TMI Blog2010 (12) TMI 1052X X X X Extracts X X X X X X X X Extracts X X X X ..... any Court at this stage as stated above is twofold; (i) to secure and ensure payment to the creditors on best possible terms and (ii) to get a fair deal for the workers both with regard to the past arrears and future employment. These aspects cannot be left to the management of the CBL alone. Attempts have to be made to get a best possible deal by tapping all sources and parties, who are interested. - CA NO. 900 OF 2008, 495 AND 1767 OF 2010 AND CP NO. 204 OF 2003 - - - Dated:- 20-12-2010 - SANJIV KHANNA, J. C.A. Sundram, P.C. Sen, Ms. Aanchal Yadav, Abhinit Das, Rakesh Khanna, Rajiv K. Garg, Ashish Garg, Chinmoy Pradip Sharma, Rajiv Behl and Atul Sharma for the Appearing Parties. ORDER 1. Bakemans Industries Private Limited (BIPL) was in the business of making and marketing biscuits and allied products under the trade mark/brand Bakeman since 1978. BIPL had availed loan of Rs. 17 crores from State Industrial Corporation of Maharashtra Limited (SICOM) and had defaulted in repayment. SICOM took over possession of BIPL factory at Patiala on 18-7-2003 under section 29 of the State Financial Corporations Act, 1951. The operations were shut and the factory was lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings directed the management of BIPL to deposit Rs. 2 crores failing which SICOM was at liberty to proceed with the statutory remedies available to them under the State Financial Corporation Act, 1951. An undertaking was also given by the Managing Director of BIPL. 6. SICOM obtained a valuation report of the property consisting of land measuring 30544 square yards and a building comprising of three floors having RCC construction with plant and machinery at Patiala, Punjab (as the property). There were also unpacked machineries, which had been imported from abroad. 7. As the management of BIPL failed to deposit Rs. 2 crores and did not submit a definite proposal in terms of the order dated 28-11-2003 in the execution proceedings, SICOM was given liberty to proceed with the sale. On 8-2-2004, SICOM advertised for sale of the factory in the newspapers. 8. On or about 15-3-2004, Ceylon Biscuits Private Limited (CBL) filed an application before the execution court seeking permission to inspect the property disclosing that they had been negotiating with the management of BIPL. 9. CBL had shown willingness to submit bid and were allowed to do so vide order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvised the purported sale of the assets of the appellant on behalf of SICOM having regard to the provisions of section 29 of the 1951 Act? (2)Whether in a case of this nature and particularly having regard to the fact that SICOM submitted itself to the jurisdiction of the executing court and the Company Court, can now turn around and contend that in effect and substance it had exercised its statutory powers under section 29 of the Act and allowed the same only to be supervised by the learned Company Judge? (3)Whether the statutory powers of a financial corporation as envisaged under section 29 of the 1951 Act would prevail over the proceedings before a Company Judge in a winding-up proceeding? (4)Whether involvement of the Official Liquidator in the facts and circumstances of the case and particularly in view of the fact that Official Liquidator brought to the court s notice claims of other creditors, the Company Judge ought to have dealt with the same in the manner laid down in the Companies Act and/or the Rules framed thereunder and/or the decision of this Court? (5)Whether the High Court while exercising its powers under section 433 of the Companies Act read with other p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty which has been put to auction was the prime property over which the fate of the creditors depended, be they secured or non-secured ones, the Company Court, in exercise of its equity jurisdiction could not have obliterated it from its mind the cases of the others. If the assets belong to the creditors, that must mean the whole body of the creditors and not only one of the secured creditors. The inconsistency of it is self-evident, as, on the one hand, it is stated that the property of the Company does not vest in the court or the Official Liquidator, on the other hand, it is stated that it is vested in the body of the creditors and not only in SICOM. 75. The High Court, therefore, could not have ignored the Official Liquidator only on the ground that a provisional Official Liquidator was appointed and not a regular Official Liquidator. The power and functions of the provisional Official Liquidator for all intent and purport would be the same as that of the Official Liquidator and, therefore, it was not necessary for the Company Judge to wait till the Company was wound up. 76. If the jurisdiction of a Company Judge is limited, any substantial deviation and departure therefrom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of the other creditors. 79. We, therefore, are of the opinion that interest of justice would be subserved if while allowing the appeal, the learned Company Judge is requested to go into the question afresh in accordance with the provisions of the Companies Act and hold a fresh auction. While doing so, indisputably, Ceylon Biscuits Pvt. Ltd. s offer would be considered. The Company Judge may consider the question of grant of some preference to Ceylon Biscuits Pvt. Ltd. but while an auction is to be held, there should be a proper valuation of all the assets of the Company both movable and immovable. 80. The court, indisputably, may consider the question of framing an appropriate scheme if it is found that there is a possibility of revival of the Company. In other words, we leave all options open to the learned Company Judge as are available in terms of the provisions of the Companies Act including adjustment of equities amongst the parties. 81. Till, however, a final order is passed, Ceylon Biscuits Pvt. Ltd. would continue to function not as an auction-purchaser but as a Receiver of the Company Court. Ceylon Biscuits Pvt. Ltd. shall file all statements of accounts in regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred up to 31-3-2008 by its subsidiary company CBIPL entrusted with the running the business of manufacturing biscuits using BIP property and other assets. 4. Reimbursement of expenses incurred between 31-3-2008 and 31-7-2008 amounting to Rs. 0.08 crores. 5. Reimbursement of expenses incurred after July 2008 and till the property is re-auctioned. 6. Permission to remove the plant and machinery brought in and purchased by CBL from time to time." 19. Vide order dated 2-12-2008, Vaish and Associates, Chartered Accountants were appointed to verify the statement submitted by CBL. They have submitted a report in which some discrepancies/objections have been raised. However, they have accepted that even after adjustment of certain amounts, CBL had transferred to CBIPL Rs. 10,89,65,576. It is also accepted that CBL had transferred Rs. 10,02,344 to third parties for operations/startup operations. They have stated that CBIPL has incurred/adjusted accumulated loss of Rs. 7,11,09,833 and had installed new assets amounting to Rs. 51,49,093. In the report it is stated that under pre-operational expenses after adjustment the total expenses incurred were Rs. 52,57,321. Rs. 14,50,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 5 and 6 at Sri Lanka as in June, 2005. In the second report they have valued the said plant and equipment at Rs. 449.43 lakhs. In the reply filed by ITCOT in this Court on 5-5-2010 to CA No. 1208/2009, the said valuation has been justified on the ground that they have applied straigtline depreciation at the rate of 6.66 per cent per year for four years, which has been added to the value of the plant and equipment as in February, 2009. Per se , this method of valuation is defective and cannot be and should not be accepted. There are several reasons for the same. Firstly, it presumes that the equipment was new equipment as on June, 2005 whereas in fact the entire plant and equipment as per the report itself was manufactured and assembled in the year 1997-98. By this method, the valuation of the plant and equipment in 1997-98 would have been several times more by applying and adding 6.66 per cent depreciation every year. By the same reasoning, the actual purchase value of the equipment/plant in 1997/1998 should have been the basis for valuation. This basis has rightly not been adopted and applied. Secondly, what was required and valued was the market value of the plant and equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to any interest on the amounts deposited by them in two instalments of Rs. 25 lakhs on 23-3-2004 and Rs. 12.25 crores on 13-8-2004 (Total Rs. 12.5 crores). 26. Learned counsel for the management of BIPL has relied upon the judgment of the Supreme Court in the case of Allahabad Bank v. Bengal Papers Mills Co. Ltd. [2004] 8 SCC 236 1 . The relevant portion is reproduced below : "10. The Official Liquidator, in winding-up proceedings by court, has the power to sell the immovable properties of the company wound up, under section 457(1)( c ) of the Companies Act, 1956. Rule 272 of the Companies (Court) Rules, 1959 provides that an Official Liquidator can sell the property belonging to the company only with the previous sanction of the court and that every sale shall be subject to confirmation by the court. Rule 273 lays down the procedure for sale and Rule 274 deals with the meeting of the expenses of the sale. Order 21 Rule 93 of the Code of Civil Procedure (for short "the Code") provides that where a sale of immovable property is set aside under Rule 92 of Order 21, the purchaser shall be entitled to an order for repayment of his purchase money with or without inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to any compensation at all, or to compensation with an obligation to account for the profits, an issue, that has to be adjudicated in an appropriate manner and not certainly while considering an application for clarification. We find that the obtaining of possession by the purchaser on deposit of the purchase price has considerable relevance in deciding whether the purchaser would be entitled to interest on the purchase price as indicated by the decision of this Court in Union Bank of India v. Official Liquidator, H.C. of Calcutta. Therein, after referring to the decision in Motors Investment Ltd. v. New Bank of India relied on by counsel for the applicant and the direction for payment of interest made therein, this Court declined the award of interest on the distinction that, in that case, possession had passed to the purchaser. The Court stated that the judgment in Motors Investment Ltd. v. New Bank of India had no bearing mainly because as soon as the amount was deposited by the purchaser, possession of the property was handed over to him. No doubt the learned Judges thereafter, also referred*** to the decision in the present case* and the non-award of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the applicant being put in possession. In that context, the adequacy of consideration paid by the applicant will be a relevant consideration. As observed in Goff and Jones in para 42-004, neither common law nor equity normally inquires into the adequacy of the consideration which the purchaser provides. But such an enquiry would be central to any defence solely based on a defence of change of position, for, it is a defence which operates to discharge, wholly or in part, a defendant s duty to make restitution. Be it noted that the sale in favour of the applicant was set aside by this Court mainly on the ground that the consideration paid was grossly inadequate." 27. Paragraphs 12 to 14 of the said decision deal with the principle of restitution and it was observed in the said case that the applicant s claim on the said ground was not entitled to succeed in the said case. 28. Law of restitution was initially recognized as based upon quasi-contract or implied contract theory. It was founded on the principal that the recipient must account for money had and received and for money paid or from quantum meruit and quantum valebant claims i.e., all claims for recov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ender enrichment unjust. The defenses available to the defendant include estoppel, bona fide purchase for value, passing on, illegality or incapacity. Defense of change in position is also available but this is examined on a case to case basis. Generally, mere fact that the defendant has spent money, does not make it inequitable to deny restitution. The defendant has to establish causal link between the receipt of money and change in position, which makes it inequitable for the recipient/defendant to make restitution. 32. However, I need not go deeper into this aspect as CBL has not relied solely upon the principle of restitution. Learned counsel for the CBL has in fact relied upon the Order 21 Rule 93 of the Code of Civil Procedure, 1908 ( Code , for short), which provides that where sale of immovable property is set aside, the purchaser will be entitled to refund of purchase money with or without interest as the court may direct, against any person to whom it has been paid. In paragraph 10 of the judgment in Allahabad Bank s case ( supra ), it has been held that principles embodied in Order 21 Rule 93 can be applied to other sales to order refund of the purchase money wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the auction sale/confirmation of sale can be challenged in appellate proceedings. Therefore interest shall not be paid. The third contention raised by the management of BIPL relates to adequacy of the sale consideration paid by the auction purchaser. In this connection, my attention was drawn to the paragraph 14 of the judgment in the case of Allahabad Bank ( supra ), wherein paragraph 42-004 from Goff and Jones: The Law of Restitution, has been quoted. 34. The third contention of the counsel for the management of BIPL will be discussed in the subsequent portion of this order. 35. It is not possible to accept as an ominous universal rule that whenever possession of the property is given to the auction purchaser, he is not entitled to interest, if the sale is subsequently set aside as auction purchaser is always aware and conscious of the fact that the auction can be challenged in appellate proceedings. There are good reasons for the same. Court auctions do not normally fetch market value for a variety of reasons including uncertainty, delay and further litigation. If this argument on behalf of Management of BIPL is to be accepted and given judicial recognition, it wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said case the Supreme Court had ordered refund of purchase price along interest at the rate of 18 per cent per annum. However, it was observed that there is no discussion on the said aspect in the said decision. In the case of Central Bank of India v. Ravindra [2002] 1 SCC 367 1 , the Supreme Court discussed the concept and principle behind award of "interest" and has held that interest is compensation for the use of the money which a person is deprived of. Reference thereafter was made to the decision of the Supreme Court in the case of Union Bank of India v. Official Liquidator [2000] 5 SCC 274 2 , wherein the Court had exercised its discretion and declined to award interest as in that case possession of the property was given to the auction purchaser. It was noticed that in the case of Motors Investment Ltd. ( supra ), possession of the property was not given to the purchaser. In the case of Allahabad Bank ( supra ) the applicant-auction purchaser had obtained possession even before he had paid the entire purchase price and possession was given when he had paid only 25 per cent or so of the purchase price and had retained possession for 10 years. The other aspect, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion-purchaser was a bona fide purchaser, he was entitled to be protected. This decision of the Privy Council has been followed in several cases in India, vide Piari Lal v. Hanif-un-nissa Bibi 38 All. 240, Balwant Singh v. Mt. Laiqa Begam MANU/UP/0489/1923." 38. This brings us to the facts of the present case and to the question whether or not discretion should be exercised to pay interest on the amount deposited by the auction purchaser, if so, at what rate. 39. Learned counsel for the management of BIPL has stated that the present case is one of inadequacy of consideration and this is the reason why the Supreme Court had set aside the sale in the judgment dated 16-5-2008 in 2008 (15) SCC 1 ( sic ). Reference in this regard is specifically made to the paragraphs 78 and 79 of the said decision. 40. In paragraph 78 of the said decision, the Supreme Court has held that the company i.e., management of the BIPL had committed wrongs and, therefore, its property had been sold in the auction and even part of the property was taken out of the country. CBL/CBIPL had employed a large number of workmen and had started operating factory and, therefore, the relief, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c or direct finding regarding under valuation or fraud by CBL. I have quoted the reasons given by the Supreme Court for setting aside the sale in the present case. It is noticed that the Supreme Court has also adversely commented about the conduct of the management of BIPL in their decision dated 16-5-2008. 42. In the present case, possession of the property was handed over to CBL on 2-3-2005 after they had deposited the entire sale consideration on 13-8-2004. It has also come on record that CBL had stopped production and manufacturing in the property after the order of the Supreme Court on 15-9-2008. CBL, however, has not placed on record the date when they have started production or trial production. The property was sealed and possession was taken by SICOM on 18-7-2003. Thus, for nearly two years the factory was closed and was not functioning. There was no maintenance and the plant and equipment was not operational. The CBL has incurred expenditure to re-start the factory and make it operational. The report given by Vaish and Associates, Chartered Accountants has confirmed that expenditure was incurred by CBL/CBIPL to re-start and making the factory operational. It is stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were transferred to CBL/CBIPL in India for startup, operation, maintenance, running costs, watch and ward expenses etc. The property was dead capital investment for CBL from 13-8-2004 till 3-3-2005, when possession was given and then again from 15-9-2008 when the operations were shut down. Thus, out of the period of more than six years, between 13-8-2004 till today, the factory has been in operation for three years and six months (except equipment/plant in Sri Lanka). 44. Keeping in view all these aspects in mind and balancing out equities, I feel that CBL should be given interest at the rate of 5 per cent on the entire Rs. 12.5 crores from the date of payment till 10-1-2011. SICOM had initially deposited the entire sale consideration into an FDR and even now Rs. 4.5 crores is lying deposited in FDRs. BIPL or management of BIPL will get advantage of the amount of Rs. 8 crores, which was appropriated by SICOM, IDBI and IFCI from the date of appropriation. BIPL or management of BIPL will not be liable to pay interest to the said financial institutions at the rate of 18 per cent during the time when this amount was appropriated. Of course after the financial institutions make pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no interest will be payable for the same. 47. The last question is whether management of BIPL should be allowed to inspect the premises and whether the matter should be adjourned to enable the management of the BIPL to submit a scheme for rehabilitation and payment to the creditors. As far as inspection of the property is concerned, I think the same should be allowed. I reject the opposition by CBL/CBIPL that inspection by management of BIPL would result in infringement of their intellectual property right as they have installed specialized equipments. It will be open to CBL or CBIPL to remove the said equipment within a period of three weeks from today. CBL/CBIPL will inform the Official Liquidator at least 5 days in advance as to the date on which they want to remove their equipment. Equipment will be removed in the presence of the Official Liquidator or his representatives. It will be open to the Official Liquidator to ask ITCOT or their representative to be present at that time. Immediately after removal of the equipment, management of BIPL will be given notice by CBL/CBIPL to inspect the property. Even if the said equipment is not removed within three weeks, inspection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny ownes a duty to its creditors, present and future. The company owes a duty to its creditors to keep its property inviolate and available for repayment of its debts. The conscience of the company, as well as its management, is confided to its Directors. A duty is owed by the Directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the Directors themselves to the prejudice of the creditors. " The learned author furthermore observed: "Support here for this approach can be found in West Mercia Safetywear Ltd. v. Dodd where Dillon, L.J. approved the following statement of the position by the New South Wales Court of Appeal in Kinsela v. Russell Kinsela Pty. Ltd.: In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of Directors arise. If as a general body, they authorise or ratify a particular action of the Director, there can be no challenge to the validity of what the Directors have done. But where a company is insolvent, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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