Supreme Court of India

ALLAHABAD BANK ETC. ETC.versusBENGAL PAPER MILLS CO. LTD. AND ORS.

Citation: 1999 INSC 194
Decided: 20 April 1999
Disposal: Appeal(s) allowed
Bench: S P BHARUCHA

Holding

A sale of a liquidated company's assets must be confirmed by the court only if the court is satisfied that the price is the best possible and the sale complies with statutory procedures; otherwise, the sale order must be set aside.

Summary

Allahabad Bank and other banks appealed against the Calcutta High Court's confirmation of a sale of Bengal Paper Mills' assets by the Official Liquidator. The sale, valued at Rs. 1.5 crore and later raised to Rs. 2 crore, was conducted with limited newspaper advertisements, without disclosing the valuation report, and without proper consideration of lease‑hold land. The banks argued that the assets were securities for their loans and could not be sold without their written consent, and that the High Court failed to ensure the best possible price for the creditors. The Supreme Court held that the High Court has a duty to confirm a sale only after being satisfied that the price is adequate and the sale process complies with statutory requirements, and that the division bench erred by overlooking defects. Consequently, the sale order and related lease were set aside, possession was to be taken back by the Official Liquidator, and the assets were to be re‑valued and re‑sold.

Issues considered

The validity of the sale of a liquidated company's assets where the valuation report was not disclosed and advertisement was inadequate.
Whether secured creditors (banks) must give written consent before their securities are sold in liquidation.
The duty of the High Court to ensure that the best possible price is obtained before confirming a sale under the Companies Act.
Whether the purchaser's subsequent expenditure and risk affect the legality of setting aside the sale.
The validity of the lease obtained by the purchaser as a consequence of the sale.

Legislation cited

Companies Act, 1956s. Section 446, s. Section 447
Companies (Court) Rules, 1959s. Rule 273

Subjects

winding upsale of assetsliquidationsecured creditorsvaluationcourt confirmation of saleCompanies Actofficial liquidatorbank securitiesleaseholdadvertisementunsecured creditors

Judgment

A ALLAHABAD BANK ETC. ETC.
v.
BENGAL PAPER MILLS CO. LTD. AND ORS.

APRIL 20, 1999

B [S.P. BHARUCHA AND R.C. LAHOTI, JJ.] __..,._

Companies Act, 1956/Companies (Court) Rules, 1959 : Section 4471
Rule 273-Winding up ordered by a Company Judge-Official Liquidator
ordered to auction assets and properties of the company after advertising in
C newspapers-Assets and properties valued at Rs. 1.5 Crores and sold at the
said value-75% of the price to be paid in instalments-Sale order challenged
in appeal before Division Bench on the ground of irregularities in sale-
Contention that valuation report of the assets of the company was not
disclosed to the appellants-Lease hold land in company's possession had
. D not been considered-Advertisements for sale should have been given all
-over India-Assets of the company had become the securities of the appellant
banks-Company Judge had regard only to the prospect of re-_employment
of 1700 ex-employees-No enquiry made as to haw the ex-employees of the
company-would be re-employed-Appeal dismissed by the Division Bench-
However, it held that Single Judge passed the order in great haste without
E proper consideration-On appeal, Held : Upon liquidation, the assets and
properties of the company in liquidation vest in the Official Liquidator for
the benefit of its creditors-Interests of creditors of the company are
paramount-Obligation of the High Court to ensure that best possible price
is realised-Division Bench of the High Court erred by turning blind eye to
F the defects noted by it in the order of sale-Official Liquidator ordered to
forthwith take possession of the assets and properties covered by the sale
order--Said assets and properties to be resold after fresh valuation and due
advertisements-Respondent No. 2 to be repaid the purchase price of Rs. 2
Crores-Lease in favour of Respondent No. 2 also set aside.
<f

G Banking Practice--Securities-Banks not requiring sale proceeds to
be kept apart to the credit of their suits-Whether amounts to giving up of
securities-Held : This question cannot be answered in the absence of full
record as it has arisen incidentally in appeals-Left to be answered by the
High Court on appropriate applications by the banks.

H A number of mortgage and hypothecation suits for recovery had been
750
ALLAHABAD BANK v. BENGAL PAPER MILLS CO.LTD. 751
filed against the respondent company by different banks including the A
petitioner bank in which even receivers had been appointed. In addition to the
above suits, in a winding up petition, the company was ordered to be wound
up by the High Court and the Official Liquidator was directed to take
possession of the company's assets and properties. High Court appointed a
valuer and passed an order granting the Official Liquidator leave to sell the
assets and properties of R-1 "by public auction by inviting sealed tenders B
upon advertisements once in 'The Statesman' once in 'Jugantore' and once
in 'Biswamitra' as per usual terms and conditions of sale."

In pursuance of the advertisement for sale, offer of R-2 was accepted.
R-2 intended to purchase the entire assets of R-1 with a view to reviving it C
as an ongoing paper mill. R-2 had entered into discussions with the labour
unions and the State Government for re-opening of the paper mill. The offer
was for a sum of Rs. 1.5 Crores and bank drafts for the aggregate amount
of Rs. 15 lakhs had been enclosed. For the payment of balance 75%, R-2
intended to pray to the High Court for payment in instalments. Consequently,
a sale order in favour of R-2 was passed in which it was recorded that the D
secured creditors raised no objection except a prayer for a direction to the
Official Liquidator for disbursement of monies to secured creditors. The
secured creditors protested against the said statement referring them and
it was modified by the Court by removing the words 'raised no objection'. The
said sale order alongwith the order making modification was challenged by E
the appellant in appeal, before a Division Bench of the High Court, where
I they took the plea that valuation report was not disclosed to the banks and
I the assets of R-1 were securities of the bank which could not be sold without
~ the written consent of the banks. The Division Bench dismissed the appeal
in view of the facts that the banks had participated in the sale from the very
beginning, no objection had been raised by the banks at any point time, no F
allegation of fraud had been raised by the banks at any point time, no
allegation of fraud had been made against the purchaser, the purchaser had
purchased the properties in a court sale and promised to give employment
to 1700 people. Hence present appeals.

Allowing the appeals, this Court
G

HELD 1.1. Upon liquidation, the assets and properties of the company
in liquidation vest in the Official Liquidator for the benefit of its creditors.
It is only from out of the sale proceeds of these assets and properties that
the creditors of the company can hope to recoup their dues. To ensure that H
752 SUPREME COURT REPORTS [1999] 2 S.C.R.

A the best possible price is realised upon the sale of these assets and properties,
the sale thereof by the liquidator is required to be confirmed by the High
Court. It is the obligation of the High Court to the creditors of the company
in liqtaidation to make sure that the best possible price has be~n realised.
It is also well to remember that, for the most part, the creditors of a company
B in liquidation are small trade creditors whose dues are not so large as would
make it economical for them to resort to proceedings in court. It is these
small creditors that the High Court is expected to protect when confirming
a sale by the liquidator, Navalkha & Sons v. Sri Ramanya Das & Ors., (1970]
3 SCR 1, relied on. (762-E; 763-F)

C Gordhan Das Chuni Lal v. T. Sriman Kanthimathinatha Pillai, AIR
(1921) Mad. 286; Rathnaswami Pillai v. Sadapathi Pillai, AIR (1925) Mad.
318; S. Soundarajan v. Mis. Roshan & Co., AIR (1940) Mad. 42 and A.
Subbarya Mudaliar v. Sundarajan, AIR (1951) Mad. 986, referred to.

1.2. The Divison Bench of the High Court could not realistically expect.
D the ordinary unsecured creditors of R-1 to file appeals on the ground of
inadequacy of the sale price. It could not have turned a blind eye to the many
defects that it itself noted in the order of sale merely because the b~nks had
moved the appeals after five months; nor was there any justification for
taking into consideration the expenditure that had been incurred by R-2
subsequent to its possession of the assets and properties. In the first place,
E the Division Bench should have noted that the Single Judge had with unseemly
haste ordered possession thereof to be handed over to R-2 on the very next
day. In the second place, the appeals had been filed within the period of '
limitation. Expenditure incurred during this period could not render the
appeals, in effect, infructuous. The same would apply to expenditure incurred
F subsequent to the filing of the appeals and until the time they were heard.
R-2 knew that the appeals were pending and that they could end in the order
of sale being set aside. Such expenditure as it incurred with this knowledge
was at its risk. In the third place, and most important, the interests of the
creditors of R-1, particularly the unsecured creditors, overweighed such
equities, if any, as m'ight have been considered to have been in favour ofR-
G · 2. It was the obligation of the Division Bench to have struck down the order
of sale, having regard to what it found wrong with it. [763-G-H; 764-A-CJ

1.3. The interests of the creditors of R-1 are paramount, as is the
obligation of the Court to them. That R-2 has incurred expenditure and
obligations, which were detailed, subsequent to the passing of the order of
H sale and upto date cannot; in the circumstances, deter this Court from
ALLAHABAD BANK v. BENGAL PAPER MILLS CO.LTD. 753

set~ing aside the order of sale. R-2 knew that the appeals were pending. It A
should have appreciated that the order of sale was very vulnerable given what
the Division Bench of the High Court had to say about it. It consciously took
the risk of incurring the expenditure and obligations and it cannot take
shelter behind them. (764-E-F)

1.4. It would be wrong in principle to vary the terms upon which the B
offer of R-2 was accepted to overcome the prejudice to the creditors of
R-1. There is no material on record to assess the fair value of the assets
and properties that were sold. The said value could have been found only after
a proper sale had been held. [764-G)

2. The judgment and order under appeal is set aside as also the order C
of sale dated 15th September, 1989 in favour of R-2. The Official Liquidator
shall forthwith recover possession from whoever is in possession of the
assets and properties covered by the said order of sale. The same shall be
resold after a fresh valuation report thereof has been obtained, a reserve bid
fixed and due advertisements published. R-2 shall be repaid the purchase D
price of Rs. 2 Crores by the Official Liquidator subsequent to recovery of
possession. The lease of the property, which was the subject matter of the
sale, in favour of R-2 is also set aside. (766-E)

3. The banks did not at any time prior to the order of sale require that
the sale proceeds, insofar as they related to properties secured in their E
favour, should be kept apart to the credit of their suits. It is, therefore, a moot
question as to whether the banks had given up their securities before the
order of sale, but this question cannot be resolved in the absence of the full
record for this was a question that arose incidentally in the appeals from the
order of sale. This question should be left to be answered by the High Court F
on appropriate applications by the banks. (765-F]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4191 of
1991 Etc.

From the Judgment and Order dated 9.7.90 of the Calcutta High Court G
in A.No. 169of1990.

G.L. Sanghi, S.K. Mehta, Dhruv Mehta, A. Sharan, M. Sharan, Sanderson,
Morgans, A.K. Shil, S. Bhowmick and G. Joshi for the Appellants.

B. Sen, Dipankar Gupta, Bhaskar Gupta, Tapas Ray, Dilip Sinha, J.R. H
754 SUPREME COURT REPORTS · [1999] 2 S.C.R.

A Das, Dhruv Aggarwal, Rashmi Jain, R.P. Gupta, Ranjan Mukherjee and A.D.
Sikri for the Respondents.
1--
i
The Judgment of the Court was delivered by r

BHARUCHA, J. The relevant facts need to be set out to appreciate
B what is involved in these appeals from the judgment and order of a Division
Bench of the High Court at Calcutta.

In June, 1985 a winding petition was filed against the first respondent
company, now in liquidation ('the_ said company'). On 30th September, 1986
a mortgage suit (Title Suit No. l 43 of 1986) was filed by the Punjab National
C Bank and the Bank of Baroda against-the said company for recovery of the
sum of Rs. 1,94,24,886.37 before the Subordinate Judge, Burdwan. On the
same day a hypothecation suit (Suit No.737 of I 986) was filed by the United
Bank of India, the Punjab National Bank and American Express against the
said company for recovery of the sums of Rs. 20,46,010.31and17,87,796.49
D in the Calcutta High Court. On the same day, a hypothecation suit (Suit No.
73 7 of 1986) was filed by the Allahabad Bank against the said company for
recovery of the sums ofRs.29,18,360.65 and 11,64,370.00 in the Calcutta High
Court. Again on the same day, the Punjab National Bank and American
. Express filed a hypothecation suit (Suit No.738 of 1986) against the said
company for the recovery of the sums ofRs.5,30,38,922.28 and Rs.2,14,548.00
E in the Calcutta High Court. On 3rd December, 1986 the Calcutta High Court
passed an interim order in Suit No.738of1986 appointing joint receivers. From
time to time, further orders were passed in the same suit for inventory and
sale of the hypothecated goods.
-
On 24th April, 1987, in the winding up petition aforementioned, the said
F company was ordered to be wound up and the Official Liquidator was directed
to take possession of the said company's assets and properties. On 15th May,
1987 an application was moved under Section 446 of the Companies Act by
~

the Punjab National Bank and American Express for leave to carry on with
their suits; also for transfer of the mortgage suit filed in the Burdwan court
G to the Calcutta High Court. On 15th May, 1987 the application was allowed
a11d the suit transferred from the Burdwan court to the Calcutta High Court
was numbered (T.C. Suit No. 5 of I 987). In June, 1987 the Allahabad Bank
made an application under Section 446 of the Companies Act for leave to
carry on with its suit and on 26th June, 1987 such leave was granted. On 25th
November, 1987, the Official Liquidator wrote to the joint receivers in respect
H of the possession of the assets and records of the said company held by
ALLAHABAD BANK v. BENGAL PAPERMlLLS CO. LTD. [BHARUCHA, J .] 755
them. On 30th November, 1987 the joint receivers replied to the Official A
Liquidator; therein they stated that the hypothecated goods could not be
sold due to lack of offers.

On I l/12th Janqary, 1988 the Punjab National Bank made an application
to the Calcutta High· Court in the transferred suit praying that the Official
Liquidator should be appointed receiver in place and stead of the joint B
receivers in Suit No.738 of 1986 with directions to take possession, make
inventory and sell the securities both in the transferred suit as well as in Su·it
No. 738of1986. The application was allowed on 12th January, 1988. On 28th
April, 1988 the joint receivers wrote to the Official Liquidator confirming that
they had handed over possession of the securities they held to him. C
On 25th November, 1988 the High Court appointed a valuer of the said
company's assets and properties. On 29th June, 1989 an order was passed in
the winding up petition giving to the Official Liquidator leave to sell the
assets and properties of the said company "by public auction by inviting
sealed tenders upon advertisements once in the 'The Statesman' once in D
'Jugantore' and once in 'Biswamitra'. as per usual terms and conditions of
sale". The sale was to be held on 15th September, 1989 at 2.00 pm in Court.
The Official Liquidator was directed to issue the advertisements at least three
weeks prior to the sale and to give notice to the valuer asking him to be
present on the date of the sale. The Official Liquidator, the secured creditors
and the valuer were required to act on a signed copy of the minutes of the E
order.

On 14th August, 1989 the sale notice was issued. It stated that the sale
was of the entire moveable and immovable assets of the said company lying
in its factory premises at Ballavpur, Ranigunge, District Burdhaman and F
moveable assets lying in its registered office at Calcutta. The sale was to be
on 'as is where is and whatever there is' basis. The terms and conditions of
sale were stated to be available at the office of the Official Liquidator.

Clause (I) of the terms and conditions of sale stated that the sale would
be as per inventory on 'as is where is and whatever there is' basis and subject G
to the confirmation by the Court. Clause (3) stated that the offer made by
intending purchasers should be contained in a sealed cover enclosing a bank
draft or pay order equivalent to I 0% of the offer. Clause (5) stated that 'the
successful purchaser will have to pay the balance purchase price to the
Official Liquidator within a week from the date of sale by the Court either by
bank draft or pay order. It is made clear that this would not prevent the Court H
756 SUPREME COURT REPORTS [1999] 2 S.C.R.

A from fixing any other date for such deposit or extending such time even if
such time has expired on such terms and co~ditions as the court may deem
-
· fit'. Clause (9) stated that the sale 'would be subject to such modifications/
alterations of terms and conditions of sale as the Hon'ble Court deems fit and
proper and the decision of the High Court shall be final'.

B In pursuance of the advertisement for sale the second respondent made
an offer on ·14th September, 1989. It is this offer which was accepted and,
therefore, its terms are relevant. It stated that the second respondent was
interested in the purchase of the entire moveable and immovable assets of the
said company with a view to reviving it as an on going paper mill. The second
C respondent had entered into discussions with existing labour unions and the
State Government and had entered into a memorandum of understanding with
the labour unions for reopening the paper mill to run it, taking workmen from
existing employees. The offer was for the sum of Rs. l ,50,00,000/- and bank
drafts for the aggregate amount of Rs. I 5 lakhs were enclosed. The offer
stated, 'If out bid is successful we shall complete the payment of the 25%
D of the sale value within a fortnight and take the possession. For the balance
we shall pray to the Hon'ble High Court, Calcutta to allow us the instalments
facility to pay off (balance) amount for which we shall however arrange a bank
guarantee to cover the entire sum. ·we would, therefore, request for a clear
order of the Hon'ble High Court transferring the assets of the said company
E in the 'usual manner ........ .'.

On 15th September, 1989, the judgment and order of sale which was
challenged before the Division Bench was passed. The learned Single Judge
.recorded that the Official .Liquidator had received, pursuant to the
advertisements, three offers, .one of which was by the second respondent for
F Rs. 1,50,00,000 the other was only with regard to the sale of furniture and the
third was for Rs. I, I 0,00,000 for the sale of the assets. The sale of assets had
taken place in the open court though there were no further bidders at the
auction. The offer of Rs. 1,50,00,000 had been subsequently raised to Rs. 2
crores by the second respondent. The Advocate General for the State of West
G Bengal, appearing for the second respondent, had submitted that the concerned
unit would not be disposed off as scrap but would be used as a going
concern. An agreement had already been reached with the union affiliated ft?
the CITU containing detailed terms ·and conditions as to the working of the
mill. The Advocate General had produced a letter from the Bengal Paper Mill
--
Mazdoor Congress affiliated to INTUC wherein an unequivocal acceptance of
H the-terms had been recorded. The Advocate General had assured the Court
ALLAHABAD BANK v. BENGAL PAPER MILLS CO. LTD. [BHARUCHA, J.] 757
·that 1700 people .would .be re-employed within a span of two weeks and to i\
·those who could not be taken in necessary compensation would be paid,
v.thich might exceed Rs. 50 lakhs. The learned Single Judge recorded that 'the
learned advocate appearing for the secured creditors has raised no objection
excepting however that the prayer for.direction on the Official Liquidator for
disbursement of some money to the secured creditors as a long period of time B
has already elapsed in the meanwhile'. The learned Single Judge then passed
the following order:

'Considering the above and considering the factum of re-employment
of 1700 people of the Mill which has been under closure for the last
7-8 years, the sale in favour of Mis. Eastern Minerals & Trading C
Agency (Paper Division) ought to be confirmed at Rs. 2 crores. It is
ordered thus accordingly. Consequently directions follow.
'
It is recorded that a total sum of Rs. 20 lakhs has been made over
to the Official Liquidator in court today and the Official Liquidator is,
therefore, thus directed to make over possession of the Mill premises D
to the purchaser by tomorrow.

The purchaser is directed to furnish further bank guarantee for a
further sum of Rs. 30 lakhs by 26th September 1989, which will be kept
in deposit with the Official Liquidator. In the event, however, the
purchaser fails to furnish such bank guarantee within the time E
stipulated above, the Official Liquidator is directed to bring it to the
notice of this Court on 27th September, 1989 for further orders.

The purchaser is further directed to pay a sum of Rs. 30 lakhs to
the Official Liquidator as against the purchase price within four weeks
from date. Balance 75% of the purchase price, that is, Rs. l.50 crores F
will be paid by the purchaser by quarterly instalment~ of Rs.15 Iakhs
each. The first quarter, however, commencing from lst January, 1990.
In default of payment of a sum of Rs. 30 lakhs or any one of the
quarterly instalments as above, the Official Liquidator is also directed
to apply before this Court forrflecessary directions.' G
The secured creditors protested against the statement in the judgment
and order that referred to them and the learned Single Judge, on 27th
September, 1989, directed that 'the order dated 15th September 1989 is modified
to the extent that the 9th line of the 6th paragraph of the said order, after the
words 'all the secured creditors' should be read as 'has made a prayer'. As H
758 SUPREME COURT REPORTS [1999] 2 S.C.R.

A so modified, the relevant part of the sentence reads: 't~e learned advocate .
appearing for all the secured creditors has made a prayer for direction on
the Official Liquidator for disbursement of some monies to the secured
creditors ........ '

B Appeals were filed by the banks against the orders dated 15th September,
1989 and 27th September, 1989. The appeals were disposed off by the order
that is under challenge.

The Division Bench noted that the valuation report was not disclosed
to any of the banks, but it stated that it appeared from the valuation report
C produced before it that the total value of the assets of the said company was
estimated by the valuer to be Rs.6,22, 16,875. Since the valuation report was
not disclosed to the banks, the banks had had no opportunity to object to
the valuation made. According to the advocate appearing on behalf of the
banks, the proper valuation of the assets should have been much higher; the
loans granted by the banks were fully secured and should have been fully
D recovered if the assets had been sold at a proper price. Since the valuation·
report was not shown to the banks, the banks had had no opportunity to
point out the defects in the valuation report. The said company had 15.2.73
acres of lease-hold land. This was not taken into consideration by the valuer
on the ground that the lease was only upto 14th October, 1992. The valuer ,
E had not indicated whether he had examined the lease-deed or whether there
was any renewal clause in it. Counsel on behalf of the banks had submitted
that no proper effort was made to obtain a fair market price for the property
sold. Advertisements should have been given all over India, particularly in
Bombay, Delhi, Madras and other important commercial centres, to obtain the
best possible price. This had not been done. Because of the non-disclosure
F of the valuation report, the secured creditors were unable to raise any objection
and were not in a position to know whether the assets had been sold at a
low price. The assets were the securities of the banks. The banks had filed
several suits and receivers had been appointed. The assets could not have
been sold without the written consent of the banks and the banks had not
G agreed to the sale of their securities. The Division Bench found itself unable
to uphold the latter contention adva1ced on behalf of the bank for the banks
had participated in the sale from the very beginning. No objection had been
raised by the banks to the proposed sale of the assets. The sale was concluded
in the presence of the advocates appearing on behalf of the banks. A variation
--
of the learned Single Judge's· order was made at the instance of the banks.
H At n'(f point of time did the banks object to the sale of the assets or the price
ALLAHABAD BANK v. BENGAL PAPER MILLS CO.LTD. [BHARUCHA, J.] 759
at which the assets were sold. Learned counsel for the banks contended that A
what was actually sold was the equity of redemption in the secured assets. ·
The Division Bench found that this stand had not been taken by the banks
before or at the time when the sale took place. Counsel had contended that
the mortgages could be given up only in writing and not otherwise and he
had pointed out that the mortgage suits filed by the banks were still pending. B
The Division Bench was unable to uphold this contention to set aside the
sale 'because in a case like this some sort of promptitude was expected from
the banks'. No allegations of fraud had been made against the purchaser. The
purchaser had purchased the properties in a court sale and had promised to
give employment to 1700 workmen of the said company. The purchaser had
incurred expenditure for running the factory and for that purpose had entered C
into contracts with various parties. Another important aspect of the case was
that no appeal had been preferred against the order of sale till 3rd February
1990 and no stay of its operation had been asked for. Counsel for the banks
had contended that the appeals were filed within the period of limitation. The
Division Bench countered that that might be so, but the purchaser had been D
allowed to take possession after the sale. He had employed persons and
placed orders without objection from the banks. It was only after these things
had happened that the banks 'woke up'. The delay was found fatal to the case
of the banks. But, the Division Bench added :

'There is, however, considerable force in the argument of Mr. Mitra E
that the sale was made with undue haste. The proposal for sale of a
large paper mill should only have been effected after giving wide
publicity all over India. Moreover, the successful bidder's offer should
have been examined in depth before acceptance. Some enquiry should
have been made to find out the number of workers actually employed
by the company in liquidation at the time of the closure of its mills. R.
No attempt was made out to find out how many of those workers were
still unemployed and whether the Trade Union with which the
purchaser had entered into an agreement represented all the
unemployed workman of the company in liquidation. It appears that
1700 of the workmen of the company have not been re-employed. No G
attempt was made to find out whether there was any outstanding
liabilities of the company, statutory or otherwise, in respect of its
workers. The company might have other liabilities. The nature and
extent of such liabilities were not found out. The sale of the assets
should not have been made in a way to deprive the right of all the
creditors, including the banks, to proceed against the assets of the H
760 SUPREME COURT REPORTS [J 999] 2 S.C.R.

A company to realise their dues.'

The Division Bench then stated :

"However the only parties that have come to this Court for setting
aside the sale are the banks who had participated fully. at every stage
B of the sale. The banks were represented at the time when the decision
was taken to sell the assets of the company. The banks were also
present when the sale was finalised. The banks had also got the
matter mentioned for effecting certain corrections in the sale order and
a prayer was made for disposal of the sale proceeds. It does not
appear that the banks were under any misapprehension that the secured
c assets were being sold.
The banks had participated in every proceedings which culminated
in the sale of the assets and made a prayer for prompt payment out
of the sale of the assets. They cannot after a !apse of five months tum
around and pray for setting aside the sale on the ground that the
D bank's interests were not properly protected at the time of the
sale .......... .
In the facts and circumstances of the case and having regard to
the conduct of the bank, this application must be dismissed."
. .
E It is to be noted that no reserve price for the sale was fixed. Why this
should have been so is not understood, particularly having regard to the fact
that a valuer had been appointed of the assets and properties and a report
obtained. The valuation report was not disclosed. The order of the learned
Single Judge does not set out what the valuation of the property that was
sold was. It does not even state that, in view of that valuation, the offer of
F Rs.2 crores made by the second respondent was a fair and adequate price.
Further, the learned Single Judge did not notice what the Division Bench did,
namely, 'The Company had 15.2.73 acres of leasehold land. This was not
taken into consideration by the valuer on the ground that the lease period
was only upto 14th October, 1992. The valuer has not indicated whether he
G had examined the lease deed or whether there was any renewal clause in the
lease agreement'. The valuation was, therefore, itself suspect.

The sale was advertised once only in three n·ewspapers, two of which
at least were local newspapers. For a sale of the magnitude of that with which
we are concerned, this was surely inadequate publicity. Inadequate publicity
H necessarily suggests the possibility that a better price could have been
ALLAHABAD BANK v. BENGAL PAPER MILLS CO. LTD. [BHARUCHA,J.] 761
obtained. A
The learned Single Judge would appear to have been carried away by
the prospect that 1700 people. would be re-employed. He did not appreciate.
that the said company's ex-employees were only some of its creditors and that
they stood on no better footing than its other unsecured creditors. No order
could have been passed that, while it favoured them, took no account of other B
unsecured creditors. The employees of the said company had been, as the
order of the learned Single Judge itself shows, out of employment for 7 to 8
years but the learned Single Judge did not inquire how many of them had
secured other employment in the intervening years.

The learned Single Judge did not ascertain and set out what the total
c
amount of the claims, secured and unsecured, against the said company was
and whether the assets and the property of the said company, other than
those sold, were adequate to pay off these claims, even in part. The learned
Single Judge did not even ascertain and state how many unsecured creditors
there were, what the aggregate amount of their claims was and what part D
thereof could be ascribed to the erstwhile employees of the said company.
The learned Single Judge did not, it appears, appreciate that his principal
obligation in conducting and confirming the sale was to the body of creditors
of the said company and that the obligation was to ensure that the best
possible price had been procured from whereout they could recover at least E
some part of _their dues.

The learned Single Judge appears not even to have noticed that the
offer of the second respondent was not in accordance with the terms and
conditions of sale inasmuch as it contemplated a payment schedule that was
at variance with the terms and conditions of sale. There is no discussion in F
the order of the learn~d Single Judge about why it was thought fit to entertain
such an offer.

There was another offer before the learned Single Judge to purchase the
assets and properties of the said company for the sum of Rs. l. l 0 crores. No
details of the offer are set out in the order of sale. If it was in accordance with G
the terms and conditions of sale, it should have been considered and compared
to the second respondent's offer. This offerer did not, .apparently, raise his
offer, but he might have done so if he have been told that he could have the
same liberal payment terms that the learned Single Judge gave to the second
respondent after it had raised its offer. No reason was given by the learned H
.'162 SUPREME COURT REPORTS [1999] 2 S.C.R.

A Single Judge in the order of sale as to why he thought it necessary or proper
to give to the l!econd respondent these very liberal terms. It is to be noted
that these terms are even more liberal than those asked for in the offer.

Though only 10% of the price had been received and there was a
B direction to furnish a bank guarantee for Rs. 30 lakhs 10 days thereafter, and
the balance purchase price was to be received only after a very. long period
of time the learned Single Judge directed the Official Liquidator to hand over
to the second respondent the possession of the assets and properties 'by
tomorrow'.

C The observation of the Division Bench in the order under appeal that
the sale was conducted with undue haste is very appropriate. So are the other
critical observations that the Division Bench made, which we have quoted
above. It could not but have been obvious to the Division Bench, therefore, .
that there was every possibility that the sale had not procured the best
D possible price. Even so, the Division Bench did not interfere with the order
of sale, because, in its view, the second respondent had been allowed by the
banks to take possession of the assets and properties and to incur expenditure.
In our view, the Division Bench was in error.

Upon liquidation, the assets and properties of the company in liquidation
E 'Vest in the Official Liquidator for the benefit of its creditors. It is only from
out of the sale proceeds of these assets and properties that the creditors of
the company can hope to recoup their dues. To ensure that the best possible
price is realised upon the sale of these assets and properties, the sale thereof
by the liquidator is required to be confirmed by the High Court. It is the
obligation of the High Court to the creditors of the company in liquidation
F to make sure that the best possible price has been realised.

In Navalkha & Sons v. Sri Ramanya Das & Ors., [1970] 3 SCR 1, this
Court quoted Rule 273 of Companies (Court) Rules, 1959, thus :

"Procedure at sale. - Every sale shall be held by the Official Liquidator,
G or, if the Judge shall so direct, by an agent or an auctioneer approved
by the Court, and subject to such terms and conditions, if any, as may
be approved by the Court. All sales shall be made by public auction
or by inviting sealed tenders or in such manner as the Judge may
direct."

H It then said :
ALLAHABAD BANK v. BENGAL PAPER MILLS CO.LTD. (BHARUCHA, J.] 763
'The principles which should govern confinnation of sales are well- A
. · established. Where the acceptance of the offer by the Commissioners is
subject to confirmation of the Court the offeror does not by mere acceptance
get any vested right in the property so that he may demand automatic
confinnation of his offer. The condition of confirmation by the Court operates
as a safeguard against the property being sold at inadequate price whether
or not it is a consequence of any irregularity or fraud in the conduct of the B
sale. In every case it is the duty of the Court to satisfy itself that having
regard to the market value of the property the price offered is reasonaBle.
Unless the Court is satisfied about the adequacy of the price the act of
confinnation of the sale would not be proper exercise of judicial discretion.
In Gordhan Das Chuni Lal v. T. Sriman Kanthimathinatha Pillai, AIR ( 1921) C
Mad. 286, it was observed that where the property is authorised to be sold
by private contract or otherwise it is the duty of the Court to satisfy itself
that the price fixed is the best that could be expected to be offered. That is
because the Court is the custodian of the interests of the Company and its
cred'itors and the sanction of the Court required under the Companies Act has
to be exercised with judicial discretion regard b~ing had to the interests of D
the Company and its creditors as well. This principle was followed in
Rathnaswami Pillai v. Sadapathi Pillai, AIR (1925) Mad. 318, and S.
Soundarajan v. Mis Roshan & Co., AIR (1.940) Mad. 42. In A. Subbaraya
Mudaliar v. K. Sundarajan, AIR (1951) Mad. 986, it was pointed out that the
condition of confirmation by the Court being a safeg4ard against the property E
being sold at an inadequate price, it will be not only proper but necessary
that the Court in exercising the discretion which it undoubtedly has of
accepting or refusing the highest bid at the auction held in pursuance of its
orders, should see that the price fetched at the auction is an adequate price
even though there is no suggestion of irregularity or fraud.'
F
It is also well to remember that, for the most part, the creditors of a
company in liquidation are small trade creditors whose dues are not so large
as would make it economical for them to resort to proceedings in court. It is
these small creditors that the High Court is expected to protect when confinning
a sale by the liquidator. G

We think that the Division Bench lost sight of what is stated above. It
could not have realistically expected the ordinary unsecured creditors of the
said company to have filed appeals on the ground of inadequacy of the sale
price. It could not have turned a blind eye to the many defects that it itself
noted in the order of sale merely because the banks had moved the appeals H
764 SUPREME COURT REPORTS [1999] 2 S.C.R.

A after five months; nor was there any justification for taking into consideration
the expenditure that had been incurred by the second respondent subsequent
to its possession of -the assets and properties. In the first place, the Division
Bench should have r.oted that the learned Single Judge had with unseemly
haste ordered possession thereof to be handed over to the second respondent
on the very next day. In the second place, the appeals had been filed within
B the period of limitation. Expenditure incurred during this period could not
render the appeals, in effect, infructuous. The same would apply to expenditure
incurred subsequent to the filing of the appeals and until the time that they
were heard. The second respondent knew that the appeals were pending and
that they could end in the order of sale being set aside. Such expenditure as
C it incurred with this knowledge was at its risk. In the third place, and most
important, the interests of the creditors of the company, particularly the
.unsecured creditors, overweighed such equities, if any, as might have been
considered to be in favour of the second respondent. It was, in our view, the
obligation of the Division Bench to have struck down the order of sale,
having regard to what it found wrong with it.
D It was contended on beJrnlf of the second respondent, the State of West
Bengal and the employees that, whatever we might think of the order of sale,
we should not interfere. For the reasons that we have stated, we cannot agree.
The interests of the creditors of the said company are paramount, as is the
obligation of the Court to them. That the second respondent has incurred
E expenditure and obligations, which were detailed, subsequent to the passing
of the order of sale and upto date cannot, in the circumstances, deter us from
setting aside the order of sale. The second respondent knew that the appeals
were pending. It should have appreciated that the order of sale was very
vulnerable, given what the Division Bench of the High Court had to say about
it. It consciously took the risk of incurring the expenditure and obligations
F and it cannot take shelter behind them.

It was submitted by learned counsel for the second respondent that we
should vary the terms upon which the offer of the second respondent was
accepted to overcome the prejudice to the said company's creditors. We have
no materials upon which we can do so, apart from the fact that to do so would
G be wrong in principle. We do not know and have no means of knowing what
the fair value of the said assets and properties that were sold was; that could
only have found after a properly advertised sale had been held. We do not
know, and counsel were unable to tell us, what the totality of the claims
against the said company are.

H Learned counsel for the banks had contended before the Division
ALLAHABAD BANK v. BENGAL PAPER MILLS CO. LTD. [BHARUCHA,J.] 765
Bench of the High Court that the mortgages could only have given up by the A
banks in writing and not otherwise and he had pointed out that the mortgage
suits by the banks were still peI?-ding. He had also contended that what was
sold to the second respondent, in any event, was only the equity of redemption
in the mortgaged property. These contentions were repeated before us. On
behalf of the second respondent it was contended, on the other hand, that B
the banks had given up their securities and become unsecured creditors.

It is to be noted that on ll th-12th January, 1988, the Punjab. National
Bank had made an application to the High Court in the transferred suit and
prayed that the Official Liquidator should be appointed receiver in place and
stead of the joint receivers in Suit No.738 of 1986 with directions to take C
possession, make inventory and sell the securities both in the transferred suit
as well as in Suit No.738 of 1986, which application was allowed on 12th
January, 1988. It is not clear from the submissions whether, as a result, the
Official Liquidator was appointed receiver of the mortgaged properties in the
transferred suit. It is also not clear whether any similar application had been
made by the other banks in their suits. It is pertinent to note that in the D .
subsequent order dated 29th June, 1989 passed in the winding up petition,
giving to the Official Liquidator leave to sell the assets and properties of the
said company, reference was made to the 'secured creditors'. Similar reference
was made to the 'secured creditors' in the order of sale. There is also some
substance in the contention based on the fact that the mortgage suits were E
pending when the order· of sale was made and that the mortgage securities
could not ordinarily have been held to have been given up without express
writing to this effect. On the other hand, it needs to be pointed out that it
appears that the banks did not at any time prior to the order of sale require
that the sale proceeds, insofar as they related to properties secured in their
favour, should be kept apart to the credit of their suits. It is, therefore, a moot F
question as to whether the banks had given up their securities before the
order of sale, but we cannot resolve the question in the absence of the full
record for this was a question that arose incidentally in the appeals from the
order of sale. We think that this is a question that has now to be left to be
answered by the High Court on appropriate applications by the banks.
G
At the same time, it is perfectly clear to us that it was not the equity
of redemption alone in the secured properties that was sold for, had that been
so, there should have been express mention to that effect·in the terms and
conditions of sale.

In an additional affidavit filed on behalf of the second respondent\H
766 SUPREME COURT REPORTS [1999] 4 S.C.R.

A before this Court it is stated that the said company had shown no interest
in renewing the lease of the property which was the subject matter of the sal~
and that ·in order to continue to lawfull,Y .remain in possession to run the
paper mill', the Bengal Paper Mills (1989) Co. Ltd., floated by the second
respondent and its associates, had ·obtained the lease in its favour from the
State of West Bengal.' The order of sale in favour of the second respondent
B being liable to be set aside, everything consequential thereon must necessarily
also be set aside. The lease, patently, was obtained as a consequence of the
order of sale. 'For doing complete justice, therefore, it is necessary to set aside
the lease.

C Learned counsel for the second respondent submitted that the second
respondent would be entitled to recover the sale price as also all expenditure
that it had incurred consequent upon the order of sale. We are in no doubt
that the Official Liquidator must refund to the second respondent the sum of
Rs.2 crores. As to any other expenditure, the second respondent must apply
to t~e High Court and satisfy it, first, that it was incurred and, secondly, that,
D in law, the second respondent is entitled to recover it.

The appeals are allowed. The judgment and order under appeal is set
aside as also the order of sale dated 15th September, 1989 in favour of the
second respondent. The Official Liquidator shall forthwith recover possession,
from whoever is in possession, of the assets and properties covered by the
E said order of sale. The same shall be resold after a fresh valuation report
thereof has been obtained, a reserve bid fixed and due advertisements
published. The second respondent shall be repaid the purchase price of Rs.2
crores by the Official Liquidator subsequent to recovery of possession as
aforestated.
F The lease of the property, which was the subject matter of the sale, in
favour of the Bengal Paper Mills (1989) Co. Ltd., is set aside.

The second respondent shall pay to the Official Liquidator the costs of
the appeals before the Division Bench of the High Court and of these appeals,
G quantified in the sum of Rs. 25000.

R.C.K. Appeals allowed.

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