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SC ruling on specific terms, conditions of sale

R.N. Sahai

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 irregular ity or fraud.

Further, there is a specific condition No. 11 in terms and conditions of sale 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. Here, neither the possession of the property nor the sale deed was executed in favour of the appellant. The offer of Rs. 1.30 crores is tota lly 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.

To that effect did the Supreme Court pronounce its judgment upholding the order of the High Court and dismissing the appeal in Divya Manufacturing Co (P) Ltd vs. Union Bank of India (Civil Appeal Nos. 4706 and 4707 of 1998 decided on July 11, 2000). The judgment was delivered by a Division Bench comprising Mr. Justice M.B. Shah and Mr. Justice R.P. Sethi.

In this case, the Division Bench of the Calcutta High Court recalled its own order confirming auction sale of assets and properties of a company in liquidation, namely, Tirupati Woolen Mills Ltd (`Tirupati Mills') at the instance of certain applicants.

The sale which was confirmed in favour of Divya Manufacturing Co (`Divya') for a sum of Rs. 1.3 crores was as a result set aside with a direction that the two concerned respondents Jay and Sharma should compensate `Divya' for the loss suffered by paying Rs. 70,000 each. The Division Bench directed for re-sale of the assets and properties as there were clear indications that the sale price of Rs. 1.3 crores was too low and there were offers of higher price. This order of cancellation of sale and directio n for re-sale were challenged by the interested parties before the Supreme Court.

The two concerned respondents Jay Prestressed Products Ltd and Sharma, at the time of hearing of appeals by the Supreme Court reiterated that they were still prepared to purchase the property in question at the price they had offered before the High Cour t 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 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 th e judges, and finally the offer of the appellant to purchase at Rs. 1.30 crores was accepted, and sale was confirmed.

At that time, Jay had not increased its offer of Rs. 1.25 crores, and Sharma was not even permitted to bid because he had not complied with the requirements mentioned in the advertisement.

The appellant's counsel also contended 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 t he 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 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, the counsel for the respondents submitted that as the price offered by the appella nt is grossly inadequate in comparison to the subsequent offers by respondents the court was justified in setting aside the sale.

The Supreme Court, while deciding the appeals, noted that the sale proceedings in this case had 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 bi dding for taking undue advantage of Court sale.

At the intervention of the 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, `Sharma' was not permitted to bid. Further, despite the fact that the a ppellant `Divya' had withdrawn its earlier offer, the court permitted it to take part in making further offer.

In these set of circumstances, there was no need to confine the bid between three offerors only. The Judges also observed that the order for re-sale 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 conclusion, it was pronounced that 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, partic ularly, the newspapers having circulation in Delhi and in Haryana with a reserved price fixed at Rs. 2 crores.

(By arrangement with Corporate Law Adviser, New Delhi.)