M/S New Cawnpore Flour Mills vs M/S Bakemans Industries Pvt Ltd
2010 Latest Caselaw 5748 Del

%     20.12.2010

      Present:     Mr. C.A. Sundram, Sr. Advocate with Mr. P.C.
                   Sen & Ms. Aanchal Yadav for Ceylon Biscuits
                   Limited.
                   Mr. Abhinit Das for the ex-management.
                   Mr. Rakesh Khanna, Sr. Advocate with Mr. Rajiv
                   K. Garg & Mr. Ashish Garg in CA No.
                   1367/2005.
                   Mr. Chinmoy Pradip Sharma for SICOM
                   Limited.
                   Mr. Rajiv Behl for the Official Liquidator.
                   Mr. Atul Sharma for IDBI/IFCI.

+     CA No. 900/2008 (filed by Ceylon Biscuits
      Limited), CA No. 1767/2010 (filed by management
      of the company under provisional liquidation) and
      CA No. 495/2010 (filed by the Official Liquidator)
      in CP No. 204/2003

1.

Bakemans Industries Private Limited (BIPL, for short) was in the business of making and marketing biscuits and allied products under the trade mark/brand Bakeman since 1978. BIPL had availed loan of Rs. 17 Crores from State Industrial Corporation Of Maharashtra Limited (SICOM, for short) and had defaulted in repayment. SICOM took over possession of BIPL factory at Patiala on 18th July, 2003 under Section 29 of the State Financial Corporations Act, 1951. The operations were shut and the factory was locked.

2. In 2003, 16 separate petitions were filed by creditors of BIPL under Section 433(e) and (f) read with Section 434 and 439 of the Companies Act, 1956 (Act, for short). By order dated 6th April, 2004, CP No. 204/2003 filed by New Cawnpore Flour Mills Private Limited was admitted and citations were directed to be published. Looking into the allegations and particularly the conduct of the management of BIPL, the Official Liquidator attached to this Court was appointed

C.P.No.204/2003 Page 1 as the provisional liquidator to take over assets, properties and books of accounts. It was observed in this order that it was not necessary to pass separate orders in each winding up petition and the order would operate in favour of creditors as if it has been made on a joint petition of the creditors.

3. In the meanwhile, BIPL purportedly approached NRI Lead Bank (which is a company not a Lead Bank) seeking financial assistance. It is not clear what exactly happened thereafter but the purported disputes between BIPL and NRI Lead Bank were referred to Arbitral Justice of ADR Arbitration, stated to be a body recognized by the Government of India in terms of Section 21 of the Arbitration and Conciliation Act, 1996. The purported reference was in terms of an alleged arbitration agreement. The arbitration proceedings were closed as the tribunal opined that there was no genuine arbitration agreement. However, new set of arbitrators were subsequently appointed and rendered an award dated 16th August, 2003. Subsequently, NRI Lead Bank filed an execution petition on the basis of written agreement/award dated 16th August, 2003 passed by Board of Conciliation. Sister concern of BIPL and SICOM were also made a party to this execution proceeding. Subsequently, Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and some other banks/State Financial Corporations were impleaded as parties.

4. Management of BIPL relying upon the purported award of the Board of Conciliation took forcible possession of the factory on 14th September, 2003. SICOM thereupon filed an application in the execution petition and vide order dated 15th September, 2003 status quo order was passed.

C.P.No.204/2003 Page 2

5. On 28th November, 2003, an assurance was given by the management of BIPL in the execution proceedings that they would come with a definite proposal for payment to the creditors. On 18th December, 2003, the High Court in the execution proceedings directed the management of BIPL to deposit Rs. 2 Crores failing which SICOM was at liberty to proceed with the statutory remedies available to them under the State Financial Corporation Act, 1951. An undertaking was also given by the Managing Director of BIPL.

6. SICOM obtained a valuation report of the property consisting of land measuring 30544 square yards and a building comprising of three floors having RCC construction with plant and machinery at Patiala, Punjab (hereinafter referred to as the property, for short). There were also unpacked machineries, which had been imported from abroad.

7. As the management of BIPL failed to deposit Rs. 2 Crores and did not submit a definite proposal in terms of the order dated 28th November, 2003 in the execution proceedings, SICOM was given liberty to proceed with the sale. On 8th February, 2004, SICOM advertised for sale of the factory in the newspapers.

8. On or about 15th March, 2004, Ceylon Biscuits Private Limited (CBL, for short) filed an application before the execution court seeking permission to inspect the property disclosing that they had been negotiating with the management of BIPL.

9. CBL had shown willingness to submit bid and were allowed to do so vide order dated 16th March, 2004. The matter was again taken up before the civil court/execution court on 24th March, 2004 when CBL made an offer of Rs. 12.5 Crores and deposited earnest money of Rs. 25 lacs in dollars. The second highest bidder had submitted a bid

C.P.No.204/2003 Page 3 of Rs.11.7 Crores.

10. On 19th April, 2004, the proceedings pending before the civil/execution court were directed to be listed before the Company Court in view of the winding up petition CP No. 204/2003.

11. Now coming back to the company petition, SICOM filed CA No. 414/2004 with the prayer that the order dated 6th April, 2004 appointing provisional liquidator and asking him to take over assets, properties and books of accounts of BIPL should be recalled. By order dated 16th April, 2004, an interim direction was passed that possession of SICOM in the above noted factory would not be disturbed till the next date.

12. Another application CA No. 729/2004 was filed in CP No. 204/2004 by the management of BIPL. This application was for direction to SICOM not to sell the property and for maintaining status quo in respect of the property. This application was disposed of vide order dated 17th July, 2004. The application was dismissed. In this order it was noticed that in the civil/execution proceedings, bids had been received from three parties, including CBL. In the order dated 17th July, 2004, it is recorded that the bid of Rs. 12.5 crores given by the CBL in the execution/ civil proceedings was the highest and the same was accepted by the Company Court.

13. This order confirming the sale of the property in favour of the CBL was taken in appeal before a Division Bench but without success and this decision was made subject matter of challenge before the Supreme Court in Civil Appeal Nos. 3628/2008 and 3629/2008. The said civil appeals were disposed of vide detailed judgment dated 16th May, 2008.

14. The Supreme Court in its detailed judgment reported in (2008) 15 SCC 1 has set out the entire history of litigation and respective

C.P.No.204/2003 Page 4 stands of the parties. In paragraph 36 of the judgment, the Supreme Court has set out the core issues that arose for consideration before them. The said paragraph reads as under:

"36. The core issues which arise for our consideration in view of the rival contentions of the learned counsel are:

(1) Whether in the facts and circumstances of the case the executing court and consequently the Company Judge could have supervised the purported sale of the assets of the appellant on behalf of SICOM having regard to the provisions of Section 29 of the 1951 Act?

(2) Whether in a case of this nature and particularly having regard to the fact that SICOM submitted itself to the jurisdiction of the executing court and the Company Court, can now turn around and contend that in effect and substance it had exercised its statutory powers under Section 29 of the Act and allowed the same only to be supervised by the learned Company Judge? (3) Whether the statutory powers of a financial corporation as envisaged under Section 29 of the 1951 Act would prevail over the proceedings before a Company Judge in a winding-up proceeding?

(4) Whether involvement of the Official Liquidator in the facts and circumstances of the case and particularly in view of the fact that Official Liquidator brought to the court‟s notice claims of other creditors, the Company Judge ought to have dealt with the same in the manner laid down in the Companies Act and/or the Rules framed thereunder and/or the decision of this Court?

(5) Whether the High Court while exercising its powers under Section 433 of the Companies Act read with other provisions could ignore the claims of the other creditors, and in particular the workmen, having regard to the provisions of Section 529-A thereof.

(6) Whether the High Court while exercising its jurisdiction both in the execution proceeding as also winding-up

C.P.No.204/2003 Page 5 proceeding can, in the fact situation obtaining herein, be said to have adopted a fair procedure.

(7) Whether in any event the High Court could have ignored the legal requirements as regards the conduct of sale of the assets of the appellant only on the basis of: (1) wrongful conduct on the part of the appellant in obtaining an award from the Conciliation Tribunal; and (2) its failure to bring a better offer from another bidder."

15. The finding of the Supreme Court is that SICOM though secured creditor had submitted itself to the jurisdiction of the Company Court and, therefore, the jurisdiction, which was exercised by the Company Court was under the provisions of the Act and not Section 29 of the State Financial Corporation Act, 1951. The Supreme Court has recorded that the Official Liquidator had brought to the notice of the Company Court claims of other creditors including workmen, who are entitled to pari pasu payment under Section 529A and 530 of the Act. It was noticed that the Official Liquidator had stated that 373 claims had been filed and the total amount demanded was about Rs.100 Crores. There were also claims of Provident Fund and statutory dues, which have to be given priority. It was held that the Company Court was wrong in effecting the sale treating SICOM as an agent. This was impermissible and contrary to the provisions of the Act. The Company Court was required to not only look after interest of the mortgagee/mortgager but also under statutory obligation to safeguard the interest of the workmen and other non- secured creditors. The Company Court, it was observed is under statutory obligation to comply with various provisions of the Act and the Rules before selling the property including provisions related to valuation. The role of the Official Liquidator, who was appointed as

C.P.No.204/2003 Page 6 the provisional liquidator was emphasized. Paragraphs 74 to 81 of the judgment records the gist of findings and ratio why the Supreme Court has set aside the sale which was confirmed vide order dated 17th July, 2004. The said paragraphs read as under:-

"74. ....This is the meat of the matter. If the property which has been put to auction was the prime property over which the fate of the creditors depended, be they secured or non- secured ones, the Company Court, in exercise of its equity jurisdiction could not have obliterated it from its mind the cases of the others. If the assets belong to the creditors, that must mean the whole body of the creditors and not only one of the secured creditors. The inconsistency of it is self- evident, as, on the one hand, it is stated that the property of the Company does not vest in the court or the Official Liquidator, on the other hand, it is stated that it is vested in the body of the creditors and not only in SICOM.

75. The High Court, therefore, could not have ignored the Official Liquidator only on the ground that a provisional Official Liquidator was appointed and not a regular Official Liquidator. The power and functions of the provisional Official Liquidator for all intent and purport would be the same as that of the Official Liquidator and, therefore, it was not necessary for the Company Judge to wait till the Company was wound up.

76. If the jurisdiction of a Company Judge is limited, any substantial deviation and departure therefrom would result in unfairness. When an order is passed in total disregard of the mandatory provisions of law, the order itself would be without jurisdiction.

In this case, however, even otherwise a fair procedure was not adopted. We, however, very much appreciate the anxiety on the part of the Court to see that otherwise just dues of

C.P.No.204/2003 Page 7 SICOM be realised. Conduct of a party plays an important role in the matter of grant of a relief. However, only because the conduct of a party was not fair, the same, by itself, cannot be a ground to adopt a procedure which is unjust or unfair, particularly, when by reason thereof, not only the Company itself but also other creditors are seriously prejudiced. We fail to see any reason as to why the hearing of the case was to be preponed. Why even a day‟s time could not have been granted when a prayer for adjournment was made. The jurisdiction of the Company Court is vast and wide. It can mould its reliefs. It may exercise one jurisdiction or the other. It may grant a variety of reliefs to the parties before it. The parties before the Company Judge are not only the company or the creditors who had initiated the proceedings but also others who have something to do therewith. Even in a given case a larger public interest may have to be kept in mind. The court may direct winding up. It may also prepare a scheme for its restructuring.

77. We, therefore, are of the opinion that the Company Judge was not correct in its view and passed the impugned judgments only having regard to the wrongful conduct on the part of the appellant in obtaining an award from the Conciliation Tribunal or failure to bring a better offer from another bidder.

78. The question which is really an intricate one is what relief can be granted. On the one hand, the Company has committed wrongs, on the other, its property has been sold in auction. Even a part of the property has been permitted by us to be taken out of the country. The factory, we are told, has started operation. It has employed a large number of workmen. Would that itself mean that we should refrain ourselves from granting any relief? Direction issued by this Court in a case of this nature need not be a narrow one.

C.P.No.204/2003 Page 8 The Court has to take into consideration the fate of not only those workmen who are working but also those who have a claim against the Company. We must also take into consideration the fate of the other creditors.

79. We, therefore, are of the opinion that interest of justice would be subserved if while allowing the appeal, the learned Company Judge is requested to go into the question afresh in accordance with the provisions of the Companies Act and hold a fresh auction.

While doing so, indisputably, Ceylon Biscuits Pvt. Ltd.‟s offer would be considered. The Company Judge may consider the question of grant of some preference to Ceylon Biscuits Pvt. Ltd. but while an auction is to be held, there should be a proper valuation of all the assets of the Company both movable and immovable.

80. The court, indisputably, may consider the question of framing an appropriate scheme if it is found that there is a possibility of revival of the Company. In other words, we leave all options open to the learned Company Judge as are available in terms of the provisions of the Companies Act including adjustment of equities amongst the parties.

81. Till, however, a final order is passed, Ceylon Biscuits Pvt. Ltd. would continue to function not as an auction-purchaser but as a Receiver of the Company Court. Ceylon Biscuits Pvt. Ltd. shall file all statements of accounts in regard to the amounts which it had invested and all other requisite statements including the valuation of machinery it had taken out of the country before the court. The court may appoint a chartered accountant to verify the said statements. The court, if it thinks fit and proper, may, apart from the provisional liquidator, appoint another person to supervise the works and functioning of Ceylon Biscuits Pvt. Ltd. as a Receiver of the court. As C.P.No.204/2003 Page 9 Ceylon Biscuits Pvt. Ltd. is being appointed as a Receiver, it goes without saying that it shall act strictly under the supervision of the court and abide by the orders which may be passed by it from time to time."

16. This Court is primarily concerned with the implementation of the directions given by the Supreme Court in paragraphs 77 to 81 quoted above.

17. CBL took possession of BIPL factory of the property on 3rd March, 2005 from SICOM. Sale certificate dated 29th October, 2007 was issued pursuant to an order dated 6th July, 2007 passed by the Company Court. CBL incorporated a subsidiary, Ceylon Biscuits India Private Limited (CBIPL, for short) on 5th April, 2005 for the purpose of manufacturing and using the property. CBL also provided working capital to CBIPL after its incorporation. After judgment of the Supreme Court, CBIPL stopped production on 15th September, 2008. It is stated that this production was stopped due to paucity and non availability of funds. CBL filed an affidavit in this Court on 8th November, 2008 stating that CBIPL had stopped production with effect from 15th September, 2008. This fact is not disputed. The property has not been put to any productive use since then.

18. The case made out in application CA No. 900/2008 by CBL is that they have been providing finance and working capital to CBIPL since its incorporation, which has been incurring losses throughout. This fact has been confirmed by the statutory auditors of CBIPL. As on 31st March, 2008, CBIPL owes CBL Rs.7,13,80,551/-. In CA No. 900/2008, CBL has asked for the following reliefs:

C.P.No.204/2003 Page 10 "1. Reimbursement of Rs. 12.5 Crores which was deposited with the Hon‟ble High Court as the auction price for the BIPL property together with interest.

2. Reimbursement of Rs. 1.18 Crores spent on commissioning of plant and machinery and maintenance and security of the land, plant and machinery purchased by CBL. Interest in this amount is also claimed.

3. Reimbursement of Rs. 6.68 Crores being the cumulative loss incurred upto 31.03.08 by its subsidiary company CBIPL entrusted with the running the business of manufacturing biscuits using BIP property and other assets.

4. Reimbursement of expenses incurred between 31.03.08 and 31.07.08 amounting to Rs. 0.08 Crores.

5. Reimbursement of expenses incurred after July 2008 and till the property is re- auctioned.

6. Permission to remove the plant and machinery brought in and purchased by CBL from time to time."

19. Vide order dated 2nd December, 2008, Vaish and Associates, Chartered Accountants were appointed to verify the statement submitted by CBL. They have submitted a report in which some discrepancies/objections have been raised. However, they have accepted that even after adjustment of certain amounts, CBL had

C.P.No.204/2003 Page 11 transferred to CBIPL Rs.10,89,65,576. It is also accepted that CBL had transferred Rs.10,02,344/- to third parties for operations/startup operations. They have stated that CBIPL has incurred/adjusted accumulated loss of Rs.7,11,09,833/- and had installed new assets amounting to Rs.51,49,093/-. In the report it is stated that under pre-operational expenses after adjustment the total expenses incurred were Rs.52,57,321/-. Rs.14,50,577/- was incurred towards maintaining assets after takeover. Rs.21,74,821/- was incurred on security and safety of the premises. Rs. 9,44,321/- was incurred on making improvements, additions to building, plant and machinery. There are certain other expenses, which have been also explained and accepted in the report.

20. I am, however, not inclined to accept prayers 2 to 4 made in the application CA No. 900/2008 despite the report of Vaish and Associates, Chartered Accountants. Substantial expenditure has been incurred by CBL/CBIPL when they were operating and running the factory. Obviously business losses and profits belong to either CBL or CBIPL, they cannot be passed on to the Court. Court was not running the factory and doing business. CBL or CBIPL was not an agent of the Court. Profits and losses are inherent in any business and it is not the obligation of the Court to reimburse the losses suffered by them while they were carrying on business. In case the contention of CBL or CBIPL is to be accepted, then if profits were earned, CBL/CBIL was liable to account for the same. Obviously such a contention cannot be accepted and, therefore, conversely also the plea and claim of CBL or CBIPL has to be rejected.

21. There are two contentious issues. First is the issue with

C.P.No.204/2003 Page 12 regard to lines 5 and 6 along with some other equipments which were dismantled and taken away to CBL factory in Sri Lanka. This was done with the permission of the High Court which order was confirmed by the Supreme Court. The question is what order or direction should be passed in respect of the lines 5 and 6 and other equipment taken to Sri Lanka. The second issue is whether CBL is entitled to interest, if so, at what rate.

22. With regard to first aspect, the Court had appointed ITCOT, Chennai, as expert valuers to visit the factory at Patiala and also visit the factory of CBL in Sri Lanka. They were asked to value the factory at Patiala and value lines 5 and 6 and other equipment dismantled from Patiala and installed by CBL in Sri Lanka. As per the report dated February, 2009, the total value of the plant and equipment, including lines 5 and 6 which were shifted and reassembled in Sri Lanka as on 23rd February, 2009 has been estimated as Rs.354.83 lacs. Subsequently, vide order dated 3rd October, 2008, ITCOT was asked to assess the fair market value of the said plant and equipment, including lines 5 and 6 at Sri Lanka as in June, 2005. In the second report they have valued the said plant and equipment at Rs.449.43 lacs. In the reply filed by ITCOT in this Court on 5th May, 2010 to CA No. 1208/2009, the said valuation has been justified on the ground that they have applied straightline depreciation @ 6.66% per year for four years, which has been added to the value of the plant and equipment as in February, 2009. Per se, this method of valuation is defective and cannot be and should not be accepted. There are several reasons for the same. Firstly, it presumes that the equipment was new equipment as on June, 2005 whereas in fact the entire plant and equipment as per the report itself was manufactured and

C.P.No.204/2003 Page 13 assembled in the year 1997-98. By this method, the valuation of the plant and equipment in 1997-98 would have been several times more by applying and adding 6.66% depreciation every year. By the same reasoning, the actual purchase value of the equipment/plant in 1997/1998 should have been the basis for valuation. This basis has rightly not been adopted and applied. Secondly, what was required and valued was the market value of the plant and equipment, which were dismantled and taken to Sri Lanka. The market value cannot be calculated by applying rate of depreciation, which can be at best a vague estimate or gives the book value and is not an accurate estimate of the market value/price.

23. At the same time, in rejoinder filed to CA No. 900/2008, CBL has stated that the manufacturer of the machinery, viz., New Era Machines Private Limited has stated that the same machinery with additional features and higher capacity would cost Rs. 3.4 Crores. It is the contention of management of BIPL that this quote of Rs. 3.4 Crores is for only one line and does not include additional features. This is disputed by the counsel for the applicant CBL/CBIPL. Fortunately, I need not dwell further into this aspect of valuation as CBL/CBIPL has agreed and even the management of BIPL has agreed to the following:

(i) The entire plant and equipment, including lines 5 and 6, which were dismantled from the property will be brought back to the property and re-assembled and made operational by CBL at their cost and expense.

                        (ii)           After     re-assembling,    an

C.P.No.204/2003                                                          Page 14

inspection will be carried out, by a court appointed expert in the presence of representatives of the management of BIPL. Management of BIPL is insisting that New Era Machines Private Limited should carry out the said inspection, especially inspection of the oven. The applicant-CBL has some reservations. The expert, who has to carry out inspection, is for the time being left open. However, the purpose and objective of the expert inspection is to ensure that the equipment, including lines 5 and 6 have been properly installed and are in good working condition.

(iii) Till the plant and equipment, including lines 5 and 6 are properly installed and certified, Rs. 4 Crores will remain with the Court and will be kept in an FDR. The said amount will be refunded to CBL1 after the expert has certified that the plant and equipment, including lines 5 and 6 have been installed and are operational.

24. The next question relates to refund of balance Rs. 8.5 Crores and whether or not the applicant-CBL is entitled to interest on the amount deposited.

25. Regarding refund of Rs. 8.5 Crores there cannot be any doubt and dispute that the amount has to be refunded as the auction has been set aside. The main issue and contention raised

Corrected vide order dt. 28.1.2011

C.P.No.204/2003 Page 15 by the management of BIPL is that CBL is not entitled to any interest on the amounts deposited by them in two installments of Rs. 25 lacs on 23rd March, 2004 and Rs.12.25 Crores on 13th August, 2004 (Total Rs. 12.5 Crores).

26. Learned counsel for the management of BIPL has relied upon the judgment of the Supreme Court in the case of Allahabad Bank Vs. Bengal Papers Mills (2004) 8 SCC

236. The relevant portion is reproduced below:-

"10. The Official Liquidator, in winding-up proceedings by court, has the power to sell the immovable properties of the company wound up, under Section 457(1)(c) of the Companies Act, 1956. Rule 272 of the Companies (Court) Rules, 1959 provides that an Official Liquidator can sell the property belonging to the company only with the previous sanction of the court and that every sale shall be subject to confirmation by the court. Rule 273 lays down the procedure for sale and Rule 274 deals with the meeting of the expenses of the sale. Order 21 Rule 93 of the Code of Civil Procedure (for short "the Code") provides that where a sale of immovable property is set aside under Rule 92 of Order 21, the purchaser shall be entitled to an order for repayment of his purchase money with or without interest as the court may direct, against any person to whom it has been paid. It has been held that even though Order 21 Rule 93 of the Code may not ipso facto apply to a sale otherwise other than under the Code, the principle embodied therein can be applied to other sales to order refund of the purchase price with interest while setting aside a sale.

But it has to be seen that Rule 93 of Order 21 of the Code gives a discretion to the court setting aside a sale, either to award interest or not to award interest. Considered in the context of that discretion, it is clear from the judgment rendered by this Court that this Court refused to direct the payment of interest to the applicant even while directing the refund of the purchase price paid by the

C.P.No.204/2003 Page 16 applicant to the Official Liquidator. In such a situation it is not possible to accede to the prayer of the applicant to order the payment of interest on the purchase price paid by it, based on the principle embodied in Order 21 Rule 93 of the Code on this application for a clarification of the judgment. In the circumstances of the present applications, we have to proceed on the basis that this Court has exercised its discretion not to award interest on the purchase price in the light of the directions issued by it in that behalf.

11. Learned counsel for the applicant relied on the decision in Motors & Investment Ltd. v. New Bank of India and submitted that in that case the Court ordered payment of interest to the purchaser on the sale being set aside. On an examination of para 6 of the said decision, it is seen that the question was not discussed as such. But the Court did order the interest earned by the purchase price to be refunded to the purchaser or in the alternative to pay interest on the amount at 18 per cent per annum. In the case of Central Bank of India v. Ravindra this Court discussed the concept of interest to point out that it was the payment fixed by agreement or allowed by law for use or detention of money. In other words, what was indicated was that interest was really compensation for the use of the money which the purchaser was deprived of. Going by the principle of compensation indicated in the said judgment, the question would arise whether the applicant, in the circumstances of this case, when it had enjoyed the assets for about ten years on deposit of the purchase price, would be entitled to any compensation at all, or to compensation with an obligation to account for the profits, an issue, that has to be adjudicated in an appropriate manner and not certainly while considering an application for clarification. We find that the obtaining of possession by the purchaser on deposit of the purchase price has considerable relevance in deciding whether the purchaser would be entitled to interest on the purchase price as indicated by the decision of this Court in Union Bank of India v. Official Liquidator H.C. of Calcutta. Therein, after referring to the decision in Motors & Investment Ltd. v. New Bank of India relied on by counsel for the applicant and the direction for payment of interest made therein, this Court declined the award of interest on the distinction that, in that case, possession had passed to the C.P.No.204/2003 Page 17 purchaser. The Court stated that the judgment in Motors & Investment Ltd. v. New Bank of India had no bearing mainly because as soon as the amount was deposited by the purchaser, possession of the property was handed over to him. No doubt the learned Judges thereafter, also referred††† to the decision in the present case† and the non-

award of interest therein. But, in our view, that makes no difference, since the distinguishing feature relied on by the said decision, was the non-passing of possession to the purchaser. In this case, as we have noticed, the applicant, the purchaser, obtained possession even before he had paid the entire purchase price and had paid only 25 per cent or so of the purchase price and kept that possession for 10 years.

12. Even on the principle of restitution, the claim of the applicant may not succeed. This is not a case where the applicant was deprived of both his money and the property purchased by him. There was, therefore, no failure of consideration. By the subsequent order of court, the sale was set aside; but during the interregnum, the applicant had the benefit of the assets he had purchased. The other contracting party, the Company in liquidation, was deprived of the use of its assets. The creditors who held the properties as security were deprived of their right to deal with the security or to enjoy the benefits of the security during the interregnum. In fact, the securities available to the creditors were utilised by the auction-purchaser, the applicant. In that situation, the applicant might have the obligation to account for the profits. Certainly, while rendering the main judgment, this Court was conscious of all these aspects while ordering refund only of the purchase price deposited without providing for payment of interest to the purchaser but at the same time leaving it open to the purchaser to work out its claim for the expenses incurred by it before the Company Court.

13. As stated in Goff and Jones: The Law of Restitution (6th Edn.) the law of restitution is the law relating to all claims, quasi-

contractual or otherwise, which are founded upon the principle of unjust enrichment. It will, therefore, be necessary to investigate that aspect even if we invoke Sections 70 and 72 of the Contract Act. Even if we invoke Section 65 of the Contract Act, the advantages derived by

C.P.No.204/2003 Page 18 each of the parties will have to be determined and quantified in terms of money and any order in favour of the applicant can be made only after undertaking that exercise. This result cannot be achieved by seeking a clarification of the judgment as now done.

14. It also appears to us that there was a change of position of the parties including the creditors, pursuant to the sale and the applicant being put in possession. In that context, the adequacy of consideration paid by the applicant will be a relevant consideration. As observed in Goff and Jones in para 42-004, "neither common law nor equity normally inquires into the adequacy of the consideration which the purchaser provides. But such an enquiry would be central to any defence solely based on a defence of change of position, for, it is a defence which operates to discharge, wholly or in part, a defendant‟s duty to make restitution."

Be it noted that the sale in favour of the applicant was set aside by this Court mainly on the ground that the consideration paid was grossly inadequate."

27. Paragraphs 12 to 14 of the said decision deal with the principle of restitution and it was observed in the said case that the applicant‟s claim on the said ground was not entitled to succeed in the said case.

28. Law of restitution was initially recognized as based upon quasi contract or implied contract theory. It was founded on the principal that the recipient must account for money had and received and for money paid or from quantum meruit and quantum valebant claims i.e. all claims for recovery of reasonable remuneration for services rendered or for goods supplied. However, since 1990‟s, the principle of restitution has been recognized as an independent legal principle, not dependent on

C.P.No.204/2003 Page 19 quasi contract or implied contract theory. Emphasis has shifted to restoration of benefits on the ground of unjust enrichment at the claimant‟s expense. This has broadened and widened the concept of restitution and the said doctrine has been applied to a variety of claims. This is noted in paragraph 13 of the judgment of the Supreme Court in Allahabad Bank (supra).

29. In Halsbury‟s Law of England (4th edition vol. 40(1) at page 8 in paragraph 10), it has been observed that generally there are 4 stages to a restitutionary claim; (i) The recipient/defendant must have been enriched (ii) Enrichment must have been at the expense of the claimant (iii) Enrichment must not have been "unjust" (iv) Consideration must be given to defenses applicable, if any. Sometimes, a 5th stage is added, namely, remedy available to the claimants.

30. For a restitutionary claim, normally the defendant should have been enriched as a result of something, which the claimant has done for or given to the defendant. Absence of enrichment is fatal to the existence of restitutionary claim. Yes, there can be cases where there is loss to the claimant but no corresponding gain to the defendant. In such cases, restitution is used to denote the restitution of the claimant to the previous position by making good the loss which he has suffered.

31. Unjust enrichment can be positive i.e. when a person receives goods or money or negative i.e. because of savings incurred. Enrichment takes place when a claim against a defendant is discharged by the payment made by the claimant. Indirect enrichment in this manner falls within the term "enrichment" as the defendant is enriched at the claimant‟s C.P.No.204/2003 Page 20 expenses. The loss to the claimant as a result of payment is matched with the benefit/gain to the defendant. The terms „unjust‟ is flexible but broadly means and implies that there is an objection and it would be unfair and result in injustice, if the defendant is allowed to retain the benefit without compensating the claimant. Mistake of fact, mistake of law, duress, undue influence, failure of consideration, discharge of debt etc., have been recognized as factors, which can render enrichment unjust. The defenses available to the defendant include estoppel, bonafide purchase for value, passing on, illegality or incapacity. Defense of change in position is also available but this is examined on a case to case basis. Generally, mere fact that the defendant has spent money, does not make it inequitable to deny restitution. The defendant has to establish causal link between the receipt of money and change in position, which makes it inequitable for the recipient/defendant to make restitution.

32. However, I need not go deeper into this aspect as CBL has not relied solely upon the principle of restitution. Learned counsel for the CBL has in fact relied upon the Order 21 Rule 93 of the Code of Civil Procedure, 1908 (Code, for short), which provides that where sale of immoveable property is set aside, the purchaser will be entitled to refund of purchase money with or without interest as the court may direct, against any person to whom it has been paid. In paragraph 10 of the judgment in Allahabad Bank (Supra), it has been held that principles embodied in Order 21 Rule 93 can be applied to other sales to order refund of the purchase money with or without interest while setting aside a sale. The Court has discretion to award interest while directing

C.P.No.204/2003 Page 21 refund of purchase money, when a sale made by the Court is set aside and the purchaser is to be refunded the money deposited by him. Reference can also be made to Section 144 of the Code which reads:-

"144. Application for restitution.--(1) Where and insofar as a decree [or an order] is [varied or reversed in any appeal, revision or other proceeding or is set aside or modified in any suit instituted for the purpose, the Court which passed the decree or order] shall, on the application of any party entitled to any benefit by way of restitution or otherwise, cause such restitution to be made as will, so far as may be, place the parties in the position which they would have occupied but for such decree [or order] or [such part thereof as has been varied, reversed, set aside or modified]; and, for this purpose, the Court may make any orders, including orders for the refund of costs and for the payment of interest, damages, compensation and mesne profits, which are properly [consequential on such variation, reversal, setting aside or modification of the decree or order].

[Explanation.--For the purposes of sub- section (1), the expression "Court which passed the decree or order" shall be deemed to include,--

(a) where the decree or order has been varied or reversed in exercise of appellate or revisional jurisdiction, the Court of first instance;

(b) where the decree or order has been set aside by a separate suit, the Court of first instance which passed such decree or order;

(c) where the Court of first instance has ceased to exist or has ceased to have jurisdiction to execute it, the Court which, if the suit wherein the decree or order was passed were instituted at the time of making the application for restitution under this

C.P.No.204/2003 Page 22 section, would have jurisdiction to try such suit.] (2) No suit shall be instituted for the purpose of obtaining any restitution or other relief which could be obtained by application under sub-section (1)"

33. Learned counsel appearing for BIPL has submitted that if possession of the property is given to the auction purchaser, he is not entitled to any interest when subsequently the auction sale is set aside. Secondly, it is submitted that the auction purchaser was/is always aware and conscious of the fact that the auction sale/confirmation of sale can be challenged in appellate proceedings. Therefore interest shall not be paid. The third contention raised by the management of BIPL relates to adequacy of the sale consideration paid by the auction purchaser. In this connection, my attention was drawn to the paragraph 14 of the judgment in the case of Allahabad Bank (Supra), wherein paragraph 42-004 from Goff and Jones: The Law of Restitution, has been quoted.

34. The third contention of the counsel for the management of BIPL will be discussed in the subsequent portion of this order.

35. It is not possible to accept as an ominous universal rule that whenever possession of the property is given to the auction purchaser, he is not entitled to interest, if the sale is subsequently set aside as auction purchaser is always aware and conscious of the fact that the auction can be challenged in appellate proceedings. There are good reasons for the same. Court auctions do not normally fetch market value for a variety of reasons including uncertainty, delay and further litigation. If this C.P.No.204/2003 Page 23 argument on behalf of Management of BIPL is to be accepted and given judicial recognition, it will have a further negative impact and depress court auction/bids. This will not be in the interest of the judgment debtors or the creditors as attempt of the Court is to fetch and get best possible price. This is not be possible if bidders are not be paid interest even if the sale/auction is set aside. After all no auction purchaser will like that his money to be stuck, pending appeal/challenge with a stipulation that if the bid/auction/sale is set aside, he will be refunded money without interest. Even if possession is given, optimum and full use of the property is invariably denied and/or not possible.

36. It is also not possible to accept the contention of the management of the BIPL that in the case of Allahabad Bank (Supra) it has been held by the Supreme Court that whenever possession of a property is given to the auction purchaser, no interest is payable. In the case of Allahabad Bank (Supra), the Supreme Court has not laid down any such ratio. The facts of the Allahabad Bank (Supra) leading to the decision dated 7th October, 2004 may be noticed. In the said case by judgment in appeal decided on 20th April, 1999, the auction purchaser was directed to be refunded the bid amount of Rs. 2 Crores as the auction sale was set aside. There was no direction to pay interest. The Official Liquidator refused to pay any interest. The applicant- auction purchaser thereupon filed an application before the Supreme Court seeking clarification of the judgment dated 20th April, 1999 and for direction that the applicant was entitled to interest accrued on the purchase price of Rs.2 Crores. The application was opposed by the creditors. Noticing the facts in

C.P.No.204/2003 Page 24 paragraph 12 of the judgment, the Supreme Court has observed that in the facts of the said case, the Court had exercised their discretion not to award interest, when the judgment dated 20th April, 1999 was passed, setting aside the sale. In paragraph 10 of the said judgment, it is clearly observed that whether or not interest should be paid to the auction purchaser on the money deposited by him if the sale is set aside, is a matter of discretion. Thus, it is not held in paragraph 10 that interest cannot be paid to the auction purchaser if the sale is set aside. In paragraph 11 of the judgment, the Supreme Court has referred to decision in the case of Motors & Investment Ltd. Vs. New Bank of India (1997) 11 SCC 271. In the said case the Supreme Court had ordered refund of purchase price along interest @ 18% per annum. However, it was observed that there is no discussion on the said aspect in the said decision. In the case of Central bank of India Vs. Ravindra (2002) 1 SCC 367, the Supreme Court discussed the concept and principle behind award of "interest" and has held that interest is compensation for the use of the money which a person is deprived of. Reference thereafter was made to the decision of the Supreme Court in the case of Union Bank of India Vs. Official Liquidator H.C. of Calcutta (2000) 5 SCC 274, wherein the Court had exercised its discretion and declined to award interest as in that case possession of the property was given to the auction purchaser. It was noticed that in the case of Motors & Investment (Supra), possession of the property was not given to the purchaser. In the case of Allahabad Bank (Supra) the applicant auction purchaser had obtained possession even before he had paid the entire purchase price and possession was given when he had paid only 25% or so

C.P.No.204/2003 Page 25 of the purchase price and had retained possession for 10 years. The other aspect, which was noticed by the Supreme Court in the case of Allahabad Bank (Supra) was regarding inadequacy of sale consideration. What is apparent from the decision of the Supreme Court in Allahabad Bank (Supra) is that these aspects have to be kept in mind while deciding whether or not to award interest to the auction purchaser and while exercising discretion in terms of the Order 21 Rule 93 of the Code. It may be appropriate here to refer to Goff & Jones, The Law of Restitution, which has a separate chapter dealing with recovery of benefits conferred under judgments or orders subsequently reversed or set aside. In the said chapter reference is made to decision in the case of Manning (1609) 8 Co.Rep 94b, which reads as under:-

"If the sale of the terms should be avoided, the vendee would lose his term, and his money, too, and thereupon great inconvenience would follow, that none would buy of the sheriff goods or chattels in such cases, and so execution of judgments......would not be done."

37. This reasoning was followed in Mani Lal Vs. Ganga Prasad AIR 1951 Allahabad 832 and the following observation was made:-

"5. In Bacon's Abridgement, it was laid down, citing still older authorities, that :

"If a man recovers damages and lath executed by fieri facias and upon the fieri facias the sheriff sells to a stranger a term for years, and after the judgment is reversed the party shall be restored only to the money for which the term was sold, and not to the term itself,

C.P.No.204/2003 Page 26 because the sheriff had sold it by the command in the writ of fieri facias."

This principle was upheld in England in numerous cases vide Mathew Manning's case (1609) 8 Co. Rep. 94b, Bennet v. Hamill (1806) 2 Sch. & Lef. 566 at p. 577, Bowen v.

Evans, (1844) 1 Jo. & Lat. 178 at p. 259. The principle was applied by the Privy Council to Indian cases in Zain-ul-Abdin Khan v.

Muhammad Asghar Ali Khan 10 ALL. 166. The Privy Council after quoting from Bacon's Abridgement observed that bona fide purchasers who were no parties to the decree had nothing to do further than to look to the decree and to the order of sale. Their Lordships pointed out the distinction between a case in which the decree holder was the auction purchaser, who was not protected when the decree was set aside or modified, and the case of a stranger auction-purchaser. If the stranger auction-purchaser was a bona fide purchaser, he was entitled to be protected. This decision of the Privy Council has been followed in several cases in India, vide Piari Lal v. Hanif-un-nissa Bibi 38 ALL. 240, Balwant Singh v. Mt. Laiqa Begam MANU/UP/0489/1923."

38. This brings us to the facts of the present case and to the question whether or not discretion should be exercised to pay interest on the amount deposited by the auction purchaser, if so, at what rate.

39. Learned counsel for the management of BIPL has stated that the present case is one of inadequacy of consideration and this is the reason why the Supreme Court had set aside the sale in the judgment dated 16th May, 2008 reported as 2008 (15) SCC 1

C.P.No.204/2003 Page 27 Reference in this regard is specifically made to the paragraphs 78 and 79 of the said decision.

40. In paragraph 78 of the said decision, the Supreme Court has held that the company i.e., management of the BIPL had committed wrongs and, therefore, its property had been sold in the auction and even part of the property was taken out of the country. CBL/CBIPL had employed a large number of workmen and had started operating factory and, therefore, the relief, which could be granted in the appeal, was an intricate question. At the same time Supreme Court noticed that there was anxiety on the part of the Court not to accept the sale in favour of CBL looking at the claims of the secured creditors, other creditors and workmen. Directions were issued in paragraph 79 including the discretion of the company court to put the property for fresh auction after appropriate valuation of the assets. I do not find anywhere in the judgment there is a specific or direct finding that CBL is involved in any fraud or had purchased the property for inadequate consideration. It may be relevant to note here that in paragraph 79 of the judgment, the Supreme Court has stated that the company Judge may consider the question for grant of some preference to CBL and had allowed CBL to continue to function as a Receiver. If CBL was guilty of fraud or was a purchaser for inadequate sale consideration, these observations and grant concession to CBL/CBIPL would not arise.

41. Learned counsel for the BIPL2 has relied upon a hand written note/document and emphasized that CBL was negotiating with the management of BIPL before they had participated in the auction and given their bid. My attention was drawn to the fact

Corrected vide order dt. 28.1.2011

C.P.No.204/2003 Page 28 that CBL had filed an application before the civil/execution court on or about 15th March, 2004. It was stated that this note/document was filed before the Supreme Court and this note/document shows that consideration/bid offered by CBL was inadequate and was much less than CBL‟s own valuation. The Supreme Court has not referred to this note/document. It is noticed that several cuttings and remarks on the note/document, have not been indicated in the true typed version. It is noticed that what was auctioned, was the tangible property and not the intellectual property rights in the brand or trade name. Subsequently, the brand and trade name of BIPL were valued by a Chartered Accountant appointed by the Court. The same were valued at Rs. 35.88 Crores. Learned counsel for the CBL has pointed out that bids were made by the ITC, Britania and a company from Saudi Arabia. He submits that there was no possibility of the bidders forming a cartel and deliberately bringing down the auction price. Management of the BIPL was given several and repeated opportunities to get a better offer/bid. I need not go into this question in detail as there is no specific or direct finding regarding under valuation or fraud by CBL. I have quoted the reasons given by the Supreme Court for setting aside the sale in the present case. It is noticed that the Supreme Court has also adversely commented about the conduct of the management of BIPL in their decision dated 16th May, 2008.

42. In the present case, possession of the property was handed over to CBL on 3rd March, 20053 after they had deposited the entire sale consideration on 13th August, 2004. It has also come on record that CBL had stopped production and manufacturing in

Corrected vide order dt. 28.1.2011

C.P.No.204/2003 Page 29 the property after the order of the Supreme Court on 15th September, 2008. CBL, however, has not placed on record the date when they have started production or trial production. The property was sealed and possession was taken by SICOM on 18th July, 2003. Thus, for nearly two years the factory was closed and was not functioning. There was no maintenance and the plant and equipment was not operational. The CBL has incurred expenditure to re-start the factory and make it operational. The report given by Vaish and Associates, Chartered Accountants has confirmed that expenditure was incurred by CBL/CBIPL to re- start and making the factory operational. It is stated by CBL/CBIPL that even after manufacturing was stopped on 15th September, 2008, they have been keeping the machinery oiled and in operational state. They are bound and shall abide by the said statement.

43. Rs. 12.5 Crores was deposited by CBL with SICOM. Out of this amount, Rs. 8 Crores was appropriated subject to right of restitution by SICOM, IDBI and IFCI in terms of the order dated 3rd May, 2006. Prior to the said date, the amount deposited was kept in an FDR. Rs. 4.5 Crores, which has not been appropriated, has been kept in an FDR. Rs. 4.5 Crores was not directed to be appropriated as this was meant for distribution amongst the workmen. Rs. 8 Crores once appropriated by the SICOM, IDBI and IFCI reduced the liability of BIPL to this extent towards interest. BIPL or management of BIPL, therefore, gets advantage of the said appropriation from the date the amount was appropriated till repayment is made. The rate of interest charged by the financial institutions, it is stated is about 18%. BIPL or management of BIPL, gets benefit/advantage of this

C.P.No.204/2003 Page 30 deposit/appropriation by the financial institutions the extent of Rs.8 Crores. At the same time CBL/CBIPL has used and utilized the plant and equipment in the factory and has used the property during the period from 3rd March, 2005 till 15th September, 2008. CBL/CBPIL has used the plant and equipment, which has depreciated and come down in value. ITCOT has stated that plant/equipment at Sri Lanka is old but in good condition. They must account for and pay and this aspect has to be kept in mind while deciding the question of rate of interest. These factors cannot be ignored. Rate of rent/mesne profits with reference/in ratio to capital value of a property in India is low. Rate of annual return in terms of mesne profit/rent is normally less than 5% of the capital market value. CBL had taken over the factory for manufacturing and sale of biscuits. A business like this has a gestation period and only after sometime it starts giving returns. As noticed above, the possession of the property remained with CBL for a period of three and a half years from March, 2005 till they stopped manufacturing activities on 15th September, 2008. The reason given by CBL/CBIPL why they had to stop manufacturing is that they were not able to get and procure funds for running the factory. The report of Vaish and Associates, Chartered Accountants shows that funds were transferred to CBL/CBIPL in India for startup, operation, maintenance, running costs, watch and ward expenses etc. The property was dead capital investment for CBL from 13the August, 2004 till 3rd March, 2005, when possession was given and then again from 15th September, 2008 when the operations were shut down. Thus, out of the period of more than six years, between 13th August, 2004 till today, the factory has been in operation for three years and six

C.P.No.204/2003 Page 31 months (except equipment/plant in Sri Lanka).

44. Keeping in view all these aspects in mind and balancing out equities, I feel that CBL should be given interest @ 5% on the entire Rs. 12.5 Crores from the date of payment till 10th January, 2011. SICOM had initially deposited the entire sale consideration into an FDR and even now Rs. 4.5 Crores is lying deposited in FDRs. BIPL or management of BIPL will get advantage of the amount of Rs. 8 Crores, which was appropriated by SICOM, IDBI and IFCI from the date of appropriation. BIPL or management of BIPL will not be liable to pay interest to the said financial institutions @ 18% during the time when this amount was appropriated. Of course after the financial institutions make payment of Rs. 8 Crores, the BIPL or management of BIPL will be liable to pay the rate of interest chargeable as per law to the financial institutions. This means that the BIPL or management of BIPL will get benefit to the extent of nearly 13% on Rs. 8 Crores, which has been appropriated by the financial institutions. (18% less 5% interest awarded to CBL. BIPL or its Management will be liable to pay 5% interest to the financial institutions on Rs. 8 Crores.) Difference between the interest earned on FDRs of Rs. 12.5 Crores and Rs. 4.5 Crores and 5% interest now awarded to CBL will also enure to the benefit of BIPL/Management of BIPL. Thus the effective rate of return towards mesne profit/depreciation for BIPL/Management of BIPL will be about 9% on Rs. 12.50 crores/bid value. It is made clear that CBL will not be entitled to any further charges/expenses on account of maintenance, keeping up etc. or for re-starting the factory and making it operational. The interest figure will include all expenses payable to them for upkeep, maintenance, watch and ward etc.

C.P.No.204/2003 Page 32

45. Rs. 8.5 Crores will be refunded by the financial institutions on or before 10th January, 2011 to CBL. The CBL will re-install the Lines 5 and 6 and other equipments, which were taken away to Sri Lanka, within a period of four months. The interest amount and Rs.4 Crores will be paid to CBL after Lines 5 and 6 and other equipments are re-installed and the expert appointed by the Court has certified that the Lines 5 and 6 and other equipments, are in operational condition/state. Till then the CBL will continue to act as a Receiver and maintain the plant and machinery and keep them in operational state but not use them.

46. It is clarified that CBL will continue to be a Receiver till further orders and the possession of the plant and equipment as well as factory belonging to BIPL is with the Court and not with CBL. CBL/CBIPL will be liable to pay the statutory dues and liabilities for the period till the factory was in operation i.e. till 15th September, 2008 and workmen‟s due till they vacate. Payment of Rs. 4 crores and the interest will be released only after the Court is satisfied that the statutory dues and liabilities and workmen‟s dues have been paid. Rs. 11.20 lakhs on account of missing plant and equipment will be deducted while making payment of Rs. 8.5 crores4 and no interest will be payable for the same.

47. The last question is whether management of BIPL should be allowed to inspect the premises and whether the matter should be adjourned to enable the management of the BIPL to submit a scheme for rehabilitation and payment to the creditors. As far as inspection of the property is concerned, I think the same should be allowed. I reject the opposition by CBL/CBIPL that inspection by management of BIPL would result in infringement of their

Corrected vide order dated 28.1.2011

C.P.No.204/2003 Page 33 intellectual property right as they have installed specialized equipments. It will be open to CBL or CBIPL to remove the said equipment within a period of three weeks from today. CBL/CBIPL will inform the Official Liquidator at least 5 days in advance as to the date on which they want to remove their equipment. Equipment will be removed in the presence of the Official Liquidator or his representatives. It will be open to the Official Liquidator to ask ITCOT or their representative to be present at that time. Immediately after removal of the equipment, management of BIPL will be given notice by CBL/CBIPL to inspect the property. Even if the said equipment is not removed within three weeks, inspection will be permitted and allowed to the management of the BIPL after three weeks.

48. In the present case SICOM took possession of the factory on 18th March, 2003. It has been almost 7 years since then. Order sheet reveals that management of BIPL was given several opportunities to give proposal/scheme or get a higher bidder or purchaser. Management of BIPL has failed to get hold of any bidder or furnish any proposal/scheme, though opportunities were granted. I do not agree with the counsel for the management of the BIPL that there were unable to give any proposal as inspection of the property has not been allowed. This is an excuse, which cannot be accepted. Management of the BIPL has not furnished name or details of any proposal given to them by a third party. Management of BIPL themselves are not in a position to propound a scheme for payment of the dues and for re-starting the business. It is noticed that in 2004, the same management as per their own case, had got in touch with CBL when the factory was lying closed and sealed. The fact that CBL was not permitted

C.P.No.204/2003 Page 34 inspection of the factory, did not debar or prevent management of BIPL from negotiating with the CBL.

49. The Official Liquidator was appointed as a provisional liquidator on 6th April, 2004. At this stage, we have to keep in mind interest of the creditors and workmen. Interest of the promoters or members/management of the company is relevant but not as important as interest of creditors and workmen. We have to also keep in mind the fact that 7 years have lapsed and unless immediate steps are taken, the value of the plant and equipments will depreciate. Supreme Court in the judgment dated 16th May, 2008 has quoted the following passage from Farar‟s Company Law:-

"74. ......We may notice the observations made by the learned author:

"As we have seen, Directors do not owe duties to shareholders as such. Neither do they owe duties to the company‟s creditors. The orthodox position being as stated by Dillon, L.J.

in Multinational Gas and Petrochemical Co. v. Multinational Gas & Petrochemical Services Ltd. Directors owe fiduciary duties to the company though not to the creditors, present or future, or individual shareholders.

Winkworth v. Edward Baron Development Co. Ltd., a House of Lords decision, might suggest that there has been a change to that position with Lord Templeman stating:

„... a company ownes a duty to its creditors, present and future. The company owes a duty to its creditors to keep its property inviolate and available for repayment of its debts.

C.P.No.204/2003 Page 35 The conscience of the company, as well as its management, is confided to its Directors. A duty is owed by the Directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the Directors themselves to the prejudice of the creditors.‟ "

The learned author furthermore observed:

"Support here for this approach can be found in West Mercia Safetywear Ltd. v. Dodd where Dillon, L.J. approved the following statement of the position by the New South Wales Court of Appeal in Kinsela v. Russell Kinsela Pty Ltd.:

„In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of Directors arise. If as a general body, they authorise or ratify a particular action of the Director, there can be no challenge to the validity of what the Directors have done. But where a company is insolvent, the interests of the creditors intrude. They become prospectively entitled through the mechanism of liquidation, to displace the power of the shareholders and Directors to deal with the company‟s assets. It is in a practical sense their assets and not the shareholders‟ assets that through the medium of the company are under the management of the Directors pending either liquidation, return to solvency, or the

C.P.No.204/2003 Page 36 imposition of some alternative administration.‟ "

50. At the same time, issue of fresh sale proclamation on the basis of the valuation report submitted by ITCOT is likely to take time. It will be open to the management of BIPL5 to negotiate and submit a proposal/scheme from a third party in the integram. I am not inclined to adjourn the matter to enable the management of BIPL to find a third party and file an application propounding a scheme as this would cause delay. It will be open to the management or any third party associated with them to participate in the auction/bidding process. The primary concern of the company court at this stage as stated above is twofold; (i) to secure and ensure payment to the creditors on best possible terms and (ii) to get a fair deal for the workers both with regard to the past arrears and future employment. These aspects cannot be left to the management of the BIPL6 alone. Attempts have to be made to get a best possible deal by tapping all sources and parties, who are interested.

C.A.Nos.900/2008 filed by CBL, 1767/2010, filed by the management of the BIPL7 and 495/2010, filed by the Official Liquidator are accordingly disposed of.

SANJIV KHANNA, J.

DECEMBER 20, 2010 VKR/NA /P/VJ/PR

Corrected vide order dated 28.1.2011

Corrected vide order dated 28.1.2011

Corrected vide order dated 28.1.2011

C.P.No.204/2003 Page 37