Chetan K. Singh Vs. Citi Bank N.A. and ors. - Court Judgment

Excerpt:
company - sale - validation of - sections 536(2) and 537 of companies act, 1956 - appellant-company-in-liquidation mortgaged leasehold interest of property in favor of bank - application filed before tribunal by bank and obtained order of attachment of property - pending adjudication of application tribunal permitted sale of property - agreement of sale entered into with third party - property sold to third party - appellant filed application for validated sale under section 536(2) of act - dismissed by trial court - hence, present application - held, disposition of property under section 536(2) of act is valid - section 537 attracted only when orders not obtained and sale takes place without leave of court - company not approached court for sanction of sale before undertaken - sale of company property is valid in view of section 536(2) of act - application dismissed - administrative law - government contract: [vijender jain, c.j., rajive bhalla & sury kant, jj] government contract rejection of highest bid challenge as to held, state has no dominus status to dictate unilateral terms and conditions when it enters into contract. its actions must be reasonable, fair and just in consonance with rule of law. as a necessary corollary thereto, state cannot refuse to confirm highest bid without assigning any valid reason and/or by giving erratic, irrational or irrelevant reasons. the state is free to enter into a contract just like any other individual and the contract shall not change its legal character merely because other party to contract is state. though no citizen possesses a legal right to compel state to enter into a contract, yet latter can neither pick and choose any person arbitrarily for entering into such agreement nor can it discriminate between persons similarly circumstanced. similarly, where breach of contract at hands of state violates fundamental rights of a citizen or its refusal to enter into a contract is contrary to statutory provisions or public duty, judicial review of such state action is inevitable. likewise, if state enters into a contract in consonance with article 299 rights of the parties shall be determined by terms of such contract irrespective of fact that one of the parties to it is a state or a statutory authority. for these precise reasons the equitable doctrine of promissory estoppel has been made applicable against the government, as against any other private individual, even in cases where no valid contract in terms of article 299 was entered into between the parties. hence, if government makes a representation or a promise and an individual alters his position by acting upon such promise, the government may be required to make good that promise and shall not be allowed to fall back upon the formal defect in the contract, though subject to well known limitations like larger public interest. the state, thus, has no dominus status to dictate unilateral terms and conditions when it enters into contract and its actions must be reasonable, fair and just and in consonance with rule of law. as a necessary corollary thereto state cannot refuse to confirm highest bid without assigning any valid reason and/or by giving erratic, irrational or irrelevant reasons. -- consumer protection act, 1986 [c.a. no. 68/1986]. articles 14 & 300a: government contract noon-acceptance of highest bid held, it does not result in taking away right to property of highest bidder highest bid, per se, unless it is accepted by competent authority, and consequential sale certificate is issued, does not grant the highest bidder right to property of type which is protected under article 300a right to property is limited to confer highest bidder the right to challenge action of appropriate authority in refusing to accept highest or other bids. [air 1984 p&h 282 (fb) explained] articles 14 & 226: government contract rejection of highest bid held, highest bidder has locus standi to maintain writ petition and assail action of state government or its authorities by contending that his bid has been turned down for arbitrary, illegal or perverse reasons however in such matters, heavy onus would like on petitioner bidder to establish his allegations as state action shall always be presumed to be in accordance with law - it was also found that the sale was not required to be set aside due to the fact that the purchase was in good faith and without notice to the conspiracy of the directors and their illegality in providing salary for themselves. in that case, the court ultimately dealt with the situation where the directors had refunded the amount taken by them from out of the sale proceeds and the claims of salaries of some workers were also satisfied. state of maharashtra [2000] 100 comp cas 417 :[2000] 2 scc 756, while clearly spells out that the disposition of property during the pendency of proceedings would not be void ab initio qualifies it as obtaining to such a situation, if the court otherwise orders the same. it is more in the nature of one action following the other for, if the occasion for invoking section 536(2) has already been exercised, there is no scope for applicability of section 537. if this approach is done then by the fact that the company had not approached this court for sanction of sale before it was undertaken, the sale effected would be seen as void by virtue of section 537. 10. even if the above approach to be taken is a restrictive consideration of the scope of section 536(2) and consequently the said provision could be invoked even in cases of post-sale by an application for rectification, the court has to be still satisfied about the bona fides of the transaction. even if the company had not consented for the sale, it would have come to a similar result of the property being sold at the instance of the creditor whose debt was fully satisfied.k. kannan, j.1. post sale of the property, which was held by the company-in-liquidation but sold without reference to the official liquidator or the company court, the company seeks for validation of the sale on the ground that the sale had been made in satisfaction of claim by a secured creditor and being a bona fide transaction, the action of the company requires to be approved under section 536(2) of the companies act, 1956.2. the facts are not in dispute that the company-in-liquidation had mortgaged the leasehold interest of the property, which was located in bhubneshwar in favour of the allahabad bank and an application had been filed before the debts recovery tribunal-ii, delhi, by the allahabad bank and obtained an attachment of the property on july 19, 2002. pending adjudication of the application, the debts recovery tribunal had permitted the sale of the property itself on october 12, 2004 (annexure a2) and agreement of sale had been entered into with the third party on march 3, 2005. a one-time settlement was arrived at with the creditor-bank on march 23, 2005, for rs. 2 crores. for the same price and for the same amount, the property had been sold on march 31, 2005, in favour of the third party. it is this sale, which is sought to be validated by an application under section 536(2) of the companies act.3. it is again an admitted case that a petition for winding up had been instituted at the instance of another bank, a private bank, five months subsequent to the filing of the petition before the debts recovery tribunal and when an attachment had been ordered. the proceedings initiated before this court on november 12, 2002, yielded to an order of winding up on march 22, 2007. evidently, the company had been served with notice in the petition for winding up and one-time settlement and the sale had been made during the pendency of the petition for winding up before this court.4. the contention of learned counsel for the petitioner is that the disposition of law by the hon'ble supreme court in allahabad bank v. canara bank : [2000] 4 scc 406 : [2000] 101 comp cas 64, allowed a financial institution to stay outside the process of winding up and enforce the security or take action before the debts recovery tribunal unfettered by any order of the court under the proceedings for winding up. he would not, however, go as far as to say that it was not necessary at all for him to obtain any concurrence of the court, especially on account of the fact that the sale had taken place pending proceedings for winding up before this court but would state that the transaction of sale even without permission of this court would not be void but it only required permission of the court, which was what he was seeking for, by applying to the court under section 536(2). admittedly, he did not apply to the court even before effecting the sale, although the proceedings were pending before that date but was seeking for approval post the transaction of the sale itself.5. in support of the contention that a transaction of sale pending proceedings is not void, learned counsel refers to a decision of this court in first national bank ltd. v. om parkash sharma : air 1962 punj 433 : [1963] 33 comp cas 1043. the court had held in that case that the disposition of property by the directors by disbursement of the amount thus obtained towards salary arrears of staff and directors' remunerations between the date of presentation of winding up petition and winding up order are void, unless of course the court otherwise orders. the court would allow for such transactions, if they have been made honestly and in the ordinary course of business. the court, in that case had observed that in the case of sale of the mortgaged property, there was no proof that the sale was undervalued but that the sale had been made subject to the bank's charge. it was also found that the sale was not required to be set aside due to the fact that the purchase was in good faith and without notice to the conspiracy of the directors and their illegality in providing salary for themselves. in that case, the court ultimately dealt with the situation where the directors had refunded the amount taken by them from out of the sale proceeds and the claims of salaries of some workers were also satisfied. the proposition of law laid down by the said judgment must be understood in the context of three vital factors : (i) the amounts, which they had paid to themselves from out of the sale proceeds had been refunded ; (ii) the salaries of the staff had been paid, which was not against the interest of the company ; and (iii) the assets of the company itself had not been shown to be undervalued.6. learned counsel again relied on the decision of the kerala high court in travancore rayons ltd. v. registrar of companies [1988] 64 comp cas 819, which while dealing with the powers of the court under section 536(2) held that obtaining the sanction of the court was meant to protect the interest of the company and its creditors in case a future challenge to the correctness or genuineness of the security was taken up. that was a case where an application had been filed even prior to the transaction of the sale and the issue essentially was whether the court had the power to grant permission for sale after the filing of the petition but before the order of winding up was made. in other words, the essential question, which the court was answering was whether the permission could be sought during the pendency of winding up proceedings during the interregnum between the date of filing of the petition and the date of the order of winding up. the court had allowed the case stating the situation of the case was bona fide, as regards the value of the property and the feasibility of ordering it for sale. in the case on hand, however, it is not a situation where the company court or the official liquidator was at any point of time approached to consider whether the property should be sold or that the property had been properly valued for the purpose of sale to satisfy the claims.7. this was the starting point of arguments for learned counsel appearing on behalf of the official liquidator and who is contesting the application. he would refer to section 537 of the companies act as fully governing the issue and makes a reference to 537(1) (b) that 'any sale held, without leave of the court of any of the properties or effects of the company after such commencement ; shall be void'. according to him, section 537(1)(b) applies comprehensively to interdict any sale after the commencement of the proceedings for winding up and the said provision cannot be controlled by any permission that could be granted under section 536(2). he also refers to a decision of this court in haryana financial corporation v. dev papers p. ltd. (in liquidation) (rendered in c.a. no. 14 of 2007 in c.p. no. 197 of 1999 on december 11, 2008) : [2009] 150 comp cas 399, where this court held that enforcing execution is impermissible under section 537, what to say of attachment or sale of such property without the leave of the court. it said that even if section 446 is not attracted, for want of sanction at the hands of the official liquidator, the attachment of the property and sale thereof in execution of the decree of the civil court without the leave of the court would be rendered void by operation of section 537 of the companies act, even though the suit will be valid. he would also urge if section 537 was to be given its full amplitude, the power of the court to grant leave under section 536(2) must be understood only to be restricted to movable properties.8. learned counsel for the respondent refers to a decision of the hon'ble supreme court in pankaj mehra v. state of maharashtra : [2000] 100 comp cas 417 : [2000] 2 scc 756, which while considering the power of the court under section 536(2) dealt with the situation of issuance of cheques by the company during the proceedings for winding up. the hon'ble supreme court said that a disposition of cheques between the presentation of the petition and passing of order would not be void ab initio, in the context of the expression found in the same section 'unless the court otherwise orders'.9. the decision of the hon'ble supreme court in pankaj mehra v. state of maharashtra : [2000] 100 comp cas 417 : [2000] 2 scc 756, while clearly spells out that the disposition of property during the pendency of proceedings would not be void ab initio qualifies it as obtaining to such a situation, if the court otherwise orders the same. the hon'ble supreme court was not actually considering the interplay of sections 536(2) and 537 but was dealing with the question of issuance of cheques that did not involve attachment and sale of property, which is covered in the succeeding section 537. this question, which was not raised before the hon'ble supreme court could not be simply shoved under the carpet by a simplistic approach that section 536(2) does not relate to disposition of immovable property. on the other hand, the reference to 'disposition of property (including actionable claims) of the company must be understood as referring to any property, which could be movable or immovable property. the expression 'property' is exhaustive and by spelling out just one specie of property, viz., an actionable claim was also included, it does not exclude other forms of property, namely, immovable property. the proper understanding will have to be only by the manner in which the respective sections themselves are arranged in the statute. if there is a disposition of property under the orders of court, it should be understood that by virtue of section 536(2), the disposition shall be valid. section 537 is attracted only when such orders have not been obtained and the sale takes place without the leave of the court and in which case such sale shall be void. it is more in the nature of one action following the other for, if the occasion for invoking section 536(2) has already been exercised, there is no scope for applicability of section 537. if this approach is done then by the fact that the company had not approached this court for sanction of sale before it was undertaken, the sale effected would be seen as void by virtue of section 537.10. even if the above approach to be taken is a restrictive consideration of the scope of section 536(2) and consequently the said provision could be invoked even in cases of post-sale by an application for rectification, the court has to be still satisfied about the bona fides of the transaction. it is difficult to believe that a company, which had lost the entire property for the satisfaction of one creditor could ever urge the plea of bona fides. if any portion of the property had been salvaged for the benefit of the company or any portion was available in surplus for the satisfaction of other unsecured creditors, it may be possible to infer bona fides. if the property which is secured is allowed to be transferred for the exact amount, which was paid to a creditor, then it means the debtor was actually facilitating one secured creditor for the earlier realisation of his own debt. even if the company had not consented for the sale, it would have come to a similar result of the property being sold at the instance of the creditor whose debt was fully satisfied. by the one-time settlement, scaling down the debt had no meaning, for no benefit was obtained by the company. as stated above, the entire security was lost to the company for satisfaction of the creditor who held the property as his exclusive security. even in the absence of one-time settlement, the company could have realised the money by sale of the property and if there was still a shortfall and if there had been any personal liability of the directors, the personal remedy may have been available for the creditor. in such an event, the onetime settlement would have meant saving their own skin against personal liability but obtained no benefit to the company or its other creditors.11. about the value of the property itself, learned counsel for the applicant suggested that he would have no objection if the property was to be assessed to be valued afresh to satisfy the conscience of the court that at the relevant point of time, the property had been properly valued. i do not propose to examine the adequacy of the sale consideration since i have already held that there was no bona fides in selling the property that resulted in the only immovable asset belonging to the company being lost.12. the application, under the circumstances, is dismissed. there shall be, however, no direction as to costs.