Case: Gajraj Jain Vs. State Of Bihar

In 1982, a company by the name M/s. Katihar Flour Mills (P) Ltd. was incorporated to take over the assets and business of a partnership firm M/s. Katihar Flour Mills, a business conducted by Jeloka group. The said company was promoted by Gopi Krishna Jeloka (since deceased), Binod Jeloka and Pradeep Jeloka (since deceased). The company is engaged in the business of manufacturing, processing, buying and selling of all kinds of grains and wheat products. The flourmill is the main asset of the company. It is located in Katihar, Bihar. On 16.5.1988, a term loan of Rs.90 lacs was taken by the said company from BICICO, a State Financial Corporation within the meaning of the State Financial Corporation Act, 1951 (hereinafter referred to as the 1951 Act) and a charge was registered under the Companies Act, 1956. At this stage, it is important to mention that Central Bank of India had advanced working capital of Rs.1.40 crores to the company and therefore, had a second charge on the plant and machinery of the company. On 20.10.1093, an agreement was approved by the share-holder of the company in terms of which three directors belonging to Jeloka group resigned and three nominees of the Jain group were inducted. Under the said agreement, 50% of the paid up capital was transferred to Jain group, which deployed Rs.1.24 crores in the company. Accordingly, the appellant became a share-holder of the company. In January, 2001, Central Bank of India instituted case No. 2 of 2001 against the company and its directors for recovery of its dues amounting to Rs.1.47 crores and for enforcement of security. On 2.2.2002, BICICO - respondent no.2 gave notice under sections 29 and 30 of the 1951 Act for recovery of its dues of Rs.28.85 lacs. On 22.2.2002, respondent no.2 issued a sale notice for auction of the flour-mill at Katihar in Bihar. Under the said notice, the last date for submitting tenders was 21.3.2002. The tenders were to be opened on 22.3.2002. On 17.3.2002, the Jeloka Group wrote a letter to respondent no.2 that the company has approached a financier M/s. Stichworth Exports Pvt. Ltd. who was willing to pay the dues of respondent no.2 against transfer of the assets of the company in their favour. By a take over notice-dated 18.3.2002, respondent no.2 took possession of the assets of the company. The possession receipt was signed by respondent no.3. On 19.3.2002, M/s. Stichworth Exports Pvt. Ltd, respondent no.4, wrote a letter to respondent no.2 offering to acquire the assets of the company for Rs.28.85 lacs plus the dues of Central Bank of India amounting to Rs.1.70 crores. On the same day, respondent no.4 made a down payment of Rs.28.85 lacs and assets were handed over by respondent no.2 to respondent no.4. On 20.3.2002, the appellant herein met the law officer of respondent no.2. Pursuant to the sale notice dated 22.2.2002, the appellant submits his tender on 21.3.2002. He deposits Rs.1 lac as earnest money. On 22.3.2002, he pays Rs.28.85 lacs representing the entire dues of respondent no.2. Despite payment of the full dues by the appellant, respondent no.2 enters into agreement of sale of assets in favour of respondent no.4. Aggrieved, appellant moves the High Court on 21.5.2002 under Article 226 of the Constitution inter alia challenging the validity of the agreement on the ground of collusion between respondents no.2, 3 and 4. On 22.5.2002, respondent no.2 returns the earnest money paid by the appellant alleging that he has withdrawn his tender. The appeal there from was also dismissed on 3.9.2002. Hence, the appellant, representing the Jain group, has come before this Court in appeal by special leave.

Court's reasoning:
. In the present case, it is not in dispute that the assets of the flour mill were charged. The first charge was in favour of the corporation; whereas the second was in favour of Central Bank of India. Under section 29(1), the corporation while enforcing the first charge was required to put the assets charged with the debt to sale and apply the sale proceeds in the manner stated in section 29(4). But before doing so, it is imperative to have the assets proposed to be sold, valued. In breach of sub-sections (1) and (4) of section 29; after putting the assets to sale by public auction, the corporation enters into an agreement for sale of the assets with respondent no.4 without ascertaining the market value and realising the sale proceeds for distribution. The assets are agreed to be sold for Rs.198.85 lacs merely by adding the corporation dues and the claim of the Central Bank of India. Even this sale consideration is not realised in full. The corporation accepts downright payment of Rs.28.85 lacs (its own dues) and the balance of Rs.170) lacs is received by it in the form of a promise to it by respondent no. 4 to pay the dues of Central Bank of India, which is not even a party of the arrangement. According to Law and Practice of Income Tax by Kanga and Palkhiwala (VIIth Edition page 47), a promise to pay the debt at a future date is no realization. In the case of M.C. Chacko vs. The State Bank of Travancore, Trivandrum (1969) 2 SCC 343 ), it has been held by this Court, that a mere undertaking to discharge an obligation or liability of the debtor may at the highest amount to indemnity, however, it is not enough to charge the property/fund with the debt. Further, according to Mulla and Pullock on Contract Act (XII Edition page 106), contracting parties may confer rights or benefits upon a third party in the form of promise to pay but the third party on whom such right or benefit is conferred by the contract cannot sue under it. Lastly, as stated above, a charge cannot be enforced against a bonafide purchaser for value (See: Law of Mortgage by Ghose page 127). In the case of Subbu Chetti vs. Arunachalam Chettiar reported in (AIR 1930 Madras 382), it has been held that when a person transfers property to another and stipulates for payment by the purchaser to a third person, a suit by such person to enforce the stipulation will not lie. In the present case, there is no sale for distribution of sale proceeds in terms of section 29(1). There is no realisation of the property, charged with debt, in terms of sub-sections (1) and (4) of section 29 of the Act. The interest of Central Bank of India and the mortgagor is totally defeated by the impugned arrangement between respondents no. 2 and 4. The words realisation of the property pledged, mortgaged hypothecated presupposes realisation of sale proceeds and application/appropriation thereof to liquidate the dues of the paramount charge-holder and from the surplus payment to person (s) entitled thereto. It is for this reason that the best possible price has got to be tried for under section 29 of the Act. In the circumstances, we hold that the impugned agreement of sale as well as the transfer of assets in favour of respondent no.4 are in breach of section 29(1) and section 29(4) of the 1931 ActIn the present case, it has been urged that absence of valuation report and the reserve bid does not vitiate the sale. We do not find merit in this argument. In the case of M/s. S.J.S. Business Enterprises (P) Ltd. (supra), it has been held that the financial corporation, in the matter of sale under section 29, must act in accordance with the statute and must not act unreasonably. In this case, the corporation fails on both the counts. It has neither complied with the provisions of sub-sections (1) and (4) of section 29, nor has it acted fairly. The test of reasonableness has been laid down in the above judgment in which it is held that reasonableness is to be tested against the dominant consideration to secure the best price. Value or price is fixed by the market. In the case of going concern, one has to value the assets shown in the balance sheet (Valuation of Real Property by S. Datta page 198). In our view, if the object of section 29 of the Act is to obtain the best possible price then the corporation ought to have called for the valuation report. This has not been done. There is no inventory of assets produced before us. The mortgaged assets of the company could be sold on itemized basis or as a whole whichever is found on valuation to be more profitable. No particulars in that regard have been produced before us. If publicity and maximum participation is to be attained then the bidders should know the details of the assets (or itemized value). In the absence of the proper mechanism the auction sale becomes only a pretence. Further, in this case, the corporation advanced Rs.90 lacs to the company. At that time, it must have valued the assets. No such report has been produced. Lastly, in this case, the price of the assets is pegged to the dues of the corporation and the Central Bank of India. The assets are agreed to be sold to respondent no.4 not for the market price but against repayments of dues of the corporation plus a promise to discharge the liability of Central Bank of India. Therefore, the corporation, respondent no.2, has not acted reasonably. It has not taken any steps to secure the best price. In fact it has failed to protect the interest of Central Bank of India, which is having the second charge on the assets transferred to respondent no.4 as well as the mortgagor which would be entitled to the balance of the sale proceeds, if any. If was contended that as the bids were withdrawn, the offer of respondent no.4 was accepted. Even assuming for the sake of argument, that there were no offers except the offer of respondent no.4, it shows that value of the assets was Rs.198.85 lacs (i.e. Rs.28.85 lacs + Rs.170 lacs.). No reason has been given why respondent no.2 did not insist of downright payment of Rs.198.85 lacs15. In addition to the vitiating circumstances enumerated above, we find that under the public notice dated 22.2.2002, tenders were invited. They were to be submitted by 21.3.2002. Under the said notice, the tenders were to be opened on 22.3.2002. The take over of assets in on 18.3.2002. However, on 19.3.2002, the corporation hands over the assets to respondent no.4 against down payment of Rs. 28.85 lacs plus promise to the corporation that the purchaser undertakes to pay the dues of Central Bank of India. A part of the amount of Rs. 28.85 lacs was paid by demand drafts dated 9.3.2002. These circumstances indicate collusion between respondent no.2 corporation, respondent 3 and respondent no.4. The take over of assets is ordered on 18.3.2002 and on 19.3.2002, the assets are handed over to respondent no.4 against down payment of Rs. 28.85 lacs in demand drafts dated 9.3.2002. Under section 29(1) of the Act, the corporation is entitled to sell or lease the assets in order to realise the pledged/hypothecated or mortgaged property. Under what colour of title were the assets handed over to respondent no.4 on 19.3.2002? Was it under sale, lease or repayment of loan? There is no explanation as to how respondent no.4 could have drawn demand drafts in favour of corporation on 9.3.2002 when their offer to purchase was on 17/19.3.2002. It is alleged on behalf of the respondent no.4 that they were given the assets with a specific understanding of return of property if a higher offer was received in the auction. No such understanding is recited in the minutes of the tender committee nor in the recitals in the impugned agreement dated 26.4.2002. We do not find any resolution/minutes of the Board of Directors of the corporation in that regard. In the agreement dated 26.4.2002, it has been recited that Rs. 90 lacs were advanced as loan in 1988 by corporation to the company against equitable mortgage of land and assets. Under section 69 of T.P. Act, equity of redemption existed in favour of the company. A mere agreement for sale of assets cannot extinguish the equity of redemption; it is only on execution of conveyance that the mortgagors right of redemption will be extinguished. (See: T.P .Act by Mulla page 794). In the present case, till today there is no conveyance and, therefore, on 21.3.2002 when appellant herein paid Rs.28.85 lacs to the corporation representing its full dues, there was complete liquidation of the dues of the corporation and yet the corporation did not return the assets to the company and arbitrarily and for extraneous reasons adjusted the said amount to the account of M/s. Aditya Flour Mills. The reason is obvious. The corporation intended to sell the assets only to respondent no.4 for a paltry amount of Rs.28.85 lacs. It has been repeatedly urged before us, on behalf of respondent no.4, that the assets in question were not worth Rs.10 crores as alleged by the appellant. Even if we assume that respondent no.4 is right in its submission, even then, in terms of the offer of respondent no.4, the property was worth Rs.198 lacs. But the corporation handed over the assets and agreed to sell them against down payment of Rs.28.85 lacs. No reason has been given by the corporation as to why it did not insist on the full payment of Rs.198.85 lacs. Be that as it may, the appellant herein cleared that dues of the corporation on 21.3.2002, before opening of tenders on 22.3.2002, and yet the corporation did not return the assets to the company. Even the tender money deposited by the appellant was returned without any demand from the appellant so that it could be argued by the corporation that the appellant had withdrawn from the auction and therefore the offer of respondent no.4 was accepted. In fact, the document at page 186 shows that appellant refused to collect the earnest money and, therefore, the amount was kept by the corporation in a separate account. Lastly, in the case of Narandas Karsondas vs. S.A. Kamtam and Another, reported in (AIR 1977 SC 774 ), it has been held that putting of property to auction does not extinguish the right of redemption. Therefore, on 21.3.2002, the company had a right to redeem the assets. It was submitted that the appellant intended to buy the assets in his own name. We do not find merit in this argument. The record shows that the appellant as the director of the company offered to clear that the dues of the corporation for which he insisted on the return of the title deeds (transfer papers) of M/s. Katihar Flour Mills. In any event, in this case, we are concerned with the conduct of the corporation which was required to act in accordance with section 29 of the 1951 Act and not unreasonably. In this connection, it may further be pointed out that under the public notice inviting tenders, the corporation was obliged to call for matching offers from the directors/promoters/ guarantors. The corporation did not call for such offers as its object was to keep out all counter-offers. Lastly, we are satisfied that the impugned agreement dated 26.4.2002 has been entered into without any consideration in favour of Central Bank of India. In conclusion, we may state that in the present case, respondent no.2 corporation has misused its authority and power in breach of law by taking into account extraneous matters and by ignoring relevant matters which has rendered all its acts ultra-vires. (See: Express Newspapers Pvt. Limited and others vs. Union of India and others, AIR 1986 SC 872 para 118)16. In the circumstances, we set aside the impugned judgment and order of the High Court and grant to the appellant the reliefs claimed by him in the writ petition. We hereby set aside the agreement dated 26.4.2002 and we direct respondent no.2 - corporation to transfer Rs.28.85 lacs, wrongly appropriated to the account of M/s. Aditya Flour Mills, to the account of M/s. Katihar Flour Mills (P) Ltd. Consequent upon such appropriate, the loan taken by the said company shall stand repaid. We further direct the concerned District Judge to restore possession of the assets (handed over by respondent no.2 - corporation to respondent no.4 - company on 19.3.2002) to M/s. Katihar Flour Mills (P) Ltd. In this connection, the District Judge is directed to draw-up an inventory of the assets. In case of shortfall, it would be open to M/s Katihar Flour Mills (P) Ltd. to take such steps as they may be advised. Consequent upon our setting-aside the agreement dated 26.4.2002, we direct the corporation to return the amount paid to it by respondent no.4 on 19.3.2002.