M-S New Cawnpore Flour Mills vs M-S Bakemans Industries Pvt Ltd on 20 December, 2010

Delhi High CourtM/S New Cawnpore Flour Mills vs M/S Bakemans Industries Pvt Ltd on 20 December, 2010Author: Sanjiv Khanna% 20.12.2010

Present: Mr. C.A. Sundram, Sr. Advocate with Mr. P.C. Sen & Ms. Aanchal Yadav for Ceylon Biscuits Limited. Mr. Abhinit Das for the ex-management. Mr. Rakesh Khanna, Sr. Advocate with Mr. Rajiv K. Garg & Mr. Ashish Garg in CA No. 1367/2005. Mr. Chinmoy Pradip Sharma for SICOM Limited. Mr. Rajiv Behl for the Official Liquidator. Mr. Atul Sharma for IDBI/IFCI.

+ CA No. 900/2008 (filed by Ceylon Biscuits Limited), CA No. 1767/2010 (filed by management of the company under provisional liquidation) and CA No. 495/2010 (filed by the Official Liquidator) in CP No. 204/2003

1.

Bakemans Industries Private Limited (BIPL, for short) was in the business of making and marketingbiscuits and allied products under the trade mark/brand Bakeman since 1978. BIPL had availedloan of Rs. 17 Crores from State Industrial Corporation Of Maharashtra Limited (SICOM, for short)and had defaulted in repayment. SICOM took over possession of BIPL factory at Patiala on 18thJuly, 2003 under Section 29 of the State Financial Corporations Act, 1951. The operations were shutand the factory was locked.

2. In 2003, 16 separate petitions were filed by creditors of BIPL under Section 433(e) and (f) readwith Section 434 and 439 of the Companies Act, 1956 (Act, for short). By order dated 6th April,2004, CP No. 204/2003 filed by New Cawnpore Flour Mills Private Limited was admitted andcitations were directed to be published. Looking into the allegations and particularly the conduct ofthe management of BIPL, the Official Liquidator attached to this Court was appointedC.P.No.204/2003 Page 1 as the provisional liquidator to take over assets, properties and books ofaccounts. It was observed in this order that it was not necessary to pass separate orders in eachwinding up petition and the order would operate in favour of creditors as if it has been made on ajoint petition of the creditors.

3. In the meanwhile, BIPL purportedly approached NRI Lead Bank (which is a company not a LeadBank) seeking financial assistance. It is not clear what exactly happened thereafter but thepurported disputes between BIPL and NRI Lead Bank were referred to Arbitral Justice of ADRArbitration, stated to be a body recognized by the Government of India in terms of Section 21 of theArbitration and Conciliation Act, 1996. The purported reference was in terms of an allegedarbitration agreement. The arbitration proceedings were closed as the tribunal opined that there

M/S New Cawnpore Flour Mills vs M/S Bakemans Industries Pvt Ltd on 20 December, 2010

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was no genuine arbitration agreement. However, new set of arbitrators were subsequentlyappointed and rendered an award dated 16th August, 2003. Subsequently, NRI Lead Bank filed anexecution petition on the basis of written agreement/award dated 16th August, 2003 passed byBoard of Conciliation. Sister concern of BIPL and SICOM were also made a party to this executionproceeding. Subsequently, Industrial Development Bank of India (IDBI), Industrial FinanceCorporation of India (IFCI) and some other banks/State Financial Corporations were impleaded asparties.

4. Management of BIPL relying upon the purported award of the Board of Conciliation took forciblepossession of the factory on 14th September, 2003. SICOM thereupon filed an application in theexecution petition and vide order dated 15th September, 2003 status quo order was passed.

C.P.No.204/2003 Page 2

5. On 28th November, 2003, an assurance was given by the management of BIPL in the executionproceedings that they would come with a definite proposal for payment to the creditors. On 18thDecember, 2003, the High Court in the execution proceedings directed the management of BIPL todeposit Rs. 2 Crores failing which SICOM was at liberty to proceed with the statutory remediesavailable to them under the State Financial Corporation Act, 1951. An undertaking was also given bythe Managing Director of BIPL.

6. SICOM obtained a valuation report of the property consisting of land measuring 30544 squareyards and a building comprising of three floors having RCC construction with plant and machineryat Patiala, Punjab (hereinafter referred to as the property, for short). There were also unpackedmachineries, which had been imported from abroad.

7. As the management of BIPL failed to deposit Rs. 2 Crores and did not submit a definite proposalin terms of the order dated 28th November, 2003 in the execution proceedings, SICOM was givenliberty to proceed with the sale. On 8th February, 2004, SICOM advertised for sale of the factory inthe newspapers.

8. On or about 15th March, 2004, Ceylon Biscuits Private Limited (CBL, for short) filed anapplication before the execution court seeking permission to inspect the property disclosing thatthey had been negotiating with the management of BIPL.

9. CBL had shown willingness to submit bid and were allowed to do so vide order dated 16th March,2004. The matter was again taken up before the civil court/execution court on 24th March, 2004when CBL made an offer of Rs. 12.5 Crores and deposited earnest money of Rs. 25 lacs in dollars.The second highest bidder had submitted a bid C.P.No.204/2003 Page 3 of Rs.11.7 Crores.

10. On 19th April, 2004, the proceedings pending before the civil/execution court were directed tobe listed before the Company Court in view of the winding up petition CP No. 204/2003.



11. Now coming back to the company petition, SICOM filed CA No. 414/2004 with the prayer thatthe order dated 6th April, 2004 appointing provisional liquidator and asking him to take overassets, properties and books of accounts of BIPL should be recalled. By order dated 16th April,2004, an interim direction was passed that possession of SICOM in the above noted factory wouldnot be disturbed till the next date.

12. Another application CA No. 729/2004 was filed in CP No. 204/2004 by the management ofBIPL. This application was for direction to SICOM not to sell the property and for maintainingstatus quo in respect of the property. This application was disposed of vide order dated 17th July,2004. The application was dismissed. In this order it was noticed that in the civil/executionproceedings, bids had been received from three parties, including CBL. In the order dated 17th July,2004, it is recorded that the bid of Rs. 12.5 crores given by the CBL in the execution/ civilproceedings was the highest and the same was accepted by the Company Court.

13. This order confirming the sale of the property in favour of the CBL was taken in appeal before aDivision Bench but without success and this decision was made subject matter of challenge beforethe Supreme Court in Civil Appeal Nos. 3628/2008 and 3629/2008. The said civil appeals weredisposed of vide detailed judgment dated 16th May, 2008.

14. The Supreme Court in its detailed judgment reported in (2008) 15 SCC 1 has set out the entirehistory of litigation and respective C.P.No.204/2003 Page 4 stands of the parties. In paragraph 36 ofthe judgment, the Supreme Court has set out the core issues that arose for consideration beforethem. The said paragraph reads as under:

"36. The core issues which arise for our consideration in view of the rival contentionsof the learned counsel are:

(1) Whether in the facts and circumstances of the case the executingcourt and consequently the Company Judge could have supervised thepurported sale of the assets of the appellant on behalf of SICOMhaving regard to the provisions of Section 29 of the 1951 Act?

(2) Whether in a case of this nature and particularly having regard tothe fact that SICOM submitted itself to the jurisdiction of theexecuting court and the Company Court, can now turn around andcontend that in effect and substance it had exercised its statutorypowers under Section 29 of the Act and allowed the same only to besupervised by the learned Company Judge? (3) Whether the statutorypowers of a financial corporation as envisaged under Section 29 of the1951 Act would prevail over the proceedings before a Company Judgein a winding-up proceeding?

(4) Whether involvement of the Official Liquidator in the facts andcircumstances of the case and particularly in view of the fact that



Official Liquidator brought to the courts notice claims of othercreditors, the Company Judge ought to have dealt with the same in themanner laid down in the Companies Act and/or the Rules framedthereunder and/or the decision of this Court?

(5) Whether the High Court while exercising its powers under Section433 of the Companies Act read with other provisions could ignore theclaims of the other creditors, and in particular the workmen, havingregard to the provisions of Section 529-A thereof.

(6) Whether the High Court while exercising its jurisdiction both in the executionproceeding as also winding-up C.P.No.204/2003 Page 5 proceeding can, in the factsituation obtaining herein, be said to have adopted a fair procedure.

(7) Whether in any event the High Court could have ignored the legal requirementsas regards the conduct of sale of the assets of the appellant only on the basis of: (1)wrongful conduct on the part of the appellant in obtaining an award from theConciliation Tribunal; and (2) its failure to bring a better offer from another bidder."

15. The finding of the Supreme Court is that SICOM though secured creditor hadsubmitted itself to the jurisdiction of the Company Court and, therefore, thejurisdiction, which was exercised by the Company Court was under the provisions ofthe Act and not Section 29 of the State Financial Corporation Act, 1951. The SupremeCourt has recorded that the Official Liquidator had brought to the notice of theCompany Court claims of other creditors including workmen, who are entitled to paripasu payment under Section 529A and 530 of the Act. It was noticed that the OfficialLiquidator had stated that 373 claims had been filed and the total amount demandedwas about Rs.100 Crores. There were also claims of Provident Fund and statutorydues, which have to be given priority. It was held that the Company Court was wrongin effecting the sale treating SICOM as an agent. This was impermissible andcontrary to the provisions of the Act. The Company Court was required to not onlylook after interest of the mortgagee/mortgager but also under statutory obligation tosafeguard the interest of the workmen and other non- secured creditors. TheCompany Court, it was observed is under statutory obligation to comply with variousprovisions of the Act and the Rules before selling the property including provisionsrelated to valuation. The role of the Official Liquidator, who was appointed asC.P.No.204/2003 Page 6 the provisional liquidator was emphasized. Paragraphs 74to 81 of the judgment records the gist of findings and ratio why the Supreme Courthas set aside the sale which was confirmed vide order dated 17th July, 2004. The saidparagraphs read as under:-

"74. ....This is the meat of the matter. If the property which has beenput to auction was the prime property over which the fate of thecreditors depended, be they secured or non- secured ones, the



Company Court, in exercise of its equity jurisdiction could not haveobliterated it from its mind the cases of the others. If the assets belongto the creditors, that must mean the whole body of the creditors andnot only one of the secured creditors. The inconsistency of it is self-evident, as, on the one hand, it is stated that the property of theCompany does not vest in the court or the Official Liquidator, on theother hand, it is stated that it is vested in the body of the creditors andnot only in SICOM.

75. The High Court, therefore, could not have ignored the OfficialLiquidator only on the ground that a provisional Official Liquidatorwas appointed and not a regular Official Liquidator. The power andfunctions of the provisional Official Liquidator for all intent andpurport would be the same as that of the Official Liquidator and,therefore, it was not necessary for the Company Judge to wait till theCompany was wound up.

76. If the jurisdiction of a Company Judge is limited, any substantialdeviation and departure therefrom would result in unfairness. Whenan order is passed in total disregard of the mandatory provisions oflaw, the order itself would be without jurisdiction.

In this case, however, even otherwise a fair procedure was not adopted. We, however,very much appreciate the anxiety on the part of the Court to see that otherwise justdues of C.P.No.204/2003 Page 7 SICOM be realised. Conduct of a party plays animportant role in the matter of grant of a relief. However, only because the conduct ofa party was not fair, the same, by itself, cannot be a ground to adopt a procedurewhich is unjust or unfair, particularly, when by reason thereof, not only the Companyitself but also other creditors are seriously prejudiced. We fail to see any reason as towhy the hearing of the case was to be preponed. Why even a days time could not havebeen granted when a prayer for adjournment was made. The jurisdiction of theCompany Court is vast and wide. It can mould its reliefs. It may exercise onejurisdiction or the other. It may grant a variety of reliefs to the parties before it. Theparties before the Company Judge are not only the company or the creditors who hadinitiated the proceedings but also others who have something to do therewith. Evenin a given case a larger public interest may have to be kept in mind. The court maydirect winding up. It may also prepare a scheme for its restructuring.

77. We, therefore, are of the opinion that the Company Judge was not correct in itsview and passed the impugned judgments only having regard to the wrongful conducton the part of the appellant in obtaining an award from the Conciliation Tribunal orfailure to bring a better offer from another bidder.



78. The question which is really an intricate one is what relief can be granted. On theone hand, the Company has committed wrongs, on the other, its property has beensold in auction. Even a part of the property has been permitted by us to be taken outof the country. The factory, we are told, has started operation. It has employed a largenumber of workmen. Would that itself mean that we should refrain ourselves fromgranting any relief? Direction issued by this Court in a case of this nature need not bea narrow one.

C.P.No.204/2003 Page 8 The Court has to take into consideration the fate of not onlythose workmen who are working but also those who have a claim against theCompany. We must also take into consideration the fate of the other creditors.

79. We, therefore, are of the opinion that interest of justice would be subserved ifwhile allowing the appeal, the learned Company Judge is requested to go into thequestion afresh in accordance with the provisions of the Companies Act and hold afresh auction.

While doing so, indisputably, Ceylon Biscuits Pvt. Ltd.s offer would be considered.The Company Judge may consider the question of grant of some preference to CeylonBiscuits Pvt. Ltd. but while an auction is to be held, there should be a propervaluation of all the assets of the Company both movable and immovable.

80. The court, indisputably, may consider the question of framing an appropriatescheme if it is found that there is a possibility of revival of the Company. In otherwords, we leave all options open to the learned Company Judge as are available interms of the provisions of the Companies Act including adjustment of equitiesamongst the parties.

81. Till, however, a final order is passed, Ceylon Biscuits Pvt. Ltd. would continue tofunction not as an auction-purchaser but as a Receiver of the Company Court. CeylonBiscuits Pvt. Ltd. shall file all statements of accounts in regard to the amounts whichit had invested and all other requisite statements including the valuation ofmachinery it had taken out of the country before the court. The court may appoint achartered accountant to verify the said statements. The court, if it thinks fit andproper, may, apart from the provisional liquidator, appoint another person tosupervise the works and functioning of Ceylon Biscuits Pvt. Ltd. as a Receiver of thecourt. As C.P.No.204/2003 Page 9 Ceylon Biscuits Pvt. Ltd. is being appointed as aReceiver, it goes without saying that it shall act strictly under the supervision of thecourt and abide by the orders which may be passed by it from time to time."

16. This Court is primarily concerned with the implementation of the directions givenby the Supreme Court in paragraphs 77 to 81 quoted above.



17. CBL took possession of BIPL factory of the property on 3rd March, 2005 fromSICOM. Sale certificate dated 29th October, 2007 was issued pursuant to an orderdated 6th July, 2007 passed by the Company Court. CBL incorporated a subsidiary,Ceylon Biscuits India Private Limited (CBIPL, for short) on 5th April, 2005 for thepurpose of manufacturing and using the property. CBL also provided working capitalto CBIPL after its incorporation. After judgment of the Supreme Court, CBIPLstopped production on 15th September, 2008. It is stated that this production wasstopped due to paucity and non availability of funds. CBL filed an affidavit in thisCourt on 8th November, 2008 stating that CBIPL had stopped production with effectfrom 15th September, 2008. This fact is not disputed. The property has not been putto any productive use since then.

18. The case made out in application CA No. 900/2008 by CBL is that they have beenproviding finance and working capital to CBIPL since its incorporation, which hasbeen incurring losses throughout. This fact has been confirmed by the statutoryauditors of CBIPL. As on 31st March, 2008, CBIPL owes CBL Rs.7,13,80,551/-. In CANo. 900/2008, CBL has asked for the following reliefs:

C.P.No.204/2003 Page 10 "1. Reimbursement of Rs. 12.5 Crores which was depositedwith the Honble High Court as the auction price for the BIPL property together withinterest.

2. Reimbursement of Rs. 1.18 Crores spent on commissioning of plant and machineryand maintenance and security of the land, plant and machinery purchased by CBL.Interest in this amount is also claimed.

3. Reimbursement of Rs. 6.68 Crores being the cumulative loss incurred upto31.03.08 by its subsidiary company CBIPL entrusted with the running the business ofmanufacturing biscuits using BIP property and other assets.

4. Reimbursement of expenses incurred between 31.03.08 and 31.07.08 amountingto Rs. 0.08 Crores.

5. Reimbursement of expenses incurred after July 2008 and till the property is re-auctioned.

6. Permission to remove the plant and machinery brought in and purchased by CBLfrom time to time."

19. Vide order dated 2nd December, 2008, Vaish and Associates, CharteredAccountants were appointed to verify the statement submitted by CBL. They havesubmitted a report in which some discrepancies/objections have been raised.However, they have accepted that even after adjustment of certain amounts, CBL hadC.P.No.204/2003 Page 11 transferred to CBIPL Rs.10,89,65,576. It is also accepted



that CBL had transferred Rs.10,02,344/- to third parties for operations/startupoperations. They have stated that CBIPL has incurred/adjusted accumulated loss ofRs.7,11,09,833/- and had installed new assets amounting to Rs.51,49,093/-. In thereport it is stated that under pre-operational expenses after adjustment the totalexpenses incurred were Rs.52,57,321/-. Rs.14,50,577/- was incurred towardsmaintaining assets after takeover. Rs.21,74,821/- was incurred on security and safetyof the premises. Rs. 9,44,321/- was incurred on making improvements, additions tobuilding, plant and machinery. There are certain other expenses, which have beenalso explained and accepted in the report.

20. I am, however, not inclined to accept prayers 2 to 4 made in the application CANo. 900/2008 despite the report of Vaish and Associates, Chartered Accountants.Substantial expenditure has been incurred by CBL/CBIPL when they were operatingand running the factory. Obviously business losses and profits belong to either CBLor CBIPL, they cannot be passed on to the Court. Court was not running the factoryand doing business. CBL or CBIPL was not an agent of the Court. Profits and lossesare inherent in any business and it is not the obligation of the Court to reimburse thelosses suffered by them while they were carrying on business. In case the contentionof CBL or CBIPL is to be accepted, then if profits were earned, CBL/CBIL was liableto account for the same. Obviously such a contention cannot be accepted and,therefore, conversely also the plea and claim of CBL or CBIPL has to be rejected.

21. There are two contentious issues. First is the issue with C.P.No.204/2003 Page 12regard to lines 5 and 6 along with some other equipments which were dismantled andtaken away to CBL factory in Sri Lanka. This was done with the permission of theHigh Court which order was confirmed by the Supreme Court. The question is whatorder or direction should be passed in respect of the lines 5 and 6 and otherequipment taken to Sri Lanka. The second issue is whether CBL is entitled to interest,if so, at what rate.

22. With regard to first aspect, the Court had appointed ITCOT, Chennai, as expertvaluers to visit the factory at Patiala and also visit the factory of CBL in Sri Lanka.They were asked to value the factory at Patiala and value lines 5 and 6 and otherequipment dismantled from Patiala and installed by CBL in Sri Lanka. As per thereport dated February, 2009, the total value of the plant and equipment, includinglines 5 and 6 which were shifted and reassembled in Sri Lanka as on 23rd February,2009 has been estimated as Rs.354.83 lacs. Subsequently, vide order dated 3rdOctober, 2008, ITCOT was asked to assess the fair market value of the said plant andequipment, including lines 5 and 6 at Sri Lanka as in June, 2005. In the secondreport they have valued the said plant and equipment at Rs.449.43 lacs. In the replyfiled by ITCOT in this Court on 5th May, 2010 to CA No. 1208/2009, the saidvaluation has been justified on the ground that they have applied straightlinedepreciation @ 6.66% per year for four years, which has been added to the value ofthe plant and equipment as in February, 2009. Per se, this method of valuation is



defective and cannot be and should not be accepted. There are several reasons for thesame. Firstly, it presumes that the equipment was new equipment as on June, 2005whereas in fact the entire plant and equipment as per the report itself wasmanufactured and C.P.No.204/2003 Page 13 assembled in the year 1997-98. By thismethod, the valuation of the plant and equipment in 1997-98 would have beenseveral times more by applying and adding 6.66% depreciation every year. By thesame reasoning, the actual purchase value of the equipment/plant in 1997/1998should have been the basis for valuation. This basis has rightly not been adopted andapplied. Secondly, what was required and valued was the market value of the plantand equipment, which were dismantled and taken to Sri Lanka. The market valuecannot be calculated by applying rate of depreciation, which can be at best a vagueestimate or gives the book value and is not an accurate estimate of the marketvalue/price.

23. At the same time, in rejoinder filed to CA No. 900/2008, CBL has stated that themanufacturer of the machinery, viz., New Era Machines Private Limited has statedthat the same machinery with additional features and higher capacity would cost Rs.3.4 Crores. It is the contention of management of BIPL that this quote of Rs. 3.4Crores is for only one line and does not include additional features. This is disputedby the counsel for the applicant CBL/CBIPL. Fortunately, I need not dwell furtherinto this aspect of valuation as CBL/CBIPL has agreed and even the management ofBIPL has agreed to the following:

(i) The entire plant and equipment, including lines 5 and 6, whichwere dismantled from the property will be brought back to theproperty and re-assembled and made operational by CBL at their costand expense.

(ii) After re-assembling, an

C.P.No.204/2003 Page 14

inspection will be carried out, by a court appointed expert in thepresence of representatives of the management of BIPL. Managementof BIPL is insisting that New Era Machines Private Limited shouldcarry out the said inspection, especially inspection of the oven. Theapplicant-CBL has some reservations. The expert, who has to carry outinspection, is for the time being left open. However, the purpose andobjective of the expert inspection is to ensure that the equipment,including lines 5 and 6 have been properly installed and are in goodworking condition.

(iii) Till the plant and equipment, including lines 5 and 6 are properlyinstalled and certified, Rs. 4 Crores will remain with the Court and willbe kept in an FDR. The said amount will be refunded to CBL1 after the



expert has certified that the plant and equipment, including lines 5and 6 have been installed and are operational.

24. The next question relates to refund of balance Rs. 8.5 Crores and whether or notthe applicant-CBL is entitled to interest on the amount deposited.

25. Regarding refund of Rs. 8.5 Crores there cannot be any doubt and dispute thatthe amount has to be refunded as the auction has been set aside. The main issue andcontention raised Corrected vide order dt. 28.1.2011 C.P.No.204/2003 Page 15 by themanagement of BIPL is that CBL is not entitled to any interest on the amountsdeposited by them in two installments of Rs. 25 lacs on 23rd March, 2004 andRs.12.25 Crores on 13th August, 2004 (Total Rs. 12.5 Crores).

26. Learned counsel for the management of BIPL has relied upon the judgment of theSupreme Court in the case of Allahabad Bank Vs. Bengal Papers Mills (2004) 8 SCC

236. The relevant portion is reproduced below:-

"10. The Official Liquidator, in winding-up proceedings by court, hasthe power to sell the immovable properties of the company wound up,under Section 457(1)(c) of the Companies Act, 1956. Rule 272 of theCompanies (Court) Rules, 1959 provides that an Official Liquidatorcan sell the property belonging to the company only with the previoussanction of the court and that every sale shall be subject toconfirmation by the court. Rule 273 lays down the procedure for saleand Rule 274 deals with the meeting of the expenses of the sale. Order21 Rule 93 of the Code of Civil Procedure (for short "the Code")provides that where a sale of immovable property is set aside underRule 92 of Order 21, the purchaser shall be entitled to an order forrepayment of his purchase money with or without interest as the courtmay direct, against any person to whom it has been paid. It has beenheld that even though Order 21 Rule 93 of the Code may not ipso factoapply to a sale otherwise other than under the Code, the principleembodied therein can be applied to other sales to order refund of thepurchase price with interest while setting aside a sale.

But it has to be seen that Rule 93 of Order 21 of the Code gives a discretion to thecourt setting aside a sale, either to award interest or not to award interest.Considered in the context of that discretion, it is clear from the judgment rendered bythis Court that this Court refused to direct the payment of interest to the applicanteven while directing the refund of the purchase price paid by the C.P.No.204/2003Page 16 applicant to the Official Liquidator. In such a situation it is not possible toaccede to the prayer of the applicant to order the payment of interest on the purchaseprice paid by it, based on the principle embodied in Order 21 Rule 93 of the Code on



this application for a clarification of the judgment. In the circumstances of thepresent applications, we have to proceed on the basis that this Court has exercised itsdiscretion not to award interest on the purchase price in the light of the directionsissued by it in that behalf.

11. Learned counsel for the applicant relied on the decision in Motors & InvestmentLtd. v. New Bank of India and submitted that in that case the Court ordered paymentof interest to the purchaser on the sale being set aside. On an examination of para 6of the said decision, it is seen that the question was not discussed as such. But theCourt did order the interest earned by the purchase price to be refunded to thepurchaser or in the alternative to pay interest on the amount at 18 per cent perannum. In the case of Central Bank of India v. Ravindra this Court discussed theconcept of interest to point out that it was the payment fixed by agreement or allowedby law for use or detention of money. In other words, what was indicated was thatinterest was really compensation for the use of the money which the purchaser wasdeprived of. Going by the principle of compensation indicated in the said judgment,the question would arise whether the applicant, in the circumstances of this case,when it had enjoyed the assets for about ten years on deposit of the purchase price,would be entitled to any compensation at all, or to compensation with an obligationto account for the profits, an issue, that has to be adjudicated in an appropriatemanner and not certainly while considering an application for clarification. We findthat the obtaining of possession by the purchaser on deposit of the purchase price hasconsiderable relevance in deciding whether the purchaser would be entitled tointerest on the purchase price as indicated by the decision of this Court in UnionBank of India v. Official Liquidator H.C. of Calcutta. Therein, after referring to thedecision in Motors & Investment Ltd. v. New Bank of India relied on by counsel forthe applicant and the direction for payment of interest made therein, this Courtdeclined the award of interest on the distinction that, in that case, possession hadpassed to the C.P.No.204/2003 Page 17 purchaser. The Court stated that thejudgment in Motors & Investment Ltd. v. New Bank of India had no bearing mainlybecause as soon as the amount was deposited by the purchaser, possession of theproperty was handed over to him. No doubt the learned Judges thereafter, alsoreferred to the decision in the present case and the non-

award of interest therein. But, in our view, that makes no difference, since thedistinguishing feature relied on by the said decision, was the non-passing ofpossession to the purchaser. In this case, as we have noticed, the applicant, thepurchaser, obtained possession even before he had paid the entire purchase price andhad paid only 25 per cent or so of the purchase price and kept that possession for 10years.

12. Even on the principle of restitution, the claim of the applicant may not succeed.This is not a case where the applicant was deprived of both his money and theproperty purchased by him. There was, therefore, no failure of consideration. By the



subsequent order of court, the sale was set aside; but during the interregnum, theapplicant had the benefit of the assets he had purchased. The other contracting party,the Company in liquidation, was deprived of the use of its assets. The creditors whoheld the properties as security were deprived of their right to deal with the security orto enjoy the benefits of the security during the interregnum. In fact, the securitiesavailable to the creditors were utilised by the auction-purchaser, the applicant. Inthat situation, the applicant might have the obligation to account for the profits.Certainly, while rendering the main judgment, this Court was conscious of all theseaspects while ordering refund only of the purchase price deposited without providingfor payment of interest to the purchaser but at the same time leaving it open to thepurchaser to work out its claim for the expenses incurred by it before the CompanyCourt.

13. As stated in Goff and Jones: The Law of Restitution (6th Edn.) the law ofrestitution is the law relating to all claims, quasi-

contractual or otherwise, which are founded upon the principle of unjust enrichment.It will, therefore, be necessary to investigate that aspect even if we invoke Sections 70and 72 of the Contract Act. Even if we invoke Section 65 of the Contract Act, theadvantages derived by C.P.No.204/2003 Page 18 each of the parties will have to bedetermined and quantified in terms of money and any order in favour of theapplicant can be made only after undertaking that exercise. This result cannot beachieved by seeking a clarification of the judgment as now done.

14. It also appears to us that there was a change of position of the parties includingthe creditors, pursuant to the sale and the applicant being put in possession. In thatcontext, the adequacy of consideration paid by the applicant will be a relevantconsideration. As observed in Goff and Jones in para 42-004, "neither common lawnor equity normally inquires into the adequacy of the consideration which thepurchaser provides. But such an enquiry would be central to any defence solely basedon a defence of change of position, for, it is a defence which operates to discharge,wholly or in part, a defendants duty to make restitution."

Be it noted that the sale in favour of the applicant was set aside by this Court mainlyon the ground that the consideration paid was grossly inadequate."

27. Paragraphs 12 to 14 of the said decision deal with the principle of restitution andit was observed in the said case that the applicants claim on the said ground was notentitled to succeed in the said case.

28. Law of restitution was initially recognized as based upon quasi contract orimplied contract theory. It was founded on the principal that the recipient mustaccount for money had and received and for money paid or from quantum meruitand quantum valebant claims i.e. all claims for recovery of reasonable remuneration



for services rendered or for goods supplied. However, since 1990s, the principle ofrestitution has been recognized as an independent legal principle, not dependent onC.P.No.204/2003 Page 19 quasi contract or implied contract theory. Emphasis hasshifted to restoration of benefits on the ground of unjust enrichment at the claimantsexpense. This has broadened and widened the concept of restitution and the saiddoctrine has been applied to a variety of claims. This is noted in paragraph 13 of thejudgment of the Supreme Court in Allahabad Bank (supra).

29. In Halsburys Law of England (4th edition vol. 40(1) at page 8 in paragraph 10), ithas been observed that generally there are 4 stages to a restitutionary claim; (i) Therecipient/defendant must have been enriched (ii) Enrichment must have been at theexpense of the claimant (iii) Enrichment must not have been "unjust" (iv)Consideration must be given to defenses applicable, if any. Sometimes, a 5th stage isadded, namely, remedy available to the claimants.

30. For a restitutionary claim, normally the defendant should have been enriched as aresult of something, which the claimant has done for or given to the defendant.Absence of enrichment is fatal to the existence of restitutionary claim. Yes, there canbe cases where there is loss to the claimant but no corresponding gain to thedefendant. In such cases, restitution is used to denote the restitution of the claimantto the previous position by making good the loss which he has suffered.

31. Unjust enrichment can be positive i.e. when a person receives goods or money ornegative i.e. because of savings incurred. Enrichment takes place when a claimagainst a defendant is discharged by the payment made by the claimant. Indirectenrichment in this manner falls within the term "enrichment" as the defendant isenriched at the claimants C.P.No.204/2003 Page 20 expenses. The loss to theclaimant as a result of payment is matched with the benefit/gain to the defendant.The terms unjust is flexible but broadly means and implies that there is an objectionand it would be unfair and result in injustice, if the defendant is allowed to retain thebenefit without compensating the claimant. Mistake of fact, mistake of law, duress,undue influence, failure of consideration, discharge of debt etc., have been recognizedas factors, which can render enrichment unjust. The defenses available to thedefendant include estoppel, bonafide purchase for value, passing on, illegality orincapacity. Defense of change in position is also available but this is examined on acase to case basis. Generally, mere fact that the defendant has spent money, does notmake it inequitable to deny restitution. The defendant has to establish causal linkbetween the receipt of money and change in position, which makes it inequitable forthe recipient/defendant to make restitution.

32. However, I need not go deeper into this aspect as CBL has not relied solely uponthe principle of restitution. Learned counsel for the CBL has in fact relied upon theOrder 21 Rule 93 of the Code of Civil Procedure, 1908 (Code, for short), whichprovides that where sale of immoveable property is set aside, the purchaser will be



entitled to refund of purchase money with or without interest as the court may direct,against any person to whom it has been paid. In paragraph 10 of the judgment inAllahabad Bank (Supra), it has been held that principles embodied in Order 21 Rule93 can be applied to other sales to order refund of the purchase money with orwithout interest while setting aside a sale. The Court has discretion to award interestwhile directing C.P.No.204/2003 Page 21 refund of purchase money, when a salemade by the Court is set aside and the purchaser is to be refunded the moneydeposited by him. Reference can also be made to Section 144 of the Code whichreads:-

"144. Application for restitution.--(1) Where and insofar as a decree[or an order] is [varied or reversed in any appeal, revision or otherproceeding or is set aside or modified in any suit instituted for thepurpose, the Court which passed the decree or order] shall, on theapplication of any party entitled to any benefit by way of restitution orotherwise, cause such restitution to be made as will, so far as may be,place the parties in the position which they would have occupied butfor such decree [or order] or [such part thereof as has been varied,reversed, set aside or modified]; and, for this purpose, the Court maymake any orders, including orders for the refund of costs and for thepayment of interest, damages, compensation and mesne profits, whichare properly [consequential on such variation, reversal, setting asideor modification of the decree or order].

[Explanation.--For the purposes of sub- section (1), the expression"Court which passed the decree or order" shall be deemed to include,--

(a) where the decree or order has been varied or reversed in exercise ofappellate or revisional jurisdiction, the Court of first instance;

(b) where the decree or order has been set aside by a separate suit, theCourt of first instance which passed such decree or order;

(c) where the Court of first instance has ceased to exist or has ceasedto have jurisdiction to execute it, the Court which, if the suit whereinthe decree or order was passed were instituted at the time of makingthe application for restitution under this C.P.No.204/2003 Page 22section, would have jurisdiction to try such suit.] (2) No suit shall beinstituted for the purpose of obtaining any restitution or other reliefwhich could be obtained by application under sub-section (1)"

33. Learned counsel appearing for BIPL has submitted that if possession of theproperty is given to the auction purchaser, he is not entitled to any interest whensubsequently the auction sale is set aside. Secondly, it is submitted that the auction



purchaser was/is always aware and conscious of the fact that the auctionsale/confirmation of sale can be challenged in appellate proceedings. Thereforeinterest shall not be paid. The third contention raised by the management of BIPLrelates to adequacy of the sale consideration paid by the auction purchaser. In thisconnection, my attention was drawn to the paragraph 14 of the judgment in the caseof Allahabad Bank (Supra), wherein paragraph 42-004 from Goff and Jones: TheLaw of Restitution, has been quoted.

34. The third contention of the counsel for the management of BIPL will be discussedin the subsequent portion of this order.

35. It is not possible to accept as an ominous universal rule that whenever possessionof the property is given to the auction purchaser, he is not entitled to interest, if thesale is subsequently set aside as auction purchaser is always aware and conscious ofthe fact that the auction can be challenged in appellate proceedings. There are goodreasons for the same. Court auctions do not normally fetch market value for a varietyof reasons inc luding uncerta inty , de lay and further l i t igat ion. I f th isC.P.No.204/2003 Page 23 argument on behalf of Management of BIPL is to beaccepted and given judicial recognition, it will have a further negative impact anddepress court auction/bids. This will not be in the interest of the judgment debtors orthe creditors as attempt of the Court is to fetch and get best possible price. This is notbe possible if bidders are not be paid interest even if the sale/auction is set aside.After all no auction purchaser will like that his money to be stuck, pendingappeal/challenge with a stipulation that if the bid/auction/sale is set aside, he will berefunded money without interest. Even if possession is given, optimum and full useof the property is invariably denied and/or not possible.

36. It is also not possible to accept the contention of the management of the BIPLthat in the case of Allahabad Bank (Supra) it has been held by the Supreme Court thatwhenever possession of a property is given to the auction purchaser, no interest ispayable. In the case of Allahabad Bank (Supra), the Supreme Court has not laid downany such ratio. The facts of the Allahabad Bank (Supra) leading to the decision dated7th October, 2004 may be noticed. In the said case by judgment in appeal decided on20th April, 1999, the auction purchaser was directed to be refunded the bid amountof Rs. 2 Crores as the auction sale was set aside. There was no direction to payinterest. The Official Liquidator refused to pay any interest. The applicant- auctionpurchaser thereupon filed an application before the Supreme Court seekingclarification of the judgment dated 20th April, 1999 and for direction that theapplicant was entitled to interest accrued on the purchase price of Rs.2 Crores. Theapplication was opposed by the creditors. Noticing the facts in C.P.No.204/2003Page 24 paragraph 12 of the judgment, the Supreme Court has observed that in thefacts of the said case, the Court had exercised their discretion not to award interest,when the judgment dated 20th April, 1999 was passed, setting aside the sale. Inparagraph 10 of the said judgment, it is clearly observed that whether or not interest



should be paid to the auction purchaser on the money deposited by him if the sale isset aside, is a matter of discretion. Thus, it is not held in paragraph 10 that interestcannot be paid to the auction purchaser if the sale is set aside. In paragraph 11 of thejudgment, the Supreme Court has referred to decision in the case of Motors &Investment Ltd. Vs. New Bank of India (1997) 11 SCC 271. In the said case theSupreme Court had ordered refund of purchase price along interest @ 18% perannum. However, it was observed that there is no discussion on the said aspect in thesaid decision. In the case of Central bank of India Vs. Ravindra (2002) 1 SCC 367, theSupreme Court discussed the concept and principle behind award of "interest" andhas held that interest is compensation for the use of the money which a person isdeprived of. Reference thereafter was made to the decision of the Supreme Court inthe case of Union Bank of India Vs. Official Liquidator H.C. of Calcutta (2000) 5 SCC274, wherein the Court had exercised its discretion and declined to award interest asin that case possession of the property was given to the auction purchaser. It wasnoticed that in the case of Motors & Investment (Supra), possession of the propertywas not given to the purchaser. In the case of Allahabad Bank (Supra) the applicantauction purchaser had obtained possession even before he had paid the entirepurchase price and possession was given when he had paid only 25% or soC.P.No.204/2003 Page 25 of the purchase price and had retained possession for 10years. The other aspect, which was noticed by the Supreme Court in the case ofAllahabad Bank (Supra) was regarding inadequacy of sale consideration. What isapparent from the decision of the Supreme Court in Allahabad Bank (Supra) is thatthese aspects have to be kept in mind while deciding whether or not to award interestto the auction purchaser and while exercising discretion in terms of the Order 21 Rule93 of the Code. It may be appropriate here to refer to Goff & Jones, The Law ofRestitution, which has a separate chapter dealing with recovery of benefits conferredunder judgments or orders subsequently reversed or set aside. In the said chapterreference is made to decision in the case of Manning (1609) 8 Co.Rep 94b, whichreads as under:-

"If the sale of the terms should be avoided, the vendee would lose histerm, and his money, too, and thereupon great inconvenience wouldfollow, that none would buy of the sheriff goods or chattels in suchcases, and so execution of judgments......would not be done."

37. This reasoning was followed in Mani Lal Vs. Ganga Prasad AIR 1951 Allahabad832 and the following observation was made:-

"5. In Bacon's Abridgement, it was laid down, citing still olderauthorities, that :

"If a man recovers damages and lath executed by fieri facias and upon the fieri faciasthe sheriff sells to a stranger a term for years, and after the judgment is reversed theparty shall be restored only to the money for which the term was sold, and not to the



term itself, C.P.No.204/2003 Page 26 because the sheriff had sold it by the commandin the writ of fieri facias."

This principle was upheld in England in numerous cases vide Mathew Manning'scase (1609) 8 Co. Rep. 94b, Bennet v. Hamill (1806) 2 Sch. & Lef. 566 at p. 577,Bowen v.

Evans, (1844) 1 Jo. & Lat. 178 at p. 259. The principle was applied by the PrivyCouncil to Indian cases in Zain-ul-Abdin Khan v.

Muhammad Asghar Ali Khan 10 ALL. 166. The Privy Council after quoting fromBacon's Abridgement observed that bona fide purchasers who were no parties to thedecree had nothing to do further than to look to the decree and to the order of sale.Their Lordships pointed out the distinction between a case in which the decreeholder was the auction purchaser, who was not protected when the decree was setaside or modified, and the case of a stranger auction-purchaser. If the strangerauction-purchaser was a bona fide purchaser, he was entitled to be protected. Thisdecision of the Privy Council has been followed in several cases in India, vide PiariLal v. Hanif-un-nissa Bibi 38 ALL. 240, Balwant Singh v. Mt. Laiqa BegamMANU/UP/0489/1923."

38. This brings us to the facts of the present case and to the question whether or notdiscretion should be exercised to pay interest on the amount deposited by the auctionpurchaser, if so, at what rate.

39. Learned counsel for the management of BIPL has stated that the present case isone of inadequacy of consideration and this is the reason why the Supreme Court hadset aside the sale in the judgment dated 16th May, 2008 reported as 2008 (15) SCC 1C.P.No.204/2003 Page 27 Reference in this regard is specifically made to theparagraphs 78 and 79 of the said decision.

40. In paragraph 78 of the said decision, the Supreme Court has held that thecompany i.e., management of the BIPL had committed wrongs and, therefore, itsproperty had been sold in the auction and even part of the property was taken out ofthe country. CBL/CBIPL had employed a large number of workmen and had startedoperating factory and, therefore, the relief, which could be granted in the appeal, wasan intricate question. At the same time Supreme Court noticed that there was anxietyon the part of the Court not to accept the sale in favour of CBL looking at the claimsof the secured creditors, other creditors and workmen. Directions were issued inparagraph 79 including the discretion of the company court to put the property forfresh auction after appropriate valuation of the assets. I do not find anywhere in thejudgment there is a specific or direct finding that CBL is involved in any fraud or hadpurchased the property for inadequate consideration. It may be relevant to note herethat in paragraph 79 of the judgment, the Supreme Court has stated that the



company Judge may consider the question for grant of some preference to CBL andhad allowed CBL to continue to function as a Receiver. If CBL was guilty of fraud orwas a purchaser for inadequate sale consideration, these observations and grantconcession to CBL/CBIPL would not arise.

41. Learned counsel for the BIPL2 has relied upon a hand written note/documentand emphasized that CBL was negotiating with the management of BIPL before theyhad participated in the auction and given their bid. My attention was drawn to thefact Corrected vide order dt. 28.1.2011 C.P.No.204/2003 Page 28 that CBL had filedan application before the civil/execution court on or about 15th March, 2004. It wasstated that this note/document was filed before the Supreme Court and thisnote/document shows that consideration/bid offered by CBL was inadequate andwas much less than CBLs own valuation. The Supreme Court has not referred to thisnote/document. I t is noticed that several cutt ings and remarks on thenote/document, have not been indicated in the true typed version. It is noticed thatwhat was auctioned, was the tangible property and not the intellectual property rightsin the brand or trade name. Subsequently, the brand and trade name of BIPL werevalued by a Chartered Accountant appointed by the Court. The same were valued atRs. 35.88 Crores. Learned counsel for the CBL has pointed out that bids were madeby the ITC, Britania and a company from Saudi Arabia. He submits that there was nopossibility of the bidders forming a cartel and deliberately bringing down the auctionprice. Management of the BIPL was given several and repeated opportunities to get abetter offer/bid. I need not go into this question in detail as there is no specific ordirect finding regarding under valuation or fraud by CBL. I have quoted the reasonsgiven by the Supreme Court for setting aside the sale in the present case. It is noticedthat the Supreme Court has also adversely commented about the conduct of themanagement of BIPL in their decision dated 16th May, 2008.

42. In the present case, possession of the property was handed over to CBL on 3rdMarch, 20053 after they had deposited the entire sale consideration on 13th August,2004. It has also come on record that CBL had stopped production andmanufacturing in Corrected vide order dt. 28.1.2011 C.P.No.204/2003 Page 29 theproperty after the order of the Supreme Court on 15th September, 2008. CBL,however, has not placed on record the date when they have started production or trialproduction. The property was sealed and possession was taken by SICOM on 18thJuly, 2003. Thus, for nearly two years the factory was closed and was not functioning.There was no maintenance and the plant and equipment was not operational. TheCBL has incurred expenditure to re-start the factory and make it operational. Thereport given by Vaish and Associates, Chartered Accountants has confirmed thatexpenditure was incurred by CBL/CBIPL to re- start and making the factoryoperational. It is stated by CBL/CBIPL that even after manufacturing was stopped on15th September, 2008, they have been keeping the machinery oiled and inoperational state. They are bound and shall abide by the said statement.



43. Rs. 12.5 Crores was deposited by CBL with SICOM. Out of this amount, Rs. 8Crores was appropriated subject to right of restitution by SICOM, IDBI and IFCI interms of the order dated 3rd May, 2006. Prior to the said date, the amount depositedwas kept in an FDR. Rs. 4.5 Crores, which has not been appropriated, has been keptin an FDR. Rs. 4.5 Crores was not directed to be appropriated as this was meant fordistribution amongst the workmen. Rs. 8 Crores once appropriated by the SICOM,IDBI and IFCI reduced the liability of BIPL to this extent towards interest. BIPL ormanagement of BIPL, therefore, gets advantage of the said appropriation from thedate the amount was appropriated till repayment is made. The rate of interestcharged by the financial institutions, it is stated is about 18%. BIPL or managemento f B I P L , g e t s b e n e f i t / a d v a n t a g e o f t h i s C . P . N o . 2 0 4 / 2 0 0 3 P a g e 3 0deposit/appropriation by the financial institutions the extent of Rs.8 Crores. At thesame time CBL/CBIPL has used and utilized the plant and equipment in the factoryand has used the property during the period from 3rd March, 2005 till 15thSeptember, 2008. CBL/CBPIL has used the plant and equipment, which hasdepreciated and come down in value. ITCOT has stated that plant/equipment at SriLanka is old but in good condition. They must account for and pay and this aspecthas to be kept in mind while deciding the question of rate of interest. These factorscannot be ignored. Rate of rent/mesne profits with reference/in ratio to capital valueof a property in India is low. Rate of annual return in terms of mesne profit/rent isnormally less than 5% of the capital market value. CBL had taken over the factory formanufacturing and sale of biscuits. A business like this has a gestation period andonly after sometime it starts giving returns. As noticed above, the possession of theproperty remained with CBL for a period of three and a half years from March, 2005till they stopped manufacturing activities on 15th September, 2008. The reason givenby CBL/CBIPL why they had to stop manufacturing is that they were not able to getand procure funds for running the factory. The report of Vaish and Associates,Chartered Accountants shows that funds were transferred to CBL/CBIPL in India forstartup, operation, maintenance, running costs, watch and ward expenses etc. Theproperty was dead capital investment for CBL from 13the August, 2004 till 3rdMarch, 2005, when possession was given and then again from 15th September, 2008when the operations were shut down. Thus, out of the period of more than six years,between 13th August, 2004 till today, the factory has been in operation for threeyears and six C.P.No.204/2003 Page 31 months (except equipment/plant in SriLanka).

44. Keeping in view all these aspects in mind and balancing out equities, I feel thatCBL should be given interest @ 5% on the entire Rs. 12.5 Crores from the date ofpayment till 10th January, 2011. SICOM had initially deposited the entire saleconsideration into an FDR and even now Rs. 4.5 Crores is lying deposited in FDRs.BIPL or management of BIPL will get advantage of the amount of Rs. 8 Crores, whichwas appropriated by SICOM, IDBI and IFCI from the date of appropriation. BIPL ormanagement of BIPL will not be liable to pay interest to the said financial institutions@ 18% during the time when this amount was appropriated. Of course after the



financial institutions make payment of Rs. 8 Crores, the BIPL or management ofBIPL will be liable to pay the rate of interest chargeable as per law to the financialinstitutions. This means that the BIPL or management of BIPL will get benefit to theextent of nearly 13% on Rs. 8 Crores, which has been appropriated by the financialinstitutions. (18% less 5% interest awarded to CBL. BIPL or its Management will beliable to pay 5% interest to the financial institutions on Rs. 8 Crores.) Differencebetween the interest earned on FDRs of Rs. 12.5 Crores and Rs. 4.5 Crores and 5%interest now awarded to CBL will also enure to the benefit of BIPL/Management ofBIPL. Thus the effective rate of return towards mesne profit/depreciation forBIPL/Management of BIPL will be about 9% on Rs. 12.50 crores/bid value. It is madeclear that CBL will not be entitled to any further charges/expenses on account ofmaintenance, keeping up etc. or for re-starting the factory and making it operational.The interest figure will include all expenses payable to them for upkeep,maintenance, watch and ward etc. C.P.No.204/2003 Page 32

45. Rs. 8.5 Crores will be refunded by the financial institutions on or before 10thJanuary, 2011 to CBL. The CBL will re-install the Lines 5 and 6 and otherequipments, which were taken away to Sri Lanka, within a period of four months. Theinterest amount and Rs.4 Crores will be paid to CBL after Lines 5 and 6 and otherequipments are re-installed and the expert appointed by the Court has certified thatthe Lines 5 and 6 and other equipments, are in operational condition/state. Till thenthe CBL will continue to act as a Receiver and maintain the plant and machinery andkeep them in operational state but not use them.

46. It is clarified that CBL will continue to be a Receiver till further orders and thepossession of the plant and equipment as well as factory belonging to BIPL is with theCourt and not with CBL. CBL/CBIPL will be liable to pay the statutory dues andliabilities for the period till the factory was in operation i.e. till 15th September, 2008and workmens due till they vacate. Payment of Rs. 4 crores and the interest will bereleased only after the Court is satisfied that the statutory dues and liabilities andworkmens dues have been paid. Rs. 11.20 lakhs on account of missing plant andequipment will be deducted while making payment of Rs. 8.5 crores4 and no interestwill be payable for the same.

47. The last question is whether management of BIPL should be allowed to inspectthe premises and whether the matter should be adjourned to enable the managementof the BIPL to submit a scheme for rehabilitation and payment to the creditors. As faras inspection of the property is concerned, I think the same should be allowed. Ireject the opposition by CBL/CBIPL that inspection by management of BIPL wouldr e s u l t i n i n f r i n g e m e n t o f t h e i r C o r r e c t e d v i d e o r d e r d a t e d 2 8 . 1 . 2 0 1 1C.P.No.204/2003 Page 33 intellectual property right as they have installedspecialized equipments. It will be open to CBL or CBIPL to remove the saidequipment within a period of three weeks from today. CBL/CBIPL will inform theOfficial Liquidator at least 5 days in advance as to the date on which they want to



remove their equipment. Equipment will be removed in the presence of the OfficialLiquidator or his representatives. It will be open to the Official Liquidator to askITCOT or their representative to be present at that time. Immediately after removalof the equipment, management of BIPL will be given notice by CBL/CBIPL to inspectthe property. Even if the said equipment is not removed within three weeks,inspection will be permitted and allowed to the management of the BIPL after threeweeks.

48. In the present case SICOM took possession of the factory on 18th March, 2003. Ithas been almost 7 years since then. Order sheet reveals that management of BIPL wasgiven several opportunities to give proposal/scheme or get a higher bidder orpurchaser. Management of BIPL has failed to get hold of any bidder or furnish anyproposal/scheme, though opportunities were granted. I do not agree with the counselfor the management of the BIPL that there were unable to give any proposal asinspection of the property has not been allowed. This is an excuse, which cannot beaccepted. Management of the BIPL has not furnished name or details of any proposalgiven to them by a third party. Management of BIPL themselves are not in a positionto propound a scheme for payment of the dues and for re-starting the business. It isnoticed that in 2004, the same management as per their own case, had got in touchwith CBL when the factory was lying closed and sealed. The fact that CBL was notpermitted C.P.No.204/2003 Page 34 inspection of the factory, did not debar orprevent management of BIPL from negotiating with the CBL.

49. The Official Liquidator was appointed as a provisional liquidator on 6th April,2004. At this stage, we have to keep in mind interest of the creditors and workmen.Interest of the promoters or members/management of the company is relevant butnot as important as interest of creditors and workmen. We have to also keep in mindthe fact that 7 years have lapsed and unless immediate steps are taken, the value ofthe plant and equipments will depreciate. Supreme Court in the judgment dated 16thMay, 2008 has quoted the following passage from Farars Company Law:-

"74. ......We may notice the observations made by the learned author:

"As we have seen, Directors do not owe duties to shareholders as such.Neither do they owe duties to the companys creditors. The orthodoxposition being as stated by Dillon, L.J.

in Multinational Gas and Petrochemical Co. v. Multinational Gas &Petrochemical Services Ltd. Directors owe fiduciary duties to thecompany though not to the creditors, present or future, or individualshareholders.

Winkworth v. Edward Baron Development Co. Ltd., a House of Lordsdecision, might suggest that there has been a change to that position



with Lord Templeman stating:

... a company ownes a duty to its creditors, present and future. Thecompany owes a duty to its creditors to keep its property inviolate andavailable for repayment of its debts.

C.P.No.204/2003 Page 35 The conscience of the company, as well asits management, is confided to its Directors. A duty is owed by theDirectors to the company and to the creditors of the company toensure that the affairs of the company are properly administered andthat its property is not dissipated or exploited for the benefit of theDirectors themselves to the prejudice of the creditors. "

The learned author furthermore observed:

"Support here for this approach can be found in West MerciaSafetywear Ltd. v. Dodd where Dillon, L.J. approved the followingstatement of the position by the New South Wales Court of Appeal inKinsela v. Russell Kinsela Pty Ltd.:

In a solvent company the proprietary interests of the shareholdersentitle them as a general body to be regarded as the company whenquestions of the duty of Directors arise. If as a general body, theyauthorise or ratify a particular action of the Director, there can be nochallenge to the validity of what the Directors have done. But where acompany is insolvent, the interests of the creditors intrude. Theybecome prospectively entitled through the mechanism of liquidation,to displace the power of the shareholders and Directors to deal withthe companys assets. It is in a practical sense their assets and not theshareholders assets that through the medium of the company areunder the management of the Directors pending either liquidation,return to solvency, or the C.P.No.204/2003 Page 36 imposition ofsome alternative administration. "

50. At the same time, issue of fresh sale proclamation on the basis of the valuationreport submitted by ITCOT is likely to take time. It will be open to the managementof BIPL5 to negotiate and submit a proposal/scheme from a third party in theintegram. I am not inclined to adjourn the matter to enable the management of BIPLto find a third party and file an application propounding a scheme as this wouldcause delay. It will be open to the management or any third party associated withthem to participate in the auction/bidding process. The primary concern of thecompany court at this stage as stated above is twofold; (i) to secure and ensurepayment to the creditors on best possible terms and (ii) to get a fair deal for theworkers both with regard to the past arrears and future employment. These aspects



cannot be left to the management of the BIPL6 alone. Attempts have to be made toget a best possible deal by tapping all sources and parties, who are interested.

C.A.Nos.900/2008 filed by CBL, 1767/2010, filed by the management of the BIPL7 and 495/2010,filed by the Official Liquidator are accordingly disposed of.

SANJIV KHANNA, J.

DECEMBER 20, 2010 VKR/NA /P/VJ/PR Corrected vide order dated 28.1.2011 Corrected videorder dated 28.1.2011 Corrected vide order dated 28.1.2011 C.P.No.204/2003 Page 37




M-S New Cawnpore Flour Mills vs M-S Bakemans Industries Pvt Ltd on 20 December, 2010

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