IBC – Liquidator Can Exercise Discretion To Explore Best Method For Selling Assets – SC Reiterates

Senior Counsel Gaurav Mitra appeared for the Appellant, while Senior Counsels Arvind Datar and Mr. Salva appeared for the Liquidator before the Apex Court.

In this case, the Gujarat Maritime Board (GMB) leased out a parcel of land to the Corporate Debtor for a period of 30 years. In 2017, ICICI Bank Limited moved an application for initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor under Section 7 of the IBC read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 before the Adjudicating Authority, NCLT.

As no Resolution Plan was approved during the CIRP, an application was moved by the Interim Resolution Professional (IRP) for initiating liquidation proceedings.

In 2019, the Adjudicating Authority ordered the liquidation of the Corporate Debtor. The Liquidator made efforts to sell the assets of the Corporate Debtor through an e-auction process, as contemplated in Sections 33 and 35 of the IBC read with Schedule-I of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Except for the sale of two residential assets, no purchasers stepped forward to purchase the other assets.

The Liquidator moved before the NCLT for permission to sell the assets of the Corporate Debtor through Private Sale, in terms of Regulation 33(2)(d) of the Liquidation Regulations, which was duly allowed. The Stakeholders took a decision to go in for the sale of the Dahej Material and Scrap at amounts higher than the reserve price of the Dahej Material fixed at ₹516 crores. The Stakeholders' Consultative Committee (SCC) resolved that the prospective bidders, who proposed to participate in the Private Sale, ought to be encouraged to participate in the Swiss Challenge Process. As a result, the Swiss Challenge Process was adopted for sale of the assets of the Corporate Debtor through Private Sale.

The first Swiss Challenge Process was unsuccessful as the highest offeror failed to deposit the earnest money amount of 10% of the reserve price. The SCC decided to conduct a second Swiss Challenge Process at a base price of ₹460 crores (being lower than the earlier calculated reserve price of ₹516 crores) as some assets from the Dahej Material were kept reserved for a potential buyer. The second Swiss Challenge Process was initiated and at the Anchor Bid stage, the Liquidator received bids from the Appellant, Respondent No. 4 and Respondent No. 5.

RK Industries submitted its bid of ₹431 crores along with Expression of Interest and deposited a sum of ₹1.00 crore in terms of the bid requirement. Although the last date for submitting the Earnest Money Deposit (EMD) in terms of the Process Document was as 24th March, 2021, the appellant deposited the EMD of ₹43.10 crores with the Liquidator for selection as an Anchor Bidder on 26th March, 2021 along with an affidavit stating that it agreed to be bound by the terms of the Swiss Challenge Process.

The second stage of the Swiss Challenge Process commenced when the respondent Liquidator published an advertisement inviting bidders to participate in the Swiss Challenge Process and submit their bids against the Anchor Bid. In response thereto, the appellant, Respondents No.1, 3, 4, 5 and 6 submitted their bids. On 2nd April, 2021, the Respondent No.1 proposed to bid in a consortium comprising of itself and the respondents No.3 to 6. The said consortium also submitted an EMD in the second stage of the Swiss Challenge Process.

Respondent No. 1 filed an application before the NCLT challenging the bid process in the second Swiss Challenge Process wherein the Appellant was selected as the Anchor Bidder.

The NCLT passed an order permitting the Liquidator to go in for Private Sale of all the assets of the Corporate Debtor and complete the entire sale process in consultation with the SCC within a period of three weeks. The Liquidator was also directed to permit all the parties before the NCLT to participate in the bidding process.

This order was challenged by the Appellant before the NCLAT, which was dismissed. The NCLAT also modified the order of the NCLT to hold that the process should be restarted with adequate preparation and after giving open notice to the buyers.

The Appellant approached the Supreme Court with a grievance that there was no good reason for the NCLAT to have permitted the procedure of Private Sale of the composite assets of the Corporate Debtor instead of taking the Second Swiss Challenge Process to its logical conclusion.

The Supreme Court analysed the issue of whether the Liquidator was justified in discontinuing the Second Swiss Challenge Process for the sale of a part of the assets of the Corporate Debtor wherein the Appellant was declared as an Anchor Bidder and opting for a Private Sale Process through direct negotiations in respect of the composite assets of the Corporate Debtor and if so, was the NCLAT justified in directing the Liquidator to restart the entire process of Private Sale after issuing an open notice to prospective buyers instead of confining the process to those parties who had participated in the process earlier?

After a conjoint reading of the relevant provisions of the IBC and the Liquidation Regulations, the Court opined that "it is evident that the Liquidator is authorized to sell the immovable and movable property of the Corporate Debtor in liquidation through a public auction or a private contract, either collectively, or in a piecemeal manner. The underlying object of the Statute is to protect and preserve the assets of the Corporate Debtor in liquidation and proceed to sell them at the best possible price. Towards this object, the provisions of the IBC have empowered the Liquidator to go in for a public auction or a private contract as a mode of sale. Besides reporting the progress made, the Liquidator can also apply to the Adjudicating Authority (NCLT) for appropriate orders and directions considered necessary for liquidation of the Corporate Debtor. The Liquidator is permitted to consult the stakeholders who are entitled to distribution of the sale proceeds. However, the proviso to Section 35 (2) of the IBC makes it clear that the opinion of the stakeholders would not be binding on the Liquidator. Regulation 8 of the Liquidation Regulations refers to the consultative process with the stakeholders, as specified in Section 35 (2) of the IBC and states that they shall extend all necessary assistance and cooperation to the Liquidator for completing the liquidation process. Regulation 31A has introduced a Stakeholders' Consultation Committee that may advise the Liquidator regarding sale of the assets of the Corporate Debtor and be furnished all relevant information to provide such advice. Though the advice offered is not binding on the Liquidator, he must give reason in writing for acting against such advice."

Addressing the second facet of the issue, the Court held that "Given the aforesaid terms and condition of the Anchor Bid Document and the Second Swiss Challenge Process Document, read collectively with the unqualified undertaking given by the appellant acknowledging that the respondent No.2 – Liquidator was well empowered to cancel/modify or even abandon the said process, it does not lie in the mouth of the appellant to urge that once it was set into motion, there was no justification to discontinue the Second Swiss Challenge Process. No special rights came to be bestowed on the appellant as the Anchor Bidder for it to insist that the said process ought to be taken forward and concluded, irrespective of the subsequent decision taken by the respondent No.2 – Liquidator, backed to the hilt by the stakeholders of discontinuing the Swiss Challenge Process and opting for Private Sale of the consolidated assets of the Corporate Debtor to be conducted through direct negotiations."

The Court was of the firm view that it is not for the court to question the judiciousness of the decision taken by the Liquidator with the idea of enhancing the value of the assets of the Corporate Debtor being put up for sale. In furtherance, the Court opined that the right to refuse the highest bid or completely abandon or cancel the bidding process was available to the Liquidator.

To that end, the Supreme Court set aside the directions issued by the NCLAT and passed fresh directions which directed that "the Private Sale process of the composite assets of the Corporate Debtor should be taken further by the respondent No.2 – Liquidator without losing any further time and be concluded at the earliest. All the eligible bidders who have made Earnest Money Deposits would be entitled to participate in the negotiations to be conducted by the respondent No.2–Liquidator for privately selling the consolidated assets of the Corporate Debtor. Accordingly, we direct that the process of private negotiations that had commenced on 24th August, 2021, shall be taken to its logical end and brought to a closure by the respondent No.2 – Liquidator within four weeks from the date of passing of this order."