2008 (5) TMI 401 - SC - Indian Laws

Auction sale set aside - Held that - Appeal partly allwed. Ends of justice would be met if respondent No. 3 M/s. MSN Organics (P.) Ltd., who has purchased the property for ₹ 1.80 crores is directed to pay an amount of ₹ 20,00,000 (rupees twenty lakhs only) to the appellant herein. It is true that when the Company Judge set aside the sale on 17-3-2006, the order was reversed by the Division Bench of the High Court since it was in breach of natural justice. That does not, however, mean that the Company Court could not pass fresh order after affording opportunity of hearing to the parties. The Company Court was right in passing fresh order after hearing the parties. If the Recovery Officer could not have confirmed the sale, obviously all actions taken in pursuance of confirmation of sale, such as, issuance of sale certificate, registration of documents, etc., would be of no consequence. Since the Company was in liquidation and Official Liquidator was in charge of the assets of the Company, he ought to have been associated with the auction proceedings, which was not done. This is also clear from the report submitted by the Official Liquidator and on that ground also, the auction sale was liable to be set aside.

Summary

Issues Involved:
1. Legality of the Recovery Officer's confirmation of the sale.
2. Compliance with the Company Court's conditions for sale confirmation.
3. Adequacy of the sale price and the subsequent higher bid.
4. Procedural fairness and principles of natural justice.
5. Appropriate remedy and compensation for the appellant.

Detailed Analysis:

1. Legality of the Recovery Officer's Confirmation of the Sale:
The Recovery Officer confirmed the sale in favor of the appellant on February 13, 2006. However, the Court found that the Recovery Officer did not have the authority to confirm the sale. The Company Court had explicitly stated that its permission was required before the sale could be confirmed. As such, the Recovery Officer's action was in clear violation of the Company Court's orders, rendering the confirmation of the sale void and without legal effect. This principle was supported by the ruling in Sikander Khan v. Radha Kishan [2002] 9 SCC 405, where it was held that the confirmation of an auction sale by an unauthorized officer is null and void.

2. Compliance with the Company Court's Conditions for Sale Confirmation:
The Company Court had laid down specific conditions in its orders dated August 13, 1999, and March 28, 2005. These conditions included that the sale of the company's assets was subject to the confirmation of the Court. The Court observed that all parties, including the Bank and the Recovery Officer, were aware of these conditions. Therefore, the Recovery Officer's confirmation of the sale without the Court's approval was inconsistent with these conditions and invalid.

3. Adequacy of the Sale Price and the Subsequent Higher Bid:
The Court emphasized that the confirmation of the sale should ensure that the property is sold at an adequate price. The appellant's bid of Rs. 67.50 lakhs was initially accepted, but a subsequent auction fetched a significantly higher bid of Rs. 1.80 crores. This substantial difference indicated that the initial sale price was inadequate. The Court referenced Navalkha & Sons v. Sri Ramanya Das [1969] 3 SCC 537, which underscored the duty of the Court to ensure the adequacy of the sale price to protect the interests of the company and its creditors.

4. Procedural Fairness and Principles of Natural Justice:
The appellant argued that the initial setting aside of the sale by the Company Judge without notice or a hearing violated principles of natural justice. While the Division Bench initially reversed this order due to procedural unfairness, the Company Judge subsequently set aside the sale after a proper hearing. The Court held that the Company Judge was justified in passing a fresh order after hearing all parties, thereby upholding procedural fairness.

5. Appropriate Remedy and Compensation for the Appellant:
The appellant had paid the full sale amount and incurred additional expenses, including stamp duty. Recognizing the appellant's financial outlay and the procedural irregularities, the Court directed respondent No. 3, who purchased the property for Rs. 1.80 crores, to pay Rs. 20 lakhs to the appellant as compensation. This amount was deemed a fair solatium for the appellant's trouble and disappointment, referencing Chundi Charan v. Bankey Behary [1899] 26 Cal. 449 (FB).

Conclusion:
The appeal was partly allowed, with the Court setting aside the sale confirmed by the Recovery Officer and directing compensation to the appellant. The judgment emphasized the importance of adherence to legal procedures, the authority of the Company Court, and the protection of the interests of all parties involved in the liquidation process.