Companies Act Case Law Union Bank Of India Vs Official Liquidator H.C. Of Calcutta And Ors.

PETITIONER:
UNION BANK OF INDIA

Vs.

RESPONDENT:
OFFICIAL LIQUIDATOR H.C. OF CALCUTTA AND ORS.

DATE OF JUDGMENT: 26/04/2000

BENCH:
R.P.Sethi, M.B.Shah

 
JUDGMENT:
Shah, J.
This appeal is filed against the judgment and order
dated 24.12.1996 passed by the Division Bench of the
Calcutta High Court dismissing the Appeal No. GA 708 of
1996 arising out of Company Petition No. 316 of 1981
whereby the learned Single judge had confirmed the auction
sale of the property of Mesrs. Kolay Biscuits Company
Private Limited – Company under liquidation. In the present
case, it is admitted fact that on 9th July 1965 Mesrs.
Kolay Biscuits Company Private Limited created a mortgage of
its land and building in favour of Union Bank of India for
the loan granted in its favour. The factory of the company
was closed down in 1980. On 20th March 1991 under the
provisions of the Sick Industrial Companies Act (SICA), the
company was declared as sick unit by the Board of Industrial
and Financial Reconstruction (for short B.I.F.R.) and
thereafter application under the said Act was rejected by
the Board. Appeal filed before the A.I.F.R. was also
dismissed. It is the contention of the Bank that on 30th
March, 1981, the borrowings by the Company increased to
about Rs. 3 Crores and Company executed four balance
confirmations in respect of the dues in various accounts.
The bank also filed a title mortgage suit No. 103/1992
before the Assistant District Judge, Sealdah against the
Company and five guarantors for recovering Rs.
4,11,21,411/- along with interest after obtaining leave by
the Company Judge under Section 446 of the Companies Act.
By order dated 19th August, 1991 the Company Judge issued
directions for winding up of the Company and appointing
official liquidator to take over assets. On 16th February,
1996, the Company Judge appointed Mr. Pranoj Roy Chowdhary
of M/s Chowdhary Associates as a valuer with a direction to
submit a report within six weeks from the date. Official
Liquidator has stated that he informed the appellant Bank
about the said order by letter dated 29th February, 1996.
Thereafter the matter was placed before the Company Judge on
21st June, 1996 and on the same date Company Judge passed an
order fixing date of sale of Companys assets as 2nd August
1996 and directed the official liquidator to make
advertisement for notice of sale of assets of the Company in
newspapers, namely, the Statesman, Dainik Bishwamitra and
Anand Bazaar Patrika inviting applications for purchase of
the property on as is where is basis with a direction that
purchaser will be bound to deposit 20 per cent of the tender
amount along with the tender by Bank draft or bankers cheque
or pay order.

On 2nd August, 1996, one Advocate Mr. Dutta moved an
application stating that nearly 1200 workmen would be
affected if the sale does not take place as a going concern
and the workmen are not re-employed. The Company Judge
observed:

the fate of so many workmen nearly 1200 in number
with their families depending upon them cannot be ignored by
the Court.
On that day on behalf of the State of West Bengal it
was submitted that its Corporation (R. No.4) was interested
to purchase the land and the entire Company and they were
also interested in re-employment of workers so the Company
be sold out as a going concern. Thereafter, the Court
straightaway directed that the sale fixed on that day would
not be held and Official Liquidtor was directed to issue
fresh advertisement in the same newspapers on 22nd August
1996 fixing the date for auction sale on 13th September,
1996 for the assets of the Company as a going concern.

On 20th September 1996, the matter was placed before
the Court and it was stated on behalf of the State
Government Corporation that it was not agreeable to purchase
with the condition of re-employing workmen. Therefore, they
withdrew their offer to purchase the Company as a going
concern. The Court also considered the Valuation Report
which was placed before it wherein the assets of the Company
were valued at Rs.66,90,032/-. On the basis of the said
valuation M/s Indrani Soft Drinks – respondent No.1 whose
offer was Rs. 40 lakhs raised the same to Rs. 67 lakhs and
agreed that they would take the Company as a going concern
and all eligible employees would be re-employed. Hence, the
Court accepted the said offer. The learned advocate
appearing on behalf of the secured creditor Union Bank of
India prayed for stay of the operation of the order but the
same was rejected on the ground that no useful purpose would
be served if the stay of the operation of the order was
granted. Thereafter, it appears that on behalf of Syndicate
and Promising Exports Limited, one advocate appeared and
submitted that it was ready and willing to purchase the
Company as a going concern by paying Rs. 70 lakhs on the
same terms and conditions as stated above. His offer was
considered by the Court by giving a direction that offeror
would deposit 20 per cent of the amount either by Bank draft
or pay order, with the official liquidator on or before 23rd
September 1996. The Court further directed that in the
event of failure to deposit the said sum, the offer of M/s
Indrani Soft Drinks will stand accepted without there being
any further bid. The matter was kept for further orders on
27th September, 1996. On that date it was found that
Promising Exports had neither sent any offer to the official
liquidator nor had deposited any amount. The Court observed
that the sale in favour of auction purchaser M/s Indrani
Soft Drinks remains accepted and directed them to pay the
balance amount within 60 days. It also directed Official
Liquidator will supply a copy of the valuation report to the
secured creditor at their cost. The Official Liquidator
was directed not to part with possession of the Company till
the entire purchase price was paid.

Against that order appellant preferred an appeal
before the Division Bench. Before the Division Bench a
contention was raised with regard to the inadequacy of the
price and the Court observed that the Court would be rather
loath to interfere and intervene in a Court sale where a
question of inadequacy of the price is to be considered by
observing that: Court sale has taken place for the benefit
of the employees concerned and more than 100 employees were
starving to death and the official liquidator was trying to
sell the assets as a going concern so that the employment
opportunities can be maintained in these hard days.

The Court also considered the fact that in the
meantime after confirmation of the sale the entire purchase
price has been paid by M/s Indrani Soft Drinks and the
Official Liquidator has intimated to the purchaser that
possession will be made over in the course of the day and at
that stage Union Bank of India thought it fit to move this
Court for staying the operation of the order which cannot be
granted. The Court also observed that the offer obtained in
Court matches with the valuation report and the grievance of
inadequacy of price cannot be accepted and sale when taking
place in a Court of law ought to be given a final shape, as
quickly as possible, so that rehabilitation of the employees
can be effected without any loss of time because Court was
informed that more than 100 employees have already died.
Against that order this appeal is filed.

Mr. G.L. Sanghi, learned senior counsel for the
appellant-Bank submitted that the order passed by the
Company Judge which is confirmed by the Division Bench is,
on the face of it, erroneous and is based on total
non-application of mind. He submitted that in sale of
Companys property it is the duty of the Court to see that
the properties are sold at a reasonable price and not at a
throw away price. He pointed out that without there being
anything on record merely relying upon the oral statement by
some person stating that he represents some workers the
orders are passed by the Company Judge and confirmed in
appeal by the Division Bench. It has been pointed out that
Company was closed since 1980 and, therefore, there was no
question of 1200 employees working in the said Company. He
further pointed out that apart from the Company being closed
since years the BIFR & AIFR, both statutory expert bodies
failed to restart the Company and thereafter the learned
Judge without verifying any of these facts and the valuation
report and without giving the copy of valuation report to
the secured creditors for whose benefit properties were
sold, directed the property to be sold and confirmed the
sale. It is also submitted that in the notice for sale
issued by the liquidator the upset price is not stated and
that at initial stage offer of respondent No.2 Messrs
Indrani Soft Drinks Limited was only Rs.40 lakhs but in the
Court after seeing the so called valuation report it was
raised to Rs.67 lakhs which clearly indicates that there was
something wrong with the offers. He also relied on the
decision of this Court in Allahabad Bank & Ors. v. Bengal
Paper Mills Co. Ltd. & Ors. [1999 (4) SCC 383] and
submitted that facts of the said case are similar and the
law laid down in the said case would be applicable in the
present case.

As against this, the learned senior counsel Mr. A.K.
Ganguli for the respondents vehemently submitted that the
Bank has not raised any objection before the Company Judge
with regard to the inadequacy of the price or non-supply of
the valuation report and for any other alleged irregularity
in the conduct of the auction sale. Therefore, the Court
should not interfere in this appeal. In any case in
adequacy of price is no ground for interference in appeal.
He pointed out that auction sale took place in the presence
of the learned advocate for the Bank and at the time of the
hearing of the matter he never represented to the Court that
the oral statement made, at the time of hearing of the
application, that 100 workers have died is incorrect or that
said facts be verified, and therefore, said statement was
rightly accepted by the Court. In the alternative, it is
his contention that if the sale is set aside a bona fide
purchaser should not suffer as he has invested large amount
after the purchase of the property in the auction sale and,
therefore, the liquidator should be directed to refund the
amount with 18% interest with additional amount invested by
Respondent no.2 and the expenses incurred by it.

At the outset, we would state that in proceedings for
winding up of the Company under liquidation, the Court acts
as a custodian for the interest of the company and the
creditors. Therefore, before sanctioning the sale of its
assets, the Court is required to exercise judicial
discretion to see that properties are sold at a reasonable
price. For deciding what would be reasonable price,
valuation report of an expert is must. Not only that, it is
the duty of the Court to disclose the said valuation report
to the secured creditors and other interested persons
including the offerors. Further, it is the duty of the
Court to apply its mind to the valuation report for
verifying whether the report indicates reasonable market
value of the property to be auctioned, even if objections
are not raised.

From the facts narrated above, it is apparent that the
attention of learned Company Judge was not focussed to the
fact that since 1980 Company was closed and that there was
no question of selling the Companys assets as a going
concern. Not only that it was the duty of the Court to
verify the statement made by some applicant that sale of the
Company on as is where is basis will affect 1200 workers
and for that proper notice was required to be issued to the
secured creditors for whose benefit the property was to be
auctioned. To straightway rely upon such statement was, to
say the least, not judicious. The Company Judge ought to
have also considered the fact that an attempt made by the
BIFR an AIFR which are expert bodies under the SICA to
revive the sick unit had failed. In any set of
circumstances, there was no material on record before the
ld. Judge for holding that Company could be revived and the
employees would be reinstated in service by giving them
re-employment. Without indulging in any such exercise
straightaway to state that property would be sold as a going
concern was totally without any basis and, therefore,
unjustified. At the time of hearing of this matter it is
admitted that after purchase of the Company, it was
restarted only for one day i.e. on the day of inauguration.

It also appears that the Division Bench was persuaded
by the so-called sympathy for the workers, without
verification of the fact that Company was closed before 17
years of sale. Court has noted in the beginning while
narrating the submission of the ld. Counsel who appeared
for the benefit of the employees that more than 100
employees were starving to death and in the later para
stated that Court was informed by the learned advocate
appearing for the employees union that more than 100
employees have already died. Without there being any
application on record and without there being proper
verification of the facts from the concerned parties, it is
not just and proper to make such observations. It is not
impossible that because of the lapse of 17 years, out of
1200 workers who might have worked in the said factory 100
employees might have died of natural death. But in any
circumstances it was unjustified to make a case over it and
to accept oral submissions and to dispose of the valuable
properties of a Company by stating that the sale of the
Company as a going concern was for the benefit of the so
called employees who were not in employment.

Further, in the present case, it is admitted that
valuation report was called for by order dated 16th
February, 1996; once the report was called for, it was the
duty of the Court to see that copy of the said report is
given to the secured creditors and other affected persons.
It was known to the Court that the appellant secured
creditor was claiming more than Rs.4 crores from the
Company. It appears that valuation report was kept as a
secret, confidential document. After winding up order, the
properties of the Company are in the custody of the Court
for the benefit of the secured creditors and if anything
remains, thereafter for other creditors and its
shareholders. In the present case, without disclosing the
valuation report to the creditors and without fixing its
reserve price, the properties were auctioned and the sale
was confirmed. This approach is unjustifiable by any
judicial standard and is against the normal procedure for
auctioning the immovable property of the Company which is to
be wound up.

Further, it appears that learned Judge has not applied
his mind to the valuation report itself. He has only
considered the last figures given in the valuation report
which says that total valuation of the property was
Rs.66,19,032/-. Had the Court considered the report, it
would have immediately noticed that valuation report was not
at all reliable. This would be clear from the following
facts narrated in the valuation report: –

Valuation: On enquiry from the local people, it is
understood the land price in this particular varies between
Rs.2 lakhs to 2.5 lakhs per Katta depending on size,
position, Road Frontage, low and or high land etc. However,
after considerating all aspects, it is felt fair and
reasonable value at Rs.2 lakhs per katta is found reasonable
but as a matter of fact the land is lease hold. So the
value of land will be lease because of lease hold land.

As per lease beginning of the year of 1963 for the
term of 99 years @ Rs.300/- per month.

So, the rent for 99 years @ Rs.300/- = Rs.3,56,400.
15% Municipal Tax & Repairing of structure etc.=Rs.53,460/-.
Total rent, tax etc. for 99 years=Rs.4,09,860/- So, the
value of land for 99 years = Rs.4,09,860/-

(Rupees four lakhs nine thousand eight hundred and
sixty only)

In our view valuer stating that for the purpose of
valuation of the land he has enquired from local people and
that he understood that the land price in this particular
area varies between Rs.2 lakhs to 2.5 lakhs per katta cannot
be said to be an opinion of an expert valuer. He has not
relied upon any sale instance for arriving at the conclusion
that the valuation varies from Rs.2 to 2.5 lakhs per katta.
He has also not stated from whom he has verified the value
of the land. Further, he has stated that after considering
all aspects, he felt that fair and reasonable value would be
Rs.2 lakhs per katta. Presuming that valuation of land is
Rs.2 lakhs per katta then also the value of the land,
admeasuring 67 katta and 8 chattak, would be more than
Rs.1.35 crore. Thereafter, he stated the land is a lease
hold land, so the value of the land would be on the basis of
its rental income and he arrived at the conclusion that its
value would be only Rs.4,09,860/-. It appears that the
valuer has also not considered the material fact that lease
period was for 99 years with the condition for its renewal.
It is apparent that learned Company Judge has simply noted
the final figures mentioned in valuation report and accepted
the same without applying his mind to the aforesaid facts.
. In Allahabad Bank v. Bengal paper Mills case (supra),
dealing with a similar auction sale of the company in
liquidation, the Court observed that instead of sale by the
liquidator in Company matters sale is required to be
confirmed by the High Court so as to ensure that best
possible price is realised upon the sale of the assets and
properties of the Company so that creditors of the Company
can hope to recoup their dues. The Court relied upon the
decision in M/s Navlakha & Sons vs. Sri Ramayana Das & Ors.
[1969 (3) SCC 537] wherein (para 6) the Court has observed
thus: 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 vs. 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
vs. Sadapathy Pillai (AIR 1925 Mad. 318) and S.
Soundararajan vs. Roshan & Co. (AIR 1940 Mad. 42.) In A.
Subbaraya Mudaliar vs. 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.
The learned senior counsel Mr. Ganguli relied upon
the decision of this Court in M/s Kayjay Industries (P) Ltd.
vs. M/s Asnew Drums (P) Ltd. and Others [1974 (2) SCC 213]
and contended that Court should not go on adjourning the
sale till a good price is received, as it being a notorious
fact that court sales and market prices are distant
neighbours; If auction sales are adjourned repeatedly,
decree holders can never get the property of the debtor
sold. He emphasised the observation mere inadequacy of
price cannot demolish every court sale. In our view, this
submission requires to be rejected on the ground that in the
said case, the Court has reproduced paragraph which we have
quoted above from the decision in Navlkha and Sons (Supra),
wherein the court has specifically held that 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; the court is required 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 sale would not be a proper exercise of
judicial discretion. This aspect is reiterated by the court
by holding that the aforesaid principles must govern every
court sale. The Court has also observed that failure to
apply its mind to the material factors bearing on the
reasonableness of the price offered may amount to material
irregularity in conduct of sale. Thereafter the Court
pertinently observed: And where a court mechanically
conducts the sale or routinely signs assent to the sale
papers, not bothering to see if the offer is too low and a
better price could have been obtained, and in fact the price
is substantially inadequate, there is the presence of both
the elements of irregularity and injury.

It is further observed

what is expected of the Judge is not to be prophet
but a pragmatist and merely to make a realistic appraisal of
the factors, and if satisfied that in the given
circumstances the bid is acceptable, conclude the sale.

As discussed above, in the present case, there is
total non-application of mind to the material which is
required to be considered for auction sale of the assets of
the Company. Learned counsel for respondent No.2 referred
to the decision of this Court in Ram Maurya vs. Kailash
Nath & Ors. [1999 (9) SCC 276] and submitted that as
secured creditors have not brought appropriate pleading
before the learned Company Judge, this Court should not
interfere in such sale. In our view, the said decision has
no bearing on the facts of the present case as the case was
decided on the basis of auction sale under Order 21 Rule 90
of the CPC and the Court has observed that judgment debtor
did not furnish adequate materials to substantiate the
allegation of fraud and material irregularity.

Further, learned counsel relied on the decision in
Motors and Invests Ltd. vs. Union Bank of India & Ors.
[1997 (11) SCC 271] and contended that the Court in the
alternative may direct refund of the amount deposited and
invested by the bona fide auction purchaser with 18%
interest. In that case, the Court has set aside the sale of
44 acres of land by holding that it was sold at too
inadequate price. In the said case also the Court has
observed: – Equally, though court sale is compulsive sale,
equal endeavour should be made to fetch adequate price for
the property sold so that the decree debt would get
satisfied and surplus, if any, could be paid over to the
judgment-debtor.

The Court further ordered that in case the official
assignee has kept the sale amount in any interest-earning
security, the principal amount together with interest is
directed to be refunded to the appellant. And, in case the
amount was not kept in any deposit and was used to discharge
outstanding debt due by respondents 2 and 3, the auction
purchaser was entitled to get interest at 18% per annum on
the amount deposited by him.

In the present case, the said judgment has no bearing
mainly because as soon as the amount was deposited by
respondent No. 2, possession of the property was handed
over to him. Not only that, in our view, similar contention
was dealt with in Allahabad Bank v. Bengal Paper Mills
case (supra) and is rejected by assigning following reasons:

It could not have turned a blind eye to the many
defects that it itself noted in the order of sale merely
because the Banks had moved the appeals after five months;
nor was there any justification for taking into
consideration the expenditure that had been incurred by the
second respondent subsequent to its possession of the assets
and properties. In the first place, the Division Bench
should have noted that the learned Single Judge had with
unseemly haste ordered possession thereof to be handed over
to the second respondent on the very next day. In the
second place, the appeals had been filed within the period
of limitation. Expenditure incurred during this period
could not render the appeals, in effect, infructuous. The
same should apply to expenditure incurred subsequent to the
filing of the appeals and until the time that they were
heard. The second respondent knew that the appeals were
pending and that they could end in the order of sale being
set aside. Such expenditure as it incurred with this
knowledge was at its risk. In the third place, and most
important, the interests of the creditors of the Company,
particularly the unsecured creditors, overweighed such
equities, if any, as might have been considered to be in
favour of the second respondent. It was, in our view, the
obligation of the Division Bench to have struck down the
order of sale, having regard to what it found wrong with
it.

Thereafter the Court has directed refund of the amount
without any interest and has permitted the auction purchaser
to apply to the High Court and specify it firstly that
expenditure was incurred and secondly that in law it was
entitled to recover it. For the reasons stated, same would
be the position in the present case. Further, in this case,
there is a specific condition of the auction sale which
reads thus: The High Court may set aside the sale in
favour of Purchaser/Purchasers even after the sale is
confirmed and/or purchase consideration is paid on such
terms and conditions as the Court may deem fit and proper
for the interest and benefits of creditors, contributories
and all concerned and/or for public interest.
Hence, if the sale is set aside in appeal, it can not
be stated that purchaser is entitled to have refund of the
amount with interest.

We also make it clear that we have not dealt with the
contention of the learned counsel for the Bank that what was
sold in auction was equity of redemption and not the rights
of the mortgagee.

In the result, the appeal is allowed. The impugned
order passed by the Company Judge in Company Petition
No.316/1981 confirmed in appeal GA No.708/96 is quashed and
set aside. Official Liquidator is directed to recover the
possession of the property sold as per the inventory and
thereafter to refund the amount deposited by the respondent
No.2 auction purchaser. It would be open to respondent
No.2 to file proper application for recovering any other
expenditure incurred by it after purchase of the said
property if it is entitled to recover the same. The
Official Liquidator is directed to resell the property after
obtaining fresh valuation report from other reliable expert
and after giving a copy of the said valuation report to
secured creditors. In the notice for sale reserved price be
fixed and due advertisement be published in newspapers
having circulation in commercial cities including Delhi,
Mumbai and Chennai on the basis of the directions which may
be issued by the High Court. The appeal stands disposed of
accordingly. No costs.

 

 

 

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