In Re: Elson Cotton Mills Ltd. (In ... vs Unknown
2004 Latest Caselaw 1431 Del

JUDGMENT

A.K. Sikri, J.

1. M/s. Elson Cotton Mills Ltd. is in liquidation.

The Official Liquidator, in consonance with the mandate of the provisions of the Companies Act, took possession of the assets of the company. Since various creditors, secured as well as unsecured, and also workers are to be paid their dues which the company (in liquidation) owes, steps are taken by the Official Liquidator to dispose of the assets so that proceeds thereof are utilised for payment to the persons falling in the aforesaid categories.

2. It was in furtherance of these steps that two plots of the company were auctioned on 29th May, 2003 for Rs. 7 crores and the bid was confirmed. M/s. JCB India Ltd. was the successful bidder and it has paid the entire consideration. However, the auction purchaser has not taken the possession of the assets so far. It may be noted that the auction purchaser have filed CA No. 721/2003 wherein it was stated that there were certain trespassers who have encroached upon the premises in question and prayer made was that the amount of Rs. 1.75 crores which was deposited by the auction purchaser by that time be invested in fixed deposit, which prayer was granted. On July 23, 2003 direction was given to the auction purchaser to deposit the balance amount and the order was passed that the said amount be also invested in a fixed deposit. The auction purchaser deposited balance amount of Rs. 5.25 crores and the entire amount, in this manner, is kept in fixed deposit. In the meantime, another issue cropped up, namely, whether the property auctioned to the auction purchaser was subject matter of acquisition proceedings by the Government as doubt was raised by the auction purchaser that the portion of the land sold to the auction purchaser was acquired by the Government for Haryana Urban Development Authority. It took some time to ascertain this position and ultimately it turned out that the land in question sold to the auction purchaser was not acquired.

3. However, before the possession could be given to the auction purchaser, after the aforesaid clarification obtained in the matter, few applications came to be filed by certain parties offering higher amount. CA No. 1012/2004 was filed by M/s. Pivot Buildcon Pvt. Ltd. for an offer of Rs. 7.52 crores. M/s. ACJ Finance and Leasing Pvt. Ltd. submitted an offer of Rs. 8 crores and M/s. Deepak Fabrications Pvt. Ltd. was willing to offer Rs. 8.10 crores. Issue, therefore, has arisen as to whether this Court can allow re-bidding because the auction purchaser is opposing this move. While arguments were addressed on this issue from time-to-time, another bidder M/s. Starwire India Ltd. came forward with an offer of Rs. 8.25 crores which he increased to Rs. 9 crores on November 4, 2004. M/s. Sunder Steels Ltd. and M/s. Tank Bund Properties Pvt. Ltd. also submitted their offers for Rs. 9 crores and Rs. 8 crores respectively. As on November 4, 2004 as these three parties remained in the fray, in order to test their bona fides it was directed that these three bidders shall deposit the earnest money of Rs. 2 crores (which represent 25% of Rs. 8 crores, the bid submitted by one of the parties) by 17th November, 2004. M/s. Tank Bund Properties Pvt. Ltd. also moved formal application for setting aside the earlier sale in favor of the auction purchaser being CA No. 1405/2004. On 2.5th November, 2004 it was decided to invite fresh bids so that any other interested is also able to participate in bidding process in case confirmation of sale in favor of the auction purchaser is set aside and the Court decides to re-auction the property. Advertisement was directed to be issued for this purpose in two leading daily newspapers. It is in this background, it is required to be decided as to whether auction of the plots which was confirmed on 29th May, 2003 for a sum of Rs. 7 crores needs to be set aside and fresh bidding allowed.

4. I have heard learned Counsel for the parties at great length. I may state at the outset that identical issue was considered by me in the case entitled in the matter of M/s. Ajanta Textile Mills Ltd. and order dated 19th August, 2004 was passed in that case following the two judgments of the Supreme Court in the case of Divya Manufacturing Co. (P) Ltd. and Anr. v. Union Bank of India and Ors. and LICA (P) Ltd. v. The Official Liquidator and Anr. reported in 1995 4 CCJ 494 (SC). I cancelled the earlier bid and allowed re-bidding. The operative portion of the aforesaid order is as under:

"It is in this factual scenario, the Supreme Court was called upon to decide as to whether the order of the Divsion Bench setting aside the sale confirmed in favor of the Divya Manufacturing Company was proper. This question was answered in affirmative by the Supreme Court and the principle which governed the outcome of the case is found in paras 11 to 15 of the judgment, wherein the judgment in the case of LICA (P) Ltd. v. Official Liquidator (supra), is also relied upon. To state the same in brief, the Court was of the opinion that the guiding principle should be to get the most remunerative price and it is the duty of the Court to keep the openness of the auction so that the intending bidders would feel free to offer the higher value. Needless to mention, this principle has public purpose behind it. The assets are sold of a company which has gone into liquidation. The Liquidator is appointed, who takes charge of assets of the company and is to undertake the liquidation process. His duty is to invite the claims from the secured as well as unsecured creditors and to ensure that after the disposal of assets of the company, these creditors are paid to the maximum extent possible. It, therefore, necessarily follows that the Court is to ensure that the assets are sold at most remunerative price. In fact, the O.L. is the trustee of these assets at his hands. Therefore, this is the guiding principle, that has to be kept in mind, while considering the present application."

5. Ms. Ganpathy, learned Counsel for the auction purchaser, however, submits that the judgment in the cases of Divya Manufacturing (supra) and LICA (P) Ltd. (supra), would have no application in the present case. His submission was that the Auction in favor of his client was confirmed on May 29, 2003 and he has deposited the entire amount within the stipulated period. Therefore, sale stood concluded in his favor. He submitted that such an auction can be set aside only if the Court finds any material irregularity in publishing and conducting the sale and bidders were not misled by it or it was a case of fraud. For this proposition, he relied upon the judgment of the Supreme Court in the case of Valivety Ramakrishnaiah v. Totakura Rangarao, . His further submission was that before confirming the sale, this Court recorded its satisfaction that the amount offered by the auction purchaser was fair and reasonable and, therefore, it was also not a case where adequate amount was not received as consideration of these properties. He submitted that only because of lapse of time if the prices of the land had shot up further, the auction purchaser cannot be denied the fruits thereof and the Court should not entertain fresh bids, that too of those persons who did not submit their bid earlier. He referred to the judgment of the Supreme Court in Kayjay Industries (P) Ltd. v. Asnew Drums (P) Ltd. and Ors., , and particularly the following passage in support of his submission:

"But it is not as if the Court should go on adjourning the sale till a good price is got, it being a notorious fact that Court sale and market prices are distant neighbours. Otherwise, decree-holders can never get the property of the debtor sold. Nor is it right to judge the unfairness of the price by hindsight wisdom. May be, subsequent events, not within the ken of the executing Court when holding the sale, may prove that had the sale been adjourned a better price could have been had. What is expected of the Judge is not to be a prophet but a pragmatist and merely to make a realistic appraisal of the factor, and, if satisfied that, in the given circumstances, the bid is acceptable, conclude the sale. The Court may consider the fair value of the property, the general economic trends, the large sum required to be produced by the bidder, the formation of a syndicate, the futility of postponements and the possibility of litigation, and several other factors dependent on the facts of each case. Once this is done, the matter ends there. No speaking order is called for and no meticulous post-mortem is proper. If the Court has fairly, even if silently, applied its mind to the relevant consideration before it while accepting the final bid, no probe in retrospect is permissible. Otherwise, a new threat to certainty of Court sales will be introduced."

6. He also relied upon another judgment of the Supreme Court in the case of Navalakha and Sons v. Sri Ramanya Das and Ors., , which provided the following guiding principle:

"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...."

"...It is well to bear in mind the other principle which is equally well-settled namely that once the Court comes to the conclusion that the price offered is adequate, no subsequent higher offer can constitute a valid ground for refusing confirmation of the sale or offer already received."

7. He submitted that the reserve price was fixed, in the instant case, at Rs. 4.6 crores on the basis of valuation report and, therefore, his bid of Rs. 7 crores was reasonable at the relevant time and represented fair value of the property. He also submitted that on confirmation of the sale in his favor, sale became absolute and rights of the ownership in the property so sold became vested in him by relying upon the pronouncement of the Apex Court in (1970) 2 SCC 40.

8. On the basis of these submissions he, at the same time, attempted to distinguish the judgment of Divya Manufacturing (supra), and submitted that the said judgment was not applicable in the given fact situation. His submission was that in Divya Manufacturing (supra) the Supreme Court held that the High Court had power to set aside the sale in favor of the auction purchaser even when the sale is confirmed only because of Clause 11 of bid conditions in that case which specifically gave such a right. Whereas in the present case "terms and conditions of sale" laid down by the Official Liquidator, on the basis of which sale was conducted, there is no such clause analogous to Clause 11 and, consequently, no such power reserved.

9. I may state at the outset that the principle regarding auction of properties by the Court and the circumstances in which the Court can set aside such sale even when it is confirmed as projected by the learned Counsel, on the basis of various judgments have been firmed up over a period of time and there cannot be any quarrel about the same. However, a very material distinction is overlooked by the learned Counsel in the process. The cases cited by the learned Counsel were of cases related to general auction and not auction of property of a company in liquidation. Insofar as these later kinds of sales are concerned, these are specifically governed by the principles laid down by the Apex Court in Divya Manufacturing (supra), and LICA (P) Ltd. (supra), and that is the only way two sets of judgments can be harmonised. The Supreme Court set down different principle altogether while dealing with sale of certain properties of the company in liquidation and for good reasons. The guiding principles laid down by the Apex Court in such cases are that attempt should be made to get the most remunerative price and it is the duty of the Court to keep openness of the auction so that intending bidder feel free to offer the higher value. This principle has public purpose behind it. The assets are sold of a company which have gone into liquidation. It is the duty of the Liquidator to ensure that maximum price is obtained from the sale of these assets so that creditors and workers of the company (in liquidation) are paid to the maximum extent possible. It is for this reason that in such sales the Supreme Court departed from the general principle that after the confirmation of the sale it should be interfered only when there is a material irregularity or fraud. Obviously in these cases sale can be set aside even in those cases where the Official Liquidator is getting better price.

10. I am not convinced with the argument of the learned Counsel when he submitted that the principles enunciated in the case of Divya Manufacturing (supra), would be non-applicable to the present case. No doubt, in Divya Manufacturing Clause 11 of the terms and conditions of sale specifically empowered the High Court "to set aside the sale in favor 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 benefit of creditors, con tributaries and all concerned and/or public interest" while formulating the aforesaid principle. However, the Court did not take refuge of Clause 11. Clause 11 was merely an additional factor which weighed in the mind of the Supreme Court. Guiding principle deduced from the earlier judgments, including that of LICA (P) Ltd. (supra), was that in every such case it is the duty of the Court to realise best price for the asset. This is the principle laid down in paras 11 to 15 of the judgment. We may quote para 13 specifically in this regard, which reads as under:

"13. From the aforesaid observations, it is abundantly clear that the Court is the custodian of the interest 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 lacs. This was on the fact 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 lacs. 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 26.6.1998 the Division Bench has ordered that offers of Eastern Silk Industries Ltd. and Jay Prestressed Products Ltd. would only be considered on 2.7.1998 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 order, the Court permitted it to take part in making further offer as noted in the order dated 2.7.1998. In this set of circumstances, there was no need to confine the bid between three offerors only."

11. Indubitably, the law laid down, as a general principle and de hors Clause 11 is that Court has power to set aside the sale even in a situation where there was no irregularity or fraud. Following passage quoted from LICA (P) Ltd. (supra) makes it more obvious:

In LICA (P) Ltd. (1) v. Official Liquidator (supra), this Court dealing with a similar question observed thus--

14. 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'.

15. The matter was again brought before this Court and in LICA (P) Ltd, (2) v. Official Liquidator (supra), 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 lacs, 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 Mr. 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'."

12. After stating this principle the Court took note of condition No. 11 in para 16 which was an additional factor and as would be apparent from the opening words of para 16 reading "Further, there is a specific condition No. 11 xxxx".

13. No doubt, in the present case sale was confirmed in favor of the auction purchaser in May, 2003, i.e. 11/2 years ago. Would it mean that even the sale is concluded in all respects? Answer is: No. It will still be open for the Court to set aside such sale when better bids are received thereafter when application is moved at distant time, caution is to be exercised and the rights accrued, if any, in favor of the auction purchaser cannot be overlooked. No doubt, such a process cannot go on endlessly and for indefinite period. Where to draw the line is the poser. Answer to this is provided in LICA (P) Ltd. (supra), which is affirmed in Divya Manufacturing (supra), i.e. so long the possession is not handed over to the purchaser or the sale deed is not executed, the Court could re-open the sale in the interest of justice. This is so stated in paras 7 and 11 of the judgment in Divya Manufacturing (supra). In the present case possession has still not bean given to the auction purchaser. In fact, as pointed out by Mr. Luthra, learned Counsel for the Official Liquidator, delay in finalising the sale is attributable to the auction purchaser himself who filed CA No. 721/2003 and thereafter CA No. 799/2003 and raised the bogey of property having been acquired. Accordingly, I set aside the sale in favor of the auction purchaser as confirmed on 29th May, 2003 and proceed with fresh holding process.

14. CA Nos. 721/2003, 1012/2004, 1405/2004 and 1154/2004 are disposed of in the aforesaid terms.

Two bids are received with following offers:

  S.No. Name of Bidder             Description of   Bid Amount
                                 assets bid for   (Rs. )
1. Tankbund Properties P. Ltd.   Entire unit      9 crores
2. GSP International             Entire unit      8 crores
 

Since there were only two bidders, I decided to go for inter se bidding in respect of the entire unit.
 

15. During the course of inter se bidding, Tankbund Properties P. Ltd. raised its bid to Rs. 12.55 crores and M/s. GSP International which also actively participated in the inter se bidding, raised his bid to Rs. 12.40 crores. In that view of the matter, Tankbund Properties Pvt. Ltd. is the highest bidder offering Rs. 12.55 crores. The Counsel for some secured creditors as are present in Court and say that the aforesaid offer of Rs. 12.55 crores is reasonable. The highest bid of Tankbund Properties Pvt. Ltd. at Rs. 12.55 crores is accepted, as the said offer is found as the highest and fair and reasonable. 25% of the bid amount shall be paid within seven days and the remaining 75% amount shall be deposited within sixty days. 25% of the bid amount shall, however, include the earnest money that is already paid by the bidder. In case the highest bidder fails to deposit 25% of the bid amount in terms of this order, the earnest money paid by it shall be forfeited. The terms and conditions of the sale notice shall also be binding on the highest bidder.

16. It will be open to the highest bidder to place his own security in the property in addition to the security already provided.

17. On full payment being made by the highest bidder, possession of the entire unit shall be handed over to the highest bidder and a report thereto shall be submitted by the OL to this Court.

18. Mr. Sinha, Counsel for second highest bidder requests for earnest money. Learned Counsel for ICICI Bank has no objection if the draft of second highest bidder is returned subject to undertaking given by him that in case first highest bidder does not deposit the amount within time, he will be ready to purchase the same. Draft towards earnest money deposited by the other tenderer shall be returned to it immediately. Learned Counsel for the highest bidder states that sale may be in the name of five nominees and in two parts; one part for plant and machinery and second party of land and building. He undertakes to give the names of five nominees on the next day.

List on 16th December, 2004.

dusty.