Divya
Manufacturing Co., Tirupati Wool Mills Shr Shangharsha Vs. Union Bank of India
, The Official Liquidator & Ors [2000] INSC 357 (11 July 2000)
M.B.Shah
J. & R.P. Sethi J.
Shah,
J.
These
appeals are filed against the judgment and order dated 11.8.1998 passed by the
Division Bench of the High Court of Calcutta in GA No. 344 of 1988 in Appeal
(ACO) No. 16 of 1998 whereby the sale of the assets and properties of the Tirupati
Woolen Mills Limited (Tirupati Mills for short) (under liquidation) confirmed
on July 2, 1998 in favour of the appellant-Divya Manufacturing Co. (Divya for
short) had been recalled and set aside on the application of respondent No.7,
Sharma Chemical Works (For short Sharma) and respondent No.8, Jay Prestressed
Products Ltd. (Jay for short) herein.
In
1972, Tirupati Mills was incorporated to manufacture Carpet yarn at Sonepat (Haryana).
On 30.5.88, a financial institution filed a reference to the BIFR and it was
declared as sick industrial company. On 27.1.1994, BIFR proposed winding up of
the Company. On 21.4.95, the High Court of Calcutta ordered winding up of the
company and directed official liquidator to take charge of the company.
On
5.7.1997, Tirupati Woolen Mills Shramik Sangharsha Samity (Samity for short)-
respondent No. 3 entered into an agreement with appellant-Divya whereby Divya
agreed to run Tirupati Mills and to provide re-employment to the workmen of the
said Company upon purchase of the assets and properties of the said Company
under liquidation. On 17.12.1997, the Samity made an application No. 741 of
1997 before the High Court of Calcutta inter alia praying that (i) the assets
and properties of the company be sold to Divya at the price valued by the
Official Liquidator and/or valuer appointed by him or at such price as the
Court may deem fit and proper; (ii) Divya be directed to re-employ all the
workers as agreed by agreement dated 5.7.1997 and (iii) the Official Liquidator
be restrained from taking further steps with regard to the sale of their assets
and properties. The learned Company Judge by order dated 22.12.1997 directed
the Official Liquidator to indicate the valuation of the properties to all
concerned.
On
24.12.1997, the learned Company Judge directed the Official Liquidator to
publish the Notice for Sale specifying that the factory of the
Company (in liquidation) would be sold as a going concern with a reserved price
fixed at Rs.37 lakhs on the basis of valuation report. However, respondent No.1
(Union Bank of India) pleaded that the approximate value
of the company in liquidation was about one crore and if the same is to be sold
after advertisement, they will have no grievance. The Official Liquidator was
directed to publish sale notice specifying the Company to be sold as a going
concern in the Hindustan Times, Statesman and Hindi newspapers in circulation
in the State of Haryana.
The
learned Judge also noticed that appellant-Divya was agreeable to purchase the
factory of the Company (in liquidation) as a going concern and to provide
employment to the existing workers who were out of employment since the last 12
years. Being aggrieved by the order dated 24.12.1997, respondent No.1- Bank
filed an appeal, being CA No.22 of 1998 before the Division Bench for setting
aside that order. The same was dismissed on 12.1.1998 with liberty to the Bank
to agitate the same before the learned Single Judge at the time of hearing of
the matter.
In the
meantime, notice for sale was issued and the Official Liquidator published an
advertisement inviting offers for the sale of the assets and properties of the
Company (in liquidation) in newspapers. On 31.12.1997, the Union Bank of India valued the immovable properties of Tirupati
Mills at Rs.1,21,00,000/-. Inspection of the assets of the Company was allowed
and 12 intending purchasers took inspection of its assets on 2.1.1998. On
16.1.1998, about 14 parties made their offers to purchase the company.
Divya
enhanced its offer to Rs.85 lakhs from 37 lakhs and it was declared as the
highest bidder. In addition to its offer of Rs. 85 lakhs, Divya also agreed to
re-employ the workmen of Tirupati Mills. Inspite of being the highest offeror
the sale was not confirmed in favour of the Divya as the Bank pleaded that they
should be given further opportunity to bring a higher offer. The High Court agreed
to give a further opportunity to the offerors to match the offer of the
appellant. On 17.1.1998, the Bank made application before the Company Court being CA 41 of 1998 for
re-advertisement of the sale. On 6.2.1998 when the matter was heard, as no one
turned up to make any higher offer, the offer of the Divya was conditionally
accepted by the learned Single Judge with liberty to the secured creditors to
find higher offer within 30 days. The appellant was directed to deposit the
balance sum of Rs.77 lakhs as per the notice for sale.
Being
aggrieved by the order dated 6.2.1998, respondent No.1, Bank and respondent
No.3, the Samity preferred appeals being GA Nos. 141 and 107 of 1998
respectively before the Division Bench. By order dated 9th March, 1998, the part of the order dated
6.2.1998 confirming the sale in favour of Divya was stayed.
On 6th
May, 1998, it was ordered that the Official Liquidator should take steps to
conduct fresh sale in the manner indicated in the said order and the Company be
sold as a going concern with a reserved price of Rs.85 lakhs.
The
Court also noted that the auction purchaser has not withdrawn the amount
deposited by it and that auction purchaser reserved its rights and contentions
with regard to the sale already clinched in its favour by the learned Single
Judge. The matter was kept for further proceedings on 17th June, 1998. Sale notices as directed mentioning terms and conditions were
issued. On 14th May
1998, on behalf of
auction purchaser (Divya) an application was filed contending therein that it
wanted to back out from the offer to purchase the Company for an amount of
Rs.85 lakhs. Court noted that the matter required consideration and therefore,
directed the parties to file necessary affidavits on or before 17th June 1998 when appeal was to come up for
consideration. Finally, at the request of learned counsel for Divya, Court
permitted it to withdraw 80 per cent of the amount out of 85 lakhs and to keep
20 per cent of the amount i.e. 17 lakhs as deposit liable to forfeiture if
ultimately there is no buyer who makes any bid for an amount of Rs.85 lakhs. On
26th June 1998, the Court directed the Official
Liquidator to open sealed covers containing the offers by six bidders. On that
day, the Court directed the matters to be placed for hearing on 2nd July 1998 for finalisation of sale either in favour
of M/s Eastern Silk Industries Ltd or M/s Jay Prestressed Products Ltd. Again
on 2nd July, 1998, additional offers of three bidders
were received i.e. M/s Eastern Silk Industries Ltd. offered Rs.
1.01 crores,
M/s Jay Prestressed Proeducts Ltd. offered Rs.
1.25 crores
and M/s Divya offered Rs. 1.30 crores. Hence, the offer of Divya was accepted
and sale was confirmed in its favour on the conditions mentioned therein. On
the same day, the Court also disposed of the appeals and applications
accordingly.
On
10th July 1998, Jay, respondent No.8 filed an application before the Division
Bench praying that order dated July 2, 1998 accepting and confirming the sale
in favour of Divya be recalled and set aside and it be given an opportunity to
submit its offer of Rs. 1.40 crores for the assets of the company in
liquidation. On 23rd July, 1998, respondent No.
7,
Sharma served upon the appellant an application inter alia praying that order
dated 2nd July, 1998 be recalled as it was prepared to
pay Rs.2 crores for the purchase of the assets of the Company. At the time of
hearing of these applications on 23rd July, 1998, on behalf of respondent Nos 7 and 8 it was submitted that
they were ready and willing to purchase the Company as a going concern and to
establish their bona fides, they were prepared to deposit 20 per cent of Rs. 2 crores.
On the basis of the said applications, the Court directed the applicants to
deposit Rs. 40 lakhs each with the Official Liquidator. Thereafter, the matter
was kept for hearing on 11th
August 1998 on which
day the Court considered the facts stated above and also the applications filed
by respondent Nos. 7 and 8 to re-open the confirmed sale. Those applications
were opposed by the auction purchaser (Divya) and also by respondent No.3 Samity.
After considering the submissions made by the learned counsel, the Court
referred to the following clause 11 of the terms and conditions of Sale and held that in view of the specific term, the
Court was vested with authority to set aside the sale for the benefit of the
creditors etc.
and/or
in public interest: Clause 11: The Honble High Court may set aside the sale in favour
of purchaser/purchasers even after the sale is confirmed and/or purchaser
consideration is paid on such terms and conditions as the Court may deem fit
and proper for the interest and benefit of creditors, contributories and all
concerned and/or public interests.
The
Court noted that it cannot shut eyes to the fact that initially the property
was proposed to be sold at the price of Rs.37 lakhs. Thereafter the sale was
confirmed at Rs.85 lakhs which was set aside and at the intervention of the
Division Bench, the amount was enhanced to Rs.1.3 crores.
The
Court observed that as two applicants have come forward with a proposal to
purchase the said property at Rs.2 crores, the principle laid down in LICA (P)
Ltd. (1) v.
Official
Liquidator [(1996) 85 Comp. Cases 788] and LICA (P) Ltd. (2) v. Official
Liquidator [(1996) 85 Comp.
Cases
792] applies squarely to the facts of the present case. The Court also observed
that it was conscious of the fact that there should be a finality even in a
company sale, but so long as possession is not handed over to the purchaser and
the sale deed is not executed, the Court by virtue of clause 11 of the terms
and conditions for sale can re-open the sale in the interests of justice. The
Court also referred to the decision in Navalkha and Sons v. Sri Ramanya Das and
ors. [(1969) 3 SCC 537]. Considering all the submissions made by the learned
counsel for the parties, the sale confirmed in favour of appellant for an
amount of Rs.1.3 crores was set aside with a direction that respondent Nos.7
and 8 should compensate Divya by paying Rs.70 thousand each for the loss
suffered by it and directed for re-sale of the assets of the Company. That
order is under challenge before this Court.
At the
time of hearing of these appeals, on behalf of respondent Nos.7 and 8, it was
reiterated that they were still prepared to purchase the property in question
at the price they had offered before the High Court of Calcutta and they were
eager to purchase the same for a sum of Rs. 2 crores. On behalf of Divya, it
was stated that it was not prepared to make any offer or statement at present.
The
learned counsel for the appellant submitted that the order passed by the High
Court setting aside the confirmed sale is on the face of it illegal and
erroneous. He submitted that before confirmation of sale in favour of Divya all
endeavours were made by the judges and finally the offer of appellant to
purchase at Rs.1.30 crores was accepted and sale was confirmed. At that time,
Jay-respondent No.8 had not increased its offer of Rs.1.25 crores. Respondent
No.7 was not permitted to bid as he did not comply with the requirements
mentioned in the advertisement for sale and, therefore, on 2nd July, 1998 before commencement of auction
sale, he was not permitted to participate in auction. It is, therefore,
submitted that after the sale is confirmed, subsequent higher offer cannot
constitute a valid ground for setting aside such confirmation. He referred to
various decisions in support of his contention and submitted that once the sale
was confirmed by the Court after applying its mind to all relevant considerations,
it is not permissible to probe in retrospect and to accept subsequent offers by
Jay or Sharma. He pointed out that as such initial valuation report fixed the
value of the property at Rs.37 lakhs only.
Thereafter
the appellant raised its offer to Rs.85 lakhs and agreed to re-employ the
workmen, so the learned Single Judge confirmed the sale in its favour. As the
said order was challenged before the Division Bench, the Division Bench
directed the Official Liquidator to conduct fresh sale and finally the highest
offer of appellant of Rs.1.30 crores was accepted by the Court. In such a
situation, the Division Bench wrongly relied upon the judgment of this Court in
LICA (P) Ltd. v. Official Liquidator and Anr. [(1996) 85 Company Cases 788]. It
is also submitted that after disposal of the appeal, the Division Bench became functus
officio and therefore also it could not review its earlier order.
As
against this, learned counsel for the respondents submitted that as the price
offered by the appellant is grossly inadequate in comparison to the subsequent
offers by respondent Nos.7 and 8, the Court was justified in setting aside the
sale.
In our
view, on facts it is apparent that the Division Bench of the High Court has
considered all the relevant facts including the fact that at the initial stage,
the appellant Divya offered only Rs.37 lakhs to purchase the properties.
That
means, the appellant wanted to purchase at a throw away price. Thereafter, at
the intervention of the Court, the price was increased to Rs.1.3 crores by the
appellant. This indicates that appellant was keen to purchase the property,
however by paying only the bare minimal amount and to take advantage of sale by
the liquidator in the hope that if there are no other purchasers, it would
purchase the Company at a price which is abnormally below the market price. It
is also true that on 2nd July 1998, the offer made by the appellant was
accepted and it was ordered that sale in its favour be confirmed, but at the
same time, before possession of the property could be handed over, or before
the sale deed could be executed in its favour, respondent Nos.7 and 8 pointed
out that the assets and properties could be sold at Rs.2 crores. For showing
their bona fides, they were directed to deposit Rs.40 lakhs each and also to
pay Rs.70 thousand each as damages to the appellant. Further, the application
for setting aside the sale was filed within a few days of the order accepting
the bid of the appellant.
In
these set of circumstances, when correct market value of the assets was not
properly known to the Court and the sale was confirmed at grossly inadequate
price, it was open to the Court to set it at naught in the interest of the
company, its secured and unsecured creditors and the employees. Appellant is
also duly compensated by payment of Rs.70 thousand each by respondent Nos.7 and
8.
The
law on this subject is well-settled. In the case of Navalkha and Sons (supra),
after appellants offer was accepted, a fresh offer from one Gopaldas Darak for
higher amount was received by stating that he could not offer in time because
he came to know of the sale only 2 days prior to the date of the application
and there was possibility of higher bids. Instead of directing a fresh auction
or calling for fresh offers, the learned Judge thought it proper to arrange an
open bid in the Court itself on that very day as between M/s Navalkha and
higher offeror Gopaldas Darak. M/s Navalkha thereafter offered higher bid at
Rs.8,82,000 and its bid was accepted and the learned Judge concluded the sale
in its favour with a direction to pay the balance amount. Thereafter an
application was filed offering Rs.10 lakhs. A contention was raised that due
publicity of the sale of the property was not made, but that application was
rejected by the Court. Hence, an appeal was filed by the applicant who made an
offer of Rs.10 lakhs and another by one contributory against the order of
confirmation. Both appeals were allowed by the Division Bench and the order
passed by the learned Judge was set aside with a direction to take fresh steps
for sale of the property either by calling sealed tenders or by auction in
accordance with law. That order was challenged before this Court by M/s Navalkha.
It was contended that there was no justification for the Division Bench to
interfere with the order of the learned Single Judge. In that context, after
quoting Rule 273 of the Companies (Court) Rules, 1959, the Court observed: The
principles which should govern confirmation of sales are well established.
Where the acceptance of the offer by the Commissioners is subject to
confirmation of the Court the offeror does not by mere acceptance get any
vested right in the property so that he may demand automatic confirmation of
his offer. The condition of confirmation by the Court operates as a safeguard
against the property being sold at inadequate price whether or not it is a
consequence of any irregularity or fraud in the conduct of the sale. In every
case it is the duty of the Court to satisfy itself that having regard to the
market value of the property the price offered is reasonable. Unless the Court
is satisfied about the adequacy of the price the act of confirmation of the
sale would not be a proper exercise of judicial discretion. In Gordhan Das Chuni
Lal v. T. Sriman Kanthimathinatha Pillai (AIR 1921 Mad.286), it was observed
that where the property is authorised to be sold by private contract or
otherwise it is the duty of the court to satisfy itself that the price fixed is
the best that could be expected to be offered.
That
is because the Court is the custodian of the interests of the company and its
creditors and the sanction of the Court required under the Companies Act has to
be exercised with judicial discretion regard being had to the interests of the
Company and its creditors as well. This principle was followed in Rathnaswami Pillai
v. Sadapathy Pillai (AIR 1925 Mad. 318) and S. Soundarajan v. M/s Roshan &
Co.
(AIR
1940 Mad. 42.) In A. Subbaraya Mudaliar v. K.
Sundararajan
(AIR 1951 Mad. 986) it was pointed out that the condition of confirmation by
the Court being a safeguard against the property being sold at an inadequate
price, it will be not only proper but necessary that the Court in exercising
the discretion which it undoubtedly has of accepting or refusing the highest
bid at the auction held in pursuance of its orders, should see that the price
fetched at the auction is an adequate price even though there is no suggestion
of irregularity or fraud.
From
the aforesaid observation, it is abundantly clear that the Court is the
custodian of the interests of the Company and its creditors. Hence, it is the
duty of the Court to see that the price fetched at the auction is an adequate
price even though there is no suggestion of irregularity or fraud. As stated
above, in the present case, the sale proceedings have a chequered history. The
appellant started its offer after having an agreement with the Employees Samity
for Rs.37 lakhs. This was on the face of it under bidding for taking undue
advantage of Court sale. At the intervention of the learned Single Judge, the
bid was increased to Rs.85 lakhs. Subsequently, before the Division Bench, the
appellant increased it to Rs.1.30 crores. At that stage, respondent No.7,
Sharma was not permitted to bid because it had not complied with the
requirements of the advertisement. It is to be stated that on 26th June, 1998, the Division Bench has ordered
that offers of Eastern Silk Industries Ltd. and Jay Prestressed Products Ltd.
would only be considered on 2nd July, 1998
and confirmation of sale would be made on the basis of the offers made by the
two parties. Further, despite the fact that the appellant Divya had withdrawn
its earlier offer, the Court permitted it to take part in making further offer
as noted in the order dated 2nd July, 1998.
In these set of circumstances, there was no need to confine the bid between
three offerors only.
In
LICA (P) Ltd. (1) v. Official Liquidator and Anr.
[(1996)
85 Comp. Cases 788], this Court dealing with a similar question observed thus:
The purpose of an open auction is to get the most remunerative price and it is
the duty of the court to keep openness of the auction so that the intending
bidders would be free to participate and offer higher value. If that path is
cut down or closed the possibility of fraud or to secure inadequate price or
underbidding would loom large. The Court would, therefore, have to exercise its
discretion wisely and with circumspection and keeping in view the facts and
circumstances in each case.
The
matter was again brought before this Court and in LICA (P) Ltd. (2) v. Official
Liquidator & Anr. [(1996) 85 Comp. Cases 792] and the Court held: Proper
control of the proceedings and meaningful intervention by the court would
prevent the formation of a syndicate, underbidding and the resultant sale of
property for an inadequate price. The order passed by this court yielded the
result that the property which would have been finalised at Rs.45 lakhs,
fetched Rs.1.10 crores and in this court a further offer of Rs.1.25 crores is
made. In other words, the property under sale is capable of fetching a higher
market price. Under these circumstances, though there is some force in the
contention of Sri Ramaswamy that the court auction may not normally be
repeatedly disturbed, since this court, on the earlier occasion, had limited
the auction between the two bidders, the impediment will not stand in the way
to direct sale afresh. Even today the parties are prepared to participate in
the bid.
Further,
there is a specific condition No.11 in terms and conditions of sale as quoted
above which empowers the Court to set aside the sale even though it is
confirmed for the interests of creditors, contributories and all concerned
and/or public interest. In this view of the matter, it cannot be said that the
Court became functus officio after the sale was confirmed. As stated above,
neither the possession of the property nor the sale deed was executed in favour
of the appellant. The offer of Rs.1.30 crore is totally inadequate in
comparison to the offer of Rs.2 crores and in case where such higher price is
offered, it would be in the interest of the Company and its creditors to set
aside the sale. This may cause some inconvenience or loss to the highest bidder
but that cannot be helped in view of the fact that such sales are conducted in
Court precincts and not by a business house well versed with the market forces
and price. Confirmation of the sale by a Court at grossly inadequate price,
whether or not it is a consequence of any irregularity or fraud in the conduct
of sale, could be set aside on the ground that it was not just and proper
exercise of judicial discretion. In such cases, a meaningful intervention by
the Court may prevent, to some extent, underbidding at the time of auction
through Court.
In the
present case, the Court has reviewed its exercise of judicial discretion within
a shortest time.
In the
result, Civil Appeal No. 4706 of 1998 filed by Divya and Civil Appeal No. 4707
of 1998 filed by the Samity stand dismissed. Interim order stands vacated.
Pending
hearing and disposal of this appeal as the order passed by the Division Bench
of the High Court was stayed, fresh directions are required to be obtained from
the Court for fixing the time- table for conduct of the auction sale.
Hence,
the Liquidator is directed to take appropriate steps at the earliest, by
obtaining an order from the Court for sale of the property by calling sealed
tenders or by auction in accordance with law after giving due publicity in the
newspapers, particularly, the newspapers having circulation in Delhi and in the
State of Haryana with a reserved price fixed at Rs.2 crores (as offered). The
parties are directed to bear their respective costs.
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