Companies Act Case Law Karnataka State Financial Corporation Vs Micro Cast Rubber & Allied Products (P) Ltd. & Ors.

PETITIONER:
KARNATAKA STATE FINANCIAL CORPORATION

Vs.

RESPONDENT:
MICRO CAST RUBBER & ALLIED PRODUCTS (P) LTD. & ORS.

DATE OF JUDGMENT: 03/06/1996

BENCH:
AGRAWAL, S.C. (J)
BENCH:
AGRAWAL, S.C. (J)
NANAVATI G.T. (J)

CITATION:
1996 SCC (5) 65 JT 1996 (6) 37
ACT:

 

HEADNOTE:

 

JUDGMENT:
J U D G M E N T
S.C. AGRAWAL, J :-
Special leave granted.
The Karnataka State Financial Corporation, appellant
herein, is a State Financial Corporation established under
the provisions of the State Financial Corporations Act, 1951
(hereinafter referred to as `the Act’). Respondent No. 1, a
company registered under the Companies Act, set up a unit
for the manufacture of rubber and like products. The
appellant extended finance to the tune of Rs. 14.15 lakhs to
respondent No. 1 on March 21, 1981. In August 1981 the unit
of respondent No. 1 commenced production but from its very
inception it continued to incur losses. In order to make
the unit viable the appellant, on December 14, 1981, re-
scheduled the payment of the loan. A further sum of Rs. 1.65
lakhs was sanctioned in March 1984 for the purpose of
purchasing a Diesel Generating Set. On October 10, 1986 the
appellant extended rehabilitation assistance under the RSR
Scheme of IDBI and treating the unit as a sick unit
sanctioned a further amount of Rs. 3.93 lakhs. Inspite of
these facilities respondent No. 1 continued to make default
in payment of instalments for repayment of the loan. On
October 23, 1990 the appellant took over the possession of
the unit of respondent No. 1 in exercise of the powers
conferred on it under Section 29 of the Act. Thereafter the
appellant took steps for sale of the unit and for that
purpose a number of advertisements were issued inviting
offers. No suitable offer was received in response to the
first two advertisements. In response to third advertisement
issued in August 1991, five offers were received. Out of
them, the offer of Shri P.K. Joseph on behalf of M/s
Chemtech Industries for a sum of Rs. 24 lakhs was the
highest and the Board of the appellant approved the said
offer and decided that the communication for acceptance of
the offer should be sent only after October 15, 1991 so as
to give an opportunity to respondent No. 1 to bring any
other offer for a higher amount. Respondent No. 1 did not
bring any offer. But, in the meanwhile, Shri P.K. Joseph
withdrew his offer on November 30, 1991 Thereafter
respondent No. 1 indicated that it would submit a proposal
for the revival of the unit but it failed to come up with
any concrete proposal. Therefore, a fresh advertisement for
the sale of the unit was issued on August 25, 1992. In
response to the said advertisement, three offers were
received. One offer was of M/s Chemtech Industries for Rs.
23 lakhs for land, building and machinery The second offer
was of M/s Prime Inputs (India) Ltd. for a sum of Rs. 18
lakhs in respect of land and building only and the third
offer was of M/s Shakti Rubbers for Rs. 6 lakhs for plant
and machinery only. A joint meeting of the offerers was held
on September 28, 1992. Respondent No. 1 was also invited.
After considering the said offers, a tentative decision was
taken to accept the offers submitted by M/s Prime Inputs
(India) Ltd. and M/s Shakti Rubbers. Respondent No. 1 sent a
letter dated October 21, 1992 seeking 15 days time to make
payment and submit a proposal for revival of the unit. By
letter dated November 12, 1992, further time was sought by
respondent No. 1 till December 15, 1992. On January 4, 1995,
an offer was submitted by respondent No. 2 to purchase the
entire unit including land, building, plants, furnishings
and fixture for Rs. 25 lakhs. The said proposal of
respondent No. 2 as well as the offers received earlier were
considered by the Board of the appellant and it was decided
to accept the offers of M/s Prime Inputs (India) Ltd. and
M/s Shakti Rubbers. On January 25, 1993, agreement was
entered for the sale of entire unit to them. Thereafter,
respondents Nos. 1 and 2 filed the writ petition (CWC 3591
of 1993) in the Karnataka High Court which has given rise to
this appeal. The said writ petition of respondents Nos. 1
and 2 was allowed by the learned single Judge of the High
Court by judgment dated August 11, 1993 whereby all
proceedings subsequent to receipt of tenders pursuant to
public notice were quashed and the appellant was directed to
observe the directions Nos. 2, 3 and 4 contained in
paragraph 22 of the judgment of this Court in Mahesh Chandra
v. Regional] Manager, U.P, Financial Corporation and Others,
1993 (2) SCC 279. Writ Appeal No. 3297 of 1993 filed by the
appellant against the said judgment of learned single Judge
was dismissed by the Division Bench of the High Court by
judgment dated February 15, 1994. Hence this appeal.
As indicated earlier, the learned single Judge, while
allowing the writ petition filed by respondents Nos. 1 and
2, has directed the appellant to observe directions Nos. 2,
3 and 4 contained in paragraph 22 in the judgment of Mahesh
chandra v. Regional Manager, U.P Financial Corporation &
Ors. (supra). The said directions are as follows :-
“(2) Valuation of a unit for
purposes of determining adequacy of
offer or for determining if bid
offered was adequate, should always
be intimated to the unit holder to
enable him to file objection if any
as he is vitally interested in
getting the maximum price.
(3) If tenders are invited then the
highest price on which tender is to
be accepted must be intimated to
the unit holder.
(4) (a) If unit holder is willing
to offer the sale price, as the
tenderer, then he should be offered
same facility and unit should be
transferred to him. And the arrears
remaining thereafter should be
rescheduled to be recovered in
instalments with interest after the
payment of last instalment fixed
under the agreement entered into as
a result of tendered amount.
(b) If he brings third parties with
higher offer it would be tested and
may be accepted.” [P. 297]
Shri S. Ravindra Bhat, the learned counsel appearing
for the appellant, has submitted that in the facts of the
present case the said directions had been substantially
complied with by the appellant. In this regard, the
submission of the learned counsel is that a number of
efforts were made to sell the unit of respondent No. 1 by
issuing advertisements from time to time but no suitable
offer was received in response to the first two
advertisements that were issued in 1991 and the offer for a
sum of Rs.24 lakhs made by Shri P.K. Joseph on behalf of M/s
Chemtech Industries which was received in response to the
third advertisement in 1991 was withdrawn by him on November
30, 1991. Thereafter, respondent No: 1 was given an
opportunity to bring a better offer or to submit a proposal
for revival but it failed to do so and, therefore, a fresh
advertisement for sale of the unit was issued on August 25,
1992. In response to the said advertisement, three offers
were received and offers submitted by M/s Prime Inputs
(India) Ltd. for land and building and M/s Shakti Rubbers
for plant and machinery were found to be better than that
submitted by M/s Chemtech Industries. When the matter was
under consideration, respondent No. 2 made an offer on
January 4, 1993. The learned counsel has submitted that the
said offer of respondent No. 2 was considered by the
appellant and it was found that it was not better than the
offers received from M/s Prime Inputs (India) Ltd. and M/s
Shakti Rubbers for the following reasons :-
(a) The offers of M/s Prime Inputs (India) Ltd. and M/s
Shakti Rubbers envisaged payment of dues of the
Karnataka Electricity Board by the offerers, whereas
the offer of respondent No. 2 proposed the said dues to
be paid by the appellant;
(b) There was shorter time for payment of consideration
in the offers of M/s Prime Inputs (India) Ltd. and M/s
Shakti Rubbers inasmuch as the entire consideration was
payable within 4 years, whereas offer of respondent No.
2 was a conditional offer and payment was to be
completed in 5 years after initial commencement of
production;
(c) In the case of M/s Prime Inputs (India) Ltd. and
M/s Shakti Rubbers, down payment of 25% amounting to
Rs. 6 lakhs was made. In the case of respondent No. 2,
only Rs. 2 lakhs was offered, and
(d) In the case of respondent No. 2, no earnest money
was paid. All other parties deposited earnest money.
The appellant, therefore, did not accept the offer of
respondent No. 2 and accepted the offers of M/s Prime Inputs
(India) Ltd. and M/s Shakti Rubbers. It is urged that the
High Court was not justified in interfering with the said
decision of the appellant.
Shri P. Mahale, the learned counsel appearing for
respondent No. 1, has submitted that the offer of respondent
No. 2 was much higher than the offers made by m/s Prime
Inputs (India) Ltd. and M/s Shakti Rubbers inasmuch as
respondent No 2 had also offered to pay a sum of Rs. 10
lakhs to Canara Bank in final settlement of dues of
respondent No. 1 to the said Bank which had a second charge
on the land, building and machinery and that this amount of
Rs. 10 lakhs is in addition to Rs. 25 lakhs to be paid to
the appellant.
The directions contained in paragraph 22 of the
judgment in Mahesh Chandra v. Regional Manager, U.P
Financial Corporation & Ors, (supra) are in the nature of
guidelines for the exercise of the power under Section 29 of
the Act. The action of the State Financial Corporation is
not liable to be interfered with if it has acted broadly in
consonance with these guidelines. In the facts and
circumstances of this case, we are of the opinion that the
directions Nos. 2, 3 and 4 in these guidelines had been
substantially complied with by the appellant. There was
compliance with direction No. 2 inasmuch as before issuing
the first advertisement for sale of the unit in March 1981
the unit had been evaluated at Rs. 28 lakhs. Keeping in view
the various offers that have been received, it cannot be
said that the said evaluation was improper. Directions Nos.
3 and 4 were also fulfilled inasmuch as respondent No. 1 was
made aware of the various offers that had been received in
response to the advertisements that were issued from time to
time and respondent Mo. 1 was given sufficient opportunity
to submit proposal for revival of the unit or to obtain
higher offers. The only question is whether in accepting the
offers of M/s Prime Inputs (India) Ltd. and M/s Shakti
Rubbers the appellant has rejected the higher offer of
respondent No. 2. As pointed out earlier, the offer made by
respondent No. 2 was not accepted by the appellant for the
reasons that on proper evaluation it was found that it could
not be regarded higher than that made by M/s Prime Inputs
(India) Ltd. and M/s Shakti Rubbers because it was found
that the offer made by respondent No. 2 envisaged the
payment of dues to the Karnataka Electricity Board by the
appellant, whereas the offers made by M/s Prime Inputs
(India) Ltd. and M/s Shakti Rubbers envisaged payment of
such dues by the offerers. It was also found that there was
shorter time for payment of consideration in the offers of
M/s Prime Inputs (India) Ltd. and M/s Shakti Rubbers
inasmuch as under the said offers the entire consideration
is payable within 4 years, whereas in offer of respondent
No. 2 the payment is to be completed in S years after
initial commencement of production. Furthermore, it was
found that in offers of m/s Prime Inputs (India) Ltd. and
M/s Shakti Rubbers, down payment of 25%, amounting to Rs. 6
lakhs, was being made, while in case of respondent No. 2
only Rs. 2 lakhs was offered. Moreover, in the offer of
respondent No. 2 no earnest money was to be paid, while
earnest money was to be deposited by other offerers. As
regards the undertaking by respondent No. 2 to pay Rs. 10
lakhs to Canara Bank in final settlement of the dues of
respondent No. 1, it may be stated that the said liability
towards Canara Bank is secured by second charge on the land,
plant and machinery that was being sold by the appellant.
The said sale by the appellant was subject to the said
charge. Every purchaser was bound to discharge the said
liability of the Canara Bank and the offer of payment of Rs.
10 lakhs by respondent No. 2 to Canara Bank does not,
therefore, enhance the value of the said offer.
In the matter of a sale by the State Financial
Corporation in exercise of the power conferred on it under
Section 29 of the Act the scope of judicial review is
confined to two situations, namely, (1) there is a statutory
violation on the part of the State Financial Corporation, or
(2) where the State Financial Corporation acts unfairly,
i.e., unreasonably. While exercising its jurisdiction under
Article 226 of the Constitution, the High Court does not sit
as an appellate authority over the acts and deeds of the
State Financial Corporation. [See : U.P. Financial
Corporation v. Gem Cap (India) Pvt. Ltd. and Others, 1993
(2) SCC 299 at p. 306]. It has not been pointed out that
there is any statutory violation on the part of the ] in
accepting the offers of M/s Prime Inputs (India) ltd. and
M/s Shakti Rubbers and in rejecting the offer of respondent
No. 2. Nor can it be said that the action of the appellant
in not accepting the offer of respondent No. 2 and accepting
the offers of M/s Prime Inputs (India) Ltd. and M/s Shakti
Rubbers was unfair or unreasonable. The High Court was,
therefore, not justified in interfering with the action of
the appellant in accepting the offers of M/s Prime Inputs
(India) Ltd. and M/s Shakti Rubbers for the sale of the unit
of respondent No. 1. The writ petition filed by respondents
Nos. 1 and 2 is, therefore, liable to be dismissed.
During the pendency of this appeal in this Court,
respondent No. 1 had placed before the Court an offer made
by M/s Sunny Brooks to purchase the unit for Rs. 28 lakhs.
The said offer cannot be said to be substantially higher
than the offers made by M/s Prime Inputs (India) Ltd. and
M/s Shakti Rubbers in September 1992 so to justify
interference with the sale by the appellant in favour of the
said offers. We are, therefore, not inclined to uphold the
impugned judgment of the High Court in view of the said
offer.
In the result, the appeal is allowed, the impugned
judgment of the Division Bench of the High Court dated
February 15, 1994 as well as the judgment of the learned
single judge dated August 11, 1993 are set aside and writ
petition filed by respondents Nos. 1 and 2 is dismissed with
costs.

 

 

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