Case: Divya Mfg.Co.(P)Ltd Vs. Union Bank Of India

That is because the Court is the custodian of the interests of the company and its creditors and the sanction of the Court required under the Companies Act has to be exercised with judicial discretion regard being had to the interests of the Company and its creditors and the sanction of the Court required under the Companies Act has to be exercised with judicial discretion regard being had to the interests of the company and its creditors as well. The principle was followed in Rathnaswami Pillai v. Sadapathy Pillai, AIR 1925 Mad. 318 and S. Soundarajan v. M/s Roshan & Co., AIR 1940 Mad. 42 . In A. Subbaraya Mudaliar v. K. Sundararajan, AIR 1951 Mad. 986 , it was pointed out that the condition of confirmation by the Court being a safeguard against the property being sold at an inadequate price, it will be not only proper but necessary that the Court in exercising the discretion which it undoubtedly has of accepting or refusing the highest bid at the auction held in pursuance of its orders, should see that the price fetched at the auction is an adequate price even though there is no suggestion of irregularity or fraud." 13. From the aforesaid observation, it is abundantly clear that the Court is the custodian of the interests of the Company and its creditors. Hence, it is the duty of the Court to see that the price fetched at the auction is an adequate price even though there is no suggestion of irregularity or fraud. As stated above, in the present case, the sale proceedings have a chequered history. The appellant started its offer after having an agreement with the Employees Samity for Rs. 374 lakhs. This was on the face of it under bidding for the taking undue advantage of Court also. At the intervention of the learned Single Judge, the bid was increased to Rs. 85 lakhs. Subsequently, before the Division Bench, the appellant increased it to Rs. 1.30 crores. At that state, respondent No. No. 7, `Sharma was not permitted to bid because it had not complied with the requirements of the advertisement. It is to be sated that on 26th June, 1998, the Division Bench has ordered that offers of Eastern Silk Industries Ltd. and Jay Presteressed Products Ltd. would only be considered on 2nd July, 1998, and confirmation of sale would be made on the basis of the offers made by the two parties. Further, despite the fact that the appellant `Divya had withdrawn its earlier offer, the Court permitted it to take part in making further offer as noted in the order dated 2nd July, 1998. In these set of circumstances, there was no need to confine the bid between three offerors only. 14. In LICA (P) Ltd. (1) v. Official Liquidator and anr. (1996)85 Comp. Cases 788, this Court dealing with a similar question observed thus : "The purpose of an open auction is to get the most remunerative price and it is the duty of the court to keep openness of the auction so that the intending bidders would be free to participate and other 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 an circumstances in each case." The matter was again brought before this Court and in LICA (P) Ltd. (2) v. Official Liquidator & anr., (1996)85 Comp. Cases 792, and the Court held : "Proper control of the proceedings and meaningful intervention by the Court would prevent the formation of a syndicate, underbidding and the resultant sale of property for an inadequate price. The order passed by this Court yielded the result that the property which would have been finalised at Rs. 45 lakhs, fetched Rs. 1.10 crores and in this court a further offer of Rs. 1.25 crores is made. In other words, the property under sale is capable of fetching a higher market price. Under these circumstances, though there is some force in the contention of Sri Ramaswamy that the Court auction may not normally be repeatedly disturbed since this court on the earlier occasion, had limited the auction between the two bidders, the impediment will not stand in the way to direct sale afresh. Even today the parties are prepared to participate in the bid." 15. Further, there is a specific condition No. 11 in terms and conditions of sale as quoted above which empowers the Court to set aside the sale even though it is confirmed for the interests of creditors, contributories and all concerned and/or public interest. In this view of the matter, it cannot be said that the Court became functus officio after the sale was confirmed. As stated above, neither the possession of the property nor the sale deed was executed in favour of the appellant. The offer of Rs. 1.30 crore is totally inadequate in comparison to the offer of Rs. 2 crores and in case where such higher price is offered, it would be in the interest of the company and its creditors to set aside the sale. This may cause some inconvenience or loss to the highest bidder but that cannot be helped in view of the fact that such sales are conducted in Court precincts and not by a business house well versed with the market force and price. Confirmation of the sale by a Court at grossly inadequate price, whether or not it is a consequence of any irregularity or fraud in the conduct of sale, could be set aside on the ground that it was not just and proper exercise of judicial discretion. In such cases, a meaningful intervention by the Court may prevent, to some extent, underbidding at the time of auction through Court. In the present case, the Court has reviewed its exercise of judicial discretion within a shortest time.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]11. In our view, on facts it is apparent that the Division Bench of the High Court has considered all the relevant facts including the fact that a that initial state, the appellant `Divya offered only Rs. 37 lakhs to purchase the properties. That means, the appellant wanted to purchase at a throw away price. Thereafter, at the intervention of the Court, the price was increased to Rs. 1.3 crores by the appellant. This indicates that appellant was keen to purchase the property, however by paying only the bear minimal amount and to take advantage of sale by the liquidator in the hope that if there are o other purchasers, it would purchase the company at a price which is abnormally below the market price. It is also true that on 2nd July 1998, the offer made by the appellant was accepted and it was ordered that sale in its faovur be confirmed, but at the same time, before possession of the property could be handed over, or before the sale deed could be executed in its favour, respondent Nos. 7 and 8 pointed out that the assets and properties could be sold at Rs. 2 crores. For showing their bona fides, they were directed to deposit Rs. 40 lakhs each and also to pay Rs. 70 thousand each as damages to the appellant. Further, the application for setting aside the sale was field within a few days of the order accepting the bid of the appellant. In these set of circumstances, when correct market value of the assets was not property known to the Court and the sale was confirmed at grossly inadequate price, it was open to the Court to set it at naught in the interest of the company, its secured and unsecured creditors and the employees. Appellant is also duly compensated by payment of Rs. 70 thousand each by respondent Nos. 7 and 8.12. The law on this subject isIn the case of Navalkha and Sons (supra), after appellants offer was accepted, a fresh offer from one Gopaldas Darak for higher amount was received by stating that he could not offer in time because he came to know of the sale only 2 days prior to the date of the application and there was possibility of higher bids. Instead of directing a fresh auction or calling for fresh offers, the learned Judge thought it proper to arrange an open bid in the court itself on that very day as between M/s Navalkha and higher offeror Gopaldas Darak. M/s Navalkha thereafter offered higher bid at Rs. 8,82,000 and its bid was accepted and the learned Judge concluded the sale in its favour with a direction to pay the balance amount. Thereafter an application was filed offering Rs. 10 lakhs. A contention was raised that due publicity of the sale of property was not made, but that application was rejected by the Court. Hence, an appeal was filed b the applicant who made an offer of Rs. 10 lakhs and another by one contributory against the order of confirmation. Both appeals were allowed by the Division Bench and the order passed by the learned Judge was set aside with a direction to take fresh steps for sale of the property either by calling sealed tenders or by auction in accordance with law. That order was challenged before this Court by M/s Navalkha. It was contended that there was no justification for the Division Bench to interfere with the order of the learned Single Judge.From the aforesaid observation, it is abundantly clear that the Court is the custodian of the interests of the Company and its creditors. Hence, it is the duty of the Court to see that the price fetched at the auction is an adequate price even though there is no suggestion of irregularity or fraud. As stated above, in the present case, the sale proceedings have a chequered history. The appellant started its offer after having an agreement with the Employees Samity for Rs. 374 lakhs. This was on the face of it under bidding for the taking undue advantage of Court also. At the intervention of the learned Single Judge, the bid was increased to Rs. 85 lakhs. Subsequently, before the Division Bench, the appellant increased it to Rs. 1.30 crores. At that state, respondent No. No. 7, `Sharma was not permitted to bid because it had not complied with the requirements of the advertisement. It is to be sated that on 26th June, 1998, the Division Bench has ordered that offers of Eastern Silk Industries Ltd. and Jay Presteressed Products Ltd. would only be considered on 2nd July, 1998, and confirmation of sale would be made on the basis of the offers made by the two parties. Further, despite the fact that the appellant `Divya had withdrawn its earlier offer, the Court permitted it to take part in making further offer as noted in the order dated 2nd July, 1998. In these set of circumstances, there was no need to confine the bid between three offerors only.Further, there is a specific condition No. 11 in terms and conditions of sale as quoted above which empowers the Court to set aside the sale even though it is confirmed for the interests of creditors, contributories and all concerned and/or public interest. In this view of the matter, it cannot be said that the Court became functus officio after the sale was confirmed. As stated above, neither the possession of the property nor the sale deed was executed in favour of the appellant. The offer of Rs. 1.30 crore is totally inadequate in comparison to the offer of Rs. 2 crores and in case where such higher price is offered, it would be in the interest of the company and its creditors to set aside the sale. This may cause some inconvenience or loss to the highest bidder but that cannot be helped in view of the fact that such sales are conducted in Court precincts and not by a business house well versed with the market force and price. Confirmation of the sale by a Court at grossly inadequate price, whether or not it is a consequence of any irregularity or fraud in the conduct of sale, could be set aside on the ground that it was not just and proper exercise of judicial discretion. In such cases, a meaningful intervention by the Court may prevent, to some extent, underbidding at the time of auction through Court. In the present case, the Court has reviewed its exercise of judicial discretion within a shortest time.