JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors - Attachment of property of CD, by ED under PMLA after approval of Resolution Plan.

 NCLAT (17.02.2020) in JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors. [Company Appeal (AT) (Insolvency) No. 957 of 2019] deliberated & ordered on the following issues;

1. Whether after approval of a ‘Resolution Plan’ under Section 31 of the Insolvency and Bankruptcy Code, 2016, is it open to the Directorate of Enforcement to attach the assets of the ‘Corporate Debtor’ on the alleged ground of money laundering by erstwhile Promoters.

2. Persons/ Authorities empowered to decide whether a ‘Resolution Applicant’ is ineligible being ‘related party’ in terms of Section 29A or not

3. Distribution of profit during the ‘Corporate Insolvency Resolution Process’.

4. Distribution of monies to be recovered on account of the Identified Transaction

5. Interim management of the ‘Corporate Debtor’ until the implementation of the ‘Resolution Plan’.

6. Can a Successful Resolution Applicant’ be asked to face with undecided claims after the Resolution Plan’ submitted by him and accepted by the ‘Committee of Creditors’

7. Whether ‘JSW Steel Limited” is to be treated as promoter of ‘Nova Iron Steel’.

Excerpts of the order;

In the ‘Corporate Insolvency Resolution Process’ of ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’), the ‘Resolution Plan’ submitted by ‘JSW Steel Limited’ (‘Resolution Applicant’) has been approved by the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi by impugned Judgment dated 5th September, 2019 with certain conditions. After the approval of plan when Monitoring Committee was monitoring the change of management, on 10th October, 2019, the Directorate of Enforcement of Central Government attached assets of ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’) under Section 5 of the ‘Prevention of Money Laundering Act, 2002’.

# 2. ‘JSW Steel Limited’ is ‘Successful Resolution Applicant’, in its appeal has sought for setting aside/ modification of conditions imposed in paragraph 128 sub paras (e), (f), (g), (i), (j), (k) of the impugned order dated 5th September, 2019. It has also raised objection and challenged the jurisdiction of Directorate of Enforcement to attach the properties of the ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’), after change of hands.

# 3. In view of such development, one of the questions raised is whether after approval of a ‘Resolution Plan’ under Section 31 of the Insolvency and Bankruptcy Code, 2016, is it open to the Directorate of Enforcement to attach the assets of the ‘Corporate Debtor’ on the alleged ground of money laundering by erstwhile Promoters.

JSW Steel Limited

# 6. On 14th October, 2019, when the appeal preferred by ‘JSW Steel Limited’ was taken up, learned counsel for the parties brought to our notice that the Deputy Director of the Directorate of Enforcement, New Delhi by order dated 10th October, 2019 attached part of the assets of the ‘Corporate Debtor’ (Bhushan Power & Steel Limited).

# 8. Taking into consideration the fact that the ‘Directorate of Enforcement’, has taken stand contrary to the stand taken by the Government of India, this Appellate Tribunal stayed the order of attachment dated 10th October, 2019 passed by the Deputy Director, ‘Directorate of Enforcement’ with regard to part property of the ‘Corporate Debtor’ (Bhushan Power & Steel Limited). Further, direction was issued not to give effect to the ‘Resolution Plan’ and impugned order dated 5thSeptember, 2019, so far it relates to the payment of the creditors, was stayed.

# 10. The matter was adjourned and finally the Hon’ble the President of India promulgated an Ordinance making further amendment in the ‘Insolvency and Bankruptcy Code, 2016’, published in the Gazette of India extraordinary Part II- Section 1, dated 28th December, 2019, to resolve the issue.

# 11. The preamble of Ordinance making further amendment in the ‘Insolvency and Bankruptcy Code, 2016’ reads as follows:

• “WHEREAS a need was felt to give the highest priority in repayment to last mile funding to corporate debtors to present insolvency in case the company goes into corporate insolvency resolution process or liquidation, to provide immunity against prosecution of the corporate debtor, to prevent action against the property of such corporate debtor and the successful resolution applicant subject to fulfilment of certain conditions and to fill the critical gaps in the corporate insolvency framework, it has become necessary to amend certain provisions of the Insolvency and Bankruptcy Code, 2016; . . . . . .

# 12. After Section 32 of the Principal Act, the following section has been inserted which came into force at once:

• “32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not- . . . . . . . .

# 13. On 13th January, 2020, this Appellate Tribunal issued notice to ‘Directorate of Enforcement’ and the Central Government through the Secretary, Ministry of Corporate Affairs, inter alia, directed:

• “The Directorate of Enforcement and the Central Government through the Secretary, Ministry of Corporate Affairs on behalf of the Serious Fraud Investigation Office and the Central Bureau of Investigation are allowed to file additional reply affidavit by 20th January, 2020 stating therein as to whether ‘JSW Steel Limited’, whose plan has been approved, are covered by the newly inserted Section 32A of the Insolvency and Bankruptcy Code, 2016. In case, the answer is in negative, they will enclose the evidence in support of their stand after serving a copy of the same on the learned counsel for ‘JSW Steel Limited’ and other Appellants.”

# 14. The Union of India through Regional Director, Northern Region, Ministry of Corporate Affairs, has taken specific plea that ‘JSW Steel Limited’ (Resolution Applicant) does satisfy the conditions prescribed under Section 32A and cannot be held to be ineligible in terms of Section 32A (2) (i) as quoted hereunder: . . ., ,

# 15. The Central Bureau of Investigation has appeared, which is making investigation, has not alleged any act of money laundering or other acts against ‘JSW Steel Limited’ or its management.

# 16. The Serious Fraud Investigation Office is under the control of the Ministry of Corporate Affairs has also not pleaded anything against ‘JSW Steel Limited’ or its management.

# 17. Mr. Sanjay Shorey, Director (Legal and Prosecution), Ministry of Corporate Affairs, appearing on behalf of ‘Union of India’ submitted that ‘JSW Steel Limited’ has not been held to be ‘related party’ by the ‘Resolution Professional’ or the ‘Committee of Creditors’ or the ‘Adjudicating Authority’.

# 19. According to Directorate of Enforcement, it is incumbent on the ‘Successful Resolution Applicant’ to make a self-declaration that whether the benefit of sub-sections (1) & (2) of Section 32A would be available to it upon fulfilment of the conditions laid down therein; and whether the‘Successful Resolution Applicant’ was a promoter or in the managementor in the control of the ‘Corporate Debtor’ or a related party. Therefore,this Appellate Tribunal should call for such a declaration by way of an affidavit from the ‘Resolution Applicant’ i.e. ‘JSW Steel Limited’.

# 20. Aforesaid stand taken by the Directorate of Enforcement cannot be accepted, in absence of any mandate under Section 32A that the ‘Successful Resolution Applicant’ after approval of the plan is required to give any such declaration as to whether the benefit of Section 32A will be applicable to them or not. Only the competent authority can decide such issue if any such allegation is levelled.

# 21. The next plea taken by the Directorate of Enforcement is that Section 32A introduced w.e.f. 28th December, 2019 is prospective and would not apply to ‘Resolution Plan’ which has already been approved under Section 31 of the ‘I&B Code’. It was submitted that the ‘Resolution Plan’ was approved on 5th September, 2019 and Section 32A has come into force on 28th December, 2019.

# 22. The plea taken by the Directorate of Enforcement is fit to be rejected for the following reasons.

# 25. Attachment of assets of the ‘Corporate Debtor’ which is under change of the hands whose order of attachment was passed on 10th October, 2019 i.e. after one month seven days under Section 5 of the ‘Prevention of Money Laundering Act, 2002’.

# 26. As contradictory plea was taken by two Departments of the Central Government, time was allowed to resolve the issue. Only thereafter, after deliberation by the Central Government, the Ordinance has been issued on 28th December, 2019 inserting Section 32A. The preamble suggests that a need was felt to give the highest priority in repayment to last mile funding to corporate debtors to present insolvency in case the company goes into corporate insolvency resolution process or liquidation, to provide immunity against prosecution of the corporate debtor, to prevent action against the property of such corporate debtor and the successful resolution applicant subject to fulfilment of certain conditions and to fill the critical gaps in the corporate insolvency framework, it has become necessary to amend certain provisions of the Insolvency and Bankruptcy Code, 2016.

# 27. After the approval of the ‘Resolution Plan’, as the attachment order was passed by the Deputy Directorate of Enforcement, we left the matter to the Central Government to decide as to whether to provide immunity against the prosecution to the ‘Corporate Debtor’ or to take action against the ‘Corporate Debtor’ and the ‘Successful Resolution Applicant’. The Ordinance having issued pursuant to direction of this Appellate Tribunal to the Central Government which on deliberation resulted into issuance of Ordinance, we hold that Section 32A will be applicable to the present case- ‘JSW Steel Limited’.

# 28. Learned counsel for the ‘Directorate of Enforcement’ submitted that ‘JSW Steel Limited’ (‘Successful Resolution Applicant’) is a ‘related party’ and, therefore, even if Section 32A is applied in the present case, related party including associate company of the Promoter/ Corporate Debtor is not eligible.

# 29. Reliance has been placed on the definition of ‘related party’ as defined under Section 5(24),

# 32. It is stated that during the course of PMLA investigation, it has come to notice that M/s. ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’) and ‘M/s. JSW Steel Limited’ are associated as shareholders holding 24.09% and 49% equity respectively in a Joint venture company namely ‘M/s. Rohne Coal Company Private Limited’.

# 33. Further, as per the updated information filed with Ministry of Corporate Affairs in Annual Return 2018-19, the company was formed in 2008 and is still in operation.

# 38. A person cannot be held to be ineligible till it is shown that it comes within any of the disqualifications under clauses (a) to (j) of Section 29A.

# 39. It is not the case that ‘JSW Steel Limited’ filed plan in concert with any person who is ineligible in terms of any of the clauses (a) to (j) of Section 29A. It is only alleged that ‘JSW Steel Limited’ is a ‘related party’ of erstwhile Promoter of the ‘Corporate Debtor’.

# 41. Upon a perusal of Section 32A (1) (a) of the ‘I&B Code’ read with the aforesaid definition, it is ex facie evident that the ‘JSW Steel Limited’ is not an associate company/ related party of the ‘Corporate Debtor’. While ‘Rohne Coal Company Private Limited’ is an ‘associate company’ of the ‘Corporate Debtor’ as well as of the ‘JSW Steel Limited’, but by virtue of both having investment in such downstream joint venture company i.e. ‘Rohne Coal Company Private Limited’, the ‘JSW Steel Limited’ and the ‘Corporate Debtor’ do not become related parties of each other.

# 42. The Directorate of Enforcement is interpretation that Section 32A of the ‘I&B Code’ is prospective in nature and the benefit of such provision cannot be claimed by the Appellant is wrong and misplaced.

# 43. A plain reading of Section 32A(1) and (2) clearly suggests that the Directorate of Enforcement/ other investigating agencies do not have the powers to attach assets of a ‘Corporate Debtor’, once the ‘Resolution Plan’ stands approved and the criminal investigations against the ‘Corporate Debtor’ stands abated. Section 32A of the ‘I&B Code’ does not in any manner suggest that the benefit provided thereunder is only for such resolution plans which are yet to be approved. Further, there is no basis to make distinction between a resolution applicant whose plan has been approved post or prior to the promulgation of the Ordinance.

# 44. Further, even prior to the passing of the Ordinance, the 3rd Respondent i.e. Union of India through Ministry of Corporate Affairs in its ‘Affidavit in Reply’ dated 10th October, 2019, had categorically stated that:

• 8). In light of the above, the ED while conducting investigation under PMLA is free to deal with or attach the personal assets of the erstwhile promoters and other accused persons, acquired through crime proceeds and not the assets of the Corporate Debtor which have been financed by creditors and acquired by a bona fide third party Resolution Applicant through the statutory process supervised and approved by the Adjudicating Authority under the IBC. In so far as a Resolution Applicant is concerned, they would not be in wrongful enjoyment of any proceeds of crime after acquisition of the Corporate Debtor and its assets, as a Resolution Applicant would be a bona fide assets acquired through a legal process. Therefore, upon an acquisition under a CIR Process by a Resolution Applicant, the Corporate Debtor and its assets are not derived or obtained through proceeds of crime under the Prevention of Money Laundering Act, 2002 (“PMLA”) and need not be subject to attachment by the ED after approval of Resolution Plan by the Adjudicating Authorities.” (Emphasis supplied)

# 50. The allegation is that in a joint venture Company namely— ‘M/s. Rohne Coal Company Private Limited’, ‘Bhushan Power and Steel Limited’ and ‘JSW Steel Limited’ are holding 24.09% and 49% equity respectively.

# 51. ‘JSW Steel Limited’ has taken specific plea that it is not a ‘related party’ of erstwhile ‘Bhushan Power and Steel Limited’- (‘Corporate Debtor’) and placed on record the following facts:

# 54. The Notification of Government of India through Ministry of Coal dated 9th April, 2017 shows that ‘JSW Steel Limited’ in its individual capacity applied for allocation of ‘Rohne Coking Coal Block’ in its favour. However, there being more applicants, the Central Government contemplated to make joint allocation of Rohne coking coal block in favour of ‘M/s. JSW Steel Ltd.’, ‘M./s. Bhushan Power & Steel Ltd.’ and ‘M/s. Jai Balaji Sponge Ltd.’ for meeting their proportionate share of requirement of coal,

# 56. There was a compulsion on the part of ‘JSW Steel Limited’ for allocation of Rohne Coking Coal Block though it applied for individual allotment, because of mandate of the Central Government. They had to share jointly with the two others including ‘M./s. Bhushan Power & Steel Ltd.’ and ‘M/s. Jai Balaji Sponge Ltd.’ for meeting their proportionate share of requirement of coal.

# 57. We hold that where a party for the purpose of its business, if mandated by the Central Government to join hands together and are forced to form a consortium or as joint associate, such person (‘Resolution Applicant’) cannot be held ineligible in terms of Section 32A (1) (a) on the ground of ‘related party’.

# 61. The ‘Resolution Professional’ and the ‘Committee of Creditors’ vide their joint additional reply dated 22nd January, 2020 filed before this Appellate Tribunal, have yet again certified that the Appellant- ‘JSW Steel Limited’ and the ‘Corporate Debtor’ are not related parties.

# 62. The question arises as to who are the Competent Authorities to decide ineligibility of the ‘Resolution Applicant’ under Section 29A or 32A (1) (a) and to find out whether it comes within the meaning of ‘related party’ for the purpose of ineligibility.

# 63. As per Section 30(1), the ‘Resolution Applicant’ while submitting ‘Resolution Plan’ has to file an Affidavit stating clearly that he is eligible or not eligible under Section 29A.

# 64. As per Section 30(3), the ‘Resolution Professional’ shall present to the ‘Committee of Creditors for its approval such ‘Resolution Plans’ which confirm the conditions referred to in sub-section (2). It is only thereafter the ‘Committee of Creditors’ is empowered to find out whether the ‘Resolution Applicant’ is ineligible under Section 29A:

# 65. It is only thereafter under Section 31, the Adjudicating Authority is to satisfy that the ‘Resolution Plan’ as approved by the ‘Committee of Creditors’ under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30.

# 66. The aforesaid provisions show that the following persons/ Authorities are empowered to decide whether a ‘Resolution Applicant’ is ineligible being ‘related party’ in terms of Section 29A or not:

• (i) The ‘Resolution Professional’ in terms of Section 30(1) is to find out whether such statement has been made or not;

• (ii) The ‘Committee of Creditors’ is empowered to decide whether the ‘Resolution Applicant’ is ineligible in terms of Section 29A. Thereby the ‘Committee of Creditors’ is also required to decide whether it is related party to the ‘Corporate Debtor’ or not.

• (iii) The Adjudicating Authority while passing order under Section 31 can find out whether the ‘Resolution Applicant’ fulfils the conditions under Section 30(2) which includes Section 30(2) (e) and in terms of Section 29A can decide whether the ‘Resolution Applicant’ is a ‘related party’ to the ‘Corporate Debtor’.

# 70. However, on the direction of the Central Government, if a person is asked to join hands with others for compliance of such direction a person cannot be held to be ineligible on the ground of ‘related party’.

# 71. In view of the aforesaid discussion, we declare the attachment of assets of the ‘Corporate Debtor’ by the Directorate of Enforcement pursuant to order dated 10th October, 2019 as illegal and without jurisdiction.

# 117. The grievance of the Appellant- ‘JSW Steel Limited’, as noticed earlier, is against part of the conditions imposed in paragraph 128 sub paras (e), (f), (g), (i), (j), (k) of the impugned order dated 5th September, 2019. With respect to the specific conditions imposed in para 128 sub paras (e), (f), (g) and (i), there exists no lis between the parties as appears from record placed by the Appellant and the ‘Committee of Creditors’. Reliance has been placed on the decision of the Hon’ble Supreme Court in “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.─2019 SCC OnLine SC 1478”.

# 119. In view of the findings as detailed above, we hold that the assets of the ‘Corporate Debtor’ (‘Bhushan Power & Steel Limited’) of which ‘JSW Steel Limited’ is a ‘Successful Resolution Applicant’ is immune from attachment by the Directorate of Enforcement.

# 123. On merit, we have also held that the conditions as stipulated in Section 32A (1) (b) and ineligibility under Section 29A is not attracted. Therefore, the relief to the extent sought for by ‘JSW Steel Limited’ is allowed.

# 127. We accordingly, set aside the part of the conditions as made in Paragraph 128 (j) of the impugned order dated 5th September, 2019 which relates to distribution of profit during the ‘Corporate Insolvency Resolution Process’. The Monitoring Committee with the help of the Resolution Professional’ will now go through the RPF issued in terms of Section 25 of the ‘I&B Code’ and as consented to by the ‘Resolution Applicant’ (‘JSW Steel Limited’) will make distribution of profit accordingly. The condition imposed at paragraph 128 (j) stands substituted with the aforesaid observations.

# 128. It is pleaded that there is ambiguity regarding List A which is mandatory part of the ‘Resolution Plan’. Paragraph 128 (g) of the impugned order reads as follows:

• “(e) Various reliefs sought from the statutory authorities under the Income Tax Act, 1961, Ministry of Corporate Affairs, Department of Registration and Stamps, Reserve Bank of India and others are also disposed of. We do not feel persuaded to accept the prayer made in the resolution plan yet the resolution plan applicant may file appropriate applications before the competent authorities which would be considered in accordance with law because it would not be competent for the Adjudicating Authority-NCLT to enter into any such area for granting relaxation, concession or waiver is wholly within the domain of competent authorities.”

# 129. Section 1.12 of the Resolution Plan deals with:

• (i) List ‘A’: certain items forming an integral part of the Resolution Plan, which were deemed to have been granted by virtue of approval of the Resolution Plan by the Adjudicating Authority, as they are in the nature of standard and ordinary implications of any resolution plan approved by an Adjudicatory Authority which is binding on stakeholders.

• (ii) List ‘B’: reliefs, concessions and entitlements for which specific orders were sought from the Adjudicating Authority as part of approval of the Resolution Plan.

# 133. List A is the integral part of the Resolution, therefore, the following orders shall be deemed to have been granted by virtue of approval of the Resolution Plan:

• (i) approving the Capital Reduction in the manner as contemplated under the Resolution Plan;

• (ii) approving the Amalgamation in the manner as contemplated under the Resolution Plan;

• (iii) the Existing Board shall stand vacated and be replaced by the Reconstituted Board;

• (iv) All penalties, interest, delayed payment charges, any other liabilities for any non-compliance with statutory obligations including taxes, including delays in filing returns or payment of tax dues, against the Company shall stand settled in accordance with the provisions of this plan as approved by NCLT.

• (v) All penalties, interest, delayed payment charges, any other liabilities for any non-compliance with applicable labour and employment Laws shall stand settled to the extent and in the manner provided in this Resolution Plan as approved by NCLT.

• (vi) Any right of subrogation, reimbursement, or recompense against the Company under any corporate guarantee, letters of comfort or similar instruments, or any obligation provided by any promoter, affiliate or Related Party of the Company shall stand extinguished and become null and void as of the NCLT Approval Date.

• (vii) Any right of any shareholder of the company under any shareholder agreement with the Company shall stand extinguished as of the NCLT Approval Date and such shareholder agreement shall stand terminated as of the NCLT Approval Date and no such shareholder shall be entitled to exercise any right including objecting to any amendment of the articles of association of the Company on and from the NCLT Approval Date.

# 136. Para 13 of the Addendum Letter stipulates that in the event that the Adjudicating Authority directed that monies were to be recovered on account of the Identified Transaction, only if the ‘Corporate Debtor’ had received such monies prior to the 3rd anniversary of the Effective Date, then the beneficiary of such monies would be the ‘Committee of Creditors’ on a prorate basis (after deduction of Pass Through Monies as defined in the Resolution Plan).

# 137. Therefore, Para 128(i) of the impugned order ought not to have modified the specific inter se understanding between the ‘Committee of Creditors’ and the Appellant on sharing of such proceeds, which has been recorded in Para 13 of the Addendum Letter and forms a part of the ‘Resolution Plan’. Further, since this is a matter which relates to a commercial understanding between the ‘Committee of Creditors’ and the Resolution Applicant as recorded in the ‘Resolution Plan’, in light of “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.─2019 SCC OnLine SC 1478”, such commercial understanding be given effect to, without any modification.

# 138. In light of the above, we set aside the condition stipulated in second part of para 128(i) of the impugned order, regarding monies recovered from tainted and other such transactions, as being contrary to the agreed position in terms of para 13 of the Addendum Letter, which forms a part of the ‘Resolution Plan’.

# 139. There is ambiguity regarding interim management mechanism.

• Para 128(e) of the impugned order – “We also approve the appointment of Monitoring Agency from the date of this order until the closing date. Accordingly, the CoC and the RP would continue as Monitoring Agency”

• Para 128(f) of the Impugned order : “The power of the Board of Directors of the Corporate Debtor shall remain suspended until the closing date”

# 142. However, in view of the observations of the Adjudicating Authority in para 128(e) of the impugned order, it is stated that the ‘Resolution Professional’ has interpreted that the ‘Resolution Plan’ has been modified to such extent. It is thus clarified that :

•  (i) The direction in para 128(f) of the impugned order that the existing Board of Directors shall remain suspended until the closing date is only to ensure that the previous suspended board of directors does not stand revived on account of the completion of the CIR Process, and does not interfere with the interim management mechanism in the Resolution Plan.

# 143. In so far as condition imposed by the Adjudicating Authority at paragraph 128 (k) of the impugned order is concerned, the matter requires consideration in view of the decision of the Hon’ble Supreme Court in “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.─2019 SCC OnLine SC 1478”. In the said case, the Hon’ble Supreme Court held:

• “88. For the same reason, the impugned NCLAT judgment in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.”

# 144. Therefore, the conditions stipulated by the Adjudicating Authority at paragraph 128(k) of the impugned order being against the provisions of law, is set aside.

# 145. Learned counsel for the Appellant- ‘JSW Steel Limited’ submitted that ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’) has 25.6% shares in ‘Nova Iron Steel’ after approval of the plan, 25.6% of the shares of ‘Bhushan Power & Steel Limited’ now stands transferred in favour of the ‘Resolution Applicant’- ‘JSW Steel Limited’. After such transfer, the ‘Resolution Applicant’- ‘JSW Steel Limited’ cannot be treated as promoter of ‘Nova Iron Steel’. Such declaration was sought for but not clarified by the Adjudicating Authority. Therefore, we have made it clear.

# 147. Whether ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’) has 25.6% shareholding in ‘Nova Iron Steel’ is a question of fact. However, if there is any such share of ‘Bhushan Power & Steel Limited’- (‘Corporate Debtor’) in ‘Nova Iron Steel’, after approval of the plan and on acquisition of ‘Bhushan Power & Steel Limited’ by ‘JSW Steel Limited’, we hold:

• (a) The Company on approval of the ‘Resolution Plan’ stand declassified as a promoter/ part of promoter group of any company or entity, including any subsidiaries or joint ventures or Associate Companies in which the ‘Corporate Debtor’ has made an investment including ‘Nova Iron Steel’ and shall not be required to follow any separate procedure for reclassification of the Company as ‘public shareholders’ of such companies.

• (b) If the ‘Corporate Debtor’ has any right over ‘subsidiary companies’, ‘associate companies’, ‘joint venture companies’ of the ‘Corporate Debtor’, once ‘Successful Resolution Applicant’ (‘JSW Steel Limited’) takes over the ‘Corporate Debtor’, it will be open to the ‘Corporate Debtor’ to decide whether it will continue with such right of ‘subsidiary companies’, ‘associate companies’, ‘joint venture companies’ or any other companies in which ‘Corporate Debtor’ has share.

• (c) It is further ordered that the company on approval of the ‘Resolution Plan’ shall stand declassified as promoter/ part of promoter/ group of promoter of any company or entity, including any ‘subsidiaries companies’, ‘associate companies’, ‘joint venture companies’ including ‘Nova Iron Steel’ in which ‘Corporate Debtor’ has made an investment and it is not required to follow any separate procedure for reclassification of the company as “shareholders of such companies”.

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Eva Agro Feeds Pvt. Ltd. Vs. Punjab National Bank and Anr. - 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.

 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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