Rajmata Rani Udai Kumari v. Official Liquidator — 1965 DIGILAW 416 (ALL)

JUDGMENT Satish Chandra, J. - Rajmata Rani Anand Udai Kumari (hereinafter called the Rajmata) has in the course of winding up of the U. P. Oil Industries, Ltd., Lucknow, applied that the Official Liquidator be directed to include in the sale deed a clause that the mill has been sold to the petitioner free from all encumbrances, in the alternative, the sale held on 29th of March, 1962, be cancelled and the money paid by the petitioner refunded to her. 2. Raja Sharda Narayan Singh was one of the Directors of the U. P. Oil Industries, Ltd. (hereinafter called the company). His wife Rani Shashi Prabha Kumari was a creditor of this company. She applied for winding up of the company on the ground that the company was unable to pay her debt. By an order, dated 16th May, 1956 the company was wound up. The company had on 24th April, 1948 issued first series of debentures for l Lacs. Of these, debentures of one lac were held by the Rajmata and the remaining 50,000 by her minor son Divendra Narain. On 23rd June, 1950, the company issued a second series of debentures for Rs. one lac. These were issued in the form of 20 bearer debenture, bonds of Rs. 5,000 each. The entire series was held by Raja Sharda Narayan Singh & Co. This was not a registered company, but a partnership firm, consisting of two partners only, Raja Sharda Narayan Singh and his wife Rani Shashi Prabha Kumari. The second series of debentures created a floating charge on the properties and assets of the company, i.e., on the building and erections including fixed plants and machinery's as detailed in Annexure ' A' of the Debentures Trust Deed, dated 23rd June, 1950. In substance, the Oil Mill of the company carried this charge. 3. The Rajmata, the Raja and the Rani who together were the holders of the first as well as the second series of the debentures, applied to the Court that the mills of the company be sold free of the charges of their debentures and the sale-proceeds may remain in the hands of the Official Liquidator subject to the charge. It appears that the company had issued a third series of debentures. It appears that the company had issued a third series of debentures. The holders of this series objected but ultimately agreed that the mills be sold free of all encumbrances provided of course that their rights were also safeguarded. Thereupon the learned company Judge on 9th January, 1959, ordered that the mills be sold free from all encumbrances and that the sale proceeds will be subject to the charge of the debentures of the first and the second series. The holders of the debentures of the third series had been held by the Court to be unsecured creditors. It was therefore, directed that the sale price shall not be disposed of till the Special Appeal by the holders of the third series of the debentures, is decided. 4. The Mills were auctioned on 22nd March, 1959. The highest bid was of Sri B. P. Agarwal who, it appears, was the erstwhile Managing Director of the company. The holders of the first and the second series of debentures filed objections to the confirmation of the sale. They said that the amount due under the first and the second series of debentures was Rs. 3,39,937. 50 P, and that they were prepared to offer at least Rs. 3,67,365.50 P. provided they are allowed to set off the amounts due under the first two series of debentures. The difference between-the two sums was Rs. 27,428 which represented the expenses in connection with the sale. The learned Company Judge by his order dated 8th April, 1959 held that the highest bid of Rs. 2,01,000 was inadequate and rejected it. He directed that a fresh sale be held. Sri B. P. Agarwal raised an objection that the holders of the second series of debentures were not in a position to give a valid discharge, by producing the bonds. The matter was considered by the company Judge on 7th August, 1959. From the order of that date it appears that it was urged on behalf of the holders of the second series of debentures that, if their title to the second series of debentures is held doubtful, the consent given by them for the properties being sold free from all charges will no longer be there and the sale cannot be held free from all charges without the consent of the debenture-holders. The resale of the mills was held over, and an enquiry was initiated into the question whether the holders of the second series of debentures were in a position to give an effective discharge. By his order dated 28th July, 1960, the learned company Judge held : "Before dealing with this question it seems desirable that the debenture-holders of the first and second series should be required to make an election as to what relief they seek in these proceedings. A secured creditor may either realise his security and prove for the balance or he may surrender his security and prove for the whole debt or he may set a valuation on his security whereupon he will be entitled to receive dividends only in respect of the balance remaining after deduction of the assessed value. Mr. Jagdish Swarup representing the debenture-holders of the first and second series states that he elects the third mode i.e., valuation. He is granted three weeks time to specify the amount at which he assesses the value of his security." 5. The matter came up again after three weeks and in the order dated 25th August, 1960, the learned company Judge observed : "Sri Jagdish Swarup for the debenture-holders of the first and second series states that he values his security at Rs. 3,67,365.50 P." 6. After an enquiry, the learned company Judge by his judgement dated 4th October, 1960, held that the holders of the second series of debentures are not in a position to produce the debenture bonds and that their claim that they have been lost has not been established. It is possible that these bonds which are bearer and negotiable, may have passed hands and some one else may come forward with the scrips of these debentures, to claim payment. He held that the holders of the second series of debentures are not in a position to give a satisfactory discharge. He ultimately directed that the mills will be resold, allowing only the holders of the first series of debentures (and not those of the second series) to avail themselves of the concession regarding set-off against the sale price. 7. Raja Sharda Narayan Singh & Co., the bolder of the second series of debentures, went up in appeal. The Bench hearing the appeal held that the parties were not afforded adequate opportunity to lead evidence. 7. Raja Sharda Narayan Singh & Co., the bolder of the second series of debentures, went up in appeal. The Bench hearing the appeal held that the parties were not afforded adequate opportunity to lead evidence. The appeal was thus allowed and the matter was remanded back to the company Judge for determination of the question, after giving the parties an opportunity to produce further evidence. 8. The, learned company Judge again enquired into the matter and reaffirmed his earlier order, and directed that on the re-sale of the property set-off may be claimed only by the holders of the first series of debentures and not by those of the second series. This order was passed on 6th February, 1962. 9. Sri I. B. Banerji, the then Official Liquidator, commenced proceedings for fresh sale of the mills 29th of March, 1962 was fixed for the sale. In the meantime, Raja Sharda-Narayan Singh & Co., again went up in appeal (Special Appeal No. 212 of.1962). In the Special Appeal Raja Sharda Narayan Singh .'& Co. tried to get the sale postponed, .but failed. Ultimately the Special Appeal was fixed for hearing very early, namely, on 28th March, 1962. The Special Appeal was heard on that date, but remained part-heard. The sale was to be held on the next date, the 29th March, 1962. Sri Jagdish Swarup, learned Counsel appearing for the appellants in the Special Appeal, renewed the prayer that the sale be adjourned. The Bench hearing the Special Appeal thereupon passed the following order "An application for the adjournment of the sale fixed for tomorrow was made by Mr. Jagdish Swarup on the ground that the hearing of the appeal did not conclude today. It is no doubt clear that if the sale is not adjourned it is likely that the interest of the appellant may be vitally affected unless of course as was pointed by Mr. Jagdish Swarup an undertaking was given on behalf of the Official Liquidator to the effect that the sale which is being published for tomorrow would be subject to the debentures of second series. Mr. Jagdish Swarup an undertaking was given on behalf of the Official Liquidator to the effect that the sale which is being published for tomorrow would be subject to the debentures of second series. Mr. Banerji appearing on behalf of the Official Liquidator has stated that it would be very difficult to have another sale easily if the sale was adjourned and therefore, he was prepared to give an undertaking and he did give that undertaking that the sale which will take place tomorrow, the 29th March, 1962 would be subject to debentures of the second series. In view of the under- taking given by Mr. Banerji on behalf of the Official Liquidator. we do not consider it necessary to adjourn the sale. It should be clearly understood by Mr. Banerji that it would be his obligation to immediately communicate with the person who is to conduct the sale at Lucknow and see that this fact that the sale is taking place subject to the mortgage of second series is properly declared to the bidders before the bidding starts so that there should be no difficulty about any of the bidders not knowing about this condition of the sale. The sale shall also be subject to orders we will make in the appeal." 10. Sri Amitav Banerji, learned Counsel appearing for the Official Liquidator, there upon sent an express telegram to Sri 1. B. Banerji, the Official Liquidator, at Lucknow The telegram reads as follows : "Prayer for adjournment of sale made stop prayer not granted on giving undertaking that sale would be subject to debenture 2nd series and also subject to the decision in Special Appeal stop. These conditions must be made known and published before the sale starts stop appeal part-heard." 11. The hearing of the appeal continued on 30th of March, 1962. The Bench dismissed the appeal. It held that section 229 of the Indian Companies Act, 1913 makes section 47 of the Provincial Insolvency Act applicable to the winding up of Companies. Section 47 gives various options to a secured creditor. The Bench observed that the appellant, namely, Sharda Narain Singh & Co. having selected the third option, namely of valuing his security, has no right to claim that his security which he valued should in any way be recognised in liquidation proceedings. Section 47 gives various options to a secured creditor. The Bench observed that the appellant, namely, Sharda Narain Singh & Co. having selected the third option, namely of valuing his security, has no right to claim that his security which he valued should in any way be recognised in liquidation proceedings. Their Lordships further observed : "Under sub-section (4) of section 47 there is undoubtedly a power in the Court to redeem the security before the security had been realised by paying to the creditor the assessed value of the security. In this particular case there was on behalf of the Court no desire to redeem the security valued by the creditors. Therefore, it was not strictly open to the creditors to lay a claim to have the amount of their security set off against the scale price..* question whether the creditors could give a valid discharge in respect of the second series of debentures or not did not, in our opinion, arise for determination in the view which we have taken of the right of the creditors to claim a set-off in respect of their security." 12. Their Lordships held that the position of the debentures of the first series was different because they had been accepted by everybody to be entitled to a set-off against the sale price ; so that in respect of them it could be said that the Court was prepared to redeem the security of the first series of debentures on payment of their value; and that that position does not obtain in regard to the Debentures of the second series, because in respect of the debentures of the second series there was no offer to redeem them on behalf of the Court. The appeal was, with these findings, dismissed. 13. The sale was held on 29th of March, 1962, as scheduled. Before the commencement of the sale, the telegram sent by Sri A. Banerji was received at the spot and was read out to all concerned. From the testimony of W.C. De Noronha, the auctioneer, who conducted the sale, it appears that a copy of the Court's order dated 28th March; 1962, was also supplied. The matter was discussed between the Official Liquidator and the intending purchasers for hours. Then the bidding started. The highest paid was of Rs. 4,16,000 by the Rajmata. From the testimony of W.C. De Noronha, the auctioneer, who conducted the sale, it appears that a copy of the Court's order dated 28th March; 1962, was also supplied. The matter was discussed between the Official Liquidator and the intending purchasers for hours. Then the bidding started. The highest paid was of Rs. 4,16,000 by the Rajmata. This bid was accepted by the learned Company Judge who on 12th April, 1962, confirmed the sale. The Rajmata took possession of the Mills on 1st May, 1962. Sri I. B. Banerji, the Official Liquidator, died in or about December, 1963 and Sri P. N. Goel was appointed the Official Liquidator on 6th January, 1964. On 19th May, 1964, the Rajmata submitted a draft of the sale deed to the Official Liquidator for approval. Sri. P.N. Goel, the Official Liquidator -rejected the petitioner's draft . The petitioner wanted that the sale deed should contain a clause that the mills have been sold free from all encumbrances. The Official Liquidator was not prepared to do it. The present application was moved on 10th of December, 1964 for an order directing the Official Liquidator to approve the draft sale deed submitted by the petitioner and in case it be not considered feasible, for a direction that the sale be cancelled. The Official Liquidator has filed in objection wherein he has urged that the sale was held expressly subject to the debentures of the second series, in view of the Court's order dated 28th March, 1962. The auction notice published by the auctioneers setting out the terms and conditions under which the sale was to be held did not indicate that the sale was to be free from all encumbrances. On the other hand, Condition No. 7 stated that the Official Liquidator will sell only such right, title and interest in the properties as the U. P. Oil Industries Ltd. (in liquidation) possesses on the date of the sale. The telegram sent by Sri A. Banerji was received before the auction commenced. Under the circumstances the sale could not be held to be free from all encumbrances. The Official Liquidator has also urged that the terms and conditions of the sale being explicit and unambiguous the petitioner should have carefully considered their effect and that she is, therefore, not entitled to get any refund or to the cancellation of the sale. 14. Under the circumstances the sale could not be held to be free from all encumbrances. The Official Liquidator has also urged that the terms and conditions of the sale being explicit and unambiguous the petitioner should have carefully considered their effect and that she is, therefore, not entitled to get any refund or to the cancellation of the sale. 14. It is clear that the first sale held in 1959 was held free from all encumbrances because all the debenture-holders had expressly given their consent for it and the Court had made a clear direction to that effect. Thereafter the ability of the holders of the second series of debentures to give a valid discharge became doubtful. The Bench deciding the Special Appeal specifically held that the holders of the second series of debentures having not been redeemed by the Court, they were not entitled to claim a set-off in respect of the price fetched at the auction. The Bench had passed a categorical order that the sale will be subject to the debentures of the second series. This order and this condition *as published and broadcast to the intending purchasers before the auction commenced. The contention of the petitioner that the sale was free of the debentures of the second series, cannot be accepted. 15. Sri Jagdish Swarup, appearing for the petitioner has urged that the actual proceedings that took place at the spot when the auction was held, clearly show that the sale was held free from all encumbrances. He has relied upon the statement of Sri Noronha as also certain entries in the auctioneer's register which Sri I. B. Banerji, the then Official Liquidator, is alleges to have countersigned. The entries state that the Official Liquidator stated that the correct interpretation of the order passed on 28th March, 1962 is that Raja Sharda Narayan Singh & Co., will get preference in the matter of `set-off of the second series of debentures if held valid by the Honourable High Court, but this does not affect any other intending purchaser who will bid for the assets free of the charges of first, second and third series of debentures, otherwise nobody will be prepared to bid. Therefore, the assets should be sold "free from all encumbrances". The entries also state that the telegram of Sri A. Banerji and a copy of the order dated 28th March, 1962, was supplied. Therefore, the assets should be sold "free from all encumbrances". The entries also state that the telegram of Sri A. Banerji and a copy of the order dated 28th March, 1962, was supplied. These entries clearly make out that the Court's order was read out to the intending purchasers, so also Sri Banerji's telegram. This left no ambiguity as to the fact that the Court had directed that the sale will be held subject to the debentures of the second series. The present applicant was represented at the sale by her manager and attorney Sri B. P. Singh. Sri B. P. Singh is the Secretary of Raja Sharda Narayan Singh as well. He has not been produced in the witness box to enable the Official Liquidator to cross-examine him. He is an educated person. I am not prepared to believe that he misapprehended the import of the Court's order. The petitioner is not entitled to rely upon what Sri I. B. Banerji, the then Official Liquidator, may have said about the meaning to be attached to the Court's order. The mills were being sold under the orders of the Court. The Court's direction was clear and categorical ; there was no room for any interpretation. If the petitioner made a bid with her eyes open, she is to thank herself for any difficulty which she now feels. 16. Sri Jagdish Swarup, learned Counsel for the petitioner, has strongly relied upon the decision of a Division Bench of this Court given in Special Appeal No. 825 of 1962. I was a Member of that Bench and delivered its judgement. It appears that after the auction sale Raja Sharda Narayan Singh & Co., on 24th May, 1962, made an application, stating that they have valued their security and were entitled to be redeemed. They prayed that the charged properties having been sold free from encumbrances, the Official Liquidator be directed to pay the amount of the second series of debentures together with interest, on execution of an indemnity bond by them, Sri I. B. Banerji, the then Official Liquidator, contested the claim on the ground that he has already received three debentures from other persons for payment and that as such the claim of the applicants was denied. The learned company Judge held that since the claimant was not in a position to produce the scrips of the debentures, he could not be treated as a secured creditor and could not be paid. Against this judgement dated 6th September, 1962, Special Appeal No. 825 of 1962 was preferred. At the hearing of the special Appeal Sr Jagdish Swarup, the learned Counsel for Raja Sharda Narayan Singh & Co., as well as Sri A. Banerji, learned Counsel of Sri I. B. Banerji the Official Liquidator, argued on the common assumption that at the auction sale, the Mill was sold free from all encumbrances. The whole arguments proceeded on that basis. The judgement also was rendered entirely on that basis. Neither of the Counsel brought the order dated 28th March, 1962 passed in Special Appeal No. 212 of 1962 to the notice of the Bench. At that time there was no dispute as to the nature and character of the sale. The Division Bench held that the debenture-holder of the second series continued to be a secured creditor and that he was entitled to payment on executing an indemnity bond and on furnishing a guarantee from a scheduled bank. The Special Appeal was decided accordingly on 8th January, 1964. The Judgment is reported in Raja Sharda Narain Singh v. U.P. Oil Industries, (1964) 1 Comp LJ 225 : (1964) 34 Comp Cases 287 : AIR 1964 Allahabad 558. This judgement cannot afford any help to the petitioner, the Rajmata, who is the; auction-purchaser and who is the petitioner now. She was not a party in that appeal though Sri Jagdish Swarup was a Counsel common to both the Special Appeal and the present application. That judgement not being inter parties, is not binding ; but the more substantial reason is that the judgement of the Special Appeal proceeded on an agreed hypothesis that the Mills were sold free from all the charges created by the debentures. That was a fact which, as I have already shown, was not correct, but was not disputed by either Counsel. The judgement of the Special Appeal, therefore, proceeded on an assumed state of facts which is not the case at present. In the present proceedings, the question whether the Mills were sold subject to the charge, is being stoutly put forth. I am informed that Raja Sharda Narayan Singh & Co. The judgement of the Special Appeal, therefore, proceeded on an assumed state of facts which is not the case at present. In the present proceedings, the question whether the Mills were sold subject to the charge, is being stoutly put forth. I am informed that Raja Sharda Narayan Singh & Co. applied for leave to appeal to the Supreme Court against the decision of the Bench (Supreme Court Appeal No. 164 of 1964) and that the requisite certificate has been granted to them in May, 1964. So, that judgement has not become final. 17. Sri Jagdish Swarup, learned Counsel for the petitioner, also placed reliance upon the report of Sri I.B. Banerji, the then Official Liquidator dated 10th of April, 1962. In this report Sri I.B. Banerji stated in paragraph 4 : "That thereafter Messrs. Sharda Narain&Co., filed a Special Appeal in the High Court and had applied for an order, staying the sale till the disposal of the appeal which came up before a Division Bench presided over by Mr. Justice Bhargava and Mr. Justice Asthana on the 23rd of March, 1962 and the application was dismissed on the date. The appellant having insisted on the fixation for an early date of hearing, the appeal came up for hearing on the 28th of March, 1962 and after having heard the appeal for nearly two and half days it was ultimately dismissed on the 30th of March, 1962. At the hearing of the Special Appeal, an attempt was made to circumvent the holding of the auction, but the Official Liquidator having decided to give the Raja the benefit of the second series of debentures at the auction, the sale was duly held." 18. The learned Counsel relies upon the statement that the Official Liquidator having decided to give the Raja the benefit of the second series of the debentures of the auction the sale was duly held, to sustain his contention that the sale was held free from all encumbrances. The Official Liquidator only says that he had decided to give the Raja the benefit of the second series of the debentures at the auction. This in no way does or could, countermand the specific directions in the Court's order dated 28th March, 1962. The Official Liquidator only says that he had decided to give the Raja the benefit of the second series of the debentures at the auction. This in no way does or could, countermand the specific directions in the Court's order dated 28th March, 1962. In paragraph 6 of the report the Official Liquidator stated that he had called upon the Rajmata to deposit the balance of the purchase money after giving a set off for the amount due to them qua first series of debentures. This also indicated that there was no question of giving a set off for the second series of debentures. That would mean that the sale was not free from the charge of the second series of debentures. 19. The sale was confirmed by the Company Judge on 12th April, 1962. If the applicant had any doubt as to whether the sale was free of the second series of debentures or not, she could have and should have approached the learned Company Judge for a clarification before the sale was confirmed. She did nothing of the kind. She took and kept the Mills in her possession. The sale having been confirmed, the purchaser cannot ask that it be cancelled or set aside. The conditions on which the sale was held were explicit and were wholly known. The so-called interpretation of the Court's direction and orders by the then Official Liquidator cannot be of any assistance to the petitioner. The,petitioner is not entitled either to a sale deed stating that the sale was held free from all encumbrances or for the cancellation of the sale. The price cannot, therefore be refunded. 20. M/s. Ganesh Flour Mills Co., Ltd. has filed another application (No. 5 of 1965) praying that the Official Liquidator be directed to execute a sale deed in favour of Rajmata stating that the sale was free from all charges and encumbrances. They, have filed the application on the ground that they have agreed to purchase the mills from the Rajmata and are, therefore, interested in the matter. Since the petition of Rajmata fails, it is not necessary to deal with. this petition. This also fails. 21. In the result both the applications fail and are dismissed, but there will be no order as to costs.