates that the stage of ineligibility attaches when the resolution plan is submitted by the resolution applicant; thus the disqualification applies in praesenti.
From the above, it is clearly manifest that 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.
Excerpts of the Order;
Application (I. A. No.14220 of 2022) for intervention is allowed.
# 2. This appeal has been preferred under Section 62 of The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’) against the order dated 30.11.2021 passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi (briefly ‘the Appellate Tribunal’ hereinafter) allowing the appeal of Punjab National Bank i.e. Respondent No.1 being Company Appeal (AT) (Insolvency) No.757 of 2021. The aforesaid appeal was filed by the Punjab National Bank against the order dated 12.08.2021 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata (briefly the ‘Tribunal’ hereinafter) in I.A. (IB) No.663/KB/2021 in CP (IB) 440/KB/2018.
# 3. At the outset, it would be necessary to advert to the relevant facts:-
(i) One Huvepharma Sea (Pune) Private Limited filed an application under Section 9 of the Code against M/s. Amrit Feeds Limited i.e. corporate debtor before the Tribunal. The same was registered as CP(IB) No.440/KB/2018. The Tribunal passed an order dated 22.10.2019 admitting the application filed under Section 9 of the Code as a result of which corporate insolvency resolution process of the corporate debtor commenced.
(ii) On 19.02.2021, the Tribunal passed an order for liquidation of the corporate debtor. Respondent No.2 was appointed as the Liquidator to oversee the corporate insolvency resolution process.
(iii) Respondent No.2 by an e-mail dated 07.06.2021 forwarded a sale notice dated 02.06.2021 for sale of the assets of the corporate debtor. 23.06.2021 was the date fixed by Respondent No.2 for auction sale of the assets of the corporate debtor. It appears that the aforesaid auction sale did not materialize. Thereafter by way of an e-mail dated 29.06.2021, Respondent No.2 forwarded a similar notice dated 28.06.2021 for auction sale of the assets of the corporate debtor scheduled on 20.07.2021.
(iv) It is stated that the appellant i.e., Eva Agro Feeds Private Limited was incorporated on 09.07.2021 under the provisions of the Companies Act, 2013.
(v) Appellant submitted its bid dated 16.07.2021 to Respondent No.2 on 17.07.2021 in respect of the assets of the corporate debtor (in liquidation). The assets put up for auction were lands admeasuring 1,05,250.40 sqft at Plot No.56, Khata Nos.27, 26, 29, 36, 36 (Old) and 362/363 (New), Mouza – Deoria, Pargana Bhuli, Tehsil – Chunar, District – Mirzapur, Uttar Pradesh with building, plant and machinery and other fixed assets thereon on a lump sum basis as mentioned at serial No.3 of the sale notice.
(vi) In terms of the sale notice, appellant paid the earnest money deposit (EMD) of Rs.1 crore in respect of the subject property. While the last date/time for submission of bid was 20.07.2021 at 14:30 hours, appellant had submitted its bid on 19.07.2021 for a sum of Rs.10 crores which was equivalent to the reserve price as notified in the bid which ended at 14:30 hours on 20.07.2021.
(vii) On 20.07.2021, appellant received an E-auction certificate from Respondent No.2 certifying that it had won the auction for the assets of the corporate debtor put up for auction sale (referred to hereinafter as the ‘subject property’). On 21.07.2021, appellant by way of an e-mail requested Respondent No.2 to issue allotment letter in respect of the subject property. It is stated that on 21.07.2021 itself appellant received an e-mail of the aforesaid date from Respondent No.2 informing that Respondent No.2 had cancelled the E-auction held on 20.07.2021 under Clause 3(k) of the Disclaimer Clause in the E-Auction Process Information Document. The appellant was further informed that a fresh E-auction would be conducted for the subject property.
(viii) Aggrieved by the same, appellant filed an application before the Tribunal under Section 60 and related provisions of the Code read with The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 as well as under Rule 11 of the National Company Law Tribunal Rules, 2016 which was registered as I.A. (IB) No.663/KB/2021 in CP (IB) 440/KB/2018. Tribunal vide order dated 12.08.2021 disposed of the said application by directing the Liquidator i.e. respondent No.2 to send a communication to the appellant requiring him to deposit the balance sale consideration within the time specified in the E-auction notice.
(ix) According to the appellant, Respondent No.2 complied with the order of the Tribunal and issued a letter to the appellant to deposit the balance consideration money. Pursuant to the said letter, appellant deposited the entire sum on 10.09.2021 following which Respondent No.2 issued a sale certificate dated 15.09.2021 in respect of the subject property in favour of the appellant.
(x) While the Liquidator accepted the order of the Tribunal, one of the financial creditors i.e. Punjab National Bank (Respondent No.1) filed an appeal before the Appellate Tribunal under Section 61 of the Code against the order dated 12.08.2021 passed by the Tribunal. The appeal was contested by the appellant. However, by the impugned order dated 30.11.2021, Appellate Tribunal allowed the appeal and set aside the order dated 12.08.2021 passed by the Tribunal. Consequently, the steps taken pursuant to the said order were also reversed. Liquidator was given liberty to initiate fresh process of auction in accordance with the provisions of the Code read with The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (briefly the ‘Regulations’ hereinafter).
(xi) Aggrieved, the auction purchaser as the appellant has preferred the present appeal.
# 16. Submissions made by learned counsel for the parties have received due consideration of the Court.
# 17. As we have noted above after initiation of the corporate insolvency resolution process, Liquidator i.e. Respondent No.2 had issued sale notice dated 02.06.2021 for sale of the subject property of the corporate debtor. The reserve price of the subject property was fixed at Rs.12.69 crores, whereas EMD was fixed at Rs.1,26,19,000.00. E-auction was scheduled on 23.06.2021 between 14.00 to 14.30 hrs. This E-auction did not fructify in the absence of any bidders. Thereafter, Respondent No. 2 issued second sale notice dated 28.06.2021 for auction sale amongst others of the subject property. This time the reserve price was scaled down to Rs.10 crores and correspondingly, the EMD was fixed at Rs.1 crore. Last date for deposit of EMD was 19.07.2021 and the date and time of bid was fixed as 20.07.2021 at 14.30 hrs. It was mentioned therein that the E-auction sale would be subject to the terms and conditions prescribed in E-Auction Process Information Document available at the website of the second Respondent.
17.1. As it appears, appellant was the sole bidder and its bid value was Rs.10 crores which was equivalent to the reserve price.
# 18. Pausing here for a moment, we may advert to the Bid Application Form. As per Clause-7 of the Bid Application Form, the applicant i.e. the bidder was required to adhere to the terms and conditions mentioned in the E-Auction Process Information Document. Clause-9 provided that the applicant would participate in the E-auction for the sale of assets on as is where is basis, as is what is basis, whatever there is basis and no recourse basis. Further, if selected as the highest bidder, the bid amount would be unconditionally binding on the applicant. Clause-12 made it clear that the applicant would at all time adhere to the provisions of the Code and the Regulations.
# 19. The E-Auction Process Information Document was issued by the Liquidator i.e. Respondent No.2 for regulating the E-auction of the subject property of the corporate debtor. As per Clause 2 (g), unless specified otherwise, EMD of the successful bidder would be retained towards part of the sale consideration and EMD of unsuccessful bidder would be refunded, which would not bear any interest. Clause 2 (h) says that in accordance with para 1(12) of Schedule I to the Regulations, on the closure of the auction, the highest bidder would be invited to provide balance sale consideration within 90 days of the date of such demand. As per proviso (i) of Clause 2(h), payments made after 30 days would attract interest at the rate of 12 per cent and as per proviso (ii) of Clause 2(h), the sale shall be cancelled if the payment is not received within 90 days. Clause 2 (i) says that on payment of the full amount, the sale would stand completed and the Liquidator would execute the certificate of sale or sale deed to transfer such assets which would be delivered to him in the manner specified in the terms of sale. As per Clause 2(m), the information provided in the E-Auction Process Information Document should be read together with the provisions of the Code and the Regulations. In the event of a conflict between the E-Auction Process Information Document and the Code or the Regulations, provisions of the Code or the Regulations, as the case may be, would prevail. Mandate of Clause 2(r) is that the successful bidder would have to take over possession of the movable assets being sold under the E-auction within 15 days from the date of the complete payment to the Liquidator without any damage to the premises where the assets were kept.
19.1. Clause 3 of the E-Auction Process Information Document deals with disclaimer. While Clause 3 (a) says that the said document has been issued by the Liquidator for general information purposes only; sub-clause (b) clarifies that the said document is not a statutory document; it has not been approved or registered with any regulatory or statutory authority of Government of India or any State Government. Further, nothing relating to the E-Auction Process Information Document should be construed as legal, financial, accounting, regulatory or tax advice by the Liquidator. Clause 3 (f) declares that by procuring a copy of the E-Auction Process Information Document, the recipient accepted the terms of the disclaimer, which forms an integral part of the E-Auction Process Information Document. As per Clause 3(i), E-Auction Process Information Document is neither an agreement nor an offer by the Liquidator to the prospective bidders or any other person. Objective of the E-Auction Process Information Document is to provide interested parties with information that may be useful to them in making their bids. Clause 3(k) declares that 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. As per Clause 5(m), the highest bid on the E-auction shall supersede all the previous bids of the respective bidders. However, the bidder of the highest offer/bid does not get any right to demand acceptance of his bid.
# 20. On 21.07.2021, appellant received a congratulatory e-mail from the second respondent i.e., the Liquidator. The language of this e-mail is quite important. Appellant was informed that it had won the auction for the subject property. The winning bidders’ order had been prepared and the item was listed on the appellant’s web page. If the appellant had any queries, it was advised to contact the auction administrator. When the appellant requested Respondent No.2 for issuance of allotment letter in respect of the subject property, it received an e-mail from the Respondent No.2 on 21.07.2021 itself at 17:56 pm. Appellant was informed that in terms of Clause 3 (k) of the E-Auction Process Information Document, he had cancelled the E-auction held on 20.07.2021. Appellant was informed that the Liquidator would come up with a fresh E-auction for sale of the subject property.
20.1. From the aforesaid, we find that no reasons were assigned by the Liquidator for cancellation of the E-auction held on 20.07.2021. Appellant was simply informed that the E-auction was cancelled in terms of Clause 3(k) of the E-Auction Process Information Document. Clause 3 (k) as discussed above only declares that the Liquidator has absolute right to accept or reject any or all bids or adjourn/postpone/cancel the E-auction etc., at any stage without assigning any reason therefor. We will advert to this clause a little later.
# 21. To complete the narrative, we may mention that aggrieved by such cancellation, appellant had filed an application under Section 60 of the Code before the Tribunal assailing such cancellation. Issue before the Tribunal was whether the Liquidator was justified in cancelling the E-auction. Tribunal noted that the Liquidator had cancelled the auction without assigning any reason. Though a contention was advanced by the Liquidator before the Tribunal that the other assets (at Lucknow) of the corporate debtor put up for auction fetched a higher price and therefore, the Liquidator chose to cancel the auction expecting a higher price in future auction process, the same was not accepted by the Tribunal. It would amount to comparing apples with oranges. Tribunal further noted that there was no material on record to support the perception of the Liquidator that cancelling the present auction and going for further auction would result in better price for the assets in question and that there cannot be an endless wait to obtain a better price. Holding that there was no reason for the Liquidator to cancel the E-auction when the earlier round of auction process did not fructify resulting in decrease in reserve price, Tribunal vide the order dated 12.08.2021 directed the Liquidator to send a communication to the appellant for depositing the balance sale consideration within the time specified in the E-auction notice.
21.1. It has come on record that following the aforesaid order of the Tribunal, Liquidator i.e. Respondent No.2 had called upon the appellant to pay the balance sale consideration and on payment of the same by the appellant, issued the sale certificate to the appellant in respect of the subject property.
# 22. We may further mention that Respondent No.2, i.e. the Liquidator did not assail the order of the Tribunal before the Appellate Tribunal. One of the financial creditors i.e. Respondent No.1 had filed the appeal before the Appellate Tribunal assailing the order of the Tribunal. Appellate Tribunal by the judgment and order dated 30.11.2021 observed that appellant was the sole bidder, its bid being equal to the reserve price. Liquidator invoked Clause 3(k) of the E-Auction Process Information Document and decided to cancel the auction. There was no concluded contract till that point of time; it is only after the total amount is paid that the sale is concluded. Before the sale can be successfully concluded, Liquidator had the right to cancel the sale. Successful bidder in the auction sale does not acquire any vested right in law to enforce the auction. Therefore, the Tribunal was not justified in setting aside cancellation of auction by the Liquidator. Tribunal had further failed to notice that the terms of the auction sale notice provided absolute right to the Liquidator to accept or reject any bid or to cancel the auction without assigning any reason. While setting aside the order of the Tribunal as well as the steps taken in compliance thereto, Appellate Tribunal gave liberty to the Liquidator to initiate fresh process of auction. Pursuant thereto, Liquidator i.e. Respondent No.2 had issued a subsequent sale notice dated 24.12.2021 for E-auction sale of the subject property, the date of auction being 17.01.2022. Interestingly, in this round of auction, the reserve price was also maintained at Rs.10 crores. As we have noticed above, this Court by order dated 10.01.2022 while issuing notice had stayed the auction scheduled on 17.01.2022.
# 23. Section-5 of the Code deals with the definition of various expressions used in the Code. As per section 5(18), ‘Liquidator’ means an insolvency professional appointed as a liquidator in accordance with the provisions of Chapter III or Chapter V of Part I of the Code, as the case may be. Chapter III deals with liquidation process, whereas Chapter V deals with voluntary liquidation of corporate persons. Section 34, which is under Chapter III, provides for appointment of Liquidator and the fee to be paid. Sub-section (1) of Section 34 says that where an adjudicating authority passes an order for liquidation of the corporate debtor under Section 33, the resolution professional appointed for the corporate insolvency resolution process shall, subject to submission of written consent, act as the Liquidator for the purposes of liquidation unless replaced by the adjudicating authority. As per sub-section (2), on the appointment of a Liquidator under Section 34 all powers of the board of directors, key managerial personnel and partners of the corporate debtor, as the case may be, shall cease to have effect and shall be vested in the Liquidator. Sub-section (3) requires personnel of the corporate debtor to extend all assistance and cooperation to the Liquidator in managing the affairs of the corporate debtor. Sub-sections (4) to (7) deal with replacement of a resolution professional whereas sub-sections (8) and (9) deal with fees to be charged by the Liquidator.
23.1. Powers and duties of Liquidator are provided in Section 35 of the Code. Sub-section (1) enumerates the various powers and duties that has to be performed and discharged by the Liquidator. Clause (f) says that the Liquidator has the power and duty to sell the immovable and movable properties and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified. As per the proviso, the Liquidator shall not sell the immovable and movable properties or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.
23.2. As per Section 36, for the purpose of liquidation, the Liquidator shall form an estate of the assets to be called the liquidation estate in relation to the corporate debtor and shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.
23.3. In addition to the above, there are various other powers and duties of the Liquidator.
# 24. From a conjoint reading of the above provisions, it is evident 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.
# 25. While we are on the powers and duties of the Liquidator, it would be apposite to refer to certain provisions of the Regulations framed in exercise of the powers conferred by Section 5 and other sections of the Code read with Section 240 of the Code as per which the Insolvency and Bankruptcy Board of India may make regulations to carry out provisions of the Code. Regulation 3 deals with eligibility for appointment as Liquidator. As per Regulation 3(1), an insolvency professional shall be eligible to be appointed as a Liquidator if he and every partner or director of the insolvency professional entity of which he is a partner or director is independent of the corporate debtor. Explanation below Regulation 3 (1) explains as to who are the persons considered independent of the corporate debtor. As per Explanation (b), a person shall be considered independent of the corporate debtor if he is not a related party of the corporate debtor.
25.1. Regulation 5 says that the Liquidator shall prepare and submit various reports to the adjudicating authority (Tribunal) regarding the liquidation process. If in this process the books of account of the corporate debtor are incomplete on the liquidation commencement date, the Liquidator under Regulation 6 shall have them completed and brought up to date. That apart, the Liquidator is required to maintain various registers and books in relation to the liquidation of the corporate debtor. In addition to that, as per Regulation 7, he may appoint a professional to assist him in discharging his duties, obligations and functions. However, those professionals should not be his relative or related party of the corporate debtor or has served as an auditor to the corporate debtor in the preceding five years. Under Regulation 8, the Liquidator is required to engage in consultation with the stakeholders and the stakeholders consulted under Section 35 (2) of the Code shall extend all assistance and cooperation to the Liquidator to complete the liquidation of the corporate debtor.
25.2. Regulation 32 empowers the Liquidator to sell the assets of the corporate debtor. Mode of sale is referred to in Regulation 33. As per Regulation 33(1), the Liquidator shall ordinarily sell the assets of the corporate debtor through an auction in the manner specified in Schedule I.
# 26. This brings us to Schedule I of the Regulations dealing with mode of sale. Para 1 lays down the steps to be taken for auction sale of an asset by the Liquidator. The steps to be taken are mentioned in paras 1(2) to 1(13). As per para 1(3), the Liquidator shall prepare terms and conditions of sale, including reserve price, earnest money deposit (EMD) as well as pre-bid qualifications, if any. The second proviso clarifies that EMD shall not exceed 10 per cent of the reserve price, which as per para 1(4) shall be the value of the asset arrived at in accordance with Regulation 35.
# 27. Reverting to Regulation 35, we may mention that as per sub-Regulation (1) of the aforesaid provision, the Liquidator shall consider the average of the estimates of the values arrived under Regulation 35. As per sub-Regulation (2), in cases not covered under sub-Regulation (1) or where the Liquidator is of the opinion that fresh valuation is required under the circumstances, he shall within seven days of the liquidation commencement date, appoint two registered valuers to determine the realisable value of the assets or the businesses of the corporate debtor. The first proviso mentions certain persons who should not be appointed as registered valuers, such as, a relative of the Liquidator; a related party of the corporate debtor etc. Sub-Regulation (3) says that the registered valuers appointed under sub-Regulation (2) shall independently submit to the Liquidator the estimates of realisable value of the assets or the businesses, as the case may be, computed in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017 after physical verification of the assets of the corporate debtor. Sub-Regulation (4) provides that the average of the two estimates received under sub-Regulation (3) shall be taken as the value of the assets or businesses.
# 28. Coming back to Schedule-I, we find that as per para 1(4A), where an auction fails at the reserve price, the Liquidator may reduce the price by up to 25% of such value to conduct subsequent auction.
28.1. Paras 1(11), (11A), (12) and (13) of Schedule-I are relevant since much emphasis has been placed by learned counsel for the parties on these provisions. As per para 1(11), if it is required, Liquidator may conduct multiple rounds of auction to maximize the realization from the sale of the assets and to promote the best interest of the creditors. Para 1(11A) says that where the Liquidator rejects the highest bid in an auction process, he shall intimate the reasons for such rejection to the highest bidder and mention it in the next progress report. While learned senior counsel for the appellant has laid great emphasis on this provision on the basis of which he has assailed the unreasoned cancellation of the bid of the appellant, learned senior counsel for the intervenor has pointed out that para 1(11A) was inserted in Schedule I vide notification dated 30.09.2021 with effect from 30.09.2021. According to him, this provision is prospective and cannot be applied to auctions conducted prior to 30.09.2021, including the auction in question. Therefore, there was no requirement for the Liquidator to give reasons for cancellation of the bid of the appellant.
# 29. We are afraid we cannot accept such a contention made on behalf of the intervenor. While it is true that para 1(11A) came to be inserted in Schedule 1 to the Regulations with effect from 30.09.2021, it does not imply that an auction sale or the highest bid prior to the aforesaid date could be cancelled by the Liquidator exercising unfettered discretion and without furnishing any reason. It is trite law that furnishing of reasons is an important aspect rather a check on the arbitrary exercise of power. 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.
# 30. In S. N. Mukherjee versus Union of India2, this Court opined that the requirement to record reason can be regarded as one of the principles of natural justice which governs exercise of power by administrative authorities. The rules of natural justice are not embodied rules. The extent of their application depends upon the particular statutory framework whereunder jurisdiction has been conferred on the administrative authority. Except in cases where the requirement of recording reasons has been dispensed with expressly or by necessary implication, an administrative authority exercising judicial or quasi-judicial functions is required to record the reasons for its decision. This Court held as follows: –
39. The object underlying the rules of natural justice “is to prevent miscarriage of justice” and secure “fair play in action”. As pointed out earlier the requirement about recording of reasons for its decision by an administrative authority exercising quasi-judicial functions achieves this object by excluding chances of arbitrariness and ensuring a degree of fairness in the process of decision-making. Keeping in view the expanding horizon of the principles of natural justice, we are of the opinion, that the requirement to record reason can be regarded as one of the principles of natural justice which govern exercise of power by administrative authorities. The rules of natural justice are not embodied rules. The extent of their application depends upon the particular statutory framework whereunder jurisdiction has been conferred on the administrative authority. With regard to the exercise of a particular power by an administrative authority including exercise of judicial or quasi-judicial functions the legislature, while conferring the said power, may feel that it would not be in the larger public interest that the reasons for the order passed by the administrative authority be recorded in the order and be communicated to the aggrieved party and it may dispense with such a requirement. It may do so by making an express provision to that effect as those contained in the Administrative Procedure Act, 1946 of U.S.A. and the Administrative Decisions (Judicial Review) Act, 1977 of Australia whereby the orders passed by certain specified authorities are excluded from the ambit of the enactment. Such an exclusion can also arise by necessary implication from the nature of the subject matter, the scheme and the provisions of the enactment. The public interest underlying such a provision would outweigh the salutary purpose served by the requirement to record the reasons. The said requirement cannot, therefore, be insisted upon in such a case.
40. For the reasons aforesaid, it must be concluded that except in cases where the requirement has been dispensed with expressly or by necessary implication, an administrative authority exercising judicial or quasi-judicial functions is required to record the reasons for its decision.
# 31. This Court in State of Orissa versus Dhaniram Luhar3 reiterated the importance of furnishing reasons in decision making, be it administrative, quasi-judicial or judicial. It was in that context that this Court opined that reason is the heartbeat of every conclusion, and without the same it becomes lifeless. Reasons are live links between the mind of the decision-taker and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity. One of the salutary requirements of natural justice is spelling out reasons for an order made; in other words, a speaking out. This is what has been opined in paragraph Nos. 7 and 8:
7. Reason is the heartbeat of every conclusion, and without the same it becomes lifeless. (See Raj Kishore Jha v. State of Bihar [(2003) 11 SCC 519 : 2004 SCC (Cri) 212 : (2003) 7 Supreme 152] .)
8. Even in respect of administrative orders Lord Denning, M.R. in Breen v. Amalgamated Engg. Union [(1971) 1 All ER 1148 : (1971) 2 QB 175 : (1971) 2 WLR 742 (CA)] observed: “The giving of reasons is one of the fundamentals of good administration.” In Alexander Machinery (Dudley) Ltd. v. Crabtree [1974 ICR 120 (NIRC)] it was observed:
“Failure to give reasons amounts to denial of justice.” “Reasons are live links between the mind of the decision-taker to the controversy in question and the decision or conclusion arrived at.” Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the “inscrutable face of the sphinx”, it can, by its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out. The “inscrutable face of the sphinx” is ordinarily incongruous with a judicial or quasi-judicial performance.”
# 32. Again, in East Coast Railway versus Mahadev Appa Rao4, this Court observed that arbitrariness in the making of an order by an authority can manifest itself in different forms. Non-application of mind by the authority making the order is only one of them. Application of mind is best demonstrated by disclosure of mind by the authority making the order and disclosure is best done by recording the reasons that led the authority to pass the order in question. Absence of reasons either in the order passed by the authority or in the record contemporaneously maintained is clearly suggestive of the order being arbitrary, hence legally unsustainable. The above observations of this Court find place in paragraph No.23 which is extracted hereinunder:
23. Arbitrariness in the making of an order by an authority can manifest itself in different forms. Non-application of mind by the authority making the order is only one of them. Every order passed by a public authority must disclose due and proper application of mind by the person making the order. This may be evident from the order itself or the record contemporaneously maintained. Application of mind is best demonstrated by disclosure of mind by the authority making the order. And disclosure is best done by recording the reasons that led the authority to pass the order in question. Absence of reasons either in the order passed by the authority or in the record contemporaneously maintained is clearly suggestive of the order being arbitrary hence legally unsustainable.
# 33. This position has been reiterated by this Court in Kranti Associates (P) Ltd. Versus Masood Ahmed Khan5, wherein this Court emphasized that an order passed by a quasi-judicial authority or even an administrative authority affecting the rights of parties, must be a speaking order. In other words, the order must speak for itself. This Court held as follows: –
12. The necessity of giving reason by a body or authority in support of its decision came up for consideration before this Court in several cases. Initially this Court recognised a sort of demarcation between administrative orders and quasi-judicial orders but with the passage of time the distinction between the two got blurred and thinned out and virtually reached a vanishing point in the judgment of this Court in A.K. Kraipak v. Union of India [(1969) 2 SCC 262 : AIR 1970 SC 150] .
13. In Keshav Mills Co. Ltd. v. Union of India [(1973) 1 SCC 380 : AIR 1973 SC 389] this Court approvingly referred to the opinion of Lord Denning in R. v. Gaming Board for Great Britain, ex p Benaim [(1970) 2 QB 417 : (1970) 2 WLR 1009 : (1970) 2 All ER 528 (CA)] and quoted him as saying “that heresy was scotched in Ridge v. Baldwin [1964 AC 40 : (1963) 2 WLR 935 : (1963) 2 All ER 66 (HL)] ”.
14. The expression “speaking order” was first coined by Lord Chancellor Earl Cairns in a rather strange context. The Lord Chancellor, while explaining the ambit of the writ of certiorari, referred to orders with errors on the face of the record and pointed out that an order with errors on its face, is a speaking order. (See pp. 1878-97, Vol. 4, Appeal Cases 30 at 40 of the Report).
15. This Court always opined that the face of an order passed by a quasi-judicial authority or even an administrative authority affecting the rights of parties, must speak. It must not be like the “inscrutable face of a sphinx”.
# 34. Having discussed the above, we may again advert to the impugned e-mail dated 21.07.2021, as per which Liquidator informed the appellant that in terms of Clause 3(k) of the E-Auction Process Information Document he had cancelled the E-auction held on 20.07.2021. As we have already noted, Clause 3(k) of the E-Auction Process Information Document simply says that 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. While the Liquidator has traced his authority to the aforesaid provision, we may mention that as per Clause 2(m), the information provided in the E-Auction Process Information Document should be read together with the provisions of the Code and the Regulations. In the event of a conflict between the E-Auction Process Information Document and the Code or the Regulations, the provisions of the Code or the Regulations, as the case may be, shall always prevail. That apart, Clause 3(i) clarifies that the E-Auction Process Information Document is neither an agreement nor an offer by the Liquidator to the prospective bidders or any other person. The objective of the E-Auction Process Information Document is to provide information to the interested party to enable it to offer its bid. As per Clause 5(n) the bidder with the highest offer/bid does not get any right to demand acceptance of his bid.
34.1. A conjoint reading of the aforesaid provisions would make it clear that 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. As this Court has emphasized the importance and necessity of furnishing reasons while taking a decision affecting the rights of parties, it is incomprehensible that an administrative authority can take a decision without disclosing the reasons for taking such a decision.
# 35. It follows therefore that though para 1(11A) has been inserted in Schedule I to the Regulations w.e.f. 30.9.20221, it only recognizes the need and necessity for giving reasons in the event of rejecting the highest bid. It is an acknowledgment of the fundamental principle. Thus, intimation of the reasons for rejection of the highest bid would also be the requirement prior to 30.09.2021.
# 36. In so far the present case is concerned, we have already noted the language employed by the Liquidator at the end of the bidding process. Vide the e-mail dated 21.07.2021 the appellant was informed that it had won the auction and that its winning order had been prepared. The language of this e-mail clearly indicates finality of the decision making by the Liquidator.
# 37. As per para 1(12) of Schedule-I, on the close of the auction the highest bidder shall be invited to provide balance sale consideration within 90 days of the date of such demand. As per the first proviso, payments made after 30 days shall attract interest @ 12%. The second proviso says that the sale shall be cancelled if the payment is not received within 90 days.
37.1 Para 1(13) says that on payment of the full amount the sale shall stand completed. The Liquidator shall execute the certificate of sale or sale deed to transfer such assets and the assets shall be delivered to the successful bidder in the manner specified in the terms of sale.
# 38. Therefore, if we read the provisions of Schedule-I, more particularly paras 1(11) to (13) thereof, in a conjoint manner a view may reasonably be taken that ordinarily the highest bid may be accepted by the Liquidator unless there are statutory infirmities in the bidding or the bidding is collusive in nature or there is an element of fraud in the bidding process.
# 39. In Valji Khimji and Company Versus Official Liquidator of Hindustan Nitro Product (Gujarat) Limited and Others6, this Court deprecated entertaining objections after confirmation of sale. Entertaining of objections after the sale is confirmed should not ordinarily be allowed, except on very limited grounds like fraud. Otherwise, no auction-sale will ever be complete. In the facts of that case, this Court noted that it was an open auction after wide publicity. There was no allegation of fraud in the auction. Therefore, there was no justification to set aside the confirmation of sale. It was opined that if every confirmed sale can be set aside the result would be that no auction-sale will ever be completed because always somebody can come after the auction or its confirmation offering a higher amount.
# 40. K. Kumara Gupta Versus Sri Markendaya and Sri Omkareswara Swamy Temple and Ors.7, is a case relating to auctioning of land belonging to the Devasthanam. This Court opined that unless and until it was found that there was any material irregularity and/or illegality in holding the public auction and/or the auction sale was vitiated by any fraud or collusion it is not open to set aside the auction or sale in favour of the highest bidder on the basis of some representations made by a third party who did not even participate in the auction proceedings and did not make any offer. If there is repeated interference in the auction process, the object and purpose of holding public auction and the sanctity of public auction would be frustrated. This Court in paragraph 23 of the judgment held that unless there are allegations of fraud, collusion etc., the highest offer received in the public auction should be accepted as a fair value. Otherwise, there shall not be any sanctity of a public auction.
# 41. It is interesting to note that insofar the present case is concerned, even after cancelling the highest bid of the appellant, in the subsequent sale notice dated 24.12.2021, Respondent No.2 i.e. the Liquidator had again fixed the reserve price of the subject property at Rs.10 crores which was the reserve price in the previous round of auction sale and which was also the bid value of the appellant. If this is the position, we fail to find any rationale or justification in rejecting the bid of the appellant and going for another round of auction at the same reserve price.
# 42. Thus, mere expectation of the Liquidator that a still higher price may be obtained can be no good ground to cancel an otherwise valid auction and go for another round of auction. Such a cause of action would not only lead to incurring of avoidable expenses but also erode credibility of the auction process itself. That apart, post auction it is not open to the Liquidator to act on third party communication and cancel an auction, unless it is found that fraud or collusion had vitiated the auction. The necessary corollary that follows therefrom is that there can be no absolute or unfettered discretion on the part of the Liquidator to cancel an auction which is otherwise valid. As it is in an administrative framework governed by the rule of law there can be no absolute or unfettered discretion of the Liquidator. Further, upon a thorough analysis of all the provisions concerning the Liquidator it is evident that the Liquidator is vested with a host of duties, functions and powers to oversee the liquidation process in which he is not to act in any adversarial manner while ensuring that the auction process is carried out in accordance with law and to the benefit of all the stakeholders. Merely because the Liquidator has the discretion of carrying out multiple auction it does not necessarily imply that he would abandon or cancel a valid auction fetching a reasonable price and opt for another round of auction process with the expectation of a better price. Tribunal had rightly held that there were no objective materials before the Liquidator to cancel the auction process and to opt for another round of auction.
# 43. Learned senior counsel for the intervenor argued that Shri Vijay Kumar Ghidia who is the director and principal shareholder of the appellant was also one of the promotor director and principal shareholder of the corporate debtor. Therefore, he is a ‘related party’ of the corporate debtor and as such is not eligible; rather debarred from participating in the auction of the subject property of the corporate debtor. However, it was pointed out by learned senior counsel for the appellant that Shri Vijay Kumar Ghidia is no longer connected with the corporate debtor having retired from the said company way back in the year 2011.
# 44. At this stage, we may advert to Section 5(24) of the Code which defines the expression ‘related party’ in relation to a corporate debtor. Section 5(24) reads as follows:- . . .
44.1 Clause (a) of Section 5(24) says that a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor would be a related party. Likewise, as per Clause (e) of Section 5(24), ‘related party’ in relation to a corporate debtor would mean a private or public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives more than two percent of its share capital or paid-up share capital, as the case may be.
# 45. Similarly, Section 5(24A) defines ‘related party’ in relation to an individual which is as follows: – . . .
45.1. From the above, it is evident that a person who is a relative of the individual or a relative of the spouse of the individual would be a ‘related party’ in relation to that individual. That apart, a private company or a public company in which the individual is a director and holds along with relatives more than two percent of its share capital or paid up share capital, as the case may be, would be a ‘related party’ in relation to an individual. Further, as per the explanation, both maternal and paternal uncles would be covered within the definition of ‘related party’.
# 46. Section 29A of the Code mentions persons not eligible to be a resolution applicant. Section 29A reads as follows: – . . * * *
46.1. Thus, as per Section 29A(g), a person shall not be eligible to submit a resolution plan if such person or any other person acting jointly or in concert with such person has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the adjudicating authority. Clause (j) says that a person shall not be eligible to submit a resolution plan if such person or any other person acting jointly or in concert with such person has a connected person not eligible under Clauses (a) to (i). As per Explanation (i), the expression ‘connected person’ means-(i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in the management or control of the business of the corporate debtor during the implementation of the resolution plan; etc.
# 47. The expression ‘related party’ appearing in Sections 5(24) and (24A) suffering ineligibility under Section 29A has received considerable attention of this Court. In Swiss Ribbons Private Limited and Another Versus Union of India and Others8, a constitutional challenge was made to Section 29A(j) of the Code read with the definition of ‘related party’ as defined under Sections 5(24) and 5(24A). While repelling the challenge, this Court held as follows:-
109. We are of the view that persons who act jointly or in concert with others are connected with the business activity of the resolution applicant. Similarly, all the categories of persons mentioned in Section 5(24-A) show that such persons must be “connected” with the resolution applicant within the meaning of Section 29-A(j). This being the case, the said categories of persons who are collectively mentioned under the caption “relative” obviously need to have a connection with the business activity of the resolution applicant. In the absence of showing that such person is “connected” with the business of the activity of the resolution applicant, such person cannot possibly be disqualified under Section 29-A(j). All the categories in Section 29-A(j) deal with persons, natural as well as artificial, who are connected with the business activity of the resolution applicant. The expression “related party”, therefore, and “relative” contained in the definition sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I, and so read, would include only persons who are connected with the business activity of the resolution applicant.
110. An argument was also made that the expression “connected person” in Explanation I, clause (ii) to Section 29-A(j) cannot possibly refer to a person who may be in management or control of the business of the corporate debtor in future. This would be arbitrary as the explanation would then apply to an indeterminate person. This contention also needs to be repelled as Explanation I seeks to make it clear that if a person is otherwise covered as a “connected person”, this provision 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. Therefore, any such person is not indeterminate at all, but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during implementation of the resolution plan. This disposes of all the contentions raising questions as to the constitutional validity of Section 29- A(j).
47.1. 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.
# 48. In Phoenix ARC Private Limited versus Spade Financial Services Limited9, 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 as under:-
88. 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.
48.1. Referring to its earlier decision in Arcelor Mittal (India) (P) Ltd. V. Satish Kumar Gupta10, where the issue was whether ineligibility of the resolution applicant under Section 29 A(c) of the Code is attached to an applicant at the date of commencement of the corporate insolvency resolution process or at the time when the resolution plan is submitted by the resolution applicant. It was clarified that the opening words of Section 29(A) stating “a person shall not be eligible to submit a resolution plan…..” clearly indicates that the stage of ineligibility attaches when the resolution plan is submitted by the resolution applicant; thus the disqualification applies in praesenti. This Court referred to Section 21(2) of the Code, more particularly to the second proviso thereto which deals with the Committee of Creditors and the ineligibility of a related party in the consideration and voting on a resolution plan by the said committee and held as follows:
101. However, if such an interpretation is given to the first proviso of Section 21(2), all financial creditors would stand excluded if they were a “related party” of the corporate debtor at the time when the financial debt was created. This may arguably lead to absurd conclusions for entities which have legitimately taken over the debt of related parties, or where the related party entity had stopped being a “related party” long ago.
# 49. Arun Kumar Jagatramka Versus Jindal Steel and Power Limited and Another11, also deals with Section 29A of the Code. In that case, this Court observed that the fundamental postulate of the Code is that a corporate debtor has to be protected from its management and corporate debt. Hence it would be anomalous if a compromise or arrangement can be entertained from a person who is responsible for the state of affairs of the corporate debtor. Referring to Arcelor Mittal (India) (P) Ltd. (supra), this Court observed that the said decision adverted to Section 29A of the Code as a typical instance of a see-through provision so that one is able to arrive at persons who are actually in ‘control’ whether jointly or in concert with other persons. It was thereafter that this Court held that Section 29A is a crucial link in ensuring that the objects of the Code are not defeated by allowing ‘ineligible persons’ responsible for running a company (corporate debtor) aground, to return in the new avatar of a resolution applicant.
# 50. From the above, it is clearly manifest that 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.
# 51. Thus having regard to the aforesaid discussion, we have 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. Consequently, we set aside the order dated 30.11.2021 passed by the Appellate Tribunal and restore the order dated 12.08.2021. The appeal is accordingly allowed. However, there shall be no order as to costs.
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