Case: Allahabad Bank Vs. Bengal Paper Mills Co. Ltd

The relevant facts need to be set out to appreciate what is involved in these appeals from the judgment and order of a Division Bench of the High Court at Calcutta.2. In June, 1985 a winding petition was filed against the first respondent company, now in liquidation ("the said company"). On 30th September, 1986 a mortgage suit (Title Suit No. 143 of 1986) was filed by the Punjab National Bank and the Bank of Baroda against the said company for recovery of the sum of Rs. 1,94,24,886.37 before the Subordinate Judge, Burdwan. On the same day a hypothecation suit (Suit No. 736 of 1986) was filed by the United Bank of India, the Punjab National Bank and American Express against the said company for recovery of the sums of Rs. 20,46,010.31 and 17,87,796.49 in the Calcutta High Court. On the same day, a hypothecation suit (Suit No. 737 of 1986) was filed by the Allahabad Bank against the said company for recovery of the sums of Rs. 29,18,360,65 and Rs. 11,64,370.00 in the Calcutta High Court. Again on the same day, the Punjab National Bank and American Express filed a hypothecation suit (Suit No. 738 of 1986) against the said company for the recovery of the sums of Rs. 5,30,38,922.28 and Rs. 2,14,548.00 in the Calcutta High Court. On 3rd December, 1986 the Calcutta High Court passed an interim order in Suit No. 738 of 1986 appointing joint receivers. From time to time, further orders were passed in the same suit for inventory and sale of the hypothecated goods.3. On 24th April, 1987, in the winding up petition aforementioned, the said company was ordered to be wound up and the Official Liquidator was directed to take possession of the said companys assets and properties. On 15th May, 1987 an application was moved under Section 446 of the Companies Act by the Punjab National Bank and American Express for leave to carry on with their suits; also for transfer of the mortgage suit filed in the Burdwan court to the Calcutta High Court. On 15th May, 1987 the application was allowed and the suit transferred from the Burdwan court to the Calcutta High Court was numbered (T.C. Suit No. 5 of 1987). In June, 1987 the Allahabad Bank made an application under Section 446 of the Companies Act for leave to carry on with its suit and on 26th June, 1987 such leave was granted. On 25th November, 1987, the Official Liquidator wrote to the joint receivers in respect of the possession of the assets and records of the said company held by them. On 30th November, 1987 the joint receivers replied to the Official Liquidator; therein they stated that the hypothecated goods could not be sold due to lack of offers.4. On 11/12th January, 1988 the Punjab National Bank made an application to the Calcutta High Court in the transferred suit praying that the Official Liquidator should be appointed receiver in place and stead of the joint receivers in Suit No. 738 of 1986 with directions to take possession, make inventory and sell the securities both in the transferred suit as well as in Suit No. 738 of 1986. The application was allowed on 12th January, 1988. On 28th April, 1988 the joint receivers wrote to the Official Liquidator confirming that they had handed over possession of the securities they held to him.5. On 25th November, 1988 the High Court appointed a valuer of the said companys assets and properties. On 29th June, 1989 an order was passed in the winding up petition giving to the Official Liquidator leave to sell the assets and properties of the said company "by public auction by inviting sealed tenders upon advertisements once in the `The Statesman once in `Jugantore and once in `Biswamitra as per usual terms and conditions of sale". The sale was to be held on 15th September, 1989 at 2.00 p.m. in Court. The Official Liquidator was directed to issue the advertisements at least three weeks prior to the sale and to give notice to the valuer asking him to be present on the date of the sale. The Official Liquidator, the secured creditors and the valuer were required to act on a signed copy of the minutes of the order.On 14th August, 1989 the sale notice was issued. It stated that the sale was of the entire moveable and immovable assets of the said company lying in its factory premises at Ballavpur, Ranigunge, District Burdhaman and moveable assets lying in its registered office at Calcutta. The sale was to be on "as is where is and whatever there is" basis. The terms and conditions of sale were stated to be available at the office of the Official Liquidator.6. Clause (1) of the terms and conditions of sale stated that the sale would be as per inventory on `as is where is and whatever there is basis and subject to the confirmation by the Court. Clause (3) stated that the offer made by intending purchasers should be contained in a sealed cover enclosing a bank draft or pay order equivalent to 10% of the offer. Clause (5) stated that `the successful purchaser will have to pay the balance purchase price to the Official Liquidator within a week from the date of sale by the Court either by bank draft or pay order. It is made clear that this would not prevent the Court from fixing any other date for such deposit or extending such time has expired on such terms and conditions as the court may deem fit. Clause (9) stated that the sale `would be subject to such modifications/alterations of terms and conditions of sale as the Honble Court deems fit and proper and the decision of the High Court shall be final.7. In pursuance of the advertisement for sale the second respondent made an offer on 14th September, 1989. It is this offer which was accepted and, therefore, its terms are relevant. It stated that the second respondent was interested in the purchase of the entire moveable and immovable assets of the said company with a view to reviving it as an on going paper mill. The second respondent had entered into discussions with existing labour unions and the State Government and had entered into a memorandum of understanding with the labour unions for reopening the paper mill to run it, taking workmen from existing employees. The offer was for the sum of Rs. 1,50,000/- and bank drafts for the aggregate amount of Rs. 15 lakhs were enclosed. The offer stated, "If our bid is successful we shall complete the payment of the 25% of the sale value within a fortnight and take the possession. For the balance we shall pray to the Honble High Court, Calcutta to allow us the instalments facility to pay off (balance) amount for which we shall however arrange a bank guarantee to cover the entire sum. We would, therefore, request for a clear order of the Honble High Court transferring the assets of the said company in the usual manner.....".8. On 15th September, 1989, the judgment and order of sale which was challenged before the Division Bench was passed. The learned Single Judge recorded that the Official Liquidator had received, pursuant to the advertisements, three offers, one of which was by the second respondent for Rs. 1,50,00,000/-, the other was only with regard to the sale of furniture and the third was for Rs. 1,10,00,000/- for the sale of the assets. The sale of assets had taken place in the open court though there were no further bidders at the auction. The offer of Rs. 1,50,00,000/- had been subsequently raised to Rs. 2 crores by the second respondent. The Advocate General for the State of West Bengal, appearing for the second respondent, had submitted that the concerned unit would not be disposed off as scrap but would be used as a going concern. An agreement had already been reached with the union affiliated to the CITU containing detailed terms and conditions as to the working of the mill. The Advocate General had produced a letter from the Bengal Paper Mill Mazdoor Congress affiliated to INTUC wherein an unequivocal acceptance of the terms had been recorded. The Advocate General had assured the Court that 1700 people would be re-employed within a span of two weeks and to those who could not be taken in necessary compensation would be paid, which might exceed Rs. 50 lakhs. The learned Single Judge recorded that "the learned advocate appearing for the secured creditors has raised no objection excepting however that the prayer for direction on the Official Liquidator for disbursement of some money to the secured creditors as a long period of time has already elapsed in the meanwhile." The learned Single Judge then passed the following orderthe above and considering the factum of re-employment of 1700 people of the Mill which has been under closure for the last 7-8 years, the sale in favour of M/s. Eastern Minerals & Trading Agency (Paper Division) ought to be confirmed at Rs. 2 crores. It is ordered thus accordingly, consequently directions follow.It is recorded that a total sum of Rs. 20 lakhs has been made over to the Official Liquidator in court today and the Official Liquidator is, therefore, thus directed to make over possession of the Mill premises to the purchaser by tomorrow.The purchaser is directed to furnish further bank guarantee for a further sum of Rs. 30 lakhs by 26th September 1989, which will be kept in deposit with the Official Liquidator. In the event, however, the purchaser fails to furnish such bank guarantee within the time stipulated above, the Official Liquidator is directed to bring it to the notice of this Court on 27th September, 1989 for further orders.The purchaser is further directed to pay a sum of Rs. 30 lakhs to the Official Liquidator as against the purchase price within four weeks from date. Balance 75% of the purchase price, that is, Rs. 1.50 crores will be paid by the purchaser by quarterly instalments of Rs. 15 lakhs each. The first quarter, however, commencing from 1st January, 1990. In default of payment of a sum of Rs. 30 lakhs or any one of the quarterly instalments as above, the Official Liquidator is also directed to apply before this Court for necessary directions.The secured creditors protested against the statement in the judgment and order that referred to them and the learned Single Judge, on 27th September, 1989, directed that "the order dated 15th September 1989 is modified to the extent that the 9th line of the 6th paragraph of the said order, after the words "all the secured creditors" should be read as "has made a prayer". As so modified, the relevant part of the sentence reads : "the learned advocate appearing for all the secured creditors has made a prayer for direction on the Official Liquidator for disbursement of some monies to the secured creditors....."10. Appeals were filed by the banks against the orders dated 15th September, 1989 and 27th September, 1989. The appeals were disposed off by the order that is under challenge.

Reasoning:
22. We think that the Division Bench lost sight of what is stated above. It could not have realistically expected the ordinary unsecured creditors of the said company to have filed appeals on the ground of inadequacy of the sale price. It could not have turned a blind eye to the many defects that it itself noted in the order of sale merely because the banks had moved the appeals after five months; nor was there any justification for taking into consideration the expenditure that had been incurred by the second respondent subsequent to its possession of the assets and properties. In the first place, the Division Bench should have noted that the learned Single Judge had with unseemly haste ordered possession thereof to be handed over to the second respondent on the very next day. In the second place, the appeals had been filed within the period of limitation. Expenditure incurred during this period could not render the appeals, in effect, infructuous. The same would apply to expenditure incurred subsequent to the filing of the appeals and until the time that they were heard. The second respondent knew that the appeals were pending and that they could end in the order of sale being set aside. Such expenditure as it incurred with this knowledge was at its risk. In the third place, and most important, the interests of the creditors of the company, particularly the unsecured creditors, overweighed such equities, if any, as might have been considered to be in favour of the second respondent. It was, in our view, the obligation of the Division Bench to have struck down the order of sale, having regard to what it found wrong with it.