1999 (4) TMI 499 - SC - Companies Law

Winding up - Sale by Official Liquidator - Held that - The appeals are allowed. The judgment and order under appeal is set aside as also the order of sale dated 15-9-1989 in favour of the second respondent. The Official Liquidator shall forthwith recover possession, from whoever is in possession, of the assets and properties covered by the said order of sale. The same shall be resold after a fresh valuation report thereof has been obtained, a reserve bid fixed and due advertisements published. The second respondent shall be repaid the purchase price of ₹ 2 crores by the Official Liquidator subsequent to recovery of possession as aforestated.

Issues Involved:
1. Validity of the sale of the company's assets.
2. Adequacy of the sale price.
3. Conduct of the sale process.
4. Rights and interests of the secured and unsecured creditors.
5. Legal implications of the sale on existing leases and liabilities.
6. Entitlement of the purchaser to recover the sale price and incurred expenditures.

Detailed Analysis:

1. Validity of the Sale of the Company's Assets:
The sale of the assets of the company in liquidation was challenged on the grounds of improper procedure and lack of transparency. The Supreme Court noted that the valuation report was not disclosed to the banks, which deprived them of the opportunity to object to the valuation. The sale was conducted with undue haste and inadequate publicity, raising concerns about whether the best possible price was obtained. The Division Bench of the High Court had also noted these issues but did not set aside the sale, which the Supreme Court found erroneous.

2. Adequacy of the Sale Price:
The valuation report estimated the total value of the assets at Rs. 6,22,16,875, but the sale was confirmed for Rs. 2 crores without proper consideration of this valuation. The Supreme Court emphasized that the High Court must ensure that the best possible price is realized to protect the interests of the creditors. The lack of a reserve price and inadequate advertising suggested that a better price could have been obtained.

3. Conduct of the Sale Process:
The sale process was criticized for its lack of transparency and haste. The advertisement for the sale was published only once in three newspapers, two of which were local. The terms and conditions of the sale were not strictly followed, as the successful bidder was allowed a liberal payment schedule that was not part of the original terms. The Supreme Court found that the learned single Judge was overly influenced by the prospect of re-employment for 1700 people, without adequately considering the interests of all creditors.

4. Rights and Interests of the Secured and Unsecured Creditors:
The Supreme Court highlighted that the principal obligation in conducting and confirming the sale was to the body of creditors. The learned single Judge failed to ascertain the total amount of claims against the company and whether the assets sold were sufficient to cover these claims. The Division Bench's decision not to interfere with the sale was found to be in error, as it did not adequately protect the interests of the creditors.

5. Legal Implications of the Sale on Existing Leases and Liabilities:
The sale included leasehold land which was not properly valued due to the lease's limited duration. The Supreme Court noted that the valuer did not examine the lease deed or consider any renewal clauses. The lease obtained by the purchaser as a consequence of the sale was also set aside, as the sale itself was found to be invalid.

6. Entitlement of the Purchaser to Recover the Sale Price and Incurred Expenditures:
The Supreme Court ordered the Official Liquidator to refund the purchase price of Rs. 2 crores to the purchaser. However, for any other expenditures incurred, the purchaser must apply to the High Court to prove the incurred costs and their entitlement to recover them. The Court emphasized that the interests of the creditors outweighed any equities in favor of the purchaser.

Conclusion:
The Supreme Court allowed the appeals, setting aside the judgment and order of the Division Bench and the order of sale dated 15-9-1989. The Official Liquidator was directed to recover possession of the assets and properties and conduct a fresh sale after obtaining a new valuation report, fixing a reserve bid, and publishing adequate advertisements. The lease in favor of the purchaser was also set aside. The purchaser was ordered to pay the costs of the appeals.

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