2025 (11) TMI 960 - AT - IBC

Bidder allowed to challenge private Swiss-challenge sale; liquidator needed prior permission under Reg.33(2)(d); fresh notices ordered

Orissa Alloy Steel Private Limited Versus SM Steels and Power Limited, Pankaj Dhanuka, Assets Care and Reconstruction Enterprise Limited and SM Steels and Power Limited Versus Pankaj Dhanuka, Assets Care and Reconstruction Enterprise Limited and Orissa Alloy Steel Private Limited

NCLAT held that the bidder challenging the private Swiss-challenge sale had locus to sue, noting compressed timelines, a withheld Process Document and ... CIRP - Liquidation - Issuance of fresh Swiss Challenge Notice in the private sale of the assets of the Corporate Debtor with the bid of OASPL as the anchor bid and EMD fixed on standard norms - locus of non-participating prospective bidder to file an application challenging the sale process - timelines for the private sale of the assets of the Corporate Debtor fixed by the Liquidator was reasonable enough to facilitate wider and optimal participation of bidders or not - Process Document was issued in a manner which only put the OASPL in an advantageous position in submitting its bid while acting as an impediment to the other bidders - requirement to obtain “prior permission” of the Adjudicating Authority for the conduct of the private sale - existence of sufficient material on record for the Liquidator to have “reasons to believe” that there was collusion between the ACRE and the OASPL so as not to proceed with the private sale. Whether SMSPL can be said to have locus to have filed the application before the Adjudicating Authority? - HELD THAT:- No material has been placed on record to show that SMSPL had been approached by the Liquidator inviting them to participate in the private sale process. It is also clear that SMSPL had not only offered a bid higher than the reserve price but was also seeking information on the manner of deposit of the Bank Guarantee towards EMD. SMSPL had contemporaneously also pointed out that the compressed timelines in the Public Announcement was a hindrance in the participation of prospective bidders including them. The curtailment of time period in submission of documents and in the conduct of due diligence of assets coupled with a restrictive EMD had posed as a hurdle in their participation as a bidder. Apart from the compression in the time period for conduct of auction, non-availability of time to submit eligibility documents had been weighing heavily on the SMSPL which had purportedly kept them out of the fray. When similar constraints were raised by SMSPL in IA No. 586 of 2024 in seeking the intervention of the Adjudicating Authority to gain a foothold in the private sale bid, the Adjudicating Authority did not commit any error in entertaining IA No. 586 of 2024. Particularly so because though the Liquidator had completed the sale process, the prior permission of the Adjudicating Authority was still pending as mandated by Regulation 33(2)(d) of LPR - the Adjudicating Authority did not commit any infirmity in entertaining I.A. No. 586 of 2024 filed by the SMSPL. Whether the timelines for the private sale of the assets of the Corporate Debtor fixed by the Liquidator was reasonable enough to facilitate wider and optimal participation of bidders? - Whether the Process Document was issued in a manner which only put the OASPL in an advantageous position in submitting its bid while acting as an impediment to the other bidders? - HELD THAT:- It was equally misplaced on the part of the Adjudicating Authority to hold that since the SCC had decided to conduct a Swiss Challenge Process, the character of the private sale had changed to public auction and therefore the timelines and conditions that apply to a public auction should have been applicable in this case also. Clause 12 of the public announcement and Clause 2.7 of the Process Document in the instant case clearly postulated the mode of sale of the Corporate Debtor as a going concern through Swiss Challenge Process under private sale as per meaning under the IBC and LPR - There is no mention of any hybrid-sale mechanism. In such circumstances, it is not inclined to agree with the Adjudicating Authority that in the present facts of the case since the features of both auction and private sale are interwoven, the timelines otherwise applicable to a public auction should also have been applicable because the private sale is being conducted by adopting the Swiss Challenge Process. The timelines provided under Schedule-I for “auction” cannot be transposed in the case of “private sale”. The Process Document which was the governing document which detailed each and every step in the sale process was itself not made available, it clearly made the entire private sale process a farcical exercise. When the Process Document itself was not in place, the timelines which were inserted in the public announcement had been rendered redundant, meaningless and otiose - the irresistible conclusion is that the Process Document was prepared in a manner that other prospective bidders were not able to meet the timelines for submission of eligibility documents and make the EMD deposit thus preventing prospective bidders to participate in the right earnest. The statutory provision of IBC and LPR mandates that auction should be undertaken in a transparent manner which could lead to maximization of value realization from the sale for the benefit of creditors/stakeholders. In the present case, the Process Document did not provide reasonable or provide sufficient time to potential bidders to understand the terms and condition of the auction and sufficient opportunity for due diligence for inspection and evaluation of the assets to enable fruitful and productive participation in the auction process. In the present case, the entire process of conduct of auction was shrouded in opacity - the manner in which the private sale process was conducted, it stamped out meaningful participation of bidders which in turn impeded procuring the highest possible price which is in the best public interest. The Process Document instead of providing a level playing field to all potential bidders and paving way for maximisation of assets, it precluded genuine bidders from submitting their bids. Instead of giving equal opportunity to all intending bidders to compete to procure the highest value, the Process Document was a handicap for the potential bidders. Whether the Liquidator was required to obtain “prior permission” of the Adjudicating Authority for the conduct of the private sale and if so whether the requirements of prior permission had been met by the Liquidator in terms of Regulation 33(2)(d) of the LPR? - HELD THAT:- The sale by auction is the preferred and accepted mode for conduct of liquidation proceeding under IBC. Sub Regulation 2 of Regulation 33 of LRP however caters to private sale and this clearly stipulates that for a private sale to be carried out, the Liquidator has to undertake “prior consultation” of the SCC. Such a private sale is to be conducted by the Liquidator with prior consultation with the SCC only when the asset is perishable or is degradable in value. In all other cases of private sale, in terms of Sub Regulation 2(d), the “prior permission” of the Adjudicating Authority is required to be obtained for a private sale. While acknowledging the need to obtain “prior permission”, it was canvassed by the learned counsel for the Liquidator that the words “prior permission” cannot be construed in a dogmatic and a pedantic manner but should be meaningfully applied. It was pointed out that “prior permission” of the Adjudicating Authority was required only in such conditions when the Liquidator was taking recourse to private sale on his own initiative. In the present case, since the private sale process and the manner of its conduct was extensively deliberated at the level of the stakeholders in the SCC, a more flexible interpretation has to be applied to the expression of “prior permission”. Moreover, there was no substantive material prior to the stage of issuing public announcement on which the prior permission of the Adjudicating Authority could be solicited. Subjecting the process to obtaining any sort of prior permission would have delayed the process significantly and become counterproductive to the objectives of value maximization and time bound completion of the sale process. The connotation of the expression “prior permission” would unambiguously mean seeking authorization before an act is carried out in contrast to seeking authorization for an action after it has already been concluded or parallelly/contemporaneously sought while in the process of being concluded. The liquidator was required to obtain prior permission from the Adjudicating Authority before proceeding with the private sale transaction, which not having been done, to our minds, tantamount to an infraction of the LPR. Whether there were sufficient material on record for the Liquidator to have “reasons to believe” that there was collusion between the ACRE and the OASPL so as not to proceed with the private sale? - HELD THAT:- Though ACRE has a significant voting share in the SCC, it could not decide on its own without the support of the other SCC members. In the case at hand, the SCC has taken near unanimous decision in approving the revised private sale offer of OASPL to be anchor bid in the proposed Swiss challenge by voting percentage of 99.92%. The SCC had also rejected the request of one JKDL to extend the timelines of private sale for it to participate by voting percentage of 99.92%. The SCC had also advised the Liquidator to continue with the current private sale without conducting any fresh e-auction as requested by SMSPL by voting percentage of 99.92% and decided not to allow SMSPL to participate in the private sale process of the Corporate Debtor by 75.08%. Clearly, none of the above decisions were solely made by ACRE and no amount of the intention to collude would have had any effect if the remaining members of the SCC decided otherwise. Nothing has been placed on record that ACRE had defrauded, coaxed, misled or coerced the remaining members of the SCC to toe its line as each of the other members were separate and distinct entities having their own independent and respective management and decision makers which comprised of public sector banks/financial institutions - the allegation of SMSPL regarding collusion between OASPL and ACRE or any foul play on the part of the Liquidator abetting such a collusion lacks sufficient basis. There are no infirmity with the impugned order to the extent that the public notice dated 22.02.2024 has been set aside; that the private sale has been approved with directions to issue fresh notice in two national dailies and one vernacular newspaper and that EMD for the purpose of private sale shall be fixed in a manner so as to meet the requirement of reasonableness - Adjudicating Authority having already given approval for the liquidation of the assets of the Corporate Debtor by private sale, this is a clear permission in terms of Regulation 33(2)(d) of the Liquidation Process Regulations. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a non-participating prospective bidder who seeks to join a concluded private Swiss-Challenge sale before judicial approval has locus to file an application challenging the sale process. 2. Whether the timelines and manner of issuance of the Process Document and public announcement governing a private sale by Swiss-Challenge (under Regulation 33 LPR Schedule-I Clause 2) were reasonable and enabled wider and effective participation of prospective bidders. 3. Whether the Process Document and related procedures were structured so as to advantage the anchor bidder and to impede other bidders (including by fixing an excessive EMD or by late issuance of the Process Document). 4. Whether 'prior permission' of the Adjudicating Authority under Regulation 33(2)(d) of the Liquidation Process Regulations (LPR) was required before initiating and fixing terms of a private Swiss-Challenge sale, and if so whether such prior permission was obtained. 5. Whether there was sufficient material on record to constitute the Liquidator's 'reason to believe' (under Regulation 33(3) LPR) that collusion existed between stakeholders (creditor/ARC trust) and the anchor bidder so as to require suspension of the sale and reporting to the Adjudicating Authority. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Locus of a belated prospective bidder Legal framework: Standing to challenge liquidation sale processes derives from the statutory scheme (IBC/LPR) and settled administrative law principles; courts have held that non-participants ordinarily cannot attack concluded sales. Precedent treatment: The Court referred to the ratio in Subir Ghosh and acknowledged its principle that a party who did not participate cannot ordinarily challenge tender conditions, while recognizing fact-sensitivity. Interpretation and reasoning: The Court examined chronology and found the private Swiss-Challenge process had been completed but final judicial approval remained pending. The belated prospective bidder had, prior to judicial approval, written expressing interest, sought Process Document/EMD details, and submitted a higher offer (with conditional terms). SCC minutes showed at least two SCC members advocated giving that party a chance because Adjudicating Authority's approval was outstanding. The Court held these facts distinguished a pure non-participant challenge: intervention occurred before NCLT confirmation and the complainant contemporaneously raised specific grievances about timelines and access to documents. Ratio vs. Obiter: Ratio - a party may have locus to seek judicial intervention where (i) judicial approval of the sale is pending, and (ii) the party raises bona fide, contemporaneous grievances that, if substantiated, affect fairness of sale; mere post-confirmation opportunism lacks locus. Obiter - remarks on commercial opportunism and timeliness. Conclusion: The Adjudicating Authority did not err in entertaining the application of the belated prospective bidder; locus existed on the facts because intervention occurred prior to judicial confirmation and raised arguable grievances concerning process and access. Issue 2 - Reasonableness of timelines for private Swiss-Challenge sale (Schedule-I applicability) Legal framework: Schedule-I of Regulation 33 LPR distinguishes auction (Clause 1) and private sale (Clause 2); timelines in Schedule-I(1) govern auction, not private sale. Nevertheless, reasonable opportunity and transparency are statutory objectives underpinning LPR and IBC's value-maximisation mandate. Precedent treatment: The Court relied on R.K. Industries (Supreme Court) and Tribunal precedents emphasizing transparency and prior permission requirements for private sale; also accepted that SCC exercise of commercial wisdom is ordinarily non-justiciable (subject to reasonableness constraints). Interpretation and reasoning: The Court found Schedule-I auction timelines inapplicable mechanically to a private Swiss-Challenge sale because the Regulation itself separates auction and private sale. However, irrespective of formal inapplicability, the liquidator retains an obligation to ensure the private sale affords reasonable time for due diligence and participation. The Court examined documentary timeline: public announcement set deadlines; the Process Document (listing eligibility documents and EMD modalities) bore a date after the last date for eligibility submission; EMD deadline coincided with Process Document publication date; overall time windows for submission, inspection and EMD were effectively inadequate. The Court held that even where private sale timelines are fixed by SCC, the liquidator must exercise oversight to prevent impracticable timelines that stifle participation and defeat transparency/value-maximisation objectives. Ratio vs. Obiter: Ratio - private sale procedures, while distinct from auction, must still provide reasonable, practicable timelines and disclosure so as to enable meaningful participation; failure to do so vitiates the process. Obiter - observations that SCC commercial wisdom is non-justiciable but not a license for impractical timelines. Conclusion: The timelines and manner of issuance of the Process Document were unreasonable and impeded participation; the private sale process, as conducted, failed the transparency and value-maximisation standards required by IBC/LPR. Issue 3 - Whether the Process Document advantaged the anchor bidder (EMD and late disclosure) Legal framework: Liquidator to ensure fair, competitive process; EMD quantum and modalities should not be structured to exclude bidders; Schedule-I provides norms (EMD not exceeding 10% in auction context) and private sale must be reasonable. Precedent treatment: The Court applied principles from R.K. Industries and Tribunal decisions criticizing processes that produce de-facto exclusivity or unfair advantage; Colfax (Supreme Court) cited for collusion standard. Interpretation and reasoning: The Court found that the Process Document was dated after the eligibility cutoff, thereby withholding the list/format of eligibility documents until the day of EMD deadline; the EMD (Rs.150 Cr) and the deadline timing made compliance effectively impossible for new entrants, while anchor bidder had been permitted to place EMD earlier and by BG. These facts indicated structural impediments to other bidders and practical advantage to anchor bidder. Though some SCC members had approved EMD quantum, the liquidator's oversight responsibility required ensuring terms were reasonable to enable wider participation. Ratio vs. Obiter: Ratio - late issuance of the governing Process Document and excessive/illusory EMD deadlines amount to procedural vitiation; such terms that preclude effective participation justify setting aside the notice and require fresh process. Obiter - SCC approval does not immunize manifestly impractical or exclusionary conditions. Conclusion: The Process Document's timing and EMD structure advantaged the anchor bidder and unduly restricted others; the sale notice was rightly set aside to facilitate a fresh, reasonably framed process. Issue 4 - Requirement and scope of 'prior permission' under Regulation 33(2)(d) LPR Legal framework: Regulation 33(2) permits private sale only after prior consultation with SCC and, where sub-para (d) applies, 'prior permission of the Adjudicating Authority' is required; proviso requires prior permission where sale is to related parties. Precedent treatment: The Court followed Supreme Court's R.K. Industries and Tribunal rulings (Bhavik) stressing that 'prior permission' is not a mere formality and must ordinarily precede initiation/settling of material terms of private sale to prevent a fait accompli. Interpretation and reasoning: The Court rejected the liquidator's contention that 'prior permission' need not precede process initiation where SCC had deliberated or that permission could be contemporaneous/ex post. The ordinary meaning of 'prior' requires authorization before terms and modalities of private sale are finalized and announced. Filing an application after the public announcement and after material steps had been undertaken (selection of anchor bid, fixation of EMD and timelines, issuance of LOI subject to approval) rendered the Adjudicating Authority's approval a post facto rubber stamp and undermined the regulatory safeguard. Ratio vs. Obiter: Ratio - 'prior permission' under Regulation 33(2)(d) must be sought before material steps fixing terms and modalities of a private sale are taken; presenting a concluded process to the adjudicating body is impermissible. Obiter - recognition that SCC commercial wisdom matters, but cannot supplant statutory 'prior permission'. Conclusion: The Liquidator erred by proceeding to conclude material aspects of the private Swiss-Challenge sale without securing prior approval; the Adjudicating Authority was justified in setting aside the public notice and directing a fresh process subject to prior permission principles being observed. Issue 5 - Whether material existed to invoke Regulation 33(3) (reason to believe collusion) and to report to Adjudicating Authority Legal framework: Regulation 33(3) prohibits proceeding with sale where the liquidator has 'reason to believe' that collusion exists and requires submission of a report to the Adjudicating Authority; 'reason to believe' must be based on material on record, not mere suspicion. Precedent treatment: The Court applied the Colfax test for collusion (secret or dishonest agreement) and emphasised evidence requirement for proving coordinated anti-competitive conduct. Interpretation and reasoning: The Court analysed allegations of funding/assignment links and common ultimate beneficial ownership between creditor trustee and anchor bidder. It found that (a) the SCC's voting thresholds showed other creditors joined in approvals (no sole control by the creditor trust); (b) the liquidator shared the collusion allegations with SCC, obtained responses from implicated parties, discussed them in SCC meetings, and had no material amounting to a 'reason to believe' collusion existed; (c) mere common ultimate beneficial ownership or assignment/financial flows absent coordinated anti-competitive conduct does not suffice. The Court held the liquidator had fulfilled obligations by inquiring, eliciting responses and placing material before SCC and Adjudicating Authority; there was no cogent record to require reporting as collusion under Regulation 33(3). Ratio vs. Obiter: Ratio - Regulation 33(3) requires material basis for 'reason to believe'; mere commonalities of ownership or commercial dealings do not automatically establish collusion. Obiter - observations on investigatory sufficiency by liquidator in the circumstances. Conclusion: No sufficient material existed to form a bona fide 'reason to believe' collusion under Regulation 33(3); the allegation of collusion was unsubstantiated on the record and did not justify cancelling proceedings on that ground alone. OVERALL DISPOSITION (as applied) 1. The Adjudicating Authority correctly entertained the belated bidder's challenge because intervention occurred prior to judicial confirmation and raised arguable, contemporaneous complaints. 2. The private sale process was vitiated by unreasonable timelines, late issuance of the Process Document and an exclusionary EMD regime that impeded meaningful participation and undermined transparency and value maximisation; therefore the public notice and concluded steps were set aside. 3. Prior permission under Regulation 33(2)(d) must be obtained before material terms and modalities of a private sale are fixed; failing that, the process risks being a fait accompli and is impermissible. 4. Allegations of collusion lacked sufficient evidentiary basis to attract Regulation 33(3) intervention; the Liquidator's inquiry and sharing of responses with SCC were adequate on the record. 5. Remedy directed: fresh private Swiss-Challenge sale to be conducted within fixed time (60 days) with open participation, reserve price retained, and EMD fixed reasonably (10% of reserve) to promote participation and value maximisation.