BoB Can Consider Company Promoters' Creditworthiness For Tender Eligibility: Karnataka High Court

The Karnataka High Court has recently upheld Bank of Baroda's decision to disqualify Manipal Technologies Limited (MTL) from participating in a tender. It held that a procuring entity is entitled to consider the financial standing and creditworthiness of a company's promoters while assessing its eligibility.

A bench of Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha dismissed MTL's writ appeal challenging an interim order refusing to stay its disqualification from the bank's tender for empanelment of vendors to print and supply magnetic strip and variable QR code-printed self-service passbooks.

“From a commercial point of view, the credentials of the promoters and persons in control of the company cannot be excluded from the scope of such consideration.”, the court ruled.

MTL was declared technically ineligible under Clause 14 of the tender. The clause disqualifies bidders if the company, its promoters or directors are defaulters, have credit facilities classified as non-performing assets, or otherwise fail the prescribed financial eligibility criteria.

Aggrieved, MTL filed a writ petition challenging both its disqualification and the validity of Clause 14. It contended that the clause was arbitrary and that its managing director, T. Gautham Pai, had ceased to be a promoter director. The Single Judge declined interim relief, prompting MTL to file the writ appeal.

Opposing the plea, Bank of Baroda argued that Pai continued to exercise effective control over MTL. It submitted that he therefore remained its promoter in substance. The Bank further contended that the eligibility condition was intended to ensure the financial credibility of bidders.

The Court first rejected MTL's challenge to the validity of Clause 14. It held that the condition was intended to ensure that bidders possessed the necessary financial standing and creditworthiness.

“The sole purpose of the clause is to ensure that bidders possess strong financial standing and are creditworthy. Clearly, a default in financial obligations by the promoters or persons in control would directly undermine the company's standing and creditworthiness.”, the court observed.

The bench observed that the commercial identity of a closely held company is no different from its shareholders and the persons in control of it. Referring to the Supreme Court's decision in New Horizons Ltd. v. Union of India, it held that a procuring entity is entitled to examine not only the company's credentials but also those of the persons controlling it while assessing eligibility.

The court also reiterated that the scope of judicial review in tender matters is limited.

It further held that MTL could not challenge Clause 14 after participating in the tender process without objection. The company had also furnished an undertaking affirming its compliance with the eligibility criteria before being declared ineligible.

Rejecting MTL's contention that T. Gautham Pai had ceased to be a promoter, the court observed,

“He remained in the management of MTL, and the change in his categorisation had no effect whatsoever on his powers or functioning in that role.”

The bench also clarified that it was not expressing any opinion on whether Pai or any entity in which he was a director had actually defaulted. It observed that the necessary facts had not been placed on record and left that issue open for consideration in the pending writ petition.

Accordingly, finding no ground to interfere with the Single Judge's order refusing interim relief, the court dismissed the appeal.

For Appellants: Senior Advocate K.G Raghavan and Advocate Raghuram Cadambi

For Respondents: Senior Advocate/ Advocate General K. Shashi Kiran Shetty and Advocates Vignesh Shetty and Amrutha B.R