GKC Projects Limited v. National Highways Authority of India

11. Mr. Kathpalia further places reliance upon a Judgment passed by the Apex Court in Reliance Energy Ltd. and Another vs. Maharashtra State Road Development Corpn. Ltd and Others, (2007) 8 SCC 1 wherein the Apex Court dealt with the definition of Net Worth in a global tender floated by the State of Maharashtra through Maharashtra State Road Development Corpn. Ltd. The relevant portion of the said judgment reads as under:

doctrine which is invoked by rel/hdec in the present case. When Article 19(1)(g) confers fundamental right to carry on business to a company, it is entitled to invoke the said doctrine of ―level playing field‖. We may clarify that this doctrine is, however, subject to public interest. In the world of globalisation, competition is an important factor to be kept in mind. The doctrine of ―level playing field‖ is an important doctrine which is embodied in Article 19(1)(g) of the Constitution. This is because the said doctrine provides space within which equally placed competitors are allowed to bid so as to subserve the larger public interest. ―Globalisation‖, in essence, is liberalisation of trade. Today India has dismantled licence raj. The economic reforms introduced after 1992 have brought in the concept of ―globalisation‖. Decisions or acts which result in unequal and discriminatory treatment, would violate the doctrine of ―level playing field‖ embodied in Article 19(1)(g). Time has come, therefore, to say that Article 14 which refers to the principle of ―equality‖ should not be read as a stand alone item but it should be read in conjunction with Article 21 which embodies several aspects of life. There is one more aspect which needs to be mentioned in the matter of implementation of the aforestated doctrine of ―level playing field‖. According to Lord Goldsmith, commitment to the ―rule of law‖ is the heart of parliamentary democracy. One of the important elements of the ―rule of law‖ is legal certainty. Article 14 applies to government policies and if the policy or act of the Government, even in contractual matters, fails to satisfy the test of ―reasonableness‖, then such an act or decision would be unconstitutional. *****

38. When tenders are invited, the terms and conditions must indicate with legal certainty, norms and benchmarks. This ―legal certainty‖ is an important aspect of the rule of law. If there is vagueness or subjectivity in the said norms it may result in unequal and discriminatory treatment. It may violate doctrine of ―level playing field‖.

39. In Reliance Airport Developers (P) Ltd. v. Airports Authority of India [(2006) 10 SCC 1] the Division Bench of this Court has held that in matters of judicial review the basic test is to see whether there is any infirmity in the decision-making process and not in the decision itself. This means that the decision-maker must understand correctly the law that regulates his decision-making power and he must give effect to it otherwise it may result in illegality. The principle of ―judicial review‖ cannot be denied even in contractual matters or matters in which the Government exercises its contractual powers, but judicial review is intended to prevent arbitrariness and it must be exercised in larger public interest. Expression of different views and opinions in exercise of contractual powers may be there, however, such difference of opinion must be based on specified norms. Those norms may be legal norms or accounting norms. As long as the norms are clear and properly understood by the decision-maker and the bidders and other stakeholders, uncertainty and thereby breach of the rule of law will not arise. The grounds upon which administrative action is subjected to control by judicial review are classifiable broadly under three heads, namely, illegality, irrationality and procedural impropriety. In the said judgment it has been held that all errors of law are jurisdictional errors. One of the important principles laid down in the aforesaid judgment is that whenever a norm/benchmark is prescribed in the tender process in order to provide certainty that norm/standard should be clear. As stated above ―certainty‖ is an important aspect of the rule of law. In Reliance Airport Developers [(2006) 10 SCC 1] the scoring system formed part of the evaluation process. The object of that system was to provide identification of factors, allocation of marks of each of the said factors and giving of marks at different stages. Objectivity was thus provided. *****

47. On the second question of future cash impact it may be reiterated that KPMG, the chartered accountants for rel/hdec has invoked the principle of ―cash flow reporting‖ which also finds place in AS 3. According to the said principle of ―cash flow reporting‖, when P&L accounts and balance sheets are prepared on accrual basis, revenues and expenses are recognised on accrual basis i.e. when the transaction or event occurs. However, timing of cash flow is not reckoned in such system of accounting. Similarly, in cases where accounts are based on accrual system of accounting, recognition of assets and liabilities is not dependent on the actual timing of cash spent on capital expenditure and cash inflow on account of capital receipt. Thus the financial statements prepared on accrual basis do not reflect the timing of the cash flow and amount of cash flow. The object of the cash flow statement is to assess the company's ability to generate the cash flow in future and to assess reasons for difference between ―net profit‖ and ―net cash flow‖ from operations. *****

50. Taking into account the above principles, it is clear that there are two methods of ―cash flow reporting‖ i.e. direct and indirect. Both give identical results in the matter of the final total. They differ only in presentation of the data. They differ only in presentation of the data contained in the cash flows from operational activities. No reason has been given by the consultants of msrdc for rejecting the indirect method invoked by KPMG, chartered accountants of rel/hdec in their letter dated 12-8-2005. The said method is known as ―reconciliation method‖.

51. In this case, as stated above, the only reason given by the consultants of msrdc to exclude rel/hdec was the negative impact on the future cash flows on account of the provisioning for doubtful debts in the accounts of hdec for FY 2001. If future cash impact was the basis to exclude rel/hdec, then the consultants for msrdc should have considered cash flow reporting methods, which includes reconciliation method. There is no question of difference of opinion or different views as far as the application of cash flow reporting is concerned, which also falls in AS 3. There is nothing to show whether indirect method has at all been considered by Crisil, particularly when KPMG had invoked that method. There is no reason given for rejecting it."

12. It is the contention of Mr. Kathpalia that when the same term has been interpreted by various authorities to include Capital Reserves and tenders have been awarded by the Ministry of Road, Transport and Highways based on the same definition, then there should be consistency in the definition of the term Net Worth. He states that it is well settled that one of the important elements of the "rule of law" is legal certainty and Article 14 of the Constitution of India applies to the Government Policies and if the Policy or act of the Government, even in contractual matters, fails to satisfy the test of consistency, then such an Act or decision must be declared unconstitutional. He states that reserves include both, reserves arising out of capital as well as reserves arising out of revenue profit. He, therefore, states that the decision of the Respondent to restrict the reserves only to reserves arising out of revenue profits cannot be accepted.

13. It is submitted by Mr. Kathpalia that if the decision of the Respondent in rejecting the bid of the Petitioner on the ground of it not meeting the minimum Net Worth criterion is accepted, it would set at naught the entire exercise and objective of the CIRP. It was stated that the Petitioner underwent a statutory rehabilitation under the Insolvency and Bankruptcy Code, 2016, and if the decision of the Respondent is not set aside, the entire CIRP of the Petitioner would be rendered redundant. Furthermore, several companies during a restructuring process, while carrying out the extinguishment of share capital propose transfer of such profits arising from the extinguishment of share capital in a Capital Reserve account. He states that the actions of the Respondent in rejecting the bid of the Petitioner not only goes against the terms of the RFP, but also the scheme of the Resolution Plan approved by the NCLT and objectives of the Insolvency and Bankruptcy Code, 2016.

14. Per Contra, Mr. Jayant K. Mehta, learned Senior Counsel appearing for the Respondent/NHAI, contends that the tenders in which the Ministry of Road, Transport and Highways has accepted the Net Worth of the company to include reserves arising out of capital, have not been tested in a Court of law and need not be accepted by the Respondent. The Respondent being the tenderer should be permitted to decide the same on the basis of the eligibility of the bidder. According to him, the purpose of finding out the financial capacity of the bidder is to ascertain as to whether the bidder would be in a position to complete the project and for which purpose the decision of the NHAI to restrict the reserves only to reserves arising out of revenue profit cannot be found fault with. It cannot be said that the decision of NHAI is arbitrary and violative of Article 14 of the Constitution of India. He states that evaluation by the tendering authority should be respected.

15. Mr. Mehta also contends that the definition of Net Worth can differ depending upon the nature of contract and the attending circumstances, and therefore, the definition of Net Worth under the Companies Act need not be accepted in all types of situations. He states that the Financial Consultant submitted its Final Evaluation Report in the month of July 2022 based on the Technical Evaluation of all the bids received from the respective Bidders. Out of nine bids received, only the Petitioner's bid was found to be non-responsive on the ground of less Net Worth. He states that after receiving the report of the financial consultant of the tendering authority, the Committee deliberated on the report and accepted the report given by the financial consultant. He states that there is no allegation of mala fide that the Petitioner has been singled out for not fulfilling the Financial Capacity criteria i.e. Net Worth criteria as per RFP.

16. Mr. Mehta places reliance upon a judgment passed by this Court in Kanti Commercials Private Limited vs. Union of India and Ors., MANU/DE/1940/2021 wherein the tendering authority, while considering the bid for expression of interest of the bidder for the disinvestment of Air India Limited, restricted the definition of Net Worth to include only those reserves which are arising out of revenue profit and had not taken into account reserves arising out of capital. He states that the clause in the tender document defining Net Worth in that case is identical to the definition of Net Worth provided under Clause 2.2.2.[9] in the Impugned Tender. The relevant portion of the said judgment reads as under: "2) The PIM provides the 'Eligibility Criteria' in Clause 11 thereof. For our purpose, we may quote Clause 11.[2] and Clause 11.[3] which deal with 'Financial Capability' in the PIM and reads as follow: ―11.[2] Financial Capability: For submitting the EOI and for being considered for subsequent qualification for Stage II of the Proposed Transaction, the IB (whether a sole bidder or a Consortium) shall satisfy the following criteria: Net Worth: A minimum Net worth of INR 35,000 Mn (INR 3,500 Crore) computed in terms of Clause 11.[3] and 11.4. OR ACI – A minimum ACI of INR 35,000 Mn (INR 3,500 Crore) computed in terms of Clause 11.[3] and 11.4. Note: Certain special dispensation in respect of Scheduled Airline Operator in India, for manner of satisfying the Financial Capability requirement, are set out in clause 11.3.(b)(ii) and 11.6.(c) below. 11.[3] Financial Capability shall be calculated as follows: a) Net Worth means the aggregate value of the paid-up equity share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet. Provided that for determining the Net Worth, any reserves created out of revaluation of assets, write-back of depreciation and amalgamation, intangible assets, redemption reserves, reserves made for any specific purpose shall not be included. Such methodology shall be applicable even to entities that are not incorporated in India (―Net Worth‖)...... b) Apart from the Net Worth criteria as set out under 11.[3] (a), IBs may also qualify on the basis of:

(i) In case of Funds,....

(ii) IB, other than Funds, may also qualify on the basis of Net Worth of its Affiliate, provided such IB itself has a positive Net Worth computed in terms of Clause 11.[3] and

11.4. …… " *****

6) As quoted above, Net Worth means the aggregate value of the paid-up equity share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet. Most relevant for our purpose is the proviso in Clause 11.3(a) which states for determination of the Net Worth, ―any reserves created out of revaluation of assets, write-back of depreciation and amalgamation, intangible assets, redemption reserves, reserves made for any specific purpose shall not be included. Such methodology shall be applicable even to entities that are not incorporated in India (Net Worth‗)‖. (emphasis supplied) *****

12) The Respondent No.3 termed the Petitioners inclusion of amalgamation reserve of INR 297.26 Crores – for the purpose of computation of net worth, as misplaced and fallacious. The Respondent No.3, inter alia, stated in its response as follows:

the transferee company on the other, shall be credited in the books of the transferee company as a general reserve and may be utilized for the purpose of issuance of bonus shares and payment of dividend by the transferee company. c. Since the Scheme approved by the Hon’ble High Court states that these reserves are created out of the difference between net asset and amount of shares allotted (rather than explicitly through profits or securities premium account), these reserves may not be considered as a part of Net Worth. d. Further, it has not been mentioned by the Petitioner that the Hon‗ble High Court has stated that the general reserve should be considered as a part of net worth. e. Hence, Petitioner ought to have been disqualified for not being able to meet the minimum Net Worth requirement.

14. Moreover, since Petitioner had raised the issues of treating the amalgamation reserve as ―general reserve‖ in light of an order by the Hon‗ble High Court and a legal opinion, the Respondent No. 3 also advised the Respondent NO. 1 and 2 to seek legal advice on the same.

15. Accordingly, it is the Respondent No. 3‗s humble submission that the Petitioner was not eligible in accordance with the eligibility criteria set out in Clause 11 of the PIM.(emphasis supplied) *****

26) A bare perusal of Clause (f) of the Scheme of Amalgamation clearly shows that the so-called general reserve of the Petitioner is a surplus arising out of the difference between the value of the net assets to be transferred to the transferee company, i.e. the Petitioner Company, and the value of shares allotted to the shareholders of the Transfer Company. Firstly, we may observe that this General Reserve is only a notional book entry, since the value of the net assets transferred is something determined by the Transferor and Transferee Companies. This general reserve is not created out of the profits of the business conducted by the Transferee i.e. the Petitioner Company. Secondly, this general reserve could be utilised for the purposes of issuance of bonus shares and for payment of dividend by the transferee company. Thus, this so-called general reserve – which is only a book entry, cannot be utilised for the purpose of carrying out the business of the Petitioner Company.

27) On the other hand, Clause 11.[3] of the PIM clearly stipulates that reserves made for any specific purpose will not be included in the ―net worth‖. It also excludes reserves created out of, inter alia, amalgamation.

28) Respondent No.3, which is a professional Firm of Chartered Accountants, and is an expert in the field, has filed their short counter affidavit as well as written submission, and the categorical stand of Respondent No.3 in its capacity as an expert has already been noticed hereinabove.

29) Firstly, we are not inclined to rely upon external sources for determining the meaning of ―General Reserve‖. The Preliminary Information Memorandum is a complete document in itself. It clearly provides that reserves made for any specific purpose, or reserves created out of, inter alia, amalgamation, shall not be included within the meaning of reserve. For the purpose of computation of Net Worth, it is only the reserve created out of profits and security premium account, which are relevant. The PIM consciously does not use the expression ―General Reserve‖. The reason why reserve created out of, inter alia, amalgamation is excluded, is because it does not reflect an actual available reserve – like a reserve created by profits and security premium account, and it is a book entry as it is notional.

30) Additionally, in Afcons Infrastructure Ltd. v. Nagpur Metro Rail Corporation Ltd, the Supreme Court has observed that, ―the words used in the tender documents cannot be ignored or treated as redundant or superfluous — they must be given meaning and their necessary significance.‖ Furthermore, another important observation in the same judgment is as under: ―15. We may add that the owner or the employer of a project, having authored the tender documents, is the best person to understand and appreciate its requirements and interpret its documents. The constitutional courts must defer to this understanding and appreciation of the tender documents, unless there is mala fide or perversity in the understanding or appreciation or in the application of the terms of the tender conditions. It is possible that the owner or employer of a project may give an interpretation to the tender documents that is not acceptable to the constitutional courts but that by itself is not a reason for interfering with the interpretation given.‖ "

17. The short questions which arises for our consideration is whether the decision taken by the Respondent while rejecting the bid of the Petitioner on the ground that the Net Worth of the Petitioner is less than Rs.42.98 crores is correct or not and whether it warrants interference by this Court while exercising its jurisdiction under Article 226 of the Constitution of India.

18. Along with the counter affidavit, the Respondent has also filed a Final Evaluation Report. The case of the Petitioner has been examined and the evaluation regarding Net Worth of the Petitioner as discussed in the Final Evaluation Report reads as under:

19. The reliance placed by Mr. Mehta, learned Senior Counsel appearing for the Respondent/NHAI, upon Kanti Commercials Private Limited (Supra) is squarely applicable to the facts of the present case. The facts of the said case are more or less identical to the facts of the present case. The Court in that case dealt with the disinvestment of Air India Limited, and there also the tendering authority was considering whether the bidder giving the expression of interest would be in a capacity to complete the project and as to whether the bidder would have the financial capacity to operate the airlines. In that case, the decision of the tendering authority to restrict the reserves only to reserves arising out of revenue profit had been accepted by this Court.

19. The law regarding interference with the decision taken by the tendering authority has been well settled by the Apex Court. In Afcons Infrastructure Limited v. Nagpur Metro Rail Corporation Limited and Anr., (2016) 16 SCC 818, the Supreme Court has observed that constitutional courts must defer to the understanding and appreciation of the author of the tender documents, unless there is mala fide or perversity in the understanding or appreciation or in the application of the terms of the tender conditions. The relevant paragraphs of the said Judgement iterating the same is as under: ―14. We must reiterate the words of caution that this Court has stated right from the time when Ramana Dayaram Shetty v. International Airport Authority of India [Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489] was decided almost 40 years ago, namely, that the words used in the tender documents cannot be ignored or treated as redundant or superfluous — they must be given meaning and their necessary significance. In this context, the use of the word ―metro‖ in Clause 4.2(a) of Section III of the bid documents and its connotation in ordinary parlance cannot be overlooked.

15. We may add that the owner or the employer of a project, having authored the tender documents, is the best person to understand and appreciate its requirements and interpret its documents. The constitutional courts must defer to this understanding and appreciation of the tender documents, unless there is mala fide or perversity in the understanding or appreciation or in the application of the terms of the tender conditions. It is possible that the owner or employer of a project may give an interpretation to the tender documents that is not acceptable to the constitutional courts but that by itself is not a reason for interfering with the interpretation given.‖

20. In Silippi Constructions Contractors v. Union of India, 2019 SCC OnLine SC 1133, the Supreme Court, while discussing the aspect of judicial intervention in matters of contract involving state instrumentalities had held that the authority which floats the contract or tender, and has authored the tender documents is the best judge regarding interpretation of the same. Any interference by the Court has to be for the purposes of preventing arbitrariness, irrationality, bias, mala fides or perversity. In paragraph 20 of the said Judgement, the Supreme Court observed as follows: ―20. The essence of the law laid down in the judgments referred to above is the exercise of restraint and caution; the need for overwhelming public interest to justify judicial intervention in matters of contract involving the State instrumentalities; the courts should give way to the opinion of the experts unless the decision is totally arbitrary or unreasonable; the court does not sit like a court of appeal over the appropriate authority; the court must realise that the authority floating the tender is the best judge of its requirements and, therefore, the court's interference should be minimal. The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted. The courts will only interfere to prevent arbitrariness, irrationality, bias, mala fides or perversity. With this approach in mind we shall deal with the present case.

25. That brings us to the most contentious issue as to whether the learned Single Judge of the High Court was right in holding that the appellate orders were bad since they were without reasons. We must remember that we are dealing with purely administrative decisions. These are in the realm of contract. While rejecting the tender the person or authority inviting the tenders is not required to give reasons even if it be a State within the meaning of Article 12 of the Constitution. These decisions are neither judicial nor quasi-judicial. If reasons are to be given at every stage, then the commercial activities of the State would come to a grinding halt. The State must be given sufficient leeway in this regard. Respondents 1 and 2 were entitled to give reasons in the counter to the writ petition which they have done.‖ (emphasis supplied)

21. The Apex Court in Michigan Rubber (India) Ltd. v. State of Karnataka, (2012) 8 SCC 216, after relying on various judgments has observed as under:- ―23. From the above decisions, the following principles emerge: (a) The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. These actions are amenable to the judicial review only to the extent that the State must act validly for a discernible reason and not whimsically for any ulterior purpose. If the State acts within the bounds of reasonableness, it would be legitimate to take into consideration the national priorities; (b) Fixation of a value of the tender is entirely within the purview of the executive and the courts hardly have any role to play in this process except for striking down such action of the executive as is proved to be arbitrary or unreasonable. If the Government acts in conformity with certain healthy standards and norms such as awarding of contracts by inviting tenders, in those circumstances, the interference by courts is very limited;

(c) In the matter of formulating conditions of a tender document and awarding a contract, greater latitude is required to be conceded to the State authorities unless the action of the tendering authority is found to be malicious and a misuse of its statutory powers, interference by courts is not warranted;

(d) Certain preconditions or qualifications for tenders have to be laid down to ensure that the contractor has the capacity and the resources to successfully execute the work; and (e) If the State or its instrumentalities act reasonably, fairly and in public interest in awarding contract, here again, interference by court is very restrictive since no person can claim a fundamental right to carry on business with the Government.‖

22. Ultimately in a number of Judgments, the Apex Court has held that that the Courts before interfering in tender or contractual matters, in exercise of its power of judicial review, should pose to itself the following questions:

(i) Whether the process adopted, or decision made by the authority is mala fide or intended to favour someone; or whether the process adopted or decision made is so arbitrary and irrational that the court can say: "the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached"? and

(ii) Whether the public interest is affected?

If the answers to the above questions are in the negative, then there should be no interference under Article 226 of the Constitution of India (Refer: Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517 and Michigan Rubber (India) Ltd (Supra)

23. Apropos the arguments regarding the applicability of the rule of contra proferentum in tender matters, the law has been settled by the Apex Court in M/s Agmatel India Pvt. Ltd. vs. M/s Resoursys Telecom and Ors., (2022) 5 SCC 362 wherein the Apex Court has held as under:

said rule was applied in the case of ambiguity in the insurance policy because the policies are made by the insurer and its ambiguity cannot be allowed to operate against the insured. This rule, in our view, cannot be applied to lay down that in case of any ambiguity in a tender document, it has to be construed in favour of a particular person who projects a particular viewpoint. The obvious inapplicability of this doctrine to the eligibility conditions in a notice inviting tender could be visualised from a simple fact that in case of ambiguity, if two different tenderers suggest two different interpretations, the question would always remain as to which of the two interpretation is to be accepted? Obviously, to avoid such unworkable scenarios, the principle is that the author of the tender document is the best person to interpret its documents and requirements. The only requirement of law, for such process of decision-making by the tender inviting authority, is that it should not be suffering from illegality, irrationality, mala fides, perversity, or procedural impropriety. No such case being made out, the decision of the tender inviting authority (NVS) in the present case was not required to be interfered with on the reasoning that according to the writ court, the product ―smartphone‖ ought to be taken as being of similar category as the product ―Tablet‖. "

23. In view of the above, the Apex Court has categorically held that the Rule of contra preferentum shall not apply in tender matters for the reason that it is for the tenderer to decide as to who would be the best suitable bidder for award of the tender and unless the decision-making process is completely arbitrary and has been design only to favour some person or is accentuated by malafide, the Courts should not interfere under Article 226 of the Constitution of India.

24. A perusal of the reasoning contained in the Final Evaluation Report indicates proper application of mind by the Financial Consultant. It cannot be said that the opinion of the Financial Consultant is so arbitrary that it would warrant interference by this Court under Article 226 of the Constitution of India. The contention of the learned Counsel for the Appellant, that restricting the reserves only to reserves arising out of revenue profit will have a disastrous effect on the Appellant company inasmuch as it cannot apply for the tenders floated by the NHAI and that this will go against the spirit of the orders passed by the NCLT reviving the company, cannot be accepted. In the present tender, the Respondent has fixed a minimum net worth (financial capacity) of Rs.42.98 Crores. It is always open for the Appellant herein to apply for projects floated by the NHAI in which the minimum net worth prescribed is less than Rs.42.98 Crores.

25. The present case deals with a very important infrastructure activity under the Bharatmala Pariyojana which is a prestigious project of the Government of India. The financial capacity of the bidder is an important factor which has to be kept in mind by the tendering authority in order to decide as to whom the tender should be awarded, and therefore, the decision of the tendering authority to restrict the reserves only to reserves arising out of revenue profits cannot be found fault with and the same cannot be held to be so arbitrary and unreasonable that this Court should exercise its jurisdiction under Article 226 of the Constitution of India and interfere in the award of tender. This Court does not find any merit in the petition.

26. The petition is dismissed, along with pending application(s), if any.

SATISH CHANDRA SHARMA, C.J. SUBRAMONIUM PRASAD, J DECEMBER 19, 2022/S. Zakir