LIVE Online Course on NDPS by Riva Pocha and Adv. Taraq Sayed. Starting from 24th May. Register Now!!
LAW Courses

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

auction confirmed cannot be set aside unless fraud establish

KANDE VENKATESH GUPTA ,
  12 August 2008       Share Bookmark

Court :
Supreme Court
Brief :
Once court confirms the sale in favour of the highest bidder in pursuance of the action, the same cannot be set aside unless some fraud is played collusion. Subsequent higher offer will not be taken into consideration
Citation :
delivered on 12-08-2008 not yet reported
REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4992_OF 2008
[Arising out of SLP(Civil) No. 12820/2006]


Valji Khimji & Company .. Appellant

-versus-

Official Liquidator of Hindustan
Nitro Product (Gujarat) Ltd & Ors. .. Respondents



JUDGMENT




Markandey Katju, J.



1. Leave granted.

2. This appeal has been filed against the impugned

final judgment & order dated 25.8.2005 & 26.8.2005
2


passed by the High Court of Gujarat at Ahmedabad in

O.J. Appeal No. 69 and 70 of 2004 in O.J. Misc. Civil

Application No. 175 of 2003 and CA No. 311 of 2004

respectively in Official Liquidator Report No. 49 of

2003.



3. Heard learned counsel for the parties and perused

the record.



4. The facts of the case are that Hindustan Nitro

Product (Gujarat) Ltd. was put under liquidation, and

an official liquidator was appointed for it. The assets

of the company were proposed to be auctioned, and

hence the Court asked the official liquidator to obtain

a valuation report. The official liquidator after

obtaining the valuation report submitted it to the

Court. The valuation of these assets, according to the
3


official liquidator, was Rs.2.55 crores. The property

was then put up for auction on 25.3.2003 after

advertising it in various well-known newspapers

having wide circulation, including `The Economic

Times' which is a well known newspaper having wide

circulation in the business community.



5. Several bids were received and were opened in the

Court. The highest bid was that of the appellant M/s.

Valji Khimji & Company amounting to Rs. 3.51 crores.

With the consent of the learned advocates

representing the secured creditors, the said bid was

accepted and the sale was confirmed on 30.7.2003.

The Court directed the appellant to deposit 25% of the

purchase price i.e. Rs.63,98,000/- within 30 days

from the said day and to deposit the balance amount

within the next three months. The Court also directed
4


that the amount may be deposited in installments, but

no installment should be less than Rs.5 lakhs. These

conditions were complied with by the appellant.



6. Although the sale was confirmed in favour of the

appellant on 30.7.2003, a letter dated 22.10.2003 was

sent to the official liquidator by one M/s. Manibhadra

Sales Corporation (respondent No. 8 herein) offering to

buy the assets in question for Rs.3.75 crores (though

this offer was admittedly withdrawn later on).



7. Subsequently in August 2004, M/s. Castwell

Alloys Limited (respondent No. 9 herein) made an offer

of Rs.5 crores for the said assets. This offer was

made more than one year after the confirmation of the

sale in favour of the appellant.
5


8. Both M/s. Manibhadra Sales Corporation and

M/s. Castwell Alloys Limited filed applications praying

for recall of the order dated 30.7.2003 by which the

sale was confirmed in favour of the appellant. On

10.9.2004, the learned Company Judge took up both

these applications and passed an order dated

10.9.2004 recalling the order dated 30.7.2003 by

which the sale was confirmed.



9. Aggrieved against the said order dated 10.9.2004

the appellant filed an appeal before the Division Bench

of the High Court which was dismissed by the

impugned judgment dated 25.8.2005 and 26.8.2005.

Aggrieved, this appeal has been filed before us by way

of Special Leave.
6


10. We have carefully perused the impugned

judgment & order of the learned Division Bench as

well as the order dated 10.9.2004 of the learned Single

Judge and are of the opinion that the same cannot be

sustained.



11. It may be noted that the auction sale was done

after adequate publicity in well-known newspapers.

Hence, 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. However, in our opinion,

entertaining objections after the sale is confirmed

should not ordinarily be allowed, except on very
7


limited grounds like fraud, otherwise no auction sale

will ever be complete.



12. It is not in dispute that the auction was an open

auction after wide publicity in well-known newspapers.

Hence, there was nothing to prevent M/s. Manibhadra

Sales Corporation and M/s. Castwell Alloys Limited to

have participated in the auction, but they did not do

so. There is no allegation of fraud either in this case.

Hence, in our opinion, there was no justification to set

aside the confirmation of the sale.



13. It appears that the reasoning of the learned Single

Judge, as also of the Division Bench, was that the

valuation of the assets of the company was made as if

these assets were scrap. The reasoning of the learned

Single Judge of the High Court thus seems to be that
8


the assets in question was wrongly given out to be

scrap and thus a proper bid was not obtained.



14. In our opinion, there is nothing to show that the

assets in question which were auctioned-sold were

ever given out to be scrap. They are not mentioned as

scrap in the advertisement or sale notice, nor is there

any material to show that the valuer valued them

treating them to be scrap.

15. We have carefully perused the sale notice and we

find that it is nowhere mentioned therein that the

assets in question are scrap.



16. No doubt , the assets of M/s. Hindustan Nitro

Product (Gujarat) Limited offered to be sold in the

auction sale were offered in lots (as mentioned in the

sale notice). The first lot was plant machineries and
9


all other movables excluding building structure,

records and compound wall, the second lot was the

building structure except T.K. Office, records &

compound wall, the third lot was a composite offer (I &

II) above, the fourth lot was land except records, and

the fifth lot was a composite offer (i.e. III & IV above).

In our opinion, this cannot be described as scrap.



17. 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 is nothing to show that

the items proposed to be auctioned sold was scrap, i.e.

they could not be used for the same purpose for which

they were earlier used after repairing or reconditioning

the same.
10


18. Learned counsel for the respondents submitted

that the assets proposed to be auctioned sold were not

in a running condition and hence were `scrap'. We

cannot agree. In our opinion merely because the

assets were not in a running condition it does not

mean that they were scrap. For instance, if the engine

of a motor car is not functioning due to some defect,

that does not mean that the motor car has become

scrap. The motor car can be towed to a garage where

a motor mechanic can repair it and then it can again

become in running condition. The motor car will

become scrap only if it is in such a dilapidated

condition that it can never be made in running

condition again despite repairs and renovation, and

hence it will have to be sold as a piece of metal.
11


19. Hence, we cannot agree with the views of the

Courts below that any fraud took place in the auction

sale.



20. Moreover, 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, we

are of the opinion that all the bidders in the auction

knew what they were bidding for. Respondent No. 9

never participated in the auction and we fail to

understand how he could start objecting to the auction

more than one year after the same was confirmed.
12


21. The other reasoning of the learned Single Judge

by which he set aside the confirmation of the sale is

that the company was entitled to incentives and

benefits like sales tax exemption and modvat. The

learned Single Judge has observed that the company

M/s. Hindustan Nitro Product (Gujarat) Limited had

made huge investments in development of an effluent

treatment plant, and received permission for supply of

gas for fuel from GAIL. The learned Single Judge was

of the view that the intangible assets were required to

be considered while fixing the value of the property.



22. We fail to understand how all this is relevant at

all. After all, what was being sold was the assets of

the company, and not the shares of the company, and

these assets were fully described in the sale notice.
13


23. The learned Single Judge in our opinion also

wrongly observed that while doing the valuation the

potential of the company was overlooked. Such

potential has really no relevance in our opinion.



24. The learned Single Judge has observed that the

valuation was made as if the assets of the company to

be sold were scrap, and instead the valuation should

have been done as if it was a going concern. We have

already observed above that this observation is really

based on no material as there is nothing to show that

the valuation of the assets was done as if they were

scrap.



25. The learned Division Bench in its impugned

judgment has broadly adopted the reasoning of the

learned Single Judge. Hence for the same reason
14


given above the judgment of the learned Division

Bench also cannot be sustained.



26. Learned counsel for the appellant Mr. Sundaram

has relied upon the decision of this Court in M/s

Kayjay Industries (P) Ltd. vs. M/s. Asnew Drums (P)

Ltd & Ors. (1974) SCC 213 in which it was observed

that mere inadequacy of price cannot demolish every

court sale. The Court also observed in para 7, as

under:


"If Court sales are too frequently adjourned with a
view to obtaining a still higher price it may prove a
self-defeating exercise, for industrialists will lose
faith in the actual sale taking place and may not
care to travel up to the place of auction being
uncertain that the sale would at all go through"



27. On the other hand, learned counsel for the

respondents relied upon a decision of this Court in

Divya Manufacturing Company (P) Ltd. etc. vs.
15


Union Bank of India & Ors. etc. (2000) 6 SCC 69.

We have carefully perused the above decision and we

find that it is clearly distinguishable.



28. The facts of the case were that at the initial stage

the appellant offered 37 lakhs for purchasing the

property in question. At the intervention of the court

the price was raised to 1.3 crores, and ultimately it

was found that the property could be sold for Rs.2

crores. It was on these facts that this Court held that

even after confirmation of the sale the same could be

set aside.



29. Thus, the ratio in Divya Manufacturing

Company (P) Ltd. (supra) was that if there is fraud

then even after the confirmation the sale can be set

aside because it is well-settled that fraud vitiates
16


everything. On the facts of that case, the Court was

of the view that that confirmed sale deserved to be set

aside.



30. In our opinion the decision of this Court in Divya

Manufacturing Company (P) Ltd. (supra) cannot be

treated as laying down any absolute rule that a

confirmed sale can be set aside in all circumstances.

As observed by one of us (Hon. Katju, J.) in his

judgment in Civil Appeal No. 4908/2008 (Dr. Rajbir

Singh Dalal vs. Chaudhary Devi Lal University, Sirsa

& Anr pronounced on 6.8.2008), a decision of a Court

cannot be treated as Euclid's formula and read and

understood mechanically. A decision must be

considered on the facts of that particular case.



31. If it is held that every confirmed sale can be set

aside the result would be that no auction sale will ever
17


be complete because always somebody can come after

the auction or its confirmation offering a higher

amount.



32. It could have been a different matter if the auction

had been held without adequate publicity in well-

known newspapers having wide circulation, but where

the auction sale was done after wide publicity, then

setting aside the sale after its confirmation will create

huge problems. 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 be themselves be to blame if they do not

come forward to bid at the time of the auction. They

cannot ordinarily later on be allowed after the bidding

(or confirmation) is over to offer a higher price.
18


33. Of course, the situation may be different if an

auction sale is finalized say for Rs.1 crore, and

subsequently somebody turns up offering Rs. 10

crores. In this situation it is possible to infer that

there was some fraud because if somebody

subsequently offers 10 crores, then an inference can

be drawn that an attempt had been made to acquire

that property/asset at a grossly inadequate price.

This situation itself may indicate fraud or some

collusion. However, if the price offered after the

auction is over which is only a little over the auction

price, that cannot by itself suggest that any fraud has

been done.



34. In the present case we are satisfied that there is

no fraud in the auction sale. It may be mentioned that

auctions are of two types - (1) where the auction is not
19


subject to subsequent confirmation and (2) where the

auction is subject to subsequent confirmation by some

authority after the auction is held.

35. In the first case mentioned above, i.e. where the

auction is not subject to confirmation by any

authority, the auction is complete on the fall of the

hammer, and certain rights accrue in favour of the

auction purchaser. However, where the auction is

subject to subsequent confirmation by some authority

(under a statute or 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 favour of the auction purchaser, and these

rights cannot be extinguished except in exceptional

cases such as fraud.
20


36. In the present case, the auction having been

confirmed on 30.7.2003 by the Court it cannot be set

aside unless some fraud or collusion has been proved.

We are satisfied that no fraud or collusion has been

established by any one in this case.



37. In view of the above, we allow this appeal and set

aside the impugned judgments and orders of the

learned Single Judge as well as the Division Bench

dated 25.8.2005 and 26.8.2005. The confirmation of

the auction sale dated 30.7.2003 in favour of the

appellant stands upheld. There shall be no order as

to costs.


..............................J.
(Altamas Kabir)


..............................J.
(Markandey Katju)
New Delhi;
21


12th August, 2008
 
"Loved reading this piece by KANDE VENKATESH GUPTA ?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"



Published in Civil Law
Views :




Comments






Latest Judgments


More »


Post a Suggestion for LCI Team
Post a Legal Query