* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ LPA No.2057/2006 & CM No.14710/2006
WHOLESOME BITES P. LTD. ..... Appellant
Through: Mr.P.V. Kapur, Sr. Adv.
with Mr. Abhinit Das &
Ms. Chetna Gulati,
Advs.
versus
STATE INDUSTRIAL CORPN. OF
MAHARASHTRA LTD. ....Respondent
Through: Mr. Ashwani Mata, Sr.
Adv. with Mr. Chinmay
Pradip Sharma, Adv.
% Date of Hearing : August 11, 2009
Date of Decision : September 10, 2009
CORAM:
* HON'BLE MR. JUSTICE VIKRAMAJIT SEN
HON'BLE MR. JUSTICE V.K. JAIN
1. Whether reporters of local papers may be
allowed to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported
in the Digest?
VIKRAMAJIT SEN, J.
1. By this Appeal the Order dated 22.8.2006 passed by the
learned Writ Judge has been assailed before us. The Court had
rejected the Appellant‟s challenge to the sale by auction of the
assets of the Appellant Company. There are two elements
which come into play wherever the legitimacy of a Court auction
is under scrutiny. On the one hand the auction must be
expeditiously executed. The reality is that more often than not
LPA 2057/2006 Page 1 of 14
parties within the trade are not interested in making a bid
because of the endemic delays and obstacles that are
encountered in jural sales. This runs counter to the expectation
that the Company Judge should endeavour to revive the
Company whose fortunes are flagging; that winding-up
proceedings should not be fatal to the existence of the
Company. If that is so, and the troubles of the Company facing
liquidation are a result of inept management, it would be in the
general interests, and especially of the work force, to locate a
party desirous of rejuvenating and continuing the business of
the wounded industrial unit. Experience, however, indicates that
persons participating in Company Court auctions are more often
than not „scrap dealers‟, whose objective is to dismember the
unit and sell its sundry assets for profit. This trend needs to be
reversed, and this is possible only if the Court ensures a quick
transfer of the Company. Very seldom do the promoters of a sick
company have such intentions; on the contrary their efforts are
to protract proceedings in order to retain control of the assets.
Having said this much, it is equally imperative that the
Company Court should be alive to the possibility of the assets
being sold at unreal prices because of machinations of some
elements. Financial institutions who are creditors of legal
entities (incorporated companies) whose liability is limited,
LPA 2057/2006 Page 2 of 14
adequately cover their possible losses by insisting on personal
guarantees of the Promoters/Directors. Therefore, Courts have
had to walk the tightrope adeptly and cautiously. Precedents on
the subject bear witness to jural efforts to bring about a balance
between these competing interests.
2. The facts of the case, in brief, are that the Appellant had
been sanctioned by way of a term loan a total sum of Rupees
365 lacs from the State Industrial Corporation of Maharashtra
Limited [„SIDCOM‟ for brevity], out of which Rupees 350 lacs
was borrowed. The Appellant was unable to liquidate the loan
and the Respondent put the assets of the Company to auction,
exercising powers under Section 29 of the State Financial
Corporation Act, 1951 („SFC Act‟ for short). This sale by the
Respondent had been assailed before the Writ Court on the
grounds that the Respondent had firstly not fixed a Reserve
Price for the sale; secondly, it had not carried out wide and
adequate publicity; thirdly, its advertisement was defective in
that it was too small with inadequate coverage and lastly that
details of the assets had not been mentioned along with the
Reserve Price in the advertisement.
3. On behalf of the Appellant reliance has been placed by
Mr. P.V. Kapur, learned Senior Counsel, on Union Bank of India
-vs- Official Liquidator, 2000(5) SCC 274. The penultimate
LPA 2057/2006 Page 3 of 14
paragraph contains a direction to the Official Liquidator to
resell the property after obtaining a fresh Valuation Report from
reliable experts, copy whereof was to be given to the secured
creditors. The Supreme Court further directed that the Notice
should be duly advertised in newspapers circulating in
commercial cities, including Delhi, Mumbai and Chennai; and
that the Notice should contain the Reserve Price. These
directions were passed in the context of Section 529 of the
Companies Act, 1956. It is of significance to note that the SFC
Act had not been invoked and, therefore, Section 29 thereof did
not feature in the considerations. Section 29 empowers a
financial corporation, such as the Respondent, to take-over the
management or possession or both of indebted and defaulting
industrial concerns and transfer by way of lease or sale the
property pledged, mortgaged, hypothecated or assigned to the
financial corporation. The directions of their Lordships
mentioned above will, therefore, not be applicable in their full
rigour.
4. Reliance has next been placed on Divya Manufacturing
Company(P) Ltd. -vs- Union Bank of India, (2000) 6 SCC 69
which was a case under the Companies Act and not under the
SFC Act. The Apex Court ordered a fresh sale in the “peculiar
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circumstances of the case” because the auction that had been
held was confined to new bidders only.
5. Allahabad Bank -vs- Bengal Paper Mills Co. Ltd., (1999) 4
SCC 383 has been relied upon for the reason that the sale was
held to be improper since the Reserve Price for the sale had not
been fixed and that the sale had been advertised only in three
newspapers, two of which were local newspapers. What should
not be lost sight of is the fact that the Allahabad Bank was the
creditor and had not been privy to the auction. Furthermore, the
offer of the highest bidder was in variance with the terms and
conditions of the sale. The other important distinction is that the
case was decided in the context of the Companies Act. We have,
however, to consider and apply the provisions of the SFC Act. In
the case in hand, the Respondent/Creditor is in favour of
sustaining the sale, even though the sale proceeds are not
commensurate with the outstandings to be received by the
Respondent from the Appellant. Therefore, the fact that the
Valuation Report was seen as suspect would in that case not be
of any avail to the Appellant.
6. In D.S. Chohan -vs- State Bank of Patiala, (1997) 10 SCC
65 in its Order the Supreme Court had observed that it is
mandatory in an auction of mortgaged property in execution of a
decree under Order XXI Rule 72A(2) of the Code of Civil
LPA 2057/2006 Page 5 of 14
Procedure, 1908 („CPC‟ for short) that a Reserve Price should
have been fixed. Hence, the sale of immovable property was
ordered to be started de novo. Section 29 of the SFC Act was
not attracted and hence was not considered. We would,
however, like to highlight that the provisions of Rule 72A are
intended to have very salutary effect. What it ordains is that the
mortgagee of immovable property can participate in an auction
only with the leave of the Court. It preserves protection to the
interests of the mortgagor inasmuch as it prescribes the
conditions which must be complied with before the Court can
grant permission. These are that the Court must fix a Reserve
Price as regards the mortgagee which will not be less than the
amount then due for principal, interest and the costs in respect
of the mortgage. At the threshold of this Judgment our
endeavour had been to focus on the fact that liability is not
limited even in respect of dues of incorporated companies
because personal guarantees of the Promoters/Directors are
asked for in the normal course of loan transactions.
Theoretically, this enables the creditors of a company to be
nonchalant in recovering the best price for sale of the assets,
since rights to proceed under the personal guarantees remain
unaffected. Rule 72A(2) removes this possible mischief since it
LPA 2057/2006 Page 6 of 14
provides that the Reserve Price will not be less than the total
dues.
7. Rani Aloka Dudhoria -vs- Goutam Dudhoria, JT 2009(3) SC
629 contains comments similar to the precedents analysed
above but in the context of the Partition Act.
8. Mr. P.V. Kapur, learned Senior Counsel appearing for the
Appellant, has also laid great store on the decision in
Bakemans Industries Pvt. Ltd. -vs- New Cawnpore Flour Mills,
AIR 2008 SC 2699, and, in particular, to the following
paragraphs:-
64. 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 SICOM be realized. 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 aLPA 2057/2006 Page 7 of 14
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 prepare a scheme for its
restructuring.
65. 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.
What should not be ignored, however, are the observations that
the proceedings under Section 29 of the SFC Act prevail over
winding up proceedings before a Company Judge and that
proceedings in Bakemans were under the Companies Act and
not in terms of Section 29 of the SFC Act. It cannot be over-
emphasised that in the case in hand the Respondent/State
Financial Corporation has exercised powers under Section 29 of
the SFC Act, unlike in Bakemans where the Respondent
Company had waived its rights and had submitted to the
LPA 2057/2006 Page 8 of 14
jurisdiction of the Company Judge. The Court was of the view
that the auction sale had been held in an undue haste. It
disapproved the conduct on the part of BAKEMANS in obtaining
an Award from the Conciliation Tribunal. Furthermore, their
Lordships noted that all creditors had not been duly notified. It
was in that factual matrix that the Court had ordered a fresh
auction.
9. In Gajraj Jain -vs- State of Bihar, (2004) 7 SCC 151 the
Apex Court opined that the first charge-holder must obtain the
best possible price, which means fair market value; it should not
be seen to protect its own interests at the expense of the
subsequent charge-holders; wherever the debtor seeks to
enforce its rights under Section 29 of the SFC Act it should
ensure that the sale is sufficient, not only for meeting its own
dues alone, but also for distributing the surplus sale proceeds
amongst other creditors. The State Corporation concerned had
accepted down-payment of its own dues and for the
outstandings of the Central Bank had procured a promise to pay
in the future, which their Lordships found not to be sufficient. In
addition, it had been observed that in the absence of a Valuation
Report and a Reserve Price an auction sale by invoking Section
29 of the SFC Act was reduced to a mere pretence.
Furthermore, the State Corporations were obliged to call for
LPA 2057/2006 Page 9 of 14
matching offers from the Directors/Guarantors which has been
done in the present case but has failed to elicit any response.
The decision in S.J.S. Business Enterprises (P) Ltd. -vs- State of
Bihar, (2004) 7 SCC 166 as well as Haryana Financial
Corporation -vs- Jagdamba Oil Mills, (2002) 3 SCC 496 and
Chairman and Managing Director, SIPCOT -vs- Contromix (P)
Ltd., (1995) 4 SCC 595 were reiterated and applied by the
Court. The decision was vitally influenced by Express
Newspapers(P) Ltd. -vs- Union of India, (1986) 1 SCC 133,
inasmuch as their Lordships were of the view that the
concerned Financial Corporation had misused its authority and
power in breach of law by taking into account extraneous
matters and ignoring relevant matters.
10. Rule 8 of the Security Interest (Enforcement) Rules, 2002
(„SIE Rules‟ for short) can be seen as attempting to achieve a
purpose similar to Order XXI Rule 74A of the CPC and
accordingly militates against the arguments advanced by
learned Senior Counsel for the Respondent. Where possession of
a secured asset has been taken-over after issuing requisite
notice, an immediate responsibility is cast on the custodian to
preserve and protect the secured assets and insure them till
they are sold or otherwise disposed of. Sub-Rule(5) obliges the
authorised officer to obtain a valuation of the property from an
LPA 2057/2006 Page 10 of 14
approved valuer and in consultation with the secured creditor to
fix the Reserve Price of the property. Pursuant thereto, the sale
can be effected by four methods. Firstly, by obtaining quotations
from persons dealing with similar secured assets or otherwise
interested in buying such assets; secondly by inviting tenders
from the public; thirdly by holding public auctions and fourthly
and lastly by private treaty. At all stages notice to the borrower
is an essential and unwavering requirement. The proviso to sub-
rule(6) envisages that in the event of the sale of secured assets
through the tender process or by holding public auctions a
public notice in two leading newspapers, of which one should be
in vernacular language, having sufficient circulation in the
locality must be carried out. The Notice must include, not only
the description of the immovable property and details of the
secured debt, but also the Reserve Price, below which the
property may not be sold. The essentials spelt-out in Gajraj Jain
have, for good reasons, been written into the SIE Rules.
11. Mr. Mata, learned Senior Counsel for the Respondent, has
submitted that the amounts due to the Respondent as on
7.2.2003 were to the tune of Rupees 4,86,82,159/- together with
interest thereon at 17 per cent per annum with effect from
1.12.2002 which aggregates approximately Rupees 6.5 crores.
The Appellant had been taken-over on 20.6.2006 and the date of
LPA 2057/2006 Page 11 of 14
auction had been fixed for 3.8.2006. Eleven Bids were rejected
and out of the remaining six legally valid Bids the highest had
been accepted. This Bid was, in fact, higher than the price
projected in the Valuation Reports. On 10.8.2006 the Appellant
was granted an opportunity to bring a better offer. A Valuation
Report had been duly obtained which assessed the valuation of
the plot at Rupees 289 lacs. In stark contrast thereto, the
Appellant had assessed the realisable value of the land at
Rupees 85 lacs, building at Rupees 65.71 lacs, plant and
machinery at Rupees 47.65 lacs and miscellaneous fixed assets
at Rupees 0.15 lacs aggregating only Rupees 198.51 lacs.
Mr. Mata, learned Senior Counsel for the Respondent,
accordingly argues that the auction sale at Rupees 3,65,30,000/-
cannot possibly be seen as an inadequate consideration. It is
further contended by Mr. Mata that the requirement of fixation
of a Reserve Price is envisaged under Order XXI Rule 72A(2) of
the CPC and under the Companies Act and not under Section 29
of the SFC Act, which argument is not correct in view of Rule 8
of the SIE Rules.
12. Furthermore, there appears to be no plausible answer to
the dicta and the exposition of law laid down in Gajraj Jain. The
argument of Mr. Mata that wherever the Reserve Price is fixed
it has the effect of depressing prices is attractive but would not
LPA 2057/2006 Page 12 of 14
be sustainable on the basis of the empirical experience. In these
circumstances, it would be difficult to sustain the impugned
Judgment, even though we have no reason to suspect fairness
and genuineness of the auction, as highlighted by Mr. Mata.
13. There is, however, another dimension to the litigation. The
Writ Petition came to be filed by the Appellant herein on
21.8.2006 and was dismissed on 22.8.2006. The Appeal was
filed on 3.11.2006 with an application for condonation of delay
of 27 days. In our view, there is a fatal omission which has
occurred on the part of Petitioner/Respondent inasmuch as the
auction purchaser has not been impleaded as a party. The Writ
Petition had been filed one day prior to the confirmation of the
offer as a sequel of which, uncontrovertedly, possession has
been handed over to the purchaser. Even if we were to ignore
the non-impleadment of the purchaser before the Writ Court
because of the dismissal of the Writ in limine, since the
purchaser is a necessary party, steps should have been taken for
its impleadment before us. We cannot be persuaded to set aside
an auction which has been fully implemented, in the absence of
the most vitally effected party, namely, the purchaser who has
been put in possession. Added to this is our satisfaction that
efforts to obtain the best price, which may closely correspond to
the prevailing market price, had been carried out. In this
LPA 2057/2006 Page 13 of 14
regard, we cannot be oblivious of the fact that the Respondent
had notified the Appellant of the highest offer in order to
give them an opportunity of presenting a yet higher offer.
Mr. Kapur contends that the Supreme Court has enunciated that
the Promoters/Directors of the debtor company are not
obligated to locate a higher offer, which runs counter to the
opinion of the Supreme Court in Gajraj Jain. What we have
before us, therefore, is the punctilious failure to comply with the
procedural safeguards of the law on the one hand, and the
setting aside of a sale behind the back of the successful bidder
who is already in possession on the other. We are unable to
persuade ourselves that the former outweighs the latter. These
contentions, we find, are relevant to any Court which is
exercising extraordinary powers contained in Article 226 of the
Constitution of India.
14. It is in these circumstances that we dismiss the Appeal, as
well as the Application, leaving the parties to bear their
respective costs.
( VIKRAMAJIT SEN )
JUDGE
September 10, 2009 ( V.K. JAIN )
tp JUDGE
LPA 2057/2006 Page 14 of 14