Supreme Court Sets Aside Auction of Sick Company’s Assets Due to Procedural Flaws: Rajiv Kumar Jindal vs. BCI Staff Colony (27 April 2023)

Introduction

Date of the Judgment: 27 April 2023

Citation: 2023 INSC 4392

Judges: Justice Ajay Rastogi and Justice Bela M. Trivedi

Can an auction of a sick company’s assets be considered valid if the agency conducting the auction fails to follow the prescribed procedures? The Supreme Court of India recently addressed this critical question in a case involving the sale of assets of a sick industrial company. The court emphasized the importance of adhering to established procedures, including proper valuation and competitive bidding, to ensure fairness and transparency in such transactions. This judgment highlights the significance of procedural compliance in insolvency matters. The bench comprised of Justice Ajay Rastogi and Justice Bela M. Trivedi.

Case Background

M/s Bharat Commerce & Industries Limited (BCI) was declared a sick company. The Board for Industrial and Financial Reconstruction (BIFR) directed the Industrial Development Bank of India (IDBI) to sell BCI’s assets under Section 20(4) of the Sick Industrial Companies (Special Provisions) Act, 1985. IDBI, as the Operating Agency, initiated the process by inviting offers for the sale of BCI’s assets. On 24th May 2004, a public notice was issued for the sale of Block IV of BCI’s Staff Colony in Rajpura. The notice required interested parties to deposit an earnest money of Rs. 6 lakhs for Block IV and submit their tenders within 30 days.

Rajiv Kumar Jindal and others submitted a bid of Rs. 2,84,00,000 on 22nd June 2004, and were the sole bidder. The Operating Agency accepted their bid on 12th August 2004, with the condition that the bidder must comply with the terms and conditions of the Asset Sale Committee (ASC), which were communicated to all bidders on 8th August 2004. However, the appellants failed to furnish a bank guarantee of Rs. 2,84,00,000 or make any payments.

The BIFR, on 24th November 2004, rejected the bid due to non-compliance with ASC guidelines and directed the Official Liquidator of the concerned High Court to take over and sell the assets of Block IV. The appellants challenged this decision before the Appellate Authority for Industrial & Financial Reconstruction (AAIFR), which on 1st April 2005, set aside the BIFR’s order and directed the BIFR to confirm the sale in favor of the appellant. Subsequently, the appellants deposited the bid value in installments.

BCI Staff Colony, Residential Welfare Association and its members filed a writ petition before the High Court of Punjab and Haryana, challenging the AAIFR’s order. The High Court set aside the AAIFR’s order and restored the BIFR’s order, directing that the money deposited by the appellant be refunded with 8% interest.

Timeline

Legal Framework

The case primarily revolves around the interpretation and application of the Sick Industrial Companies (Special Provisions) Act, 1985 (Act 1985). Specifically, Section 20(4) of the Act 1985 empowers the BIFR to direct the sale of assets of a sick company. Section 18(2)(k) of the Act 1985 allows the scheme to provide for the method of sale of assets, such as by public auction or inviting tenders.

Section 21(c) of the Act 1985 mandates that the Operating Agency must prepare a valuation report to arrive at the reserve price for the sale of the company’s assets.

The relevant provisions are:

• Section 18(2)(k) of the Act 1985:
  
  “method of sale of the assets of the industrial undertaking of the sick industrial company such as by public auction or by inviting tenders or in any other manner as may be specified and for the manner of publicity therefor;”
• Section 21(c) of the Act 1985:
  
  “a valuation report in respect of the shares and assets in order to arrive at the reserve price for the sale of a part or whole of the industrial undertaking of the company or for fixation of the lease rent or share exchange ratio;”

Arguments

Arguments by the Appellants (Rajiv Kumar Jindal and Others):

• The appellants argued that the guidelines of the ASC were not appended to the initial advertisement, and they were not informed about the requirement to furnish a bank guarantee until the bid was accepted.
• They contended that they had paid the entire sale consideration on 3rd June, 2005 and 7th June, 2005, and a tripartite Memorandum of Understanding (MOU) was executed on 18th July, 2005.
• The appellants submitted that once the auction sale is confirmed, objections should only be entertained if there are material irregularities or fraud, relying on the judgment in Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited and Others (2008) 9 SCC 299.
• They argued that they had adhered to the conditions of the ASC and were ready to make the payment, and the delay in furnishing the bank guarantee was due to lack of awareness.
• The appellants also contended that the employees who were residing in the property had no locus to question the auction.

Arguments by the Appellants (BCI Staff Colony, Residential Welfare Association):

• The appellants argued that the auction bid was rightly set aside by the High Court.
• They submitted that they had made an offer of Rs. 3 crores, which was higher than the bid of the other appellants and they have been residing in the property for a long time.
• They sought the Court’s indulgence to accept their offer and direct the authorities to execute the sale certificate in their favor, relying on the judgments in Navalkha and Sons v. Sri Ramanya Das and Others (1969) 3 SCC 537 and Divya Manufacturing Company (P) Ltd. Tirupati Woollen Mills Shramik Sangharsha Samity and Another v. Union Bank of India and Others Official Liquidator and Others (2000) 6 SCC 69.

Arguments by the Intervenors (Employees of the Company in Liquidation):

• The intervenors supported the High Court’s finding.
• They argued that their dues were outstanding and could not be paid due to lack of funds with the Official Liquidator.
• They requested that the BIFR or the Official Liquidator initiate a fresh bidding process to maximize the value of the property, so that their dues could be cleared.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the court addressed were:

• Whether the auction process was valid, considering the Operating Agency’s failure to obtain a valuation report and notify the reserve price.
• Whether the acceptance of the bid was valid when the bidder failed to comply with the terms and conditions of the ASC.
• Whether the High Court was justified in setting aside the AAIFR’s order and restoring the BIFR’s order.
• Whether the employees of the company in liquidation had the locus standi to challenge the order of the AAIFR.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

• Lakshmanasami Gounder v. C.I.T., Selvamani and Others (1992) 1 SCC 91 – The Court referred to this case to emphasize that the object of an auction is to secure the maximum price and to avoid arbitrariness in the procedure.
• Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited and Others (2008) 9 SCC 299 – The Court referred to this case to highlight that once the auction sale is confirmed, objections should only be entertained if there are material irregularities or fraud.
• National Highways Authority of India v. Gwalior-Jhansi Expressway Limited Through Director (2018) 8 SCC 243 – The Court referred to this case to support its submission that once the auction sale stands approved, at least the employees who were residing in the property in question and who had never participated in the bidding process, have no locus to question the order passed by the AAIFR.
• Navalkha and Sons v. Sri Ramanya Das and Others (1969) 3 SCC 537 – The Court referred to this case for the proposition that the appellants have made an offer of Rs.3 crores which was higher than the bid furnished by the appellants in Civil Appeal No.10128 of 2011.
• Divya Manufacturing Company (P) Ltd. Tirupati Woollen Mills Shramik Sangharsha Samity and Another v. Union Bank of India and Others Official Liquidator and Others (2000) 6 SCC 69 – The Court referred to this case for the proposition that the appellants have made an offer of Rs.3 crores which was higher than the bid furnished by the appellants in Civil Appeal No.10128 of 2011.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the procedural irregularities in the auction process and the lack of competitive bidding. The court emphasized that the Operating Agency (IDBI) failed to:

• Obtain a valuation report of the property from an approved valuer.
• Disclose the reserve price in the auction notice.
• Ensure compliance with the guidelines of the ASC by the bidder.

The Court also noted that the appellants were the sole bidder and had not complied with the ASC guidelines, which required them to furnish a bank guarantee and make timely payments. The Court held that the AAIFR had erred in setting aside the BIFR’s order without considering these aspects.

The Court also considered the fact that the employees of the company were directly affected by the sale and had a right to question the auction process.

The court observed, “The object of the auction is to secure optimum realizable value of the property by giving opportunity to the potential buyers facing competitive bids either in open or closed format.”

The court further stated, “The purpose of auction (open or close format) is to get the most remunerative price and giving opportunity to the intending bidders to participate and fetch higher realizable value of the property.”

The court also noted, “the very procedure in the first instance initiated by the Operating Agency was defective at its very inception and before initiation of the auction proceedings, neither the value of the property was assessed through the approved valuer nor the reserve price was notified in the auction notice dated 24th May, 2004”

Key Takeaways

✓ The judgment underscores the importance of strict adherence to procedural requirements in the auction of assets, particularly in the context of sick industrial companies.

✓ It emphasizes that the Operating Agency must obtain a valuation report and disclose the reserve price before initiating the auction process.

✓ The court has highlighted that competitive bidding is essential to secure the optimum realizable value of the property.

✓ The rights of affected parties, such as employees residing on the property, cannot be overlooked.

Directions

The Supreme Court directed that:

• The money deposited by the appellants in Civil Appeal No. 10128 of 2011 shall be refunded with interest, as per the High Court’s order.
• The official liquidator may take all reasonable steps to fetch the optimum value of the property in order to achieve the object of public auction.

Development of Law

The ratio decidendi of this case is that an auction of a sick company’s assets is invalid if the Operating Agency fails to follow the mandatory procedures, such as obtaining a valuation report, disclosing the reserve price, and ensuring compliance with the ASC guidelines. This judgment reinforces the importance of procedural compliance and competitive bidding in insolvency proceedings. There is no change in the previous position of the law, but the court has reaffirmed the importance of adhering to the existing legal framework.

Conclusion

The Supreme Court’s judgment in Rajiv Kumar Jindal and Others vs. BCI Staff Colony Residential Welfare Association and Others underscores the necessity of adhering to prescribed procedures in the auction of assets of sick industrial companies. The court set aside the auction due to the Operating Agency’s failure to obtain a valuation report, disclose the reserve price, and ensure compliance with ASC guidelines. The judgment emphasizes the importance of competitive bidding and the rights of affected parties, ensuring fairness and transparency in such transactions.