Auction of assets behind the back of Official Liquidator is fatal to an auction
Where the Official Liquidator is custodian of an assets, it is mandatory to put him on notice irrespective of the fact whether the auction is under a Recovery Certificate issued by the Debts Recovery Tribunal (DRT) or under the provisions of the Companies Act. Keeping the Official Liquidator in the dark about sale of assets of which he is the custodian would be fatal to the auction.
In an case before the Hon’ble Allahabad High Court a Company was ordered to be wound up. The assets consequently got vested in the Official Liquidator of the Company. The Company also in debt to the Bank as well. The Bank, as secured creditor moved the Debts Recovery Tribunal (DRT) and obtained a Recovery Certificate. Based on the Recovery Certificate it went ahead and auctioned off the property and a third party auction purchaser also came into being. It was then that the Official Liquidator came to know about auction of a property of which he was the custodian.
The Official Liquidator challenged the auction before the High Court. Reading the provisions of Rule 31 of Schedule II Income Tax Act the single judge bench held that it was mandatory to issue notice to the Official Liquidator. Non issue of notice Official Liquidator was violation of the Rules hence held the auction as void.
The Bank challenged the order of the single judge. The Division bench relied upon the Supreme Court’s decision in the matter of INTERNATIONAL COACH BUILDERS LIMITED Vs. KARNATAKA STATE FINANCIAL CORPORATION. In that case the Hon’ble Supreme Court, after considering its earlier decisions in the matter of RAJASTAN STATE FINANCIAL CORPORATION Vs. OFFICIAL LIQUIDATOR as well ALLAHABAD BANK Vs. CANARA BANK AND ANOTHER had held that it was mandatory to issue notice to the Official Liquidator when he was custodian of the assets. It was held as follows :
- A Debt Recovery Tribunal acting under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 would be entitled to order the sale and to sell the properties of the debtor, even if a company in liquidation, through its Recovery Officer but only after notice to the Official Liquidator or the Liquidator appointed by the Company Court and after hearing him.
- A District Court entertaining an application under Section 31 of the SFC Act will have the power to order sale of the assets of a borrower company-in-liquidation, but only after notice to the Official Liquidator or the Liquidator appointed by the Company Court and after hearing him.
- (iii) If a financial corporation acting under Section 29 of the SFC Act seeks to sell or otherwise transfer the assets of a debtor company-in-liquidation, the said power could be exercised by it only after obtaining the appropriatepermission from the Company court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution thereof among the creditors in terms of Section 529-A and Section 529 of the Companies Act.
- In a case where proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 or the SFC Act are not set in motion, the creditor concerned is to approach the Company Court for appropriate directions regarding the realization of its securities consistent with the relevant provisions of the Companies Act regarding distribution of the assets of the company-in-liquidation."
Based on the above decision of the Hon’ble Allahabad High Court it was held which ever way one looked at the auction conducted by the Bank, it was violative of the Act. The assets were vested in the Official Liquidator and it was mandatory to have issued notice to him. Non issue notice to the Official Liquidator was fatal to the auction.
The third party auction purchasers prayers were also dismissed as nothing could be done when the provisions of law were violated. The auction was set aside.
[Read full Judgement]
|