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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

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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

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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

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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

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(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

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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

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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.

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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.