Punjab National Bank vs Orissa State Financial Corporation and Others

D.M. Patnaik, J.—The petitioner-bank challenges the action of the Orissa State Financial Corporation for auction sale of the assets of M/s. Utkal Ferro Alloys Pvt. Limited (for short, "the company") to opposite party No. 5.

The Orissa State Financial Corporation (for short, "the OSFC") sanctioned a loan of Rs. 11 lakhs and 8 thousand, the Industrial Promotion and Investment Corporation (in short, "the IPCOL") sanctioned a loan of Rs. 3 lakhs and the petitioner-bank sanctioned credit limit up to Rs. 92 lakhs to the opposite party-company for setting up its factory at Rairangpur in the district of Mayurbhanj against valuable securities both movables and immovables. By a common agreement dated July 11, 1979, it was agreed by all the above parties that the properties so mortgaged to OSFC shall be first charge and for the loan advanced by the petitioner-bank it shall be the second charge, to be enforced by the petitioner-bank.

When the company defaulted in repaying the loan the latter seized the unit on September 5, 1987, and sale notice was published on September 11, 1987. This time the sale to one Arun Kumar could not be materialised and was cancelled and the second sale notice was published on March 7, 1995, in the Economic Times and this time opposite party No. 6 offered Rs. 27 lakhs with a down payment of rupees five lakhs and rest amount for payment within seven years. This was accepted by the OSFC.

The petitioner''s case is, such valuable assets have been sold away for a meagre sum of Rs. 27 lakhs for which the petitioner-bank is at great loss. It is alleged that such a low offer has come because of the utter inaction of the OSFC in not giving wide publicity for sale to attract potential businessmen to purchase a highly sophisticated and technologically advanced unit. It is also alleged that although under the agreement dated July 11, 1979, the petitioner-bank was entitled to a prior notice for sale. Had it been done, it could have fetched a buyer of its choice. The sale is claimed to be invalid in the absence of such a notice as provided under the agreement. It, therefore, prays to set aside the same.

The main point urged in the counter-affidavit by opposite party No. 1, the OSFC is that, so far as the agreement dated July 11, 1979, is concerned the same was not registered with the Registrar of Companies as provided u/s 125 of the Companies Act, and therefore, the agreement being void is non-existent in the eye of law and therefore, a prior notice to the petitioner-bank was not necessary. Further, it asserted that the sale notice dated September 11, 1987, was intimated to the Regional Director, Company Law Board under annexure A and annexure B. It is its further case that the first sale in favour of Shri Arun Kumar Nanda was cancelled since the buyer only purchased the assets of the company whereas it could not discharge the liabilities of the company for which the creditors of the company moved the Corporation to cancel the sale which was done. However, on the second occasion on March 14, 1995, before the sale the Disposal-cum-Advisory Committee of the Corporation held its meeting on March 14, 1995, in which the officers of the bank were present. On their asking", ten days'' time was granted to them to fetch the buyer but they failed to do so, and therefore, the Corporation was constrained to put the unit to auction which has been settled with opposite party No. 6 with the terms and conditions stated above. Opposite party No. 5, the company has supported the case of the petitioner-bank whereas, opposite party No. 6 has supported the case of the OSFC.

Having heard learned counsel for the petitioner and opposite parties Nos. 5 and 6, we are satisfied that the unit has been sold for a low price and the procedure adopted by the OSFC did not comply with the guidelines laid down by the apex court in the case of Mahesh Chandra v. V.P. Financial Corporation [1993] 78 Comp Cas 1 AIR 1994 SC 935.

It has been laid down in the above case that the defaulting unit should be sold by public auction, but the valuation of the unit for the purpose of determining the adequacy of the offer should always be intimated to the unitholder to enable him to file objection if any, he being a vitally interested party in getting the maximum price. If the unitholder is willing to offer the sale price as any other tender, then he should be offered the same facility and the unit should be transferred to him, and if necessary, arrears remaining thereafter should be rescheduled to be recovered in instalments and if he brings a third party with a higher offer the same may be tested and accepted. It is also laid down that sale by private negotiation should be permitted if the unit is a very large concern with a huge amount of investment for which ordinary buyers may not be available. These conditions having not been adhered to, the sale is liable to be set aside.

In the result, the petition is allowed and the sale is set aside. The OSFC shall advertise the unit for fresh sale giving wide publicity as required in the case of Mahesh Chandra [1993] 78 Comp Cas 1 ; AIR 1994 SC 935 and also comply with other requirements in that case. Besides, we direct that minimum 15 days notice should be given to the petitioner-bank as well as opposite party No. 5, the company, to enable it to join the auction and if necessary to allow them to fetch their own buyers for participation in the auction. Opportunity to inspect the unit be also given to the petitioner-bank and opposite party No. 5. No costs.

S. Chatterji , J.

I agree.