2003 (4) TMI 431 - SC - Companies Law

Whether the acceptance of the proposal involving the sale of the Company s surplus land to CMS Ltd. and the consequential directions issued by the High Court are supportable in law? Whether the directions of the High Court can be given effect to at all at this point of time? Held that - Appeal allowed. The pre-requisites laid down under the Companies Act for passing the order under section 391 or 394 cannot be treated as empty formalities which can be thrown to winds at the whim of the Judge. The most objectionable part of the impugned order is to consider one or two offers placed before the Court by the Company without giving due publicity. If the peculiar circumstances of the case required that the normal procedure of calling for bids through advertisement or other means of publicity was to be dispensed with, the Court should have at least recorded reasons for the same. But, nothing of that sort was done. The Division Bench should have acted with the awareness that there could be no arbitrary selection of the prospective purchaser, even assuming that an order for sale could be lawfully made. No provision for monitoring the revival has been made. At the same time all the pending proceedings were terminated. There can be no doubt that the Division Bench out-stepped the limits of its jurisdiction and passed orders of extraordinary nature. The other important reason why the impugned order of the Division Bench cannot be sustained is the subsequent developments that have taken place. It appears that CMS Ltd. (6th Respondent) is no longer interested in the deal. They have not entered appearance before this Court though notice was served. Secondly, the learned counsel for United Bank of India has made it clear that the bank is no longer agreeable to abide by the terms agreed to earlier under which the bank had to receive Rs. 1.80 crore in full settlement of their claim. Thus as the substratum and underlying basis of the order under appeal has disappeared and it is no longer possible to give effect to the directions given by the Division Bench in the Company Appeal. For all these reasons, the order passed in the company appeal is liable to be set aside. The High Court did not consider the relevance and effect of the guidelines issued by the State Government in regard to the exercise of power under section 20 vis-a-vis excess land held by sick industrial units. The High Court was not justified in describing them as unknown guidelines , because the orders containing the guidelines were very much on the record and they were adverted to in the pleadings, etc.

Issues Involved:
1. Legality of the High Court's order rejecting the State Government's decision under section 20 of the Urban Land (Ceiling and Regulation) Act (ULC Act).
2. Validity of the High Court's approval of the sale of the Company's surplus land to CMS Ltd.
3. Relevance and application of guidelines issued by the State Government regarding surplus land held by sick industrial units.
4. Jurisdictional propriety of the High Court's order in the context of the Companies Act.
5. Impact of subsequent developments on the enforceability of the High Court's order.

Detailed Analysis:

1. Legality of the High Court's Order Rejecting the State Government's Decision under Section 20 of the ULC Act
The High Court set aside the State Government's rejection of the 2nd Respondent-Company's application for exemption under section 20 of the ULC Act. The High Court observed that the sale of vacant land to CMS Ltd. would serve both the Company's and public interest by clearing creditors' dues, paying workmen's arrears, and reviving the industry. It also noted that the State Government ignored the Supreme Court's decision in T.R. Thandur v. Union of India and relied on "some unknown existing guidelines." The High Court concluded that the twin considerations of undue hardship and public interest were satisfied, thus justifying the exemption.

2. Validity of the High Court's Approval of the Sale of the Company's Surplus Land to CMS Ltd.
The High Court confirmed the sale of 300 cottahs of land to CMS Ltd. for Rs. 3.90 crores, directing the utilization of the sale proceeds to settle debts and revive the Company. However, the Supreme Court found that the High Court exceeded its jurisdiction by approving the sale without following the procedure prescribed under sections 391 to 394 of the Companies Act, including giving notice to the Central Government and involving all creditors. The Court also criticized the arbitrary selection of CMS Ltd. without due publicity or recording reasons for dispensing with the normal procedure.

3. Relevance and Application of Guidelines Issued by the State Government
The State Government had issued guidelines for dealing with surplus land held by sick industrial units, which the High Court described as "unknown guidelines." The Supreme Court noted that these guidelines were on record and relevant to the case. It refrained from expressing any view on the validity of these guidelines but emphasized that the High Court should consider them while adjudicating the writ petition.

4. Jurisdictional Propriety of the High Court's Order in the Context of the Companies Act
The Supreme Court highlighted that the High Court did not specify any provision of the Companies Act under which it passed the order approving the sale. The Court pointed out that the High Court disregarded the mandatory procedures under sections 391 to 394 of the Companies Act. The Supreme Court held that the High Court's order was beyond its jurisdiction and lacked proper legal foundation.

5. Impact of Subsequent Developments on the Enforceability of the High Court's Order
The Supreme Court noted that CMS Ltd. was no longer interested in the deal, and the United Bank of India was unwilling to accept the previously agreed settlement amount due to accumulated interest. These developments rendered the High Court's order unenforceable. Consequently, the Supreme Court set aside the High Court's order and restored the Company Petition and Writ Petition to the High Court for fresh consideration.

Conclusion:
The Supreme Court allowed the appeals, set aside the High Court's order, and restored the Company Petition No. 90 of 1992 and Writ Petition No. 383 of 1997 to the High Court for reconsideration. The Court emphasized the need for the High Court to follow the prescribed procedures under the Companies Act and consider the State Government's guidelines while adjudicating the writ petition. The Supreme Court made no order as to costs.

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