Companies Act Case Law Divya Manufacturing Co Tirupati Wool Mills Shr Shangharsha Vs Union Bank Of India The Official Liquidator & Others

PETITIONER:
DIVYA MANUFACTURING CO.,TIRUPATI WOOL MILLS SHR SHANGHARSHA

Vs.

RESPONDENT:
UNION BANK OF INDIA , THE OFFICIAL LIQUIDATOR & OTHERS.

DATE OF JUDGMENT: 11/07/2000

BENCH:
M.B.Shah J. & R.P. Sethi J.

 
JUDGMENT:
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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