Saturday, June 13, 2009

Duties of the Official Liquidator: Madras HC decision

A recent judgment of the Madras High Court throws some light on the role of an Official Liquidator. In TCI Distribution Centers v. Official Liquidator (C.A. 1953/2008 in C.P. 526/2000), the Official Liquidator had sold certain properties through an auction-sale. The auction-purchaser later found out that the properties were not exactly the same as described in the sale advertisement. The purchaser therefore sought to set aside the sale. In rejecting the plea, the Court expanded on the duties and liabilities of the Official Liquidator.


The Court explained that under Section 456 of the Companies Act, the OL is required to take into his custody all the properties of the company in winding up. Nonetheless, following an earlier decision of the Bombay High Court, it was clarified that unlike the case of insolvency where property vests in the assignee, the property of the company does not vest in the OL. The property remains the property of the company [Maharashtra State Financial Corporation v. Official Liquidator, AIR 1993 Bom 392]. An ordinary owner usually “goes after” some property in order to purchase it and become its owner; on the other hand, property “falls into” the custody of the OL without the OL actually seeking for that property. From this, and again based on earlier precedent [United Bank of India v. Official Liquidator, (1994) 1 SCC 575], the Court held that when the OL sells any property of the company, he “cannot and does not hold out any guarantee or warranty” and in particular he offers no warranty of title.


Up to this point, the Madras High Court relied on existing precedent – but then, the Court went on to lay down what duty is actually owed by the OL. It was held that the OL should not commit deceit. Liability for deceit would require proof of a false statement of fact (with knowledge of falsity) or a deliberate concealment of fact (with knowledge of materiality of the fact). The Court also hinted that the OL should not commit the tort of negligent mis-statement; and if deceit or negligent mis-statement is made out, the sale of property would be voidable under contractual principles of misrepresentation/fraud. On facts, it was held that there was no ground for setting aside the sale.


As for the legal position, the case appears to be authority for the proposition that if not even one of the torts mentioned above (deceit/negligent mis-statement) were established, the sale cannot be set aside. In particular, the Court rejected the argument that such sales could be set aside on grounds analogous to those under Order 21, Rule 90 of the Code of Civil Procedure. Under Order 21, Rule 90, a sale in the course of execution proceedings can be set aside if substantial injury has been caused because of material irregularity in conducting or publishing the sale. It was argued that this provision should be applied by analogy, considering that the Company (Court) Rules, 1959 allowed for the application of CPC principles. The Court however held that the principles pertaining to execution proceedings could not apply by analogy considering the nature and purpose of winding up proceedings and the peculiar role which the OL finds himself in. Thus, effectively, the purchaser must be able to show the existence of either deceit or negligent mis-statement. If he does not do so, he cannot succeed in getting an auction sale by the OL set aside.


This is a high burden for a purchaser to discharge. Deceit under common law requires the presence of the specified mens rea – it is one of the few torts where mental state is relevant. Knowledge of falsity must be proved [Bradford Building Society v. Borders, (1941) 2 All ER 205]. The tort of negligent mis-statement requires the existence of a special relationship between the parties which would put the person making the statement under a special duty of care [Hedley Berne v. Heller & Partners, (1964) AC 465; Caparo v. Dickman, (1990) 2 AC 605]. An OL can hardly ever be said to be under a “special relationship” as contemplated under the law of negligent mis-statement. Perhaps, such a high burden is essential keeping in mind the role of the OL as well as the nature and purpose of winding up proceedings.


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