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TMI Blog2008 (10) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... the seventh defendant and the eighth defendant-company through the creation of mortgages, assignment of mortgages, lease and sub-mortgage. C.S. No. 980 of 2007 has been subsequently instituted containing similar prayers as found in C.S. No. 937 of 2007 by the seventh defendant-company. A common order was passed on January 4, 2008, which found that the plaintiff had established a prima facie case by showing that all the four impugned transactions were not free from doubt in its opinion and that there were serious questions of allegations of fraud to be tried in the suit. The learned single judge took notice of the fact that the receiver was able to generate income of Rs. 29 to 30 lakhs per month and being assured by counsel representing the receiver that the income could be further increased by proper management and refixing the rates of tickets, the court found that the balance of convenience lay in favour of the plaintiffs and other shareholders, who, if the interim orders were not issued would be subject to great hardship and inconvenience. Consequently, the court passed the restraint orders against the respective defendants from acting on the four impugned documents dated Octobe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, Chennai in O.A. No. 18 of 2007 for Rs. 12.53 crores and odd with interest at 19.5 per cent. per. annum. The bank had itself filed an original application for the appointment of a receiver pending disposal of the original application and a retired judge of this court hon'ble Mr. Justice Swamidurai was appointed as the receiver. 4. Some of the directors of the mills company are the directors of the theatre company. Both the companies are private and the shareholders and the directors are all members of a Hindu family, whose common ancestor was Sankara Narayana Pillai. Two of the brothers had originally spanned out of Udaiyathur village of Tirunelveli District and shifted to Chennai first by establishing the business of trade in grams and grains; later a business relating to flour mill operations and still later relating to theatre business. As the family grew in its size, with several branches removed in the order of descent from the common ancestor Sankara Narayanan Pillai, dissensions arose and inevitably the business began to flounder and so too, its income. The waning wealth gave rise to increased acrimony. Some of the shareholders of the company filed a company petition b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat by the action of the bank in its resort to SARFAESI Act did not result in distress sale of the cinema theatre complex. The plan of action that materialised took the shape of first satisfying the claim of the bank so that the imminent threat of sale was warded off. He did not have the money himself. He could not have therefore discharged the mortgage. He therefore came upon the idea of entering into a memorandum of understanding through a partnership firm M/s. Ashoka Associates hereinafter called the partnership firm in which he was himself a partner with the fourth defendant (in C.S. 980 of 2007) M/s. Lavanya and Co., on October 3, 2007. Another agreement was made on October 4, 2007, with M/s. Pyramid Saimeera Theatre Ltd., that gave expression to the intention of the second defendant secured through the memorandum of understanding dated October 3, 2007. The second defendant through the firm assured to himself a short term loan of Rs. 12.6 crores carrying interest at 14 per cent. with an undertaking to repay the same within ten months on the security of the theatre premises. The memorandum of understanding dated October 4, 2007, was to generate a facility of obtaining Rs. 3.50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad at his instance. IV. Imputations against the conduct of the second defendant : 7. One of the shareholders of the company who was the plaintiff in C.S. No. 937 of 2008 and the company itself had reasons to complain. According to them, the entire manoeuvre of the second defendant betrayed lack of bona fides. One secured creditor was supplanted by another creditor. The reason for further consternation was how in the process, the second defendant himself was able to take kickbacks when no benefits accrued either to the company or to the shareholders/members of the family. It was further possible for the second defendant and his cohorts who were partners in the firm to take over the affairs of the theatre business from the company. They smelt a rat and two consecutive suits were filed seeking for the prayer that the assignment deeds dated October 9, 2007 and the mortgage and the lease deeds dated October 9, 2007, were null and void through C.S. No. 937 of 2007. The subsequent suit in C.S. No. 980 of 2007 was more comprehensive in detailing instances of what according to the plaintiff therein as constituting a fraud and seeking for similar declaration that the assignment deeds, mort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be directed to be sold under the supervision of the court and the proceeds realised after discharge of loans could be distributed. 10. Mr. N.V. Subramanian, learned counsel appearing for the second defendant had strong objections to the same and urged that in the absence of unanimous decision relating to sale, the court would not be within its powers to pronounce on a direction for sale of the property. To him, the more important concern was to save the property from being sold and recover the property from the hands of the receiver and to put him in joint possession with the lessee. 11. Mr. T.R. Mani, learned senior counsel appearing for the third party applicant Mr. Sakthivel and Arunachalathammal, also shareholders, resisted the proposal for sale of the property and according to him, if the properties were to be continued to be in the hands of the receiver, for another period of two years, the entire loan could be discharged. According to him, the properties of the eighth defendant could itself be sold and that the second defendant was thwarting it because he was interested in retaining control over the flour mill company and its assets. Mr. K. Sridhar, learned counsel appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court can assume jurisdiction. The basis of the suits and the strength of the respective plaintiffs' contentions shall be the starting point. The arsenal stands sharpened against the actions of the second defendant as they point out to the fact that no one benefits by the actions, except the second defendant himself and his immediate family. 13. The second defendant's contention is that as a founder-director of the company he has an overwhelming interest to ensure utmost protection of the property of the family and see that it is not lost completely. He makes reference to the scheme of action by referring to the affidavit that he has filed before the Company Law Board and his own affidavit in support of his petition. The decision to thwart any attempt of the sale of the theatre premises it seems to us, begins and ends there as merely a wish. The so called scheme that he has envisaged has no viable formulation as to how he could generate the money to pay immediately the creditors who are thirsting for the moneys that they have advanced. If the second defendant had money and as a guarantor, if he had discharged the debt originally contracted by the eighth defendant from the bank, ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt to the bank and got back the property to be enjoyed by the company itself, it would have been different. However, he has brought about the transactions of assignment in his favour on October 9, 2007 and before the ink dried he has caused the assignment to the partnership firm in which he himself is a partner and on the same day, he has executed two more documents one of simple mortgage and another a deed of lease. By such process, he has only ensured that the property in the hands of the receiver could go to the hands of a lessee for a longer period. He has undertaken to discharge the loan within a period of ten months, but his own scheme does not disclose as to how he was going to generate the money for repayment to the sub-mortgagee. Indeed the said period has come and gone at the time, when we were hearing the appeal and when asked whether he could discharge the mortgage, he conceded that he has no resources to do so. Even the lease amount of Rs. 29 lakhs per month, could not have been sufficient to discharge the mortgage within the time which he had undertaken to discharge it. The effect of the impugned transactions as far as the company was concerned, from the bank b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal to continue has referred to all the above instances as creating suspicion in the bona fide transaction. 18. We were referring to the lack of bona fides of the second defendant only to apprise ourselves about the situation about how and where all his transactions have led the company into and how more vulnerable he has exposed the company to lose out any income from the property to reach any member of the family and at the same time, obtain the benefit only to himself and other members of his immediate family. 19. Mr. T.R. Mani, learned senior counsel appearing for some of shareholders has his own view to dispute the bona fides of the second defendant. According to him, the second defendant's attempt is to ensure that the property of the eighth defendant in which he is a shareholder, is protected and if the second defendant had been truly intending to safeguard the theatre property, instead of the several manoeuvres he has undertaken through several transactions which are impugned, he ought to have made some provision for sale of the mills property and attempted to discharge the loan. According to him, after all, the principal debtor was the eighth defendant itself and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's power to lease. But, there is no power for the mortgagee who is not put in possession of the property to lease. The counsel for the second defendant points out to the clause in the corporate guarantee that the power is granted to the bank to grant a lease. But, if at all the power could be exercised, it could be only under the term of the mortgage deed, after taking possession from the mortgagor. The mortgage in favour of the bank was only a mortgage by deposit of title deeds and possession had not passed on to the mortgagee. (iii) Rights of assignee vis-a-vis SARFAESI Act : 22. What, however, enables the bank to do under the SARFAESI Act could be limited to be available only to the "secured creditor" as defined under the said Act. It is seen from the records that the bank has issued notice under section 13(2) on January 29, 2003 and issued notice of possession on March 24, 2003. It has been held in Transcore v. Union of India reported in [2006] 5 CTC 753; [2007] 135 Comp. Cas. 1 (SC), that under the Act, there is no difference between symbolic possession and actual possession and a secured creditor who could obtain symbolic possession would also have a right to make a lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour security interest is created for due repayment by any borrower of any financial assistance ;" 25. This definition takes in its wings only banks or financial institutions or any consortium or group of banks and excludes for its operation any private individual. The second defendant who was the original assignee and the partnership firm to which the mortgage is subsequently assigned cannot treat itself as a "secured creditor" to exercise all the powers under the SARFAESI Act. Consequently, possession can never fall to the second defendant or its successors in order that it could lawfully create a lease in favour of Pyramid Saimeera. It is only because of these difficulties that the second defendant has sought for the discharge of the receiver who was appointed by the Debts Recovery Tribunal at the instance of an application filed by the bank. If the mortgagee himself could have taken possession by virtue of the special provision under section 13(4) and handed over possession to his assignee, such assignee may be able to lease the property and also put the lessee in possession. Without any of these acts, it will be impermissible for a private assignee such as the second defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully. 27. Mr. N.V. Subramanian, learned counsel for the second defendant contended that full satisfaction shall be directed to be recorded by the Debts Recovery Tribunal and having regard to the fact that the indebtedness to the bank has been discharged, the mandate of the receiver shall be terminated and the property shall be put in joint possession of the second defendant and M/s. Pyramid Saimira Ltd. While the termination of the receiver's mandate by the discharge of the loan in favour of the bank would have normally been the result, such a course cannot ensue in a situation like this, where further complications have resulted by the conduct of the second defendant himself. The learned single judge has directed by her order that the Receiver shall continue in office till the conclusion of the suit and subject to the direction of the court. The receiver has subjected himself to the jurisdiction of this court and has filed reports in the months of June, 2008 and July, 2008, when the proceedings have been pending before us. The reports disclose that the balance of income after deduction of tax and all other expenses is Rs. 12,56,855 for the period between June 1, 2008 and June 30, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal [1999] 96 Comp. Cas. 602 (SC); [2000] BC 662, Krishna Filaments Ltd. v. Industrial Development Bank of India [2004] 118 Comp. Cas. 356 (Bom) and Bank of India v. Manickam alias Sellakumarasamy [2006] 4 MLJ 914; [2007] 137 Comp. Cas. 330 (Mad), deals with the power of the court to transfer a case pending before a civil court when the SARFAESI Act was introduced. The issue was whether the civil court should adjudicate on the subsistence of the debt in the case or whether the debt was discharged, as contended and that only when the court records the finding that the debt is subsisting, the case could be transferred. The Supreme Court held that all pending matters before the civil court which was filed on the basis of debt as subsisting was enough ground for a transfer and it would be only a Tribunal which could adjudicate on the contentious issues. 29. United Bank of India v. Debts Recovery Tribunal reported in [1999] 96 Comp. Cas. 602 (SC); [2000] BC 662, was a case where the court decided on the expression "debt" referred to under the SARFAESI Act and dealt with similar issue where the Supreme Court held that the expression "debt" has to be given its wide amplitude if the aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as vitiated by fraud, it will not take away the jurisdiction of the Debts Recovery Tribunal and the SARFAESI Act. According to him, if the plaintiff has challenged the assignment made by the bank which is protected under section 13(4) the proper remedy of persons affected by such a decision would be only to prefer an appeal provided under section 17 of the Act. According to him, the decision of the Supreme Court in Transcore v. Union of India [2006] 5 CTC 753; [2007] 135 Comp. Cas. 1, puts beyond the pale of any controversy that even in respect of matters where proceedings have been taken either before the civil court or before the Debts Recovery Tribunal, it shall be possible for the secured creditor under the SARFAESI Act and that the remedy of an aggrieved party would be only by means of appeal under section 17 of the SARFAESI Act before the Debts Recover)' Tribunal. The reliance on this judgment is to lend support to the primacy in the jurisdiction that vests with the Debts Recovery Tribunal excluding the jurisdiction of the civil court in respect of matters covered under the Act. If the suit had been merely an action challenging the assignment by the bank in favour of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to come to the succour of the eighth defendant and redeem itself out of the financial stringency that these transactions have involved the principal debtor or the cinema theatre complex. 36. Above all, when the action of the second defendant is questioned by means of suits and there exists ample prima facie proof that the transactions are a fraudulent ploy to wrest control of the business of the seventh defendant and persisting the indebtedness of the company, it is not possible to accept the contention that the civil court's jurisdiction is ousted. The courts have held that exclusion of jurisdiction of the civil court is not to be readily inferred, unless the statute excludes the jurisdiction giving the finality to the issues raised before it. The validity of the transactions and alleged fraud have relevance to the series of documents that have been generated by the second defendant to route to the partnership firm through assignment and through instruments of debts by sub-mortgage and lease, all of which, cannot be considered by the Debts Recovery Tribunal. It is therefore not possible to give in to the proposition canvassed by counsel for the second defendant. It is not merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot by itself offer to the second defendant to have any relief under the Act and consequently, it does not lie in the mouth of the second defendant to deflect the proceedings taken before the civil court to the Debts Recovery Tribunal again. In the arguments before us, all the parties including counsel appearing for the plaintiffs, sound in unison that they do not desire to put the clock back so as to revive the loan in favour of the bank. Though the plaintiffs have attacked the assignment of the bank to the second defendant, among other transactions, they will not go so far as to say that the banks loan shall stand revived. It is perhaps uncharitable to characterise the assignment of the debt by the bank to the second defendant as fraudulent and we do not associate ourselves with the branding that the learned single judge had made against the bank, especially when it has offered one-time settlement by way of concession to the outstanding liability. Mr. A.L. Somayaji learned counsel appearing on behalf of the bank requests the remarks made against the bank in paragraphs 86, 87 and 107 of the judgment to be expunged. We are convinced that it is a justified request and accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have accrued and distribute the surplus proceeds. 42. Mr. P.S. Raman, learned senior counsel appearing for M/s. Pyramid Saimeera, Mr. AR. L. Sundaresan, learned senior counsel appearing for M/s. Lavanya have no objection to the property being sold, if only the respective amounts which they have advanced are repaid with reasonable interest. Their clients have paid the money and it is their money that has obviated the sale at the instance of the bank. If at all, there was a justification for the appointment of a receiver, either one of them should have been put in possession with direction to account as a receiver. But in all fairness to them, they stake no right to possession and express willingness for sale. The proposal for sale is objected to only by counsel for the second defendant, Mr. N.V. Subramanian and Mr. T.R. Mani, counsel appearing for the intervenors who have but a miniscule percentage of shareholding of the company. 43. Both Mr. N.V. Subramanian and Mr. T.R. Mani contended that the direction for sale of the property is really outside the scope of the interlocutory application and unless there is unanimity for the sale proposals, the court shall not order the same. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mortgage in favour of the fifth defendant would stand nullified which would revive the deed in favour of the bank in which case, the amount of Rs. 13.5 crores which the bank had accepted as a one time settlement would no longer be available and it would be possible for the bank to scale up its demand on the contract rate of 19.5 per cent. from the initial date of loan. The banks' right to enforce its debts under the SARFAESI Act or before the Debts Recovery Tribunal would revive and when no party has come with any proposal to discharge the loan with any other source of income, it will bring back the same situation as it all started, when the bank took action for enforcement of its debts. Counsel for the bank also argued that if the document of assignment to the second defendant could not be enforced by any interim order, it would result in its liability to return Rs. 13.5 crores to the second defendant, treat the one-time settlement as cancelled and the bank would be compelled to invoke the SARFAESI Act for sale. This process would be obviously grossly unjust to all parties. The bank's right to enforce its debt stands deferred only by the pendency of the actions before the court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial Corporation Ltd. [1996] 85 Comp. Cas. 111, rendered by a Division Bench of this court, which, while exercising its company jurisdiction, recognised the primacy of resolution passed by the shareholders in a overwhelming majority and the court's keep-the-hands-off approach, if it was ultimately for the benefit of the company. The Division Bench also held that the proceedings pending under sections 397 and 398 of the Act would not itself be a ground to stay the implementation of the resolution. The second defendant's objection to the sale would be easily seen as an obstruction by a person, who has a personal axe to grind. Even the second defendant later conceded that if sale was the ultimate result, his clients shall have priority of a right of purchase. The objections of some of the shareholders that form a miniscule percentage of holding (766 shares that belonged to the estate of S. Narayana Pillai and 500 shares held by Arunachalathammal out of the total subscribed capital of 7,596 shares) and represented through Mr. T.R. Mani, learned senior counsel, could be again seen only as the desire of persons who want to have their cake and eat it too. Senior counsel, in his argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court of Justice had amongst its divisions the chancery division. The following matters were assigned by the judicature at Chancery Division : (i)The administration of the estates of deceased persons. (ii)The dissolution of partnerships or the taking of partnership or other accounts. (iii) The redemption or foreclosure of mortgages, (emphasis supplied) (iv)The raising of portions or other charges on land. (v) The sale and distribution of the proceeds of property subject to any lien or charge, (emphasis1 supplied) (vi)The execution of trusts, charitable or private. (vii)The rectification or setting aside, or cancellation of deeds or other written instruments. (viii)The specific performance of contracts between vendors and purchasers of real estates, including contracts for leases. (ix)The partition or sale of real estates. 50. In directing the sale, we are trying to balance the equitable claims of several parties. The bank loan has to be discharged. The one-time settlement shall be affirmed. The parties who have advanced moneys to the second defendant and third defendant which have gone to discharge the bank loan shall have to be paid back their moneys. The indebtedness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... global tender process within two weeks before the commissioner appointed by the court. The commissioner will give appropriate directions to the auctioneers that he may choose from out of persons that may be suggested by the parties for the conduct of the sale within a period of two months and for discharge of loans of parties. The receiver shall hand over the property to the successful purchasers subject to the direction of the learned single judge. (h)The amounts paid by the fourth and fifth defendants, which have gone to discharge the loan of the first defendant-bank, will carry simple interest at 14 per cent. per annum from the respective dates of loan and the amounts shall be paid from out of the sale proceeds of the theatre premises. (i)The report of the learned Commissioner will be presented before the learned single judge exercising the original jurisdiction. (j)The amount of Rs. 2.6 crores received by the second defendant under the impugned transactions shall be paid back to the seventh defendant (the theatre company). The amount will carry interest at 12 per cent. per annum from the date of receipt of the amount from M/s. Pyramid Saimira till the date of payment. (k)If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoy the benefit of the transactions for which they had advanced huge amount, they would be forced to pursue their right by availing of legal remedy for refund of the amount paid by them with interest. In such a scenario, not only the benefit of the one-time settlement would not be available to the company and its shareholders, but also the company would be embroiled in further litigations and the ultimate result would either be the same or even more disastrous. In order to avoid such disastrous consequence, the board of directors of the company, which is the plaintiff in one of the cases, has passed a resolution subject, of course, to the approval of the appropriate authorities so that the theatre complex can be sold off and the amount payable either to the bank or the fourth and the fifth defendants, as the case may be, can be repaid. The overwhelming majority of the shareholders through their counsels have also submitted that the best possible solution would be to sell off the property so that the surplus amount can be distributed among all the shareholders after meeting all the liabilities. The only objection has emanated from some of the shareholders, who represent comparati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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