Andhra Pradesh State Financial Corporation vs Nagarjuna Paper Mills Ltd. (In Liquidation)

S. Dasaradharama Reddy, J.—This is an application filed by the A. P. State Financial Corporation (briefly referred to as "the S.F.C.") to permit it to finalise the tenders in respect of sale of the assets of Nagarjuna Paper Mills Limited directed to be wound up in R.C.C. No. 6 of 1991 in favour of Smt. P.A. Radha and J. Vijayalakshmi for Rs. 144 lakhs. In the affidavit filed in support of the application, it is stated that the tenders submitted pursuant to the first advertisement given on August 14, 1995, could not be finalised as the tenders failed to furnish the details with regard to the payment of sale consideration. The tenders were cancelled as per the recommendation of the tenders negotiating committee and the sale was readvertised on November 6, 1995, in the newspapers. In response to this advertisement, five tenders were received out of which three tenderers receded and took refund of the earnest money deposits. Smt. P.A. Radha and J. Vijayalakshmi offered Rs. 143 lakhs while G.S. Rao offered Rs. 141 lakhs. During the negotiations with the tenderers, Sri G.S. Rao withdrew from the participation and sought refund of the earnest money deposit. Finally, negotiations were conducted with the sole and remaining tenderer, P.A. Radha and J. Vijayalakshmi, who agreed to enhance the bid by rupees one lakh, i.e., Rs. 144 lakhs and agreed to make a down payment of 35 per cent. and the balance 65 per cent. in three years from the date of confirmation of the sale in quarterly instalments with a moratorium period of one year together with interest at the current lending rates. It is also stated that the tenderer has undertaken not to withdraw the offer pending permission of this court of finalising the tenders and that he deposited 35 per cent. down payment by November 30, 1995. This offer was approved by the board of directors of the S.F.C. on December 11, 1995, and was also approved by the A.P.I.D.C. and I.F.C.I., the other financial institutions. It is also stated that an amount of Rs. 89.38 lakhs is due to the Corporation from the company as on March 31, 1993, together with future interest.

The official liquidator has filed report stating that the details of the previous offers were not given and also seeking a direction that the Corporation must deposit immediately with the official liquidator whatever amount was received so far. In the second report filed, the official liquidator states that no documentary evidence is filed to show that 35 per cent. down payment was made by November 30, 1995, and that the S.F.C. has not deposited the said 35 per cent. with the official liquidator. It is also stated that the payment of the balance consideration in a number of instalments with a moratorium period is a matter between the S.F.C. and the buyers.

Learned counsel for the S.F.C. has produced the record. From the valuation report prepared by the A.P.S.F.C. and the A.P.I.D.C., the land is valued at Rs. 25.30 lakhs while the building is valued at Rs. 20 lakhs and the plant and machinery at Rs. 35 lakhs totalling to Rs. 80.30 lakhs. Among the tenderers who submitted tenders in response to the first advertisement, one Jayakali Prasad Paper Mills Ltd., which gave an original offer of Rs. 54 lakhs finally offered Rs. 132 lakhs during negotiations. It was asked to deposit Rs. 46.50 lakhs which is 35 per cent. of the offer less Rs. 1 lakh (E.M.D.) by September 19, 1995. But as it has not deposited the amount by that date, the tenders were cancelled and the committee decided to call for fresh tenders.

Pursuant to the second advertisement, five tenderers submitted their tenders ranging from Rs. 40 to Rs. 72 lakhs. Initially, Smt. Radha and Vijayalakshmi quoted Rs. 54 lakhs while G.S. Rao quoted Rs. 40 lakhs. During negotiations, G.S. Rao offered up to Rs. 141 lakhs, one Venugopalarao offered Rs. 81 lakhs, T.M.T. India Limited offered Rs. 139 lakhs and R. Venkateswara Associates offered Rs. 143 lakhs. Subsequently, Mr. A. Venugopal Rao, T.M.T. India Limited and R. Venkateswara Rao Associates have withdrawn from further negotiations, leaving in the field Sri G.S. Rao and Smt. Radha and Vijayalakshmi. Finally, G.S. Rao also withdrew and Smt. Radha and Smt. Vijayalakshmi enhanced the bid by rupees one lakh, i.e., Rs. 144 lakhs, agreeing to pay Rs. 12.6 lakhs on November 29, 1995, another amount of Rs. 16 lakhs on November 30, 1995, and the balance of 35 per cent. by December 15, 1995. It was also made a condition that the balance of 65 per cent. has to be paid in three years in instalments with a one year moratorium carrying current rates of interest. This was agreed to by the S.F.C. and also by the A.P.I.D.C. and the I.F.C.

I am of the opinion that this offer of Smt. Radha and Vijayalakshmi cannot be accepted for the following reasons :

(1) The bio-data of these persons along with complete details of companies with which they are associated is not furnished though required under condition No. 4 of the terms and conditions;

(2) Even though there was authorisation in favour of Mr. P.S.R. Krishna Rao for negotiations there is no confirmation by the two proposed buyers of their final offer;

(3) Though it is stated in para 11 of the affidavit filed on behalf of the A.P.S.F.C. that Smt. Radha and Smt. Vijayalakshmi deposited 35 per cent. down payment by November 30, 1995, the record shows that P.S.R. Krishna Rao has written on November 29, 1995, to the S.F.C. that the petitioners have paid Rs. 12.6 lakhs on November 26, 1995, by two demand drafts and agreed to pay further sum of Rs. 16 lakhs by November 30, 1995, and the balance by December 15, 1995. From the memorandum to the board of directors submitted by the managing director on December 1, 1995, it is stated that Rs. 14,00,015 was deposited in cash by the tenderers on November 30, 1995, as against Rs. 16 lakhs payable even as per their offer. Thus, it is obvious that the petitioners have not kept up to their schedule of payment. It is also not clear whether they have paid the entire 35 per cent. even by December 15, 1995. As already seen, the earlier offer of Jayakali Prasad Paper Mills was rejected on the ground that it has not paid 35 per cent. of the payment within the stipulated time. If so, it is not known why the Corporation has not applied the same reasoning in the case of this tenderer also;

(4) As per condition No. 5 of the terms and conditions, for accepting the tenders, in case the sale consideration exceeds the total outstanding due to the Corporation, the difference in sale consideration shall be paid along with down payment. As the sale consideration (Rs. 144 lakhs) exceeds the outstandings due to the Corporation (Rs. 89.38 lakhs as on March 31, 1993 - exact figure as on the date of sale, not furnished), the difference has to be paid along with down payment;

(5) As per the terms and conditions of the advertisement in the newspapers, the successful tenderer shall deposit a minimum of 35 per cent. of the bid amount including the earnest money deposit on the same day or before the date specified by the Corporation and the balance within 30 days or in the manner prescribed by the Corporation. This facility of term loan and repayment of the loan in three years instalments with one year moratorium was not made known in the terms and conditions. Had it been made known, the other tenderers would have quoted more amount and submitted more revised offers during negotiations.

The decision of the Supreme Court in Industrial Finance Corporation and Others Vs. Official Liquidator, High Court, Calcutta and Another, etc., is apposite. In that case, the assets of a company, incidentally also a paper mill, which was ordered to be wound up were sold in auction by the company court showing the upset price as Rs. 6.9 crores. As per the conditions of the auction, the successful tenderer must deposit 10 per cent, of the bid at the time of sale and the balance amount has to be paid by instalments as would be fixed by the court. The sale notice did not specify the number of instalments nor had it specified the period within which the entire consideration shall be remitted. One Buxa Holdings Limited which offered Rs. 6 crores earlier raised its offer to Rs. 8 crores. That offer was accepted by the court with the condition that the balance consideration after deducting 10 per cent. earnest money deposit shall be paid in two instalments of Rs. 50 lakhs for the first two years and thereafter in half-yearly instalments of Rs. 30 lakhs each. No interest was stipulated. The Division Bench of the High Court modified the terms to the effect that for the first two years, the instalments payable will be Rs. 60 lakhs each and thereafter half-yearly instalments will be in sums of Rs. 40 lakhs each. Aggrieved by this, the financial institutions approached the Supreme Court contending that the Buxa Company should be directed to pay the entire balance consideration immediately or in the alternative the number of instalments may be reduced with a provision for interest. Upholding their objections, the Supreme Court observed as follows (at page 312) :

"It would have been better if the sale notice itself had prescribed the number of instalments which would be granted to the purchaser, besides other terms and conditions and then invited offers on that basis. Alternatively, the court could have invited the offers subject to such conditions as the offerers may prescribe and then have them evaluated by a qualified person and select the most appropriate one. If none of them are found acceptable and if the court thought it appropriate, it could also allow the bidders to submit revised offers and then have them evaluated. We are not saying that these are the only two methods. There may be others. Our object is only to emphasise that any method devised should be such as to obviate the necessity or occasion for the court to negotiate the terms and conditions of sale with the party or parties. The sale notice in this case merely stated that the balance consideration may be paid in instalments as would be fixed by the court. The number and duration of instalments and other allied terms like bank guarantee, nature and terms of default clause, payment of interest on instalments were all left to be determined by the court. It is true that in this case, the bid of Rs. 6 crores was got enhanced to Rs. 8 crores, with lesser number of instalments than offered by the purchaser - all as a result of persuasive efforts by the company judge. Even so, it has given room for the argument that had it been known beforehand that so many instalments would be granted without stipulation of interest, several higher offers could have been received."

Finally, the Supreme Court modified the number of instalments. The principle laid down by the Supreme Court applies here also. Here also, the facility of paying the balance 65 per cent, of the sale consideration by obtaining a term loan was not made known in the advertisement, thus denying to many others the opportunity of submitting their tenders, may be even for higher price.

Mr. Lohita relied on U.P. Financial Corporation v. Naini Oxygen and Acetylene Gas Ltd. [1995] 82 Comp Cas 671; U.P. Financial Corporation and Others Vs. Naini Oxygen and Acetylene Gas Ltd. and Another, , wherein it was held that unless it is shown that the action of the Corporation is mala fide, even a wrong decision by it is not open to challenge and that it is not for the court as a third party, to substitute its opinion, however more prudent or commercial it may be, for the decision of the Corporation. This decision is distinguishable since it dealt with an action of the finance corporation in selling the assets of a company which was a defaulter. We are concerned here with the sale of assets of the company which is being wound up and permission granted to A.P.S.F.C. to remain outside the winding up proceedings was subject to the condition that the sale has to be confirmed by this court. It is obvious that in confirming the sale, the court has to keep in mind the interests of shareholders, workers and creditors of the company under liquidation. In Lica (P.) Ltd. (No. 1) v. Official Liquidator [1995] 85 Comp Cas 788 (SC) , it was observed by the Supreme Court that (at page 791) :

"The purpose of an open auction is to get the most remunerative price and it is the duty of the court to keep openness of the auction so that the intending bidders would be free to participate and offer higher value. If that path is cut down or closed the possibility of fraud or to secure inadequate price or underbidding would loom large. The court would, therefore, have to exercise its discretion wisely and with circumspection and keeping in view the facts and circumstances in each case. One of the terms of the offer in this case is that even confirmation of the sale is liable to be set aside by the High Court as per clause 11 of the conditions of offer. The sale conducted was subject to confirmation. Therefore, mere acceptance of the offer of Mr. Shantilal Malik does not constitute any finality of the auction nor would it be automatically confirmed. The appellant offered a higher price even now at Rs. 45,00,000. Keeping in view the interest of the company and the creditors and the workmen to whom the sale proceeds would be applied, the learned company judge was right in exercising her discretion to reopen the auction and directing Mr. Shantilal Malik as well to make a higher offer than what was offered by the appellant. In every case it is not necessary that there should be fraud in conducting the sale, though on its proof the sale gets vitiated and it is one of the grounds to set aside the auction sale. Therefore, the discretion exercised by the learned single judge cannot be said to be unwarranted.

The offer of the appellant of Rs. 45,00,000 shall be the minimum. It is open to the second respondent, Shantilal Malik, to participate in the auction and the learned single judge is directed to conduct the auction in the open court between the parties and the highest offer may be accepted as per law and action be taken thereon as per law. The appeal is accordingly allowed but in the circumstances parties are directed to bear their own costs".

Pursuant to this direction, auction was held again fixing the upset price at Rs. 45 lakhs. The appellant therein offered Rs. 1.10 crores. Noticing that a further offer of Rs. 1.25 crores was made by the respondent, the Supreme Court directed a fresh auction again not restricting the bid to the two parties and keeping the upset price at Rs. 1.5 crores. Thus, it is the duty of the company court to see that the maximum price is received for sale of assets of a company directed to be wound up, in the interests of the shareholders, workers and creditors.

For the above reasons, the offer of Rs. 144 lakhs made by P.A. Radha and J. Vijayalakshmi cannot be accepted and the Corporation is directed to readvertise the sale of assets of the company, this time by public auction keeping the minimum price at Rs. 144 lakhs and also by sending copies of the notice of auction to all leading paper mills in the country. The company application is accordingly dismissed.