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2004 (5) TMI 588 - SC - Indian LawsValidity of the impugned sale agreement dated 26.4.2002 - Compliance with Section 29 of the 1951 Act - Allegations of collusion and arbitrariness in the sale process - Rights and obligations of the financial corporation and the appellant - HELD THAT - In the present case, till today there is no conveyance and, therefore, on 21.3.2002 when appellant herein paid ₹ 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 ₹ 28.85 lacs. It has been repeatedly urged before us, on behalf of respondent no.4, that the assets in question were not worth ₹ 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 ₹ 198 lacs. But the corporation handed over the assets and agreed to sell them against down payment of ₹ 28.85 lacs. No reason has been given by the corporation as to why it did not insist on the full payment of ₹ 198.85 lacs. Be that as it may, the appellant herein cleared the 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was returned without any demand from the appellant so that it could be argued by the corporation that the appellant had withdrawn from the auction and therefore the offer of respondent no.4 was accepted.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 v. S. A. Kamtam Anr. 1976 (12) TMI 186 - SUPREME COURT , 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 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. The Court set aside the impugned judgment and the sale agreement dated 26.4.2002. It directed the financial corporation to transfer 28.85 lacs to the account of M/s Katihar Flour Mills (P) Ltd. and restore possession of the assets to the company. The appeal was allowed with no order as to costs, and the contempt petition was dismissed
Issues Involved:
1. Alleged malafide actions and breach of Section 29 of the State Financial Corporation Act, 1951 by BICICO. 2. Legality of the asset transfer and sale agreement with M/s Stichworth Exports Pvt. Ltd. 3. Adequacy of the auction process and valuation of assets. 4. Compliance with Section 29(4) regarding the distribution of sale proceeds. 5. Alleged collusion between respondents and arbitrary actions by BICICO. Issue-wise Summary: 1. Alleged Malafide Actions and Breach of Section 29 of the State Financial Corporation Act, 1951 by BICICO: The Supreme Court examined whether BICICO acted malafide and in breach of Section 29 of the State Financial Corporation Act, 1951 by transferring the assets of the debtor company on 19.3.2002 and executing the agreement dated 26.4.2002 with M/s Stichworth Exports Pvt. Ltd. The Court found that BICICO failed to act reasonably and in accordance with the statute, thereby breaching Section 29. 2. Legality of the Asset Transfer and Sale Agreement with M/s Stichworth Exports Pvt. Ltd.: The Court held that the sale agreement dated 26.4.2002 was collusive, arbitrary, and contrary to Section 29 of the Act. It was observed that the assets were handed over to respondent no.4 before the tender process was completed, indicating a pre-decided arrangement. The agreement was set aside as it was found to be in breach of the statutory provisions. 3. Adequacy of the Auction Process and Valuation of Assets: The Court emphasized that the financial corporation must act to secure the best possible price for the assets, which requires adequate publicity and a fair auction process. BICICO failed to obtain a valuation of the assets before the sale and did not ensure maximum participation in the auction, thus not securing the best price. The auction process was deemed inadequate and unreasonable. 4. Compliance with Section 29(4) Regarding the Distribution of Sale Proceeds: Under Section 29(4), the sale proceeds must first satisfy the paramount charge of the financial corporation, with any surplus held in trust for subsequent charge holders. The Court found that BICICO did not follow this procedure, as the sale proceeds were not realized in full and the balance was merely a promise to pay Central Bank of India. This was a breach of Section 29(4). 5. Alleged Collusion Between Respondents and Arbitrary Actions by BICICO: The Court noted several circumstances indicating collusion between BICICO and respondent no.4, such as the premature handover of assets and the pre-dated demand drafts. The actions of BICICO were found to be arbitrary and for extraneous reasons, leading to the conclusion that there was collusion and malafide intent. Conclusion: The Supreme Court set aside the impugned judgment and the agreement dated 26.4.2002. It directed BICICO to transfer Rs. 28.85 lacs to the account of M/s Katihar Flour Mills (P) Ltd. and restore possession of the assets to the company. The appeal was allowed with no orders as to costs.
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