Holding

A confirmed auction sale, after adequate publicity, may be set aside only on proof of fraud or collusion; mere higher subsequent offers or alleged misvaluation do not suffice.

Summary

The Official Liquidator of Hindustan Nitro Product (Gujarat) Ltd. auctioned the company's assets after wide newspaper publicity, accepting the highest bid of Rs.3.51 crores from Valji Khimji & Co. and confirming the sale on 30 July 2003. Subsequent higher offers were made by two other companies more than a year later, leading them to seek recall of the confirmed sale. The High Court Single Judge set aside the confirmation, reasoning that the assets were treated as "scrap" and undervalued, but the Division Bench upheld that order. On appeal, the Supreme Court held that once an auction sale is confirmed after adequate publicity, it can be disturbed only on proof of fraud or collusion; the later higher offers and alleged mischaracterisation as scrap did not constitute such grounds. Consequently, the Court allowed the appeal, reinstating the original confirmation of sale.

Issues considered

Whether a confirmed auction sale can be set aside on the ground that the assets were mischaracterised as scrap and undervalued.
Whether a higher subsequent offer after confirmation of sale justifies recalling the sale.
Whether the absence of fraud or collusion precludes setting aside a confirmed auction sale.
Whether the term "scrap" applies to assets that are not in running condition but can be repaired.
Whether rights of the auction purchaser accrue upon confirmation and can be extinguished without fraud.

Subjects

auctionliquidationofficial liquidatorsale confirmationfraudscrapvaluationrights of purchasercourt saleauction publicity

Judgment

[2008] 12 S~C.R. 1

VALJI KHIMJI AND COMPANY A
v.
OFFICIAL LIQUIDATOR OF HINDUSTAN
NITRO PRODUCT (GUJARAT) LTD. AND ORS.
(Civil Appeal No. 4992 of 2008)
AUGUST 12, 2008 B

[ALTAMAS KABIR AND MARKANDEY KATJU, JJ.]

Company Jaw: Auction sale of assets of liquidated com-
pany - After advertisement in well known newspapers having c
wide circulation - Highest bid accepted and sale confirmed :.....
Subsequent fresh offer by two companies at higher price -
Recalling of order of confirmation of sale by High Court -
Correctness of - Held: Not correct as there was nothing to
show that there was fraud or collusion in auction - sale - Once
D
sale is confirmed, certain rights accrued in favour of auction -
purchaser which could not be extinguished except in excep-
tional case such as fraud.
Words and Phrases: 'scrap' - Meaning of
An Official Liquidator was appointed in respect of E
Company•in-liquidation. The assets of the company were
proposed to be auctioned. The Official liquidator submit-
ted the valuation report whereby the assets were valued
at Rs.2.55 crores. The property was thereafter put to auc-
tion on 25.3.2003 after advertising it in various well known F
newspaper having wide circulation. Highest bid of appel-
lant of Rs.3.51 crores was accepted and sale was con-
firmed on 30.7.2003. Court passed certain directions re-
garding deposit of the purchase price which was duly
complied with by the appellant. G
In October, 2003, respondent No.8 offered to buy the
assets in question for Rs.3.75 crores. Again in August
2004, respondent no.9 made an offer of Rs.5 crores for
':f

1 H
2 SUPREME COURT REPORTS [2008] 12 S.C.R.

A the said assets. This offer was made more than one year
+-
tc
after the confirmation of the sale in favour of the appel-
lant. The prospective purchasers filed applications for
recalling the order dated 30.7.2003 by which the sale was
confirmed in favour of the appellant.
B The Single Judge of High Court set aside the confir-
mation of sale on the ground that while doing valuation
of the assets, the potential of the company was over-
looked and that the assets in question were wrongly given
out to be scrap and thus a proper bid was not obtained.
c Appellant filed appeal which was dismissed by Division
Bench of High Court. Hence the present appeal.
Allowing the appeal, the Court
HELD: 1.1. The. auction sale was done after adequate
D publicity in well-known newspapers. Even after the auc-
tion, 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, entertaining objections
after the sale is confirmed should not ordinarily be allowed,
E except on very limited grounds like fraud. If it is held that
every confirmed sale can be set aside, the result ~s that no
auction sale will ever be complete because always some-
body can come after the auction or its confirmation offer-
ing a higher amount. [Paras 11, 31] [6, G-H; 7, A; 10,G]
F 1.2. It could have been a different matter if the auc-
-uon had been held without adequate publicity in well- >--
known newspapers having wide circulation, but where
the auction sale was done after wide publicity, then set-
ting aside the sale after its confirmation will create huge
G 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 are
themselves to be blamed if they do n.ot come forward to
bid at the time of the auction. They cannot ordinarily later
H on be allowed after the bidding (or confirmation) is over
VALJI KHIMJI & COMPANY v. OFFI. LIQUIDATOR OF 3
HINDUSTAN NITRO PRO. (GUJARAT) LTD. & ORS.

to offer a higher price. If the price offered after the auction A
is over which is only a little over the auction price, that
cannot by itself suggest that any fraud has been done.
[Paras 32, 33] [10,H; 11,A-B,D]
2.1. There is nothing to show that the assets in ques-
tion which were auction-sold were ever given out to be 8
___;_
'
scrap. They were not mentioned as scrap in the adver-
tisement or sale notice, nor was there any material to show
that the valuer valued them treating them to be scrap. The
word 'scrap' would ordinarily mean something which can-
not be used for the same purpose for which it was being c
earlier used even after repairing or renovating the same.
There is nothing to show that the items proposed to be
auction-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. Merely because the D
assets were not in a running condition it does not mean
that they were scrap. [Paras 14, 17, 18] [7,D-E,H; 8,A-C]
2.2. The Single Judge of the High Court wrongly ob-
served that while doing the valuation the potential of the
company was overlooked. Such potential has really no E
relevance. [Para 23] [9,C]
3.1. The views of the Courts below cannot be ac-
cepted that any fraud took place in the auction sale. All
the bidders in the auction knew what they were bidding F
for. Respondent No. 9 never participated in the auction.
He could not start objecting to the auction more than one
year after the same was confirmed. [Paras 19, 20] [8,E,F,G]
Divya Manufacturing Company (P) Ltd. etc. v. Union
Bank of India & Ors. etc. (2000) 6 SCC 69 - distinguished. G
'.

~ Mis Kayjay Industries (P) Ltd. v. Mis. Asnew Drums (P)
Ltd & Ors. (197 4) SCC 213; Dr. Rajbir Singh Dalal v.
Chaudhary Devi Lal University, Sirsa & Anr JT 2008(8) SC
621 - referred to.
H
4 SUPREME COURT REPORTS [2008] 12 S.C.R.

A 3.2. 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 subse-
quent confirmation by some authority (under a statute or
B terms of the auction) the auction is not complete and no
rights accrue until the sale is confirmed by the said author- f-
ity. 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
c cases such as fraud. [Paras 34, 35] [11 E-H; 12 A]
3.3. In the instant case, the auction having been con-
firmed on 30.7.2003 by the Court it cannot be set aside
unless some fraud or collusion has been proved. No fraud
or collusion has been established by any one in this case.
D [Para 36] [12 B]
Case Law Reference
(1974) sec 213 referred to Para 26
(2000) 6 sec 69 distinguished Para 27, 30
E
JT 2008(8) SC 621 referred to Para 30
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 4992
of 2008
F From the final Judgment and Order dated 25.8.2005 and
28.8.2005 of the High Court of Gujarat at Ahmedabad in O.J.
Appeal Nos. 69 & 70 of 2004 in O.J. Misc Civil Application No.
175 of 2003 & C.A. No. 311 of 2004 in Official Liquidator Re-
port No. 49 of 2003 respectively.
G C.A. Sundaram, Bhargava V. Desai, Abhishek Gupta,
Rohini Musa and Zafar lnayat for the Appe.llant. ,\
SanjaySarin, Samina Shaikh,Ashok Mathur, Sanjay Bhatt,
S. Mahendran, Subramonium Prasad, Abinav Ramakrishna and
H Raj iv Talwar for the Respondents.
VALJI KHIMJI & COMPANY v. OFFI. LIQUIDATOR OF HINDUSTAN 5
NITRO PRO. (GUJARAT) LTD. & ORS. [MARKANDEY KAT JU, J.]
--!;--
The Judgment of the Court was delivered by A
MARKANDEY KAT JU, J. 1. Leave granted.
2. This appeal has been filed against the impugned final
judgment & order dated 25.8.2005 & 26.8.2005 passed by the
High Court of Gujarat atAhmedabad in O.J. Appeal No. 69 and B
--1 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. c
4. The facts of the case are that Hindustan Nitro Product
(Gujarat) Ltd. was put under liquidation, and an official liquida-
tor was appointed for it. The assets of the company were pro-
posed to be auctioned, and hence the Court asked the official
D
liquidator to obtain a valuation report. The official liquidator af-
ter obtaining the valuation report submitted it to the Court. The
valuation of these assets, according to the 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 newspa-
pers having wide circulation, including 'The Economic Times' E
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 F
& 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
G
said day and to deposit the balance amount within the next three
months. The Court also directed that the amount may be de-
posited in installments, but no installment should be less than
Rs.5 lakhs. These conditions were complied with by the appel-
lant.
H
6 SUPREME COURT REPORTS [2008] 12 S.C.R.

A 6. Although the sale was confirmed in· favour of the appel-
lant 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 r
B later on).
7. Subsequently in August 2004, Mis. Castwell Alloys Lim-
ited (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.
c
8. Both Mis. 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
0
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
E 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.
10. We have carefully perused the impugned judgment &
order of the learned Division Bench as well as the order dated
F 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
G wanted to make a bid in the auction he should have partici-
pated 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 ob-
H jections after the sale is confirmed should not ordinarily be al-
VALJI KHIMJI & COMPANY v. OFFI. LIQUIDATOR OF HINDUSTAN 7
NITRO PRO. (GUJARAT) LTD. & ORS. [MARKANDEY KAT JU, J.]

-t-- lowed, except on very limited grounds like fraud, otherwise no A
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, B
.;'

--\ 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 c
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 the assets in question was wrongly
given out to be scrap and thus a proper bid was not obtained.
D
14. In our opinion, there is nothing to show that the assets
-r-'
in question which were auctioned-sold were ever given out to
be scrap. They are not mentioned as scrap in the advertise-
ment or sale notice, nor is there any material to show that the
valuer valued them treating them to be scrap. E
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 F
(Gujarat) Limited offered to be sold in the auction sale were of-
fered in lots (as mentioned in the sale notice). The first lot was
plant machineries and all other movables excluding building struc-
tu re, records and compound wall, the second lot was the building
structure except T.K. Office, records & compound wall, the third
G
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. Ill & 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 H
8 SUPREME COURT REPORTS [2008) 12 S.C.R.

A being earlier used even after repairing or renovating the same. >-
There is nothing to show that the items proposed to be auc-
tioned sold was scrap, i.e. they could not be used for the same
purpose for which they were earlier used after repairing or re-
conditioning the same. ~
i·
B 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 opin-
ion merely because the assets were not in a running condition
it does not mean that-they were scrap. For instance, if the en-
c gine of a motor car is not functioning due to, some defect, that
· does not mean that the motor car has become scrap. The mo-
tor 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
'D condition that it can never be made in running condition again
despite repairs and renovation, an~ hence it will have to be ~·

'
sold as a piece of metal. --+-
19. Hence, we cannot agree with the views of the Courts
below that any fraud took place in the auction sale.
E ~

20. Moreover, whenever anyone goes to buy some prop-
erty in an auction sale, the person proposing to bid always
makes enquiries about the properties for which he is propos-
ing to make the bid. In fact, he will in all probability inspect the
F said property/assets, and he will not make any bid without mak-
ing 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 partici-
pated in the auction and we fail to understand how he could
•
start objecting to the auction more than one year after the same
G
was confirmed.
21. The other reasoning of the learned Single Judge by ~-
which he set aside the confirmation of the sale is that the com-
pany was entitled to incentives and benefits like sales tax ex-
H emption and modvat. The learned Single Judge has observed
VALJI KHIMJI & COMPANY v. OFFI. LIQUIDATOR OF HINDUSTAN 9
NITRO PRO. (GUJARAT) LTD. & ORS. [MARKANDEY KAT JU, J.]

that the company M/s. Hindustan Nitro Product (Gujarat) Lim- A
ited 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 intangibl~ assets were required to be considered while fix- .
ing the value of the property. B

·-\
22. We fail to understand how all this is relevant at all. Af-
ter all, what was being sold was the assets of the company, and
not the shares of the company, and these assets were fully de-
scribed in the sale notice.
c
23 ..,The learned Single Judge in our opinion also wrongly
observed that while doing the valuation the potential of the com-
pany was overlooked. Such potential has really no relevance in
~ our opinion.
24. The learned Single Judge has observed that the valu- D
ation 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 noth-
ing to show that the valuation of the assets was done as if they E
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 given above the judgment of the
learned Division Bench also cannot be sustained. F

26. Learned counsel for the appellant Mr. Sundaram has re-
lied upon the decision of this Court in Mis Kayjay Industries (P) Ltd
vs. Mis. Asnew Drums (P) Ltd & Ors. (1974) SCC 213 in which it
was observed that mere inadequacy of price cannot demolish ev-
G
ery 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 H
10 SUPREME COURT REPORTS [2008] 12 S.C.R.

A 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. Union Bank of India & Ors. etc.
(2000) 6 SCC 69. We have carefully perused the above deci-
B sion 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 ques-
tion. At the intervention of the court the price was raised to 1.3
c 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) j

D Ltd. (supra) was that if there is fraud then even after the confir-
mation the sale can be set aside because it is well-settled that
fraud vitiates everything. On the facts of that case, the Court
was of the view that that confirmed sale deserved to be set
aside.
E
30. In our opinion the decision of this Court in Divya Manu-
facturing 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
F Dalal vs. Chaudhary Devi Lal University, Sirsa & Anr pro-
nounced on 6.8.2008), a decision of a Courj cannot be -treated
as Euclid's formula and read and understood mechatrical~y. A
deci.sion must be considered on the facts of that particular case.
G 31. If it is held that every confirmed sale can be set aside
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.
32. It could have been a different matter if the auction had
H
VALJI KHIMJI & COMPANY v. OFFI. LIQUIDATOR OF HINDUSTAN 11
NITRO PRO. (GUJARAT) LTD. & ORS. [MARKANDEY KAT JU, J.]

~ been held without adequate publicity in well-known newspapers A
having wide circulation, but where the auction sale was done
after wide publicity, then setting aside the sale after its confir-
mation will create huge problems. When an auction sale is ad-
vertised in well-known newspapers having wide circulation, all
eligible persons can come and bid for the same, and they will B
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 al-
""' lowed after the bidding (or confirmation) is over to offer a higher
price.

33. Of course, the situation may be different if an auction c
sale is finalized say for Rs.1 crore, and subsequently some-
body turns up offering Rs. 10 crores. In this situation it is pos-
sible 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 D
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 E
fraud in the auction sale. It may be mentioned that auctions are
· of two types - (1) where the auction is not subject to subse-
quent confirmation and (2) where the auction is subject to sub-
sequent confirmation by some authority after the auction is held.
F
35. In the first case mentioned above, i.e. where the auc-
J.
tion 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
G
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
H
12 SUPREME COURT REPORTS [2008] 12 S.C.R.

A fraud. >-
36. In the present case, the auction havil"'lg 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 a~y one in this case.
8
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
c of the appellant stands upheld. There ~hall be no order as to
costs.
D.G. Appeal allowed.