Option to Purchase Land Assets through Court Ordered Auction


 

Option to Purchase Land Assets through
Court Ordered Auctions – Some Legal
Issues
Delep Goswami, FCS, Advocate, Supreme Court of India, New Delhi.
This Article deals with some
recent decisions of the
Supreme Court which clear the
legal issues raised by
unsuccessful bidders and
disgruntled litigants in court
ordered auction sale of
properties. These decisions
point out the pragmatic and
practical approach of the
Judiciary in reiterating
the well established legal
principles involved in
Auction Sales and mitigates
the grievances of the Litigants
and helps in enforcement of
the rights of the Auction
Purchaser whose bid is
accepted by the Court.
Ready made property available for sale always attract prospective buyers. This option is
being increasingly availed of by prospective property buyers and since there are a large
number of companies which are being wound up under the supervision and direction of
various High Courts, the sale of properties and assets including land, factory building and
other moveable assets of such companies in liquidation through public auction attract many
buyers. In addition to the large number of companies in liquidation which are governed
by the provisions of the Companies Act and the Rules made thereunder, the land, building
and machinery of a a large number of companies which default in repayment of loans to the
term lending Banks and Financial Institutions are also sold through public auction and
numerous judgments of the Courts in liberally interpreting the provisions of the
Securitization and Reconstruction of Financial Assets and Enforcement Security Interest Act,
2002 (in short “Securitization Act”) the speedier enforcement of security through sale of
property through public auction under the Securitization Act have also started attracting
prospective property buyers to such public auctions. Since some of the properties sold
through public auction are already well developed and/were in use, and since the
infrastructure and other amenities to use such properties are in place requiring very minimal
expenses, property buyers are also constantly on the look out for advertisements published
by the lenders under the Companies Act and also under the Securitization Act. As per the
recent press release in September, 2008 by the Ministry of Corporate Affairs, the Ministry
has launched a new website named www.companyliquidator.gov.in as a part of its initiative
to bring greater efficiency in the functioning of the Official Liquidators placed at the disposal
of various High Courts in the country. The website would, inter-alia, also provide
information about the sale and auction notices issued by various Official Liquidators with
regard to properties and assets of companies under liquidation and ordered to be sold by
the Courts.
While, such properties sold through public auction may come handy and ready to use,
unfortunately some uncertainties do creep in when some disgruntled bidders and motivated
litigants trigger of litigations which ensue after the bids for such properties are opened,
where inter-se bidding is also allowed, and the rights of the highest bidder in these auction
sales are kept in abeyance. In this Article some legal issues emanating from such litigations
are highlighted which clearly show the judicial trend in answering questions raised in such
type of sale of assets through Court ordered auctions.
In a recent judgment pronounced by the Hon’ble Supreme Court of India in re: Valji Khimji &
Co. v. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited (2008-86-SCL 81-SC), the
sale of properties of the company in liquidation through public auction was challenged. In
the instant case, the properties of the company in liquidation was put up for sale by the
Official Liquidator (“O.L.”) after advertisements for the sale were published in various
newspapers. As per the valuation report submitted by the O.L. to the Company Court, the
property was valued at Rs.2.55 crores. The Appellant’s bid of Rs.3.51 crores was the highest
and the said bid was accepted and the sale was confirmed in favor of the Appellant on
30.7.2003. Accordingly, the Appellant deposited 25 per cent of the purchase price. Although
Articles
the sale was confirmed in favor of the Appellant on 30.7.2003,
yet one “M” sent a letter to the O.L. offering to buy the assets in
question for Rs.3.75 crore. Subsequently, one “C” made an
offer of Rs.5 crore for the said assets. Both, the said “M” and
“C” filed applications praying for recall of the order dated
30.7.2003. The Company Judge recalled the said order by which
the sale was confirmed. The Appellant filed appeal before the
Division Bench of the High Court, but the same was dismissed.
On appeal to the Supreme Court, it was noted that auction sale
was done after adequate publicity in well known newspapers.
It was an open auction after wide publicity in well known
newspapers and hence nothing prevented the said “M” and “C”
to have participated in the auction, but they did not do so. There
was no allegation of fraud either in the instant case. If any one
wanted to make a bid in the auction, he should have participated
in the said auction and made his bid. Moreover, even after the
auction, the sale was confirmed by the High Court only on
30.7.2003, and any objection to the sale could have been filed
prior to that date. The Supreme Court held that entertaining
objections after the sale is confirmed should not ordinarily be
allowed, except on very limited ground like fraud, otherwise
no auction sale will ever be complete. Hence, there was no
justification to set aside the confirmation of the sale.
The Supreme Court also noted that the reasoning of the Single
Judge as also of the Division Bench of the High Court was that
valuation of the assets of the company was made as if those
assets were scrap. The reasoning of the Single Judge of the
High Court seemed to be that the assets in question were
wrongly given out to be scrap and thus, a proper bid was not
obtained. However, there was nothing to show that the assets
in question which were auctioned/sold were ever given out to
be scrap. They were not mentioned as scrap in the advertisement
or sale notice, nor was there any material to show that the
valuer valued them treating them to be scrap. It was also noted
that no doubt the assets of the company offered to be sold in the
auction sale were offered in lots, but that could not be described
as scrap. The word “scrap” would ordinarily mean something
which cannot be used for the same purpose for which it was
being earlier used even after repairing or renovating the same.
There was nothing to show that the items proposed to be
auctioned/sold were scrap i.e. they could not be used for the
same purpose for which they were earlier used after repairing
or reconditioning the same. The Supreme Court also did not
accept the contention of the Respondents that since the assets
were not in a running condition, they were treated as “scrap”.
Thus, the Supreme Court held that the views of the lower Courts
that any fraud took place in the auction sale, could not be
accepted. The Supreme Court also noted that whenever anyone
goes to buy some property in an auction sale, the person
proposing to bid always makes enquiries about the properties
for which he is proposing to make the bid. In fact, he will in all
probability inspect the said property/assets and he will not
make any bid without making thorough enquiries about the
said properties/assets. Hence, all the bidders in the auction
knew what they were bidding for. Respondent No.9 never
participated in the auction and it could not be understood how
he could start objecting to the auction more than one year after
the same was confirmed. The Supreme Court held that when an
auction sale is advertised in well known newspapers having
wide circulation, all eligible persons can come and bid for the
same, and they will themselves be blamed if they do not come
forward to bid at a time of the auction. They cannot later on be
allowed after the bidding (or confirmation) is over to offer a
higher price. If every confirmed sale can be set aside on such
ground, the result would be that no auction sale will ever be
complete because always somebody can come after the auction
or its confirmation offering a higher amount. The Supreme
Court also observed and clarified that where the auction is not
subject to subsequent confirmation by any authority, the auction
is complete on the fall of the hammer and certain rights accrue
in favor of the auction purchaser. However, where the auction
is subject to subsequent confirmation by some authority under
a Statute or under the terms of the auction, the auction is not
complete and no rights accrue until the sale is confirmed by the
said authority. Once, however, the sale is confirmed by that
Authority, certain rights accrue in favor of the auction purchaser
and these rights cannot be extinguished except in exceptional
cases such as fraud or collusion.
Yet, another judgment dated 8.8.2008 in re: IFCI Limited and
Another v. Vishnu Kant Gupta, the Hon’ble Supreme Court of
India allowed, subject to certain directions to be fulfilled by
the highest bidder in a public auction to retain the property of
the company in liquidation and did not thereby disturb the
acceptance of his bid by the Company Judge. Brief facts leading
to the case are that in an auction conducted by the Official
Liquidator under the direction of the Company Court in January,
2001, the first Respondent was the highest bidder for the
property in liquidation and his bid for Rs.5 crores was accepted
by the Company Judge. The first Respondent made the initial
payment of Rs.10 lakhs towards the purchase price. He was
prepared to pay the entire amount as per the terms and
conditions of the bid by the Company Judge and there was no
default on the part of the first respondent. Unfortunately, due
to 2 appeals preferred before the Division Bench against the
said order of the Company Judge, an interim stay was granted
in February, 2001 and because of the stay, the auction purchaser/
first respondent could not pay the amount. Anyhow, after 6
years, when these 2 appeals were dismissed for default and
interim relief order got vacated, the auction purchaser (i.e. the
First Respondent before the Supreme Court) immediately made
part payment of the amount and also stated that he would be
paying the remaining amount within a very short period of
time. The purchaser/first respondent made first payment of
Rs.1.5 crores on 9.2.2007. Also, on 12.2.2007, he offered Rs.1.55
crores by a Bank Draft and gave un undertaking to pay Rs.2
crores within 3 days.
Option to Purchase Land Assets through Court Ordered Auctions – Some Legal Issues
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Meanwhile, 2 parties offered to pay more than Rs.5 crores for the
property. One party was willing to pay Rs.6 crores, whereas the
other was prepared to pay Rs.6.5 crores. In the circumstances, the
Company Judge felt that it would be in the interest of the
Company to re-advertise and re-invite tenders and accordingly
he passed an order for re-advertisement of tenders and reinvitation
of offers.
The highest bidder in the auction sale held in 2001 (i.e. the First
Respondent before the Supreme Court) was very much aggrieved
by the order passed by the Company Judge in 2007 and preferred
an appeal before the Division Bench and on the facts and
circumstances of the case, the Division Bench held that the
grievance of the Appellant was well founded and the Company
Judge was not justified in setting aside the highest offer made in
2001 by the Auction Purchaser and the Company Judge was not
justified in 2007 to order re-advertisement and re-inviting tenders
for the same property just because in 2007 two new parties offered
higher price for the same property. However, while allowing
the appeal filed by the said Auction Purchaser, the Division Bench
directed the said highest bidder/Auction Purchaser to deposit
interest on the accepted bid amount from 5th December,2006 when
the appeals were dismissed, up to February 9, 2007 when the
Auction Purchaser/First Respondent made first payment of Rs.1.5
crores. On 12.1.2007, he offered Rs.1.55 crores by a Bank Draft
and also gave un undertaking to pay Rs.2 crores within 3 days.
The said interest amount came to about Rs.10 lakhs. Accordingly,
the Auction Purchaser/First Respondent paid Rs.5 crores as per
the bid accepted by the Company Judge and Rs.10.40 lakhs
towards interest as ordered by the Division Bench of the High
Court.
Against the said order of the Division Bench, the Appellant IFCI,
a secured creditor of the company in liquidation, preferred an
appeal before the Hon’ble Supreme Court which was disposed
of on 8.8.2008.
Before the Supreme Court, the first respondent contended that
after six years of the said auction sale in 2001, if someone comes
forward and says that he is inclined to pay higher amount, the
sale concluded and accepted by the Company Court in 2001 cannot
be set aside on such ground of higher price after 6 years. The first
respondent also argued that there was no fault on his part to pay
the accepted bid amount of Rs.5 crores, which was not paid
because of the stay granted by the Division Bench against the
first auction sale. The first respondent also argued that it is
equally well settled principle of law that once the Court finds
that the price offered is adequate, no subsequent higher offer can
constitute a valid ground for refusing confirmation of sale.
In the Supreme Court, the appellant IFCI contended that the
Company Judge was right in setting aside the sale conducted in
2001 and was right in inviting fresh offers. The appellant IFCI
also submitted that the first respondent paid only a paltry amount
of Rs.10 lakhs before six years and no payment was made by him
for a pretty long time and hence the Division Bench was not right
in directing the Official Liquidator to hand over possession of
the property to the first respondent on payment of the bid amount,
plus interest thereon. The appellant contended that for six years,
the first respondent did not show his willingness to deposit the
amount in the Court so that it could have been invested in any
Nationalized Bank and could have earned interest. Resultantly,
the entire amount remained with the Purchaser and now he wants
to take advantage, though much more attractive and higher
offers have already been received by the Official Liquidator.
The Supreme Court in its judgment dated 8.8.2008 observed that
one very eloquent fact cannot be lost sight of is that the highest
bid of Rs.5 crores by the first respondent was accepted by the
Company Judge on 31st January, 2001. Ordinarily, when the
highest bid of intending purchaser has been accepted, he is
required to pay 25% of the purchase price immediately, whereas
in this case only Rs.10 lakhs was paid by the purchaser/first
respondent in January, 2001. As against Rs.1.25 crores (25% of
the highest bid of Rs.5 crores) which ought to have been paid in
January, 2001 only Rs.10 lakhs was paid and nothing was done
by the first respondent to pay the sale price apparently because
of the stay granted by the Division Bench. However, because of
non-payment by the highest bidder, a sizeable interest could not
be earned. Therefore, after considering all the relevant facts and
submissions and while exercising discretionary and equitable
jurisdiction under Article 136 of the Constitution, and keeping in
view the overall circumstances and to meet the ends of justice,
the Supreme Court directed that the sale in favor of the first
respondent/highest bidder in the auction held in 2001 be
confirmed on the condition that the first respondent will pay an
additional amount of Rs.3 crores within a period of three months
and that it will be over and above the payment which has been
made by him. The Supreme Court also made it clear that if the
payment is not made as per this order, the first respondent will
not be entitled to claim any right on the basis of the bid made
and accepted on 31st January, 2001 and fresh auction will be
conducted as per the order of the Company Judge.
Yet, in another case involving the sale of properties of a company
in liquidation and decided by the Supreme Court of India on
9.7.2008 (in re: FCS Software Solutions Limited v. LA Medical Devices
Limited and Others – JT/2008-7-SC 499), how the Court dealt with
the auction sale deserves to be mentioned here. The Court noted
that in November, 2004, the bid of the Appellant for the immovable
properties offering Rs.1.47 crores was the highest and was accepted
by the Official Liquidator and that the Appellant on its own had
forgone its claim of leased machinery of the company in liquidation.
However, the attention of the Company Judge was invited by
other bidders by filing Company Applications alleging that there
were several irregularities in the first auction as the tender notice
did not state valuation of moveable and immovable property;
reserve price was not fixed, inventory of plant and machinery was
not made available etc. The Company Judge considered the
objections pointing out several irregularities and having primafacie
satisfied, ordered fresh auction. The Company Judge extended
Option to Purchase Land Assets through Court Ordered Auctions – Some Legal Issues
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an opportunity to the Appellant to raise its bid and the approach
of the Company Judge was to get highest price so as to satisfy
maximum claims against the company in liquidation, but the
Auction Purchaser refused to raise his bid amount for the property.
While considering arguments against such fresh auction ordered
by the Company Judge, the Supreme Court noted that certain
facts which were necessary to be brought to the notice of intending
purchasers were not set out in the proclamation of sale, nor were
those disclosed at the time of sale notice and those related to
valuation of moveable and immovable properties of the company
in liquidation and fixation of reserve price, non-inventory of plant
and machinery etc. The Supreme Court therefore held that the
procedure followed by the Court Judge ordering re-auction and
re-invitation of bids cannot be said to illegal.
In pursuance of the directions by the Company Court, fresh
advertisement was issued. The Official Liquidator received offers
and the highest offer was by one M/s NICE Society (who were
Respondent No.3 before the Supreme Court), who offered to
purchase the property for Rs.3.5 crores and in the circumstances,
bid of the said respondent was accepted. The Appellant i.e. the
first auction purchaser challenged the order of the Company
Judge accepting the bid of M/s NICE Society. The Division Bench
however dismissed the appeal of the first Auction purchaser and
against the said order, the Appellant went to the Supreme Court.
The Supreme Court also noted that in the impugned order it was
stated that “Even during the course of proceedings in this appeal,
we had specifically asked the learned Counsel for the Appellant
as to whether the Appellant was willing to go for inter-se bidding,
to which he flatly declined.”
While disposing of the appeal by FCS Software Solutions Limited
(supra), the Supreme Court referred to its earlier decision in M/
s Navalkha & Sons –vs- Sri Ramanya Das & Ors (1969-3-SCC-337)
wherein it was held that the principles which should govern
confirmation of sale are well-settled. Where the acceptance of
the offer by the Commission is subject to confirmation of the
Court, mere acceptance of the offer by the Commissioner would
not confer vested right to the property in favor of the bidder.
Condition of confirmation by the Court operates as a safeguard
against the property being sold at an inadequate price, whether
or not, it is consequence of any irregularity or fraud in the conduct
of sale. It is the duty of the Court to satisfy itself about the proper
valuation. But, once the Court comes to the conclusion that the
price offered is adequate, no subsequent higher offer can
constitute a valid ground for refusing confirmation of the sale or
offer already received.
In deciding the appeal by FCS Software Solutions (supra), the
Supreme Court also referred to an earlier decision by the Supreme
Court in re: Kayjay Industries Pvt. Limited –vs- M/s Asnew Drums
Pvt. Limited & Ors (1974-2-SCC-213), wherein the Supreme Court
held that it is the duty of the Court to accept the highest bid and
the Court is not bound to go on adjourning the sale on the basis
of valuation report. Referring to and relying on the decision in
M/s Navalkha & Sons (supra), the Supreme Court stated that in
public sales, the authority must protect interest of the parties
keeping in view the fact that a Court sale is a forced sale and,
notwithstanding the competitive element of public auction, the
best price is not often forthcoming.
Therefore, in its judgment in the FCS Software’s case (supra), the
Supreme Court noted that the highest bid for the property in
liquidation was by M/s NICE Society for Rs.3.5 crores and that
even at the stage when appeal was being heard by the Division
Bench, an opportunity was afforded to the Appellant M/s FCS
Software Solutions Private Limited to offer a better price, but
still it did not avail of such an opportunity and that the sale deed
was executed in favor of M/s NICE Society and the possession of
the property was handed over to the said NICE Society and that
it had incurred expenses and if at this stage the sale in its favor is
set aside, serious prejudice will be caused to the said Respondent
No.3 i.e. M/s NICE Society.
At the same time, the Supreme Court however noted from the
facts of the case that it is clear that the Appellant’s bid was accepted
in November, 2004 and that immediately it had deposited 25% of
the amount. The Appellant also deposited remaining amount of
75% on April 12/13, 2005. The Supreme Court therefore felt that
it would be appropriate if the Respondent No.3 i.e. NICE Society
was directed to pay an amount of Rs.30 lakhs to the Appellant
which would serve the ends of justice as payment of Rs.30 lakhs
will serve as a “solatium to the purchaser for his trouble and
disappointment for the loss of that which is perhaps a good
bargain” (vide Chundi Charan –vs- Bankey Behary (1899-ILR 26-
Cal-449-FB). Thus, the purchase by M/s NICE Society was allowed
not to be disturbed.
CONCLUSION
The recent initiative taken by the Ministry of Corporate Affairs
to bring in transparency in the workings of the Official
Liquidators attached to various High Courts and to highlight the
advertisements for sale of the land and other property etc. of the
companies under liquidation do suggest that enormous
opportunity exists for the property buyers to buy properties
through court ordered auction and there is no doubt that this
mode of acquiring property will be increasingly used. Coupled
with this, the positive and pragmatic Court decisions clearing
the doubts expressed about the rights of the auction purchasers
would also enable the prospective property buyers to present
their case in a better manner and to enforce their rights, should
there be any litigation triggered out of such public auction sale
of property of companies, whether under liquidation or under
sale due to default in payment of the dues/loan amounts to the
banks and financial institutions. Also, the professionals associated
with purchase of property on behalf of their clients can therefore
explore the possibility of buying property through court ordered
auction and assist in effective use of such valuable resources of
the country. 􀂉
Option to Purchase Land Assets through Court Ordered Auctions – Some Legal Issues


Source : ICSI -