Supreme Court Upholds Re-Auction of Sick Company Assets: Rajiv Kumar Jindal vs. BCI Staff Colony (2023)

Introduction

Date of the Judgment: 27 April 2023
Citation: 2023 INSC 381
Judges: Justice Ajay Rastogi and Justice Bela M. Trivedi

Can a sale of a sick company’s assets be valid if the auction process did not follow the prescribed guidelines? The Supreme Court of India recently addressed this question, focusing on whether the Operating Agency adhered to the mandatory procedures under the Sick Industrial Companies (Special Provisions) Act, 1985. The court examined the case of a disputed auction of assets belonging to M/s Bharat Commerce & Industries Limited (BCI), a company declared sick. The bench, comprising Justice Ajay Rastogi and Justice Bela M. Trivedi, delivered the judgment.

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 act as the Operating Agency to sell BCI’s assets under Section 20(4) of the Sick Industrial Companies (Special Provisions) Act, 1985. IDBI initiated the process by publishing a public notice on May 24, 2004, inviting offers for Block IV of BCI’s Rajpura unit. The notice required an earnest money deposit of Rs. 6 lakhs for Block IV. Rajiv Kumar Jindal and others submitted the sole bid of Rs. 2,84,00,000 on June 22, 2004. The bid was accepted on August 12, 2004, subject to the Asset Sale Committee (ASC) guidelines. However, the appellants failed to furnish a bank guarantee or make payments as per the ASC guidelines. The BIFR rejected the bid on November 24, 2004, directing the Official Liquidator to take over the sale. The Appellate Authority for Industrial & Financial Reconstruction (AAIFR) overturned the BIFR order on April 1, 2005, directing the sale to the appellants. This decision was challenged by the BCI Staff Colony, leading to the High Court setting aside the AAIFR order and restoring the BIFR order on February 5, 2010, ordering a fresh auction. The matter reached the Supreme Court through appeals.

Timeline:

Arguments

Appellants (Rajiv Kumar Jindal and Others):

• The appellants argued that the guidelines of the Asset Sale Committee (ASC) were not provided with the initial auction advertisement. They contended that they were not informed about the requirement to furnish a bank guarantee until after their bid was accepted. They submitted that the Appellate Authority for Industrial & Financial Reconstruction (AAIFR) had considered this point in their favor.

• The appellants asserted that they had paid the entire sale consideration by June 7, 2005, and a tripartite Memorandum of Understanding (MOU) was executed on July 18, 2005. They argued that the High Court did not consider this while setting aside the bid.

• The appellants contended that once an auction sale is confirmed, objections can only be entertained if there are material irregularities or fraud. They argued that the process should not be kept open indefinitely for higher offers, citing the judgment in Valji Khimji and Company v. Official Liquidator of Hindustan Nitro Product (Gujarat) Limited and Others [(2008) 9 SCC 299].

• The appellants claimed they adhered to the ASC conditions, were ready to pay, and were not informed about the bank guarantee until September 2004. They argued that after the AAIFR allowed their appeal, they paid the bid amount and thus did not violate any terms.

• The appellants argued that the employees residing on the property, who did not participate in the bidding, had no right to question the AAIFR’s order. They contended that allowing such challenges would prevent auction sales from ever achieving finality, relying on National Highways Authority of India v. Gwalior-Jhansi Expressway Limited Through Director [(2018) 8 SCC 243].

Appellants (BCI Staff Colony, Residential Welfare Association):

• The appellants supported the High Court’s decision to set aside the auction bid but were aggrieved by the direction to sell the property according to the law. They argued that their offer of Rs. 3 crores was higher than the bid of the other appellants and, being residents of the property, they should be given preference. They relied on 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].

Intervenors (Employees of BCI):

• The intervenors supported the High Court’s decision, arguing that their dues were outstanding and could not be paid due to a lack of funds with the Official Liquidator. They requested a fresh bidding process to maximize the property’s value, which would benefit the employees, who have a superior claim over financial creditors.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the auction of assets of the sick company was valid when the Operating Agency failed to follow mandatory procedures under the Sick Industrial Companies (Special Provisions) Act, 1985.
2. Whether the High Court was justified in setting aside the order of the AAIFR and restoring the order of the BIFR.
3. Whether the employees residing on the property, who did not participate in the bidding, had the right to question the AAIFR’s order.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the procedural lapses in the auction process and the need to ensure fairness and transparency in the sale of assets of a sick company. The court emphasized the importance of competitive bidding and adherence to the guidelines set by the Asset Sale Committee (ASC). The court also considered the interest of the employees of the company in liquidation.

The court emphasized that the Operating Agency’s failure to obtain a valuation report and disclose the reserve price was a significant lapse. The lack of competitive bidding and the non-compliance with ASC guidelines further solidified the court’s decision to invalidate the auction. The court also considered the employees’ interest in maximizing the value of the property to settle their dues.

Key Takeaways

• Procedural Compliance: The judgment underscores the importance of strict adherence to procedural guidelines in the sale of assets of sick companies. Operating Agencies must ensure that all steps, including valuation, reserve price disclosure, and competitive bidding, are followed meticulously.
• Fairness and Transparency: The court emphasized the need for fairness and transparency in auction processes. The absence of competitive bidding and the failure to disclose the reserve price were major factors in the court’s decision to invalidate the auction.
• Protection of Employee Interests: The court acknowledged the interests of the employees of the sick company, highlighting the need to maximize the value of the assets to settle their outstanding dues.
• Locus Standi: The court clarified that parties directly affected by the auction, such as residents of the property, have the right to challenge the auction process, even if they were not bidders.

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 order.
• The Official Liquidator should take all reasonable steps to fetch the optimum value of the property to achieve the object of public auction.

Development of Law

The ratio decidendi of this case is that the sale of assets of a sick company through public auction must adhere strictly to the procedures laid down under the Sick Industrial Companies (Special Provisions) Act, 1985. The Operating Agency must obtain a valuation report, disclose the reserve price, and ensure competitive bidding to secure the optimum realizable value of the property. This judgment reinforces the importance of procedural compliance and transparency in such sales and clarifies that affected parties, such as residents of the property, have the right to challenge the auction process.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision to set aside the auction of assets of M/s Bharat Commerce & Industries Limited (BCI). The court found that the Operating Agency, IDBI, failed to follow mandatory procedures by not obtaining a valuation report, not disclosing the reserve price, and accepting a solitary bid without competitive bidding. The court emphasized the importance of adhering to the guidelines of the Asset Sale Committee (ASC) and directed that the Official Liquidator should initiate a fresh auction process to maximize the value of the property for the benefit of all stakeholders, including the employees of the company.