TMI Blog2013 (11) TMI 493X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly, it is made explicit both in the CLA as well as DOH that prior permission of PICUP had to be taken if any attempt was made to sell any part of the goods at any time. That there was a charge created in favour of PICUP in respect of the goods is evident from the fact that EHPL itself registered the charge with ROC under Forms 8 and 13. Both the Agreement and the DOH made it clear that PICUP was a secured creditor and could enforce the hypothecation in its favour by bringing the said goods to sale - Decided in favour of petitioner. Effect of the proceedings under the SFC Act - Held that:- ETC was aware of the charge on the goods in favour of PICUP even on the date of Agreement - Agreement between ETC and EHPL having been entered without prior clearance of PICUP is not binding on PICUP - plant and machinery of EHPL were sold by it without the permission of PICUP. Therefore the sale, which was in violation of the CLA, the DOH and Clause 3 of the Agreement, was not valid - Decided against petitioner. Even if ETC paid Rs. 29.15 lacs to EHPL for purchasing its plant and machinery it cannot seek to recover the said sum from PICUP. ETC is at best in the position of an unsecured cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the winding up petition, the factory of EHPL at Sikandarabad was lying closed. ETC claims that on 14th November 2000 EHPL through Mr. V.P. Rai, its Director, entered into a verbal agreement with ETC for sale of its plant and machinery including scrap, dye blocks, crane, gantry, cables ferrous and non-ferrous, generators, electrical parts, etc. (hereafter referred to as goods ) located at the factory premises of EHPL at Sikandarabad for a sum of Rs. 32,00,000. ETC claims to have paid EHPC a sum of Rs. 15,00,000 between 14th November 2000 and 7th February 2001 as part payment of the above consideration. ETC claims that subsequently a written agreement dated 7th February 2001 was executed between the parties. A copy of the said Agreement is enclosed with the petition as Annexure-P1 (later marked as Exhibit PW1/8). 4. In terms of the said Agreement, signed by Mr. V.P. Rai as Director of EHPL (described as Seller) and Mohd. Yamin as Proprietor of ETC (described as Purchaser) the latter was to purchase the goods for a total sale consideration of Rs. 32,00,000. The Agreement noted in Clause 2 that the Seller had received Rs. 15,00,000 as an advance and part payment from the Purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was made to ETC by EHPL that a bank guarantee ( BG ) in the sum of Rs. 10,00,000 had to be furnished to the TTO. No bank was willing to issue such guarantee unless a fixed deposit ( FD ) of the like amount was placed with the bank. ETC states that as a result it paid Rs. 10.00,000 by way of cash to EHPL to enable it to get a BG issued in its favour. A receipt dated 29th June 2001, issued by Mr. V.P. Rai, has been marked as Exhibit PW1/9 in these proceedings. 8. It is contended that ETC was obliged to pay Rs. 17,00,000 after 7th February 2001 only after EHPL obtained clearances from PICUP and other creditors. However, a sum of Rs. 14.15 lacs was paid subsequent to that date as a result of a concession obtained by fraud by the company through its Director, Mr. V.P. Rai. ETC states that when the sole proprietor went to the factory at Sikandarabad to make arrangements for removal of the goods and making the balance payment of Rs. 2.85 lacs, he found the officers of PICUP and Uttar Pradesh Financial Corporation ( UPFC ). The security guards posted by prevented him from removing any goods. The officers informed that they had a charge over the plant and machinery. When Mr. V.P. Rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and building of the respondent company. In the interest of justice and to safeguard the interest of the petitioner, the applicant PICUP is permitted to complete the sale of the company s land and building as prayed in this application subject to deposit of a sum of Rs. 30,00,000 in this Court within eight weeks from today. The amount so deposited may be invested in a short term fixed deposit by the Registrar of this Court pending further orders. With the consent of the parties the date fixed i.e. 16th May 2002 is cancelled. List on 31st July 2002. Dasti to the counsel for the applicant. 11. On 31st July 2002, the following order was passed: It is confirmed that the property in question has been sold. Learned counsel for the Petitioner states that the Bank draft No.039998 dated 25.7.2002, drawn on Bank of Patiala, Branch Code 5-643 SBPLucknow (PICUP) in the sum of Rs. 30,00,000 in the name of Registrar of Delhi High Court has been brought to the Court. He is directed to deposit it with the Registrar of this court in the course of the day. Adjourned to 25.10.2002. 12. On 11th December 2002, the Company Court passed a detailed order in which, after noting the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 17. Another formal order to that effect was passed on 4th February 2005. It was at that stage that CA No. 477 of 2005 was filed by ETC under Section 446 (2) (b) of the Act for a direction to PICUP to pay a sum of Rs.71,00,000 received by it from selling the goods of EHPL together with 25% addition being the profit payment to have been made by the purchaser from PICUP minus Rs. 29.15 lacs already deposited by it. In the alternative, it was prayed that the Court may grant ETC such lesser relief as it may be found entitled to. The contention of ETC in its application was that it was a contingent and prospective creditor of EHPL for a sum of Rs. 29.15 lacs being the price of the goods which had been agreed to be sold to it for a sum of Rs. 32,00,000. ETC claimed to be bonafide purchaser ready to pay the balance sum of Rs. 2.85 lacs for removal of the goods. ETC further claimed that it was also a secured preferential creditor of EHPL and had a right over the goods in the property which had passed to it. It was contended that in any case ETC had a lien over the goods and that the charge was not inferior to any other charge. It was contended that the sale conducted by PICUP was w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufficient to dispose of the case. However, if while disposing of the main petition the Company Court felt that the issues were required to be framed or the parties should lead evidence, it would so be directed. Thereafter, the Company Court by a detailed order proceeded to dispose of CA No.477 of 2005. It was held by the Company Court that ETC was fully aware that the goods it wanted to purchase were already charged and secured with PICUP and that unless clearance is obtained from PICUP, EHPL could not sell the goods even under the Agreement dated 7th February 2001. Further, since PICUP never entered into an agreement with ETC, there was no breach of agreement by PICUP. Further, the OTS dated 5th March 2001 was clear and unequivocal. EHPL could not have sold the assets before making the down payment of Rs. 9,87,251.99. The payment of Rs. 3,30,000 by ETC to PICUP did not give rise to any equity in its favour. The balance of Rs. 11.70 lacs was never made to PICUP. Further, PICUP could not be held liable for the fraudulent actions of Mr. V.P. Rai. In the circumstances, the Company Court by the order dated 4th October 2006 directed ETC to deposit Rs. 29.15 lacs in the Court within a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant, the DB held that the refusal of the Company Court to frame issues amounted to a material illegality affecting the disposal of the case on merits. It was further held that the Company Court had erred in coming to the conclusion that since PICUP had no privity of contract with ETC, it could not be held responsible for any acts of omission or commission by EHPL. It was held that under the provision of the SFC Act PICUP could be liable, even if it was only to the extent that the assets and property of the Company under liquidation came into its hands and subject to its disposal. Consequently, the judgment dated 4th October 2006 of the Company Court was set aside and the matter was remitted to the Company Court for disposal in accordance with law. The following directions were issued: The claim of the appellant will be posted for framing of issues and recording evidence followed by adjudication on the basis of the evidence adduced at the trial by the parties. The amount of Rs. 29.15 lacs, deposited by the appellant in this Court, shall be kept in a fixed deposit to earn maximum interest for a period of one year to enure to the benefit of the successful party. 23. It ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became the owner thereof before PICUP converted its hypothecation into a pledge? O.P.P. 13. If the property in goods did not pass to the Petitioner whether the consideration of Rs. 29.15 lacs paid by the Petitioner to the company in liquidation was trust money and did not become the property of either the company or PICUP and therefore, the Petitioner is entitled to the same? 14. What is the effect of Petitioner paying Rs. 3.30 lacs by a bank draft to PICUP? O.P.P. 15. Whether the Petitioner is entitled to recover the loss of profit @ 25% from PICUP? O.P.P. 16. Relief. No further issue arises or is claimed by any of the parties. The petitioners may file affidavit by way of evidence within six weeks. List the matter before the Joint Registrar concerned for further proceedings including the Exhibition of admitted documents etc. on 7th September, 2009. The matter may be placed before this Court for cross-examination on 20th November, 2009. 25. Thereafter, the affidavit dated 6th May 2010 by way of evidence of Mr. Mohd. Shah Alam, son of Mr. Mohd. Yamin, was filed. He was crossexamined on 19th October 2010. In view of the fact that issues were framed, CA No.1181 of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent it was informed by EHPL. It was accordingly prayed that a sum of Rs. 29.15 lacs deposited with the Court together with interest accrued thereon should be released to ETC. Submissions of counsel for PICUP 28. Appearing on behalf of PICUP, Mr. Sandeep Aggarwal disputed the bonafides of ETC. He stated that the transactions evidenced by the so-called Agreement dated 7th February 2001 demonstrated the collusion between ETC and EHPL. He submitted that the Agreement was not between EHPL and ETC but between Mr. V.P. Rai and Mr. Mohd. Yamin in their personal capacities. He submitted that on 22nd June 2000 a notice invoking Section 29 of the SFC Act was issued to EHPL by PICUP and, therefore, the proceedings under the SFC Act commenced on that date much prior to the Agreement dated 7th February 2001. As on that date, the principal amount owing to PICUP was Rs. 65,81,678.97, the interest was Rs. 56,75,242.00 and the interest tax Rs. 11,23,156.97. Mr. Aggarwal questioned the authenticity of the receipts produced by ETC in support of its plea that Rs. 29.15 lacs has been paid to EHPL. He reiterated that PICUP was nowhere concerned with any private arrangement between ETC and EHPL. Ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of the fixed assets of EHPL, on pari passu basis, in favour of the lenders. The fixed assets, both existing and future, included land, building, plant and machinery etc. Clause 14 creates a pari passu charge on the assets. Clause 19 concerns particular affirmative covenants . Clause 19(d) requires EHPL to ensure that during the currency of the loan, all fixed assets and other assets offered as security would be insured and that until repayment of the loans the amounts shall be treated as a charge on the properties offered as securities. 32. On the same date, i.e., 24th January 1990, a common DOH was executed by EHPL in favour of PICUP. Inter alia, it was agreed under Clause 7 that EHPL would put up at appropriate and conspicuous places in its premises boards which would indicate that the goods were hypothecated to PICUP and it shall be deemed whenever so required that the said property stands hypothecated with PICUP and UPFC. Clauses 8, 9 and 10 of the DOH read as under: 8. That the PICUP and UPFC shall at all times be and is hereby authorised, as if in absolute possession and without notice to the Borrower by its servants and with or without workmen to enter any part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and to take charge of them. EHPL was obliged to afford every facility for placing the hypothecated property in their exclusive possession and control. The premise of this clause was that PICUP and UPFC were already in constructive possession and could take actual physical possession of the hypothecated goods at any time. Clause 21 read as under: 21. The Borrower shall not, without the written consent of the PICUP and UPFC create in any manner any charge, lien or other encumbrance on the security given to the PICUP and UPFC in respect of such advance or create any interest in such security in favour of any other party or person. 34. Clause 38 permitted PICUP and UPFC to take recourse to the provisions of U.P. Public Moneys (Recovery of Dues) Act, 1972, besides the SFC Act. The schedule to the DOH set out in detail the complete description of the entire assets in the factory of EHPL at Sikandarabad. On 7th February 1990, EHPL registered with the ROC, in Forms 8 and 13 under Sections 125 and 130 of the Act, the respective charges in favour of PICUP and UPFC of the moveable assets in terms of the DOH and the mortgage of immoveable assets by deposit of title deeds. 35.1 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of security would be "considered to be in the exclusive possession and under the exclusive control of the bank in such a manner that such possession and control shall be apparent and indisputable . This clearly changed the relationship between the assets and the company and on the execution of the agreement, the company continued to hold the assets not in its capacity as its owner but as a trustee for the bank. This was enough to constitute constructive delivery of the pledged goods to the bank, even though actual delivery was never made. The constructive delivery coupled with the agreement conferred on the bank special property in the pledged goods and the requirements of a valid pledge were, therefore, fully satisfied. In any event, the mortgage of movable property is a recognised form of hypothecation and such hypothecation confers a good title upon the persons in whose favor it is made even in the absence of possession and the law recognises the transaction as security and equity gives effect to it. AIR 1969 AP 201 (sic) and AIR1966 Cal 405. It has been recognised that such a transaction is not only valid but is customary throughout the country and even resorted to by banks wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very coupled with the agreement confers on the bank a special property in the pledged goods . (iii) The mortgage of movable property is a recognised form of hypothecation. Such hypothecation confers good title on the person in whose favor it is made even in the absence of possession. It can be validly enforced in law. 39. Although the hypothecation as a legal concept is not explicitly recognized under the ICA, the said legislation is not exhaustive of all possible arrangements that the financial institutions may have in securing the moneys advanced by them. Section 29 of the SFC Act recognizes the hypothecation as a possible means of enforcing liability and reads as under: 29. Rights of Financial Corporation in case of default. (1) Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any instalment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Financial Corporation shall have the right to take over the management or possessio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y time. That there was a charge created in favour of PICUP in respect of the goods is evident from the fact that EHPL itself registered the charge with ROC under Forms 8 and 13. Both the Agreement and the DOH made it clear that PICUP was a secured creditor and could enforce the hypothecation in its favour by bringing the said goods to sale. This answers Issues 1 to 4. The effect of the proceedings under the SFC Act 41. The consequence of PICUP invoking Section 29 of the SFC Act by its notice dated 22nd June 2000 requires to be discussed at this stage. Two facts are important to note while examining the question whether PICUP was obliged to abide by the winding up proceedings and whether the sale by it would be subject to the orders of the Company Court. One is that the process under the SFC Act was invoked much before the Agreement dated 7th August 2001 was entered into between Mr. Rai and Mr. Yamin. The second fact is that PICUP took the proceedings under the SFC to their logical conclusion and sold the assets hypothecated in its favour even before notice was issued in the winding up petition. 42. In Shivalik Agro Poly Products Ltd. v. Disco Electronics Ltd. AIR 2002 Delhi 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: 8. Section 29 of the SFC Act stipulates that if any industrial concern is under liability to the financial corporation under an agreement and makes default in repayment of loan, it empowers the financial corporation to take over the management or possession or both of the industrial concern and realize the property pledged, mortgaged, hypothecated or assigned to financial corporation. Section 31, inter alia, provides that without prejudice to the provisions of Section 29 of the SFC Act any authorised officer of the financial corporation, may apply to the District Judge for an order for the sale of the property pledged/mortgaged/hypothecated/ assigned, etc. Section 46B is a non obstante clause and stipulates that provisions of the SFC Act and of any rule or orders made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, etc. .. 13. . However, for the purpose of ascertaining the rights between the financial corporations under Section 29 of the SFC Act and other secured creditors under Sections 529 and 529A of the Act, it is the actual date of the winding up order which would be determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 529 and 529A of the Act. As explained in Sneh Contracts (P) Ltd. v. Tara Cements Pvt. Ltd. (supra), the doctrine of relation back cannot be applied to such situations. In any event, where the SFC has brought the assets hypothecated in its favour to sale even before the winding up petition is entertained by the Company Court, and long before the actual order of winding up is passed, the SFC can be sued by other creditors for their claims but only to the extent of the funds of the company under winding up that are available after satisfying the claims of the secured creditors and workmen. 46. As far as the present case is concerned, there can be no manner of doubt that the invocation by PICUP of Section 29 of the SFC Act took place long before the agreement was entered into on 7th February 2001 between Mr. Rai, on behalf of EHPL and Mr. Yamin, on behalf of ETC. Apart from the self-serving affidavit of Mr. Alam on behalf of ETC there is nothing to prove the so-called verbal agreement of 14th November 2000 between ETC and EHP. The written Agreement was entered into on 7th February 2001 at which time, as is plain from Clauses 3 and 4 thereof, ETC was aware of the charge in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of his son, Md. Shah Alam. PW1/2 Photocopy of DD dated 14th November 2000 issued by Allahabad Bank to PICUP in the sum of Rs. 3,30,000. PW1/3 Copy of the handwritten receipt on the letterhead of EHPL signed by Mr. V.P.Rai acknowledging receipt of DD in the sum of Rs.3.30 lacs and cash of Rs. 2.70 lacs on 14thNovember 2000 and stating that the balance payment is Rs. 25 lacs. PW1/4 Photocopy of DD drawn on Allahabad Bank in favour of TTO, Sikandarabad in the sum of Rs. 4,00,000. The handwritten note of Mr. V.P. Rai dated 26th December 2000 of receipt of above DD as well as Rs. 15,000 by way of cash is appended below the photocopy of the DD. PW1/5 Photocopy of DD dated 7th February 2001 drawn on Allahabad Bank for a sum of Rs. 1,00,000 in favour of Trade Tax A/c EHPL. PW1/6 Photocopy of DD dated 7th February 2001 drawn on Allahabad Bank for a sum of Rs. 1,00,000 in favour of SBI, A/c EHPL. PW1/7 Handwritten receipt dated 7th February 2001 on the letterhead of EHPL signed by Mr. V.P. Rai acknowledging receipt of DD for a sum of Rs. 1,00,000 in favour of SBI DD in the sum of Rs. 1,00,000 in favour of TTO and a receipt of Rs. 2.50 lacs by way of cash. PW1/8 Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 7th August 2001. Importantly by that date, in terms of the CLA and DOH, constructive possession of the goods had passed to PICUP. A charge on the goods had been created in its favour. The charge had been statutorily registered with the ROC. Therefore as on 7th August 2001, the date of the Agreement, EHPL could not have either delivered possession of or conveyed the property in the goods to ETC. Even in terms of Clause 3 of the Agreement the parties acknowledged that the sale was not complete till prior clearance was obtained from PICUP. These factors negate the plea of ETC that the property in goods passed to it under Section 20 SGA as on 7th August 2001. 53. At this stage it must be noted that even after sale of the assets of EHPL, PICUP was unable to recover the entire amount owing to it as on 22nd June 2002. The sale consideration of Rs. 71 lacs covered the interest amount and only a part of the principal amount as on that date. For the remaining amount, PICUP itself filed a claim before the OL. Therefore, even if a claim is filed by ETC with the OL as unsecured creditor, that claim can be met only from the funds available with the OL independent of the realization of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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