“Reasoned Orders”, “Aspect of Adjudication” & “Discharge of A Quasi-Judicial Function”

Absence of reasons may be a good reason to draw inference that the decision making process was arbitrary

Recently, the Hon’ble Supreme Court of India (“Supreme Court”) while interpreting the provisions of the Insolvency and Bankruptcy Code, 2016, held that a liquidator cannot cancel an auction merely in the anticipation of a higher price¹. In doing so, the Court examined and put to test how the liquidator “applied his mind” in arriving at a decision of cancellation.

A. Background& Decision

1. Eva Agro Feeds Private Limited (“Eva Agro”) participated in an auction for sale of factory owned by a company under liquidation (Amrit Feeds Limited (“Amrit Feeds”)) and was declared the highest bidder. The liquidator without assigning any reason cancelled the auction and in doing so, he relied on a clause in the bid document which stated that the liquidator may cancel the auction without assigning any reason.

2. The cancellation was challenged before the Hon’ble National Company Law Tribunal, Kolkata Bench (“NCLT”), and the reason although not assigned at the time of cancellation was stated (before the NCLT) to be on account of fetching better price since another asset located in another city fetched better price. The NCLT disagreed with the basis and held, inter alia, by way of order dated August 12, 2021 (“NCLT Order”) that as there was no material to sustain the perception of the liquidator, there could not be an endless wait to get the best price².

3. The NCLT Order was challenged by the financial creditor (Punjab National Bank) of Amrit Feeds before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”)³. Interestingly, this action was supported by the liquidator before the NCLAT. The NCLAT set aside the NCLT Order by way of judgment dated November 30, 2021 (“NCLAT Judgment”) on the ground that since: (i)Schedule I to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Schedule I”) permits liquidator to conduct multiple rounds of auction; and (ii)as per Schedule I, sale stands completed only on payment of the full amount (in this case, only the earnest money was paid), therefore the liquidator was empowered to cancel the auction.

4. Accordingly, the liquidator proceeded with holding another auction (“Fresh Auction”) although surprisingly, at the same reserved price as the one confirmed earlier by Eva Agro. The NCLAT Judgment was challenged before the Supreme Court⁴. The appeal was admitted and stay on the Fresh Auction was granted by way of order dated January 10, 2022. Subsequently, by way of judgment dated September 9, 2023 (“SC Judgment”), the Supreme Court set aside the NCLAT Judgment and restored the NCLT Order.

B. Basis for decision by the Supreme Court

1. The Supreme Court decision was primarily based on the following⁵:

(a) Furnishing of reasons: (i) presupposes application of mind to the relevant factors and consideration by the concerned authority before passing an order; (ii) it is an important aspect rather a check on the arbitrary exercise of power; (iii)it is an integral facet of principles of natural justice, and is embedded in a provision or action whereby the highest bid is rejected by the liquidator;

(b) Absence of reasons may be a good reason to draw inference that the decision-making process was arbitrary.

2. Additionally, in this case, auction was held in June, 2021 whereas Schedule I in September, 2021 was amended to include a provision that a liquidator in order to reject the highest bid has to intimate reasons. Accordingly, the respondent side was heavily relying on the amendment to say that the obligation on the liquidator to intimate reasons triggered post September, 2021. However, the Supreme Court held that the amendment was nothing but a statutory recognition to the requirement of furnishing reasons. Accordingly, the Court concluded that the legislature has expressly stated what was implicit.

C. Key Takeaways

1. The thrust of the Supreme Court decision casts an obligation on adjudicating authorities to provide a rationale / reasoning for the purposes of arriving at a conclusion. Furnishing of reasoning is an elementary aspect of adjudication, and this position has been consistently upheld.

2. Take for example the power to condone delay which are vested with the Appellate Tribunal constituted under the Foreign Exchange Management Act, 1999 (“FEMA”) (ordinarily referred to as the FEMA Appellate Tribunal). Section 19(2) of FEMA requires that an appeal against the order of adjudicating authority is to be filed within 45 days from the date of receipt of order. The Appellate Tribunal is empowered to entertain the appeal beyond such period and condone the delay provided sufficient cause is made out. So as to demonstrate sufficient cause, reasons are to be given. In this context, the Hon’ble Madras High Court has held that it is not the number of days of delay but the reasons for the delay that has to be condoned⁶. Thus, emphasis is laid on reasoning which the adjudicating authority is obligated to reduce in writing while granting the concession.

3. Another example would be in context of levy of penalty under the Indian Stamp Act, 1899 (“Stamp Act”). This legislation vests power with the collector to levy penalty of an amount not exceeding 10 times the stamp duty, if he thinks fit⁷. The orders of the collectors, at times, levy penalty in an arbitrary manner, including imposing maximum penalty. In such cases, it has been observed that whenever a statute vests discretion on an authority, such discretion is to be exercised on a rational basis⁸. The emphasis is again laid on reasoning behind the imposition which, in this case, is codified (i.e. if the collector “thinks” fit).

It is in this manner that reasoning becomes an important, rather a key facet of principles of natural justice particularly where an authority is discharging a quasi-judicial function. Reasoning pre-supposes due application of mind which obligation either emanates from the legislation or is a mandate by virtue of discharge of a function. Authorities cannot escape this obligation as case records can always be summoned by the appellate body, and the file notings etc. in the records would reveal the manner in which the authority applied its mind. Accordingly, when a decision is sought to be challenged, it becomes imperative to assess whether principles of natural justice are applied (and reasons recorded in writing), as it may aid a litigant at the appellate stage.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.