2009 (7) TMI 764 - HC - Companies Law

Setting aside the confirmation of sale -Winding up - Application preferred by the Auction Purchaser as well as the Official Liquidator - Held that - No hesitation in taking the view that the entire sale need not be set aside even if the claim of the Applicant/Auction Purchaser that due to theft serious damage has been caused to the movable assets of the Company (in liquidation) were to be accepted as it is. Find merit in the suggestion given by the Official Liquidator that in the facts of the present case it may be possible to apportion the quotient towards movable and immovable on the assumption which is just and reasonable. If either offer was to be accepted by the Auction Purchaser, the loss caused on account of the theft cannot only be computed but it is possible to compensate the Auction Purchaser for such loss. Notably, the second option offered by the Official Liquidator to reduce the value of the movable assets from the sale consideration of ₹ 17.05 crores in no way would cause any prejudice to the Auction Purchaser. However, it is for the Auction Purchaser to opt for any of these mechanism within a reasonable time, failing which the Official Liquidator will have to proceed on the assumption that the Auction Purchaser is unwilling to fulfil its obligation of paying balance consideration and taking delivery of the assets. In which case, will have to proceed with resale of the entire property forthwith by invoking the terms and conditions of the sale

Issues Involved:
1. Confirmation of sale of movable and immovable assets.
2. Condition and valuation of assets at the time of auction.
3. Supervening circumstances affecting the assets post-confirmation of sale.
4. Applicant's request for cancellation of sale and refund.
5. Official Liquidator's report and suggestions.
6. Legal principles and precedents regarding cancellation of sale.
7. Compensation for loss due to theft.
8. Accountability and future measures.

Detailed Analysis:

1. Confirmation of Sale of Movable and Immovable Assets:
The movable and immovable assets of the Company in liquidation were put up for auction as one lot, with a reserved price of Rs. 15 crores. The highest bid of Rs. 17.05 crores was confirmed by the Court on October 3, 2008.

2. Condition and Valuation of Assets at the Time of Auction:
The valuer's report indicated that the movable assets, including plant and machinery, were out of order, rusted, and many were to be scrapped. The immovable property consisted of land and buildings valued at around Rs. 14.69 crores. The sale was on an "As is Where is and Whatever there is basis."

3. Supervening Circumstances Affecting the Assets Post-Confirmation of Sale:
Post-confirmation, a massive theft occurred at the factory premises, significantly damaging the plant and machinery. The Applicant claimed that the theft made it difficult to start the factory and requested the cancellation of the sale.

4. Applicant's Request for Cancellation of Sale and Refund:
The Applicant sought cancellation of the sale and refund of the earnest money and further deposits, citing the inability to start the factory due to the theft and resultant damage to the assets.

5. Official Liquidator's Report and Suggestions:
The Official Liquidator confirmed the theft and assessed the loss and damage. The report suggested two options:
1. Adjust the loss from the sale consideration.
2. Reduce the value of movable assets from the sale consideration and resell the movable assets.

6. Legal Principles and Precedents Regarding Cancellation of Sale:
The Court referred to Rule 9 of the Companies (Court) Rules, 1959, and principles from Order 21 of the CPC, emphasizing that substantial injury must be proven to set aside a sale. The Court also considered precedents from the Gujarat High Court and the Supreme Court, which highlighted the need for substantial injury and the possibility of partial cancellation of the sale.

7. Compensation for Loss Due to Theft:
The Court evaluated the loss based on the valuer's reports and suggested compensating the Applicant by adjusting the loss from the sale consideration. The Court noted that the Applicant could not question the first valuation report and that the loss could be quantified and compensated.

8. Accountability and Future Measures:
The Court highlighted the need for accountability and suggested that the Official Liquidator and Security Agency should ensure the protection of assets during the interim period between sale confirmation and possession. The Court ordered that a copy of the judgment be forwarded to the Secretary, Ministry of Company Affairs, for necessary action.

Conclusion:
The Application for cancellation of the sale was rejected. The Court directed the Official Liquidator to proceed with the sale and compensate the Applicant for the loss due to theft by adjusting the sale consideration. The Official Liquidator was also authorized to seek the release of seized goods from the criminal court. The Court emphasized the need for accountability and preventive measures to avoid similar situations in the future.

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