Eva Agro Feeds ltd Vs Punjab National Bank

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Author: Aishwarya Mudgadkar 7 th Sem, MP Law College

Facts

The legal battle named Eva Agro Feeds Pvt. Ltd. vs Punjab National Bank (Civil Appeal No. 7906 of 2021) mainly arises from the auction of assets of M/s Amrit Feeds Limited which was in the process of liquidation under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and in the cou… The corporate debtor was put through the process of liquidation on February 19, 2021 following a positive outcome of a Corporate Insolvency Resolution Process (CIRP) that was commenced in October 2019.

Background of Parties

EvaAgro Feeds Pvt. Ltd.: The appellant in this case, Eva Agro Feeds, is a company that engages in producing and selling animal feeds. Whatever the reason, Eva Agro Feeds participated in the auction of assets during the insolvent process of M/s Amrit Feeds Limited.
Punjab National Bank (PNB): The respondent, PNB is a financial creditor holding one of the most senior ranks among the members in the Committee of Creditors in the case of M/s Amrit Feeds Limited. Being one of the constituents holding a major claim against the debtor, PNB had a vested interest in the liquidation proceedings so as to ensure that the recovery in the given liquidation maximized the realisable value.
M/s Amrit Feeds Limited: This corporate debtor also underwent a Corporate Insolvency Resolution Process (CIRP) that proved unsuccessful in the year 2019, October which resulted to its liquefaction on 19th February 2021.

Events Leading to Dispute:

Eva Agro Feeds took part in an auction conducted electronically on July 20, 2021, and placed a bid alongside an earnest money deposit (EMD) of ₹1Crore.
The appellant then got a reply that the auction was won.
Upon that however, on July 21, 2021, the liquidator cancelled the auction stating Clause 3 (k) of the E-Auction Process Information Document which reconfirmed that there would another auction held.
An agitation was made by Eva Agro Feeds to the National Company Law Tribunal, after the annulment, seeking the reinstatement of the auction, which the NCLT obliged temporarily.

Lower Court Proceedings:

The NCLT also directed that separate communication be made by the Liquidator to Eva Agro Feeds regarding the remaining sale consideration deposit.

Yet, that as s financial creditor appealed the decision of the NCLT to the National Company Law Appellate Tribunal, which on November 30 2021 modified the Nautical Appeal Tribunal single judge order and directed the holding of a fresh auction.

Important Info:

The decision by the Supreme Court of India on whether any auction can be cancelled by the liquidator if at all law permits, does not support the argument that such auction can be cancelled simply based on wishful thinking on the part of some parties who feel that those left in the bid may come up with some higher amounts.

Issues

The key legal issues that were deliberated upon by the Supreme Court included:

Incorrect Reasoning for Auction Cancellation: Whether the liquidator’s step to cancel the auction was done for the right reasons as per IBC and the rules made there under.
Power of Liquidators: The level of power liquidators have while conducting auctions and the level at which they are required to give justifiable reasons for such actions as cancellation.
Section 29A Disqualification: If it was false that Eva Agro Feeds was barred from participating in the tender in view of past associations with the corporate debtor.

Law

The informative discussions in the case revolved around:

Insolvency and Bankruptcy Code 2016 (IBC): which deals with bankruptcy in India. 2. IBBI (Liquidation Process) Regulations 2016: lays down the rules for liquidating a company.
Legal rules on natural justice and those requiring give reasoned decisions under all administrative processes.

Petitioner Arguments

Eva Agro Feeds advanced the argument that:

The liquidator had no cause to terminate an auction that was already legally binding. 2. The mere hope or expectation of a better price is not sufficient to disregard a bid that has already been accepted.
The actions taken by the liquidator compromised the integrity of the auction. Respondent Arguments

Punjab National Bank submitted that:

The liquidator is entitled to a considerable degree of discretion with regard to auctions, and may cancel such auctions even where there is reason to believe that a suitable price would not be realized upon sale.
The possibility of better prices made them cancel what they called a non-competitive sale.

Analysis

The Supreme Court refrained from indulging in the discussion of the merits of the claim and instead focused on many issues civil procedure

Discretionary Powers of Liquidators

The Court noted that, like any other person acting on behalf of a company in corporate restructuring, that is, liquidators under IBC are also vested with discretion to some extent but those discretions cannot be said to be on an absolute scale or on a wild scale, the factors themselves are expected to be in framework where there are tenets of transparency and fairness in relation to the stakeholders’ dealings:

Limits on Discretion: The Court pointed out that there are statutory provisions aimed at safeguarding the interest of the stakeholders and such policy must be adhered to within the context of the exercise of discretion.
Balancing Interests: Liquidators usually have a duty to creditors but must also consider the fairness to bidders in the event of a sale through auction or any other form of asset realisation.

Requirement of Reasoning

The Court also contained what may be regarded as one of the most important aspects which is the clear reasoning provided by liquidators when as decision makers, they have to make decisions which impact the stakeholders.

Principles of Natural Justice: The Court restated that the natural injustice principles entail giving reasons for a particular course of action by administrative decision-makers whom that action goes against.
Effect on Stakeholders: In not providing a clear explanation for cancelling a bid that was previously accepted, the liquidators expose themselves to the risk of mistrust by both creditors and bidders, which is crucial to the efficient administration of the liquidation.
Interpretation of Section 29A

The discussion, however, cannot be exhausted without examining the attitude of the Supreme Court towards the eligibility requirements of the bidders as provided in Section 29A:

Contextual Analysis: It endeavoured to ascertain whether past connections with M/s Amrit Feeds may inhibit Eva Agro Feeds from engaging in the tendering process.
Time Factor Consideration: In the end, it observed that quite a long period had passed since anyone held a directorship.

Legal Framework Implications

The discussion of the case included how this case is in relation to the other insolvency cases and legal structures governing them:

Augmenting Regulatory Control– In compliance with the decision, all segments of parties in an insolvency process are expected to comply with the relevant law and ensure that the provisions of the IBC are observed.
Possible Reforms in Legislation: It can also lead to the legislative order to amend the laws on the conduct of auctions in the course of insolvency procedures that which may lead amendments to the existing laws aimed at clarifying the limits of the discretion of the liquidators.

Wider Economic Apprehension

In the last instance, this case addresses wider economic issues that should be taken into consideration in the course of any bankruptcy proceedings.

Market Circuit: An open and above-board auction process enhances market circuit discouraging walkouts of bidders during the liquidation sales.
Effective Asset Recovery: Adhering to the principles of equity at the auctions would lead to more effective asset recovery, ensuring the interests of creditors and respect for the economy even in the challenged industries.

Conclusion

The Supreme Court’s decision dated September 6, 2023, confirms the previous ruling of the NCLT thereby siding with Eva Agro Feeds Pvt. Ltd. and overturning the ruling made by NCLAT. The Court laid down a few important points:

A liquidator must act in good faith and provide proper justification for the cancellation of auctions if any.

Material impossibility of greater bids expected in the future does not warrant the cancellation of an already accepted bid.

The order enhanced the standards of conduct in insolvency proceedings whereby bidders are protected while taking part in liquidation sales.

Market and Auctions in Insolvency-Emphasizing principles of justice, equity, and the rule of law in administrative action affecting the rights of interested parties. This historic ruling will serve as a reference point in addressing future cases that will touch on issues of auctioning off assets in the context of insolvency, transparent and fairness and respect that due process brings in any action affecting the rights and interests of the parties involved. Laying down reasonable limits with respect to the discretionary powers exercised by the liquidators as well as upholding the tenets of natural justice, the decision goes a long way in ensuring that the insolvency regime in India is more balanced.

References