Kerala High Court
Penta Properties And P.V. Mohanan vs Official Liquidator And Anr. on 13 January, 1995
Equivalent citations: [1997]88COMPCAS178(KER)
Author: B.N. Patnaik
Bench: B.N. Patnaik
JUDGMENT B.N. Patnaik, J.
1. The Travancore Ogale Glass Manufacturing Company Limited (for short "the company") went into liquidation. The winding up order was passed on June 10, 1985, in C.P. No. 3 of 1984. The Federal Bank Ltd., Always, as one of its secured creditors, was permitted by the company court, by order dated February 11, 1985, in C.A. No. 291 of 1984, to file a suit against the company. The suit (O.S. No. 3 of 1986) was filed before the Subordinate Judge's Court, Ernakulam. By the decree dated January 30, 1988, the bank was made entitled to realise a sum of Rs. 1,48,22,388.73 with future interest at the rate of 10 per cent. per annum from January 2, 1986, and costs were quantified at Rs. 8,11,188.25. Thereafter, the bank filed an execution petition (E.P. No. 275 of 1990) in the Sub-Court, Ernakulam. Notice was issued to the official liquidator and the company in the execution proceedings. But, the official liquidator did not file any objections. The case was posted on April 11, 1990, July 25, 1990, and November 24, 1990, awaiting objections from the official liquidator. Since no objection was filed, the execution court on November 24, 1990, directed the bank to produce draft sale papers. The proclamation was settled on June 4, 1991, and the court directed the proclamation to be published for sale of the property on August 1, 1991. But the sale had to be postponed till September 27, 1991, as per the direction of this court. On September 27, 1991, the reserve price was fixed by the executing court at Rs. 2,10,37,148.59 for immovable properties and Rs. 10,00,000 for movable items. Permission was also given to the decree-holder to bid at the court sale. But, there were no bidders on September 27, 1991, and the sale was adjourned. Thereafter, the execution court revised the reserve price and reduced it to Rs. 1 crore and 10 lakhs after taking evidence and by considering the report of a valuer. On December 21, 1991, the decree-holder (the bank) bid the immovable items of properties for Rs. 1,10,00,000. The application filed by the official liquidator, on that day, for an adjournment of the sale was rejected by the execution court. The official liquidator, thereafter, filed an application (M.C.A. No. 6 of 1991) before this court for stay of further proceedings in E.P. No. 275 of 1990 and for a direction to the execution court to sell the plaint schedule properties only after due publicity in various newspapers. This court passed an interim order of stay of confirmation of sale, by order dated January 29, 1992, in M.C.A. No. 6 of 1992. By order dated July 5, 1993, E.P. No. 275 of 1990, in 0. S. No. 3 of 1986 on the file of the Sub-Court, Ernakulam, was withdrawn and transferred to this court. On November 4, 1993, the official liquidator filed an application (M.C.A. No. 193 of 1993) praying therein to set aside the sale of the assets of the company which was made in the execution proceedings by the Sub-Court, Ernakulam, and for order of resale of the same. It is contended in the petition that the bank had not obtained leave of this court to commence the execution proceedings under Section 446(1) of the Companies Act. In the execution proceedings, no wide publicity has been given before the sale was conducted. Hence no bidders came forward to purchase the property. The bank being the secured creditor reduced the upset price fixed. The property in question would fetch much higher price than the amount for which it was sold to the bank. The total extent of land in the possession of the official liquidator comprises 26.40 acres of land out of which only 24.65 acres of land is charged to the bank, the secured creditors. The total extent is much more than what is charged to the bank and the whole extent of 26.40 acres is lying as a single patch of land and it is just and necessary that the whole extent of land is put up for sale. In the absence of proper advertisement, the assets did not fetch adequate value. It is also stated that in the meantime many offers have come from various sources for sale of the property at a higher rate than the price for which it was sold. The sale having not been conducted after giving wide publicity and since the price for which it was sold is far less than its value, the sale should be set aside and the property should be put to fresh auction sale by this court.
2. While the matter stood thus, Penta Properties, represented by its managing partner filed a petition (M.C.A. No. 89 of 1994) praying therein to vacate the order passed in M.C.A. No. 6 of 1991, staying the confirmation of the sale. It is stated that considering the fact that the confirmation of the sale alone is stayed by this court, the applicant made an offer to the bank agreeing to buy the properties for a total amount of Rs. 1,85,00,000. The applicant has also agreed to discharge the entire amount quantified by the official liquidator as payable to the workers of the company less the amount available with the official liquidator from the sale proceeds of other assets of the company. The above offer was accepted by the board of directors of the bank in their meeting held on May 18, 1994. On the basis of the acceptance of the offer, the applicant has deposited with the bank a sum of Rs. 10 lakhs on May 20, 1994, and a further sum of Rs. 90 lakhs on June 23, 1994, by way of advance towards the sale price. Thereafter a formal agreement was entered into between the bank and the applicant on July 19, 1994 (annexure-B in M.C.A. No. 89 of 1994). It is contended that an application to set aside the sale can only be filed in the execution court and not before the company court. The sale at the instance of a secured creditor who stands outside the winding up is not subject to confirmation by the company court. Once the company court under Section 446 of the Companies Act gives permission to a creditor to file a suit impleading the official liquidator, the court where the suit is filed is the only court having jurisdiction in all matters concerning the trial of the suit and the execution of the decree. Since the bank is standing outside the winding up, the right of the official liquidator is only to represent the workers for enforcing the pari passu charge available to them under Sections 529 and 529A of the Companies Act. The applicant agrees to pay the entire amount due to the workers as quantified by the official liquidator and fixed by this court. If the petition to set aside the sale is rejected, the workers would get a pari passu amount with the bank from out of the sale price. The amount quantified as due to the workers is about 58.57 lakhs while the amount due to the bank as on November 30, 1993, would be about 2 crores 75 lakhs. The workers are now offered the entire amount as quantified by the official liquidator. The workers thus stand to gain a manifest advantage by the agreement being implemented. They would also get their amount at an early date without being subjected to protracted litigation.
3. The bank in its counter-affidavit dated November 25, 1993, while resisting the prayer of the official liquidator to set aside the sale held by the civil court, contended that separate sanction under Section 446 of the Companies Act is not necessary to initiate the execution proceedings in a suit which was instituted after obtaining the requisite permission under Section 446 of the Act. The decree in O.S. No. 3 of 1986 was passed on the basis of the compromise petition jointly filed by the plaintiff as well as the official liquidator. Now the official liquidator cannot be heard to say that the liability to the bank has to be determined with reference to the decree amount as on the date of the decree. No reason is advanced by the official liquidator to justify the setting aside of the sale validly conducted. No irregularity or illegality is shown or referred to in the petition filed by him. The prayer is not maintainable in law as the properties have already been sold in execution of a decree by a court of competent jurisdiction which is not so far challenged in the manner provided in law. What is mortgaged is a plot of land which is described as having an extent of 24 acres 60 cents lying within well-defined boundaries and the entire premises where the factory is situated. The excess area of 1.75 acres now alleged to be there is not separately demarcated or identifiable. Even if there is some excess in the area, that has to be treated as an inseparable part of the property mortgaged. The proceeding has to be disposed of by following the principles laid down in the Code of Civil Procedure in the matter of setting aside the sale of property in court auction in execution of a decree validly passed by a civil court of competent jurisdiction. None of the grounds recognised in law for setting aside a sale is available in the present case.
4. A former director of the company in liquidation has filed a counter-affidavit supporting the prayer of the official liquidator. It is stated that the immovable properties charged to the Federal Bank Ltd., would have fetched not less than Rs. 25,000 per cent, if only due publicity has been given regarding the sale which was conducted by the civil court. The said property would have fetched more than 5 crores of rupees in the court auction. The official liquidator is liable not only to protect the interest of the workmen and the secured creditor but also of all those who have interest over the assets of the company including the unsecured creditors and the shareholders. In the circumstances, the application filed by the official liquidator is to be taken as an application filed for and on behalf of those who have a right, title or interest over the assets of the company. There was material irregularity and fraud in publishing and conducting the sale inasmuch as no proper publicity was given for sale of such highly valuable property. The fact that the bank wanted to purchase the property at a reduced price than the reserve price fixed earlier would go to show that there was some unfairness in the conduct of the bank and the sale is, therefore, vitiated by such material irregularity and the fraud committed by the bank in publishing and conducting the sale.
5. In another counter-affidavit filed by the official liquidator in M.C.A. No. 110 of 1994, it is contended that he has taken all necessary steps to safeguard the interest of the workers of the company and that only because of such steps having been taken the confirmation of sale has been stayed by this court. In view of the higher offers for purchase of the property it can be put up for sale after wide publication in the newspapers.
6. In M.C.A. No. 68 of 1994, one A. Viswanathan has filed a petition stating that the property in question would fetch much more than the amount for which it was sold. He is prepared to purchase the property for an amount higher than what is offered by the bank. He claims that he is the managing director of Ananth Oil Extractions Ltd., which is a public limited company and the annual turnover is nearly 15 crores. He is solvent to purchase the property at a higher price.
7. In M.C.A. No. 110 of 1994, one P.K. Gangadharan, the general secretary of the Travancore Ogale Glass Factory Thozhilali Union, states that the official liquidator is legally bound to safeguard the interests of the workmen and to represent them in all proceedings connected with the winding up of the company. One Shri A.D. Devassia has offered to pay of Rs. 3.5 crores as price for the assets of the company as per his affidavit filed in M.C.A. No. 109 of 1994. This shows that the price of the property is much higher than the price offered by Penta Properties. The workmen would have got all their dues with interest thereon, if there had been sale of the property at a proper rate. One Shri P.V. Mohanan filed a petition (M.C.A. No. 70 of 1994) stating that he is prepared to purchase the property at a higher price than what is offered by Penta Properties.
8. In M.C.A. No. 109 of 1994, one A. D. Devassia, who claims to be a businessman, prays for an order permitting him to purchase the entire immovable properties at a cost of 3.5 crores. Since there was no proper publication of the sale by the executing court it was not possible for him to participate in the execution sale.
9. All the M. C. As, were heard together. The sole question that arises for consideration is whether the sale held by the execution court is liable to be set aside by this court.
10. Learned counsel for the applicant in M.C.A. No. 89 of 1994 (Penta Properties), has contended that once execution of the decree was allowed to be proceeded with in a civil court, the procedure as laid down in Order XXI of the Civil Procedure Code, 1908, should be followed. Even if the company court is competent to decide this question, yet it can do so only in accordance with the provisions of the Civil Procedure Code, 1908. The second contention is that the bank as a secured creditor having opted to stand outside the winding up cannot be prevented from putting the property on sale in an execution proceeding and if there was no material irregularity or illegality in the proceeding the sale cannot be set aside. The third contention is that the application for setting aside the sale filed by the official liquidator is barred by limitation, i.e., more than 60 days after the sale, such a petition cannot be entertained by the company court.
11. Learned counsel appearing for the company contended that permission of the company court having not been taken to levy execution and sell the properties, the sale is void and as such it is non est in the eye of law. Further, it is contended that in view of the fact that a much higher price is being offered for the property than the price for which it was sold and in view of the fact that there was no wide publicity of the sale proclamation, there was material irregularity and will cause injustice to all those who are interested therein.
12. Sub-sections (2) and (3) of Section 446 of the Companies Act lay down as follows :
"The court which is winding-up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of--
(a) any suit or proceeding by or against the company ;
(b) any claim made by or against the company (including claims by or against any of its branches in India) ;
(c) any application made under Section 391 by or in respect of the company ;
(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding-up of the company ;
whether such suit or proceeding has been instituted, or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding-up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960.
(3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding-up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court."
14. This court stayed the confirmation of the sale before any such order was passed by the civil court. Thus, the proceeding is deemed to be now pending in the company court after this court passed the order staying the confirmation of sale and for withdrawal and transfer of the execution proceeding to this court. In view of Clause (a) of Sub-section (2) and Sub-section (3) of Section 446 of the Act this court was competent to pass such an order.
15. It is pointed out that the application for setting aside the sale having not been made within 60 days as required under Section 127 of the Limitation Act on the date of sale, the same is barred by limitation. In support of this contention, learned counsel relies on the decision of the Madras High Court in Official Liquidator, Radel Services P. Ltd. v. Southern Screws P. Ltd. [1988] 63 Comp Cas 749. It is laid down in that decision that though the application can be filed in exercise of the option provided to the liquidator under Section 446(2), if the claim has to be considered as in the nature of a suit, the provisions in the Limitation Act relating such suits only would govern the case. But the Gujarat High Court in Rajratna Naranbhai Mills Co. Ltd. v. New Quality Bobbin Works [1973] 43 Comp Cas 131 by relying on the decisions of the Supreme Court in Sha Mulchand and Co. v. Jawahar Mills Ltd., AIR 1953 SC 98 ; [1953] 23 Comp Cas 1 and Town Municipal Council, Athani v. Labour Court, AIR 1969 SC 1335, while considering the applicability of Section 137 of the Limitation Act, 1963, to an application made by the official liquidator, held that the provisions of the Limitation Act would apply to applications made under the Code of Civil Procedure, 1908. The application made by the official liquidator was not one under the Civil Procedure Code, 1908, It was a special application under the Companies Act made to the High Court on whom jurisdiction is conferred by Section 10 of the Companies Act. Since this proposition of law as laid down by the Gujarat High Court is based on two Supreme Court decisions, I am inclined to agree with it and hold that the provisions of the Limitation Act would not apply to the application made by the official liquidator to set aside the sale.
16. With regard to the contention of the board of directors of the company, that the sale is void on account of want of permission by the company court to proceed with the execution of the decree and for sale of the property under Section 537 of the Companies Act, I find that it is not tenable. Section 537 of the Act lays down, inter alia, that where any company is being wound up by or subject to the supervision of the court any execution put in force, without leave of the court, against the estate or effects of the company, after the commencement of the winding-up ; or any sale held, without leave of the court, of any of the properties or effects of the company after such commencement shall be void. But, in the present case, there is no dispute that the bank had obtained leave of the court to institute a suit against the company. While considering a similar contention, the Supreme Court in Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp Cas 21 held that if sanction was obtained for prosecution of a suit or appeal from the company court a fresh sanction for institution of the execution proceedings is not necessary. It has been laid down that since an execution application was only a continuation of a suit, and the control of the High Court would enure during the execution proceeding also, it was unnecessary to obtain fresh sanction of the High Court for the institution of the execution proceedings. It would be giving effect to a technicality divorced from the true object of the section to hold that even in a suit filed or prosecuted with the sanction of the court, the decree may not be enforced by a successful party without fresh leave. By following these decisions, the Punjab and Haryana High Court in Shri Ram Saran Sharma v. Bank of India [1990] 69 Comp Cas 544 held that once the permission of the company judge during the pendency of the parent suit against the company under liquidation was taken under the provisions of Section 446 of the Act no fresh sanction for execution of the decree passed in such suit was required under Section 537 of the Act. Since the decision of the Punjab and Haryana High Court is based on the principle of law laid down by the Supreme Court, it is unnecessary to refer to any other decision. The principle as laid down by the Punjab and Haryana High Court, with which I respectfully agree, applies to the facts of this case. Hence, there can be no argument that the sale was void under Section 537 of the Companies Act.
17. Learned counsel for the applicant in M.C.A. No. 89 of 1994 contends by referring to a decision of the Supreme Court in M.K. Ranganathan v. Government of Madras, AIR 1955 SC 604 ; [1955] 25 Comp Cas 344 that the bank having opted to stand outside the winding up it can realise its security without the intervention of the court by effecting a sale of the mortgaged premises by private negotiation or by public auction. This contention is based on the premise that the sale held by the execution court is not liable to be set aside. If that be so, the negotiation between the bank and Penta Properties cannot be questioned. It is also pointed out that Penta Properties have agreed to safeguard the interest of the workmen as required under Sections 529 and 529A of the Companies Act. The Supreme Court decision was dealing with a case where a managing director of a company which was under liquidation which stood outside the winding up sold the property by private negotiation without the intervention of the court. But, in the present case, the secured creditor as one remaining outside the winding up, namely, the bank was allowed to file the suit with the permission of the company court. The bank, therefore, cannot enter into negotiation with a private party, when the suit was filed with the permission of the court. Confirmation of sale having been stayed by the company court it cannot enter into such a negotiation without the permission of the court. Moreover, in the reported decision, the sale in question was a private one and was made without the permission of the court. The facts are distinguishable and as such, in my view, the principle laid down in the aforesaid Supreme Court decision would not be applicable to the facts of this case. That decision was rendered before the amendment of Sections 529 and 529A of the Companies Act. Section 529A of the Companies Act lays down as follows ;
"529A. Overriding preferential payments.-(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company--
(a) workmen's dues ; and
(b) debts due to secured creditors to the extent such debts rank under Clause (c) of the proviso to Sub-section (1) of Section 529 pari passu with such dues ;
shall be paid in priority to all other dues.
(2) The debts payable under Clause (a) and Clause (b) of Sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions."
18. A secured creditor, who can realise his security by remaining outside the winding up will now act in association with the official liquidator, who will represent the workmen. By this Section, the workmen of the company in liquidation have been made secured creditors in respect of their claims against the company when the assets of the company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. Hence, even if the bank remains outside the winding up of the company, the workmen's portion will be deducted from what is realised and applied rateably for the discharge of workmen's dues. It is true that Penta Properties have undertaken to pay the workmen's dues over and above the sale price of the property: But, the official liquidator as the custodian of the property has to safeguard not only the interest of the workmen but also all other secured and unsecured creditors. This is evident on a reading of Section 447 of the Companies Act which lays down that an order for winding-up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory.
19. The next vital question that arises for consideration is whether the sale held by the execution court is liable to be set aside. Learned counsel for the applicant in M.C.A. No. 89 of 1994 has submitted that the official liquidator has failed to prove that there was any material irregularity or fraud in publishing or conducting the sale or that the company sustained substantial injury by reason of any such irregularity or fraud as contemplated in Rule 90 of Order 21 of the Civil Procedure Code, 1908.
20. Substantial injury means the actual loss sustained by the judgment-debtor. Sometimes there may not be express allegation of substantial injury ; but some appear to be implicit from all the facts and circumstances alleged. It appears in this case that in the earlier sale proclamation value of the property was shown to be Rs. 2,10,37,148.59. But, by the revised sale proclamation the value of the property was drastically reduced to rupees one crore and ten lakhs, after the sale being adjourned on the first occasion. It would appear from the offer made by one Devassia that an amount of Rs. 3.5 crores is being offered towards the price of the property. In the course of hearing, learned counsel appearing for the appellant in M.C.A. No. 109 of 1994 has submitted that his party is ready and willing to pay the entire amount of Rs. 3.5 crores even within a month from the date of demand. The disparity in the actual price and the sale price amounts to more than one and a half crores. Since the property was sold at almost half the actual price, there is, in my opinion, material irregularity warranting the setting aside of the sale. That apart, it appears from the records that the property in question is situated in a very important area of the city of Ernakulam. It is needless to say that the price of real estate is increasing day by day. It would be unjust to sell a land at a far lower price than it would actually fetch. In this view of the matter, the sale held by the execution court cannot be sustained.
21. Hence, for the reasons stated above, the sale is set aside. The official liquidator is directed to take steps to publish a fresh proclamation of sale in at least two leading dailies of local language published in the State and two other leading English dailies having nation-wide circulation, besides affixing copies of the proclamation in the premises of the High Court as well as of the company and in the notice board of the Municipal Office having jurisdiction of this area, by describing the property in full and by quoting the upset price at Rs. 3.5 crores. The intending bidders shall deposit Rs. 50 lakhs with the official liquidator in cash or bank draft drawn in favour of the official liquidator as earnest money at least seven days before the date notified for auction sale. For auction sale a specific date shall be mentioned in the sale proclamation which shall not be earlier than thirty days of its publication, on the condition that the sale is subject to confirmation by this court. The said auction sale shall be held in the office of the official liquidator in the presence of the Joint Registrar of the High Court.
22. With the above observations, M.C.A. No. 89 of 1994 is dismissed and all the other M. C. As. are disposed of accordingly.