2014 (6) TMI 781 - HC - Companies Law

Auction sale held during winding up of company - Validity of transfer of right - Objection on Deed of conveyance made in favour of applicant - Held that - The advertisement was misleading and the applicant having been mislead into believing that the transaction was an outright sale, had proceeded in that fashion. As already pointed out, the lease cum sale agreement executed in favour of the company in liquidation had long expired, which would indicate that it was for the KIADB either to call upon the lessee to complete the sale transaction by paying amounts due under the agreement or to terminate the lease if there was default on the part of the lessee. There was also no clause found in the lease cum sale agreement which would determine the lease as would be the case provided for under Section 111 of the Transfer of Property Act, 1882. In other words, when the company in liquidation was ordered to be wound up by operation of law, the lease would be determined in the event there was a clause in the lease deed, which indicated that the lease would stand determined in the event of the lessee being declared insolvent or going into liquidation. In the absence of any such clause and in the absence of further act on the part of the KIADB to terminate the lease, the lease transaction was in limbo. In that, the only obligation that was outstanding was in terms of clauses 7 and 8 of the lease deed, which required the lessee to execute the sale deed if all other obligations on the part of the lessee had been completed. Apparently, since there is no indication that there was any default in the payment of the lease rent by the lessee, the only obligation that was outstanding on the part of the KIADB was the execution of the sale deed. And the lease hold rights, which were capable of being transferred as on the date of the order, was on a misrepresentation made by the KIADB and this court has overlooked the obvious that the lease deed was not current as on the date of the order and there were no lease hold rights that could be taken over, except the position that had continued with the company in liquidation as on the date of the order and further right to obtain a sale deed pursuant to the lease cum sale agreement. Therefore, the applicant having been considered as the successful bidder and the applicant having complied with such further directions as regards payment of monies, as already stated and this court having affirmed the sale, it is not open for the KIADB to resile and claim that the advertisement issued in respect of the lease cum sale was faulty and was incomplete and therefore, void. It is a bona fide purchaser for value, in that, the advertisement issued with the leave of this court indicated that the property was being auctioned on as is where is basis , though it was subject matter of lease cum sale agreement dated 12.3.1973, for a period of 11 years. It would give the impression that the company in liquidation had acquired rights over the property by the time the advertisement was issued. The applicant thereafter having participated and paid substantial amount towards the bid amount and having been lead to believe that it had purchased the property absolutely, being denied the same, on the footing that there was a lapse on the part of the Official Liquidator in not incorporating the condition that the sale was only in respect of the lease hold rights, which in any event, were not available as on the date of the sale, since the lease had long expired, the objection raised by the KIADB to deny the sale transaction and to refuse the execution of the Deed of Conveyance in favour of the applicant is unjust and cannot be sustained. - Decided in favour of appellants.

Issues Involved:
1. Validity of the auction sale of the company's assets.
2. Compliance with the terms and conditions of the sale.
3. Rights and obligations of the auction purchaser.
4. Role and responsibilities of the Official Liquidator.
5. Authority and objections of the Karnataka Industrial Area Development Board (KIADB).

Issue-wise Detailed Analysis:

1. Validity of the auction sale of the company's assets:
The court examined the circumstances under which M/s Gangavathi Sugar Mills Limited was ordered to be wound up and the subsequent sale of its assets. The Official Liquidator was permitted to sell the land, building, plant, and machinery by an order dated 2.12.2011. The sale was confirmed in favor of the applicant, who deposited the bid amount of Rs.45.90 crore. However, objections were raised by K.R. Bhadraswamy Gupta and M/s India Sugars and Refineries Limited, claiming the assets were undervalued. These objections were dismissed, and the sale was confirmed.

2. Compliance with the terms and conditions of the sale:
The advertisement for the auction did not include specific terms and conditions as directed by the court, particularly those stated in Paras 12 to 18 of the KIADB's objections. The KIADB argued that the sale was void due to non-compliance with these conditions. The court noted that the advertisement was misleading, and the applicant was not made aware of the specific terms, leading to the conclusion that the sale was not an outright sale but rather a transfer of leasehold rights.

3. Rights and obligations of the auction purchaser:
The applicant, as an auction purchaser, contended that they were unaware of the specific terms imposed by the court and believed they were purchasing the land outright. The court acknowledged that the applicant was a bona fide purchaser for value and had complied with all payment obligations. The lease cum sale agreement had expired, and the only outstanding obligation was the execution of the sale deed by the KIADB.

4. Role and responsibilities of the Official Liquidator:
The Official Liquidator issued the advertisement for the auction without incorporating the specific terms and conditions directed by the court. This oversight led to the applicant being misled about the nature of the sale. The court found that the Official Liquidator's failure to include these conditions could not be held against the applicant.

5. Authority and objections of the Karnataka Industrial Area Development Board (KIADB):
The KIADB resisted the application, arguing that the sale was void due to non-compliance with the court's order and that the property was only subject to leasehold rights. The court examined precedents and found that the KIADB's objections were not tenable. The court directed the KIADB to execute the Deed of Conveyance in favor of the applicant, rejecting the KIADB's claim that the advertisement was faulty and void.

Conclusion:
The court concluded that the applicant was a bona fide purchaser who had been misled by the advertisement issued by the Official Liquidator. The objections raised by the KIADB were found to be unjust, and the court directed the KIADB to execute the Deed of Conveyance in favor of the applicant within four weeks. The application was allowed, and the sale was upheld despite the procedural lapses in the advertisement.

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