2010 (9) TMI 1300 - HC - Companies Law

Issues Involved:

1. Validity of the auction sale proceedings in light of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
2. The applicability of Section 22 of SICA during the pendency of an appeal before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).
3. The inherent right of an auction purchaser to get the auction sale proceedings confirmed.
4. The validity of the compromise between the petitioner and the financial institution.
5. The observations made by the Debt Recovery Appellate Tribunal (DRAT) against the financial institution.

Detailed Analysis:

1. Validity of the Auction Sale Proceedings:

The core issue was whether the auction sale proceedings conducted by the Recovery Officer were valid given the provisions of Section 22 of SICA. The High Court found that the auction sale proceedings held on 25.1.2005 were void ab initio as they were conducted while an appeal was pending before the AAIFR. The court emphasized that the operation of Section 22 of SICA is automatic, rendering any action taken in violation of it void. The Supreme Court's decision in Bhoruka Textiles Ltd. was cited, which held that decisions violating Section 22 are coram non judice.

2. Applicability of Section 22 of SICA:

The court addressed whether Section 22 of SICA applies during the pendency of an appeal under Section 25 before the AAIFR. It was clarified that once a reference is registered under Section 15 of SICA, Section 22 comes into play, and an inquiry under Section 16 is not a prerequisite. The court reasoned that if a sick company succeeds in its appeal, the assets should be protected from creditors during the appeal process to avoid rendering the appeal infructuous.

3. Right of Auction Purchaser:

The judgment highlighted that there is no inherent right for an auction purchaser to have the auction sale proceedings confirmed, especially when a higher offer is available. This was supported by previous judgments, including Mohan Wahi Vs. Commissioner of Income Tax and LICA (P) Ltd. Vs. The Official Liquidator, which established that auction confirmation is not a vested right, particularly when the company is a sick company.

4. Validity of the Compromise:

The court noted that the compromise between the petitioner and the financial institution, which involved a payment higher than the auction bid, was valid. The financial institution received Rs. 4 crore, significantly higher than the Rs. 2.72 crore bid in the auction. The court refrained from delving into whether the compromise adhered to the time limits under the applicable rules, given the overriding issue of the auction's validity under Section 22 of SICA.

5. Observations Against the Financial Institution:

The DRAT had made adverse observations against the financial institution regarding the fairness of the compromise. However, the High Court set aside these remarks, emphasizing that commercial decisions should be respected, and tribunals should not substitute their judgment for that of commercial institutions. The court allowed the financial institution's writ petition to the extent of removing adverse remarks.

Conclusion:

The High Court exercised its powers under Articles 226 and 227 to set aside the DRAT's order, quash the auction sale proceedings, and direct the return of possession of the property to the petitioner. The decision underscored the automatic application of Section 22 of SICA during pending appeals and the lack of inherent rights for auction purchasers to demand confirmation of sales. The writ petition was allowed, with each party bearing its own costs.

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