TMI Blog2015 (11) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... workmen would not disentitle them to a pari passu charge or leave a secured creditor free to deal with a security as he chooses. The circumstances of the present case leave little doubt that the sale itself, without the leave of the court and given the manner in which it was effected, was unlawful. Thus following Order would meet the ends of justice: a) The Deed of Assignment dated 14.03.2012 between Shashi Gopal and MMPL in respect of the hypothecated securities is set aside as illegal and void. b) MMPL shall on or before 2nd December,2015, deposit a sum of ₹ 25 lakhs with the Official Liquidator, being the difference between the amount already received by MMPL from Sony Music (₹ 1.75 crores) and the amount paid by MMPL to Shashi Gopal (₹ 1.5 crores). c) The Official Liquidator shall complete the adjudication of the claims of the workmen of the Company in Liquidation within a period of sixteen weeks from today. In doing so, the Official Liquidator shall also consider whether the claims are in fact by persons who are entitled to priority as workmen under Section 529-A of the Companies Act. He shall also verify the amounts paid by Shashi Gopal to UBI to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exdirector of Magnasound India Ltd. ( MSIL ), the Company (In Liqn.), in favour of one Magnasound Media Pvt. Ltd. (hereinafter MMPL ) is illegal and void. The Official Liquidator is also seeking other consequential directions including, inter-alia, a direction to MMPL and Sony Music Entertainment Pvt. Ltd. (hereinafter Sony Music ) to hand over the documents and assets which were the subject matter of the purported Deed of Assignment and also for directions to restrain MMPL and Sony Music from dealing with these assets. 2. It is the Official Liquidator s case that Shashi Gopal, in purported exercise of his rights as a Subrogee, has after the winding up order sold assets belonging to the Company (In Liqn.) without the leave of this Court, without valuation and without inviting public offers to a related party at a price randomly fixed by the Assignor (Mr. Shashi Gopal) and the Assignee (MMPL). It is submitted on this basis that the Assignment is void as contrary to Sections 536(2) and 537(1)(b) of the Companies Act, 1956. 3. The Company in liquidation had sometime in the late 1990s, availed of certain facilities from Union Bank of India (hereinafter UBI ). In this connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 150 lakhs. In the event of there being a surplus over and above ₹ 150 Lakhs, the surplus was to go to the bank, while any shortfall was to be made good by the Guarantors. 6. The Compromise Decree does not seem to have been fully complied with as a result of which the Debt Recovery Tribunal directed issuance of a Recovery Certificate on 21.1.2008 for the balance amount of ₹ 212 lacs which remained unpaid. The Recovery Certificate in the sum of ₹ 212 lacs was thereafter issued on 30.4.2008. 7. On 15.5.2008, Shashi Gopal (an Ex Director of the Company in Liquidation and a guarantor) filed a Misc. Application before the DRT, inter alia, for purchase of the assets of the Company in Liquidation. The OL filed a reply dated 27.5.2008 in this Misc. Application where he noted that the assets may be sold by public auction only in one lot after publication of necessary sale notice and not by way of private treaty at any cost. On 20.6.2008, the said Shashi Gopal filed an application for withdrawal of his Misc. Application. The Misc. Application was thereafter disposed of as withdrawn. 8. Meanwhile, on 24.3.2009, the DRT issued a Warrant of Attachment in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.1.2010. 11. Meanwhile, by a letter dated 6.1.2010 addressed to the OL, Mr. Shashi Gopal in his capacity as a subrogee claimed that all royalties if any payable by music societies, Phonographic performance Ltd (PPL) and Indian Performing Rights Society LTD (IPRS) are payable to me from 1996 onwards in respect of the use of Masters of Magnasound India Ltd if they have not already been paid. By this letter, Mr. Shashi Gopal sought a no objection letter from the OL in this regard. By his reply dated 21.1.2010, the OL fixed a meeting on 25.1.2010 to discuss Mr. Shashi Gopal s role as a Subrogee and the issue regarding the collection of any royalties payable, towards the use of the Masters of the Company in Liquidation. By this letter, the Subrogee was expressly told to maintain status quo . Mr. Shashi Gopal did not attend the meeting so fixed. 12. Consequently, the OL addressed another letter dated 28.1.2010 fixing a meeting on 9.2.2010. On 10.2.2010 the said Mr. Shashi Gopal addressed a letter to the OL noting that he wished to withdraw his letter dated 6.1.2010 along with a request that no meeting be fixed in this regard. On 9.7.2010, a winding up order was passed in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this meeting, these representatives undertook not to deal with the proposed acquisition/ licence in respect of the assets mentioned in the public notice dated 11.4.2012 . 15. This was followed, however, by an Advocates letter dated 2.5.2012 where Sony Music purported to claim that it was satisfied beyond reasonable doubt that the title of MMPL with respect to the assets mentioned in the public notice including the repertoire is free, clear and marketable as well as free from all encumbrances. The letter went on to assert that the Company in Liquidation was not the owner of the said repertoire and that the undertaking given by the representatives of Sony Music at the meeting held on 24.4.2012 was wrongly taken and therefore stood withdrawn . By his reply dated 14.5.2012, the OL recorded that the attempt being made by Sony Music to withdraw their undertaking was ill conceived and called upon them to maintain status quo until the rights, if any, of MMPL in the catalogue/repertoire of the Company in Liquidation was ascertained. 16. By their Advocates reply dated 6.6.2012, Sony Music claimed that UBI had disposed of the repertoire with the prior consent of the OL as record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter of law be so entitled. Any reference in the Deed of Subrogation to his being so entitled is clearly of no legal effect. This is on account of the fact that a Bank cannot assign its debt to a non banking entity nor can it assign a recovery certificate or the benefit of a consent decree to such an entity. In this behalf, he relied on the Judgment of the Hon ble Supreme Court in ICICI Bank Ltd. v. Official Liquidator for APS Star Industries Ltd. (2010) 10 SCC 1 (paras 29, 30 to 40 and 41 to 44). ; b) That in the present case, UBI does not appear to have done so. It has not assigned its debt, decretal or otherwise, to Mr. Shashi Gopal but has merely transferred in his favour the benefit of the securities held by them on account of his being a subrogee. This is a benefit to which Mr. Shashi Gopal would have been even 1 (2010) 10 SCC 1 (paras 29, 30 to 40 and 41 to 44). otherwise entitled by operation of law on payment being made by him in his capacity as a guarantor of amounts due from the principal debtor to the secured creditor; c) That Shashi Gopal is thus merely a Subrogee in respect of the amounts paid by him to UBI. He is in that capacity entitled to the benefit of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich have in fact been made. That being so, the subrogee was not entitled to sell the hypothecated assets by private treaty without reference to the Company Court; g) That even otherwise, a hypothecatee or pledgee is in a fiduciary position and is obligated to sell a security in such a manner as would fetch the best possible price. In support of this proposition, he relied on the Judgments of the Hon ble Apex Court in Lallan Prasad v. Rahmat Ali Anr. AIR 1967 SC 1322 (para 29); Jaya Singh Dnyanu Mhoprekar Anr. v. Krishna Babaji Patil Anr. AIR 1985 SC 1646 (para 9); h) That the law requires him to adopt every precaution in this respect including obtaining a valuation and selling the property by public notice. In this connection, he placed reliance on the Judgments of the Hon ble Apex Court in Gajraj Jain v. State of Bihar Ors. (2004) 7 SCC 151 (paras 12, 14); FCS Software Solutions Ltd. v. LA Medical Devices Ltd. Ors. (2008) 10 SCC 440 (paras 33, 36); i) That any sale by a fiduciary to himself or a related party is in any event clearly void. In support of this contention, he relied on the Judgments of the Privy Council and the Apex Court in Achi Thayar Ammal Ors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position , he relied on the Judgments of the Hon ble Supreme Court in The Commissioner of Gift Tax, Madras v. N. S. Getty Chettiar 1971(2) SCC 741, 746 (para 18); Empress Mills, Nagpur v. Municipal Committee, Wardha AIR 1958 SC 341, 348; Union of India v. Sankalchand Himatlal Seth AIR 1977 SC 2328, 2341, Utkal Contractors and Joinery Pvt. Ltd. Ors. v. State of Orissa and Ors. (1987) 3 SCC 279, 288-290 ; the Judgment of the House of Lords in Attorney General v. H.R.H. Prince Ernest Augustus of Hanover [1957] 1 All E.R. 49, 53 and the definition of the word disposition in Black s Law Dictionary (9th Ed. West 2009) and the New Oxford English Dictionary of English (Clarendon Press 1998); b) That a secured creditor is entitled to stand outside the winding up and to enforce his security without the leave of the Company court. He relied in this behalf on the Judgments in M.K. Ranganathan Anr. v. Government of Madras Ors. [1955] SCR 374, 383-87, 390-91; MSFC v. Official Liquidator, Bombay AIR 1993 Bom 392, paras 6-22; Iftex Oil Chemicals Pvt. Ltd. v. Official Liquidator of M/s. Dhake Dyes Chemicals Pvt. Ltd. [1999] 101(2) Bom. L.R. 32, and SICOM v. MSFC (1988) 64 Com. Cas. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive; 21. Mr. Chetan Kapadia, Learned Counsel on behalf of Shashi Gopal, while adopting the arguments of Dr. Tulzapurkar, also contended, by way of written submissions, that the condition of the master tapes and the cassette/CD photo covers which were originally handed over to the Official Liquidator in good condition, were received by the subrogee in a poor condition. He further contended that the subrogee was therefore obliged to spend considerable time and money to restore the master tapes and photo cards to render them usable. He further contended that in any event, even if the hypothecated securities were capable of fetching more than ₹ 1.5 crores and had been sold by UBI under the consent decree in its favour, such overflow would have enured to the benefit only of UBI and not the workmen. 22. Mr. Amit Jamsandekar, Learned Counsel for Sony Music, submitted that his client had bonafide acquired rights from MMPL. He further urged that after acquisition of the rights, Sony Music had invested tremendous amount of money, skills, labour and resources to commercially exploit the copyright acquired by them. On this basis, he contends that it would be inequitable to set as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in MK Ranganathan v. Govt. of Madras (supra) that a secured creditor is entitled to stand outside the winding up and enforce his security by sale without reference to the OL or the Company Court pre-dated the introduction of Section 529A which places workers on par with secured creditors and is no longer good law. This position has been recognized in the judgment of the Hon ble Supreme Court in International Coach Builders (supra) and several judgments that follow it. As would be evident from the paragraphs reproduced hereinbelow, the Hon ble Supreme Court in International Coach Builders (supra) has in no uncertain terms recognized that after introduction of Section 529A, a secured creditor would be entitled to enforce its security by sale only with the consent of the OL and under the directions of the Company Court: 14. It is contended on behalf of the SFCs that they are secured creditors and as such entitled to exercise their rights under the mortgage as also the statutory rights conferred on them by Section 29 of SFC Act without interference of courts. Hence,it is urged that the SFCs can sell the mortgaged and charged properties without reference to any court, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions in Maharashtra State Financial Corporation v. Ballarpur Industries Limited MANU/MH/0061/1993 : AIR1993Bom392. 17. As a result of the proviso added in Section 529, the security of every secured creditor is deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen s dues (called workmen s portion, as defined in Sub-section (3) therein. It is further provided that, where the secured creditor, instead of relinquishing its mortgage and proving his debt, opts to stand outside the winding up proceedings and realise his security, the Official Liquidator shall be entitled to represent the workmen and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official Liquidator for the discharge of workmen s dues. It is true that even the amended proviso does not give the Liquidator an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates a pari passu charge in favour of the workmen to the extent of their dues and makes the Liquidator the representative of the workmen to enforce such a charge. By reason of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a mortgagee and a pari passu charge-holder over the same security for realising the security. The realization of the security can only be done by both the charge-holders joining and realising the security simultaneously. If a sale takes place, it can only be simultaneously for recovery of the claim of all pari passu charge-holders and sale proceeds are required to be divided proportionately in the same proportion as their dues. 23. In support of their respective contentions, parties have referred to and relied upon judgments of different High Courts. The view taken by the commends itself to us. The Division Bench of the said High Court pointed out that, like a secured creditor, the official liquidator as a pari passu charge holder cannot independently bring the security to sale ignoring the secured creditor. He must, therefore, either obtain concurrence of the secured creditor for sale and take the Court s sanction, or he can apply for sanction of the Court after notice to the secured creditor. In either event, the Court while granting sanction may impose appropriate condition and give directions regarding the conduct of the sale, the fixing of the reserve bid, acceptance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l liquidator representing workmen for the pari passu charge in their favour under the proviso to Section 529 of the Companies Act, 1956. 3. If the official liquidator does not consent, the SFCs have to move the Company court for appropriate directions to the official liquidator who is the pari passu charge holder on behalf of the workmen. In any event, the official liquidator cannot act without seeking directions from the Company Court and under its supervision. 25. Thus, after the introduction of Section 529-A which gave workers a pari passu charge along with secured creditors in mortgaged or hypothecated securities in a winding up, it is no longer open for a secured creditor to contend that it is entitled to enforce its securities without reference to or the leave of the Company Court. 26. It was then contended on behalf of MMPL that the Official Liquidator having failed to adjudicate the claims of the workmen, no pari passu charge in their favour could be said to exist which would limit the right of the subrogee to deal with the hypothecated securities. This argument is clearly misconceived. The mere fact that the Official Liquidator has not yet adjudicated the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out reference to the Company Court. 29. The fact that the Official Liquidator did not reply to the letter dated 9.5.2011 by which Shashi Gopal purported to inform the OL that he intended to exercise a power of sale in respect of the hypothecated securities is also of no consequence. The Official Liquidator has adverted to the circumstances in which his Office failed to reply to the said letter. Even otherwise, a secured creditor is not entitled to rely on the silence of the Official Liquidator to exercise a unilateral right of sale without reference to the Company Court. The Official Liquidator is merely an officer of the Court and acts under its directions. If the letter dated 9.5.2011 had come to his notice at the time of its receipt, he would have had little choice but to place the matter before the Company Court by means of a report for further directions. On such a report being placed, this Court would have had the opportunity to consider the question and to issue appropriate directions to safeguard the interests of the workers and other creditors of the Company. In the absence of any response from the Official Liquidator, Shashi Gopal as the subrogee was duty bound to move ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, it is an admitted position that there has been no valuation prior to sale nor were offers invited from the public. The sale was effected, without the leave of the Company Court, by private treaty in favour of a company which appears to belong to the same group as the Company in Liquidation. Mr. P.M. Sudheer, a director of MMPL who has sworn affidavits on its behalf, appears to have been employed as the Manager (Accounts) of the Company in Liquidation. He has in fact made a claim before the OL in that capacity for his outstanding dues. Given these facts, even if no leave were required to be obtained by the subrogee prior to the sale of the hypothecated securities, the sale in the present case was infirm and open to challenge by the OL. 32. The question then arises as to whether the sale is liable to be set aside under Section 536(2) or 537(1)(b) of the Companies Act. It has been contended on behalf of Mr. Shashi Gopal and MMPL that any sale of the assets of a Company in Liquidation by a third party would not fall within the ambit of Section 536(2) and that the section would apply only to cases of sale of its assets by the company itself after the commencement of win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise void, the contention advanced on behalf of Mr. Shashi Gopal that the OL has not alleged undervaluation in the sale is entirely misconceived. The burden does not lie upon the OL to do so. In any event, it is self evident that the assets have been undervalued. The agreements between MMPL and Sony Music belatedly disclosed in the course of the hearing would themselves show that the assets were undervalued. While the sale by Shashi Gopal in favour of MMPL of the entire repertoire was for a sum of ₹ 1.5 crores, the agreements executed by MMPL in favour of Sony Music for part of the repertoire for a limited period is for a sum of ₹ 1.75 crores without even taking into account any revenue overflow in which MMPL was entitled to share. 35. It has been urged on behalf of Shashi Gopal in his Written Submissions (though not on affidavit) that the Master tapes were handed over to the OL in good condition when he took over the assets of the Company in Liquidation while their condition was very poor when they were handed over to Shashi Gopal pursuant to directions of the DRT. He further claims that he was constrained to devote considerable time and money to repairing/reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid off. Apart from these considerations which make the offer unacceptable, it is also curious that the offer proceeds from MMPL rather than the subrogee. If anything, this itself is a tacit admission that the amount of ₹ 1.5 crores that was paid by MMPL for the hypothecated securities was an undervaluation. 38. That apart, the duty of the Official Liquidator and the Company Court is to ensure that the interest of all stakeholders including the workers and creditors, both secured and unsecured, are protected. Further, the Deed of Subrogation would appear to indicate that apart from the hypothecated securities, there are other securities as well including a bungalow at Lonavala which have been handed over to Shashi Gopal in his capacity as a subrogee. It is entirely conceivable that the amount to which the subrogee is entitled would not exceed the value of all of these securities. It is therefore imperative that each security fetch the best possible price. The manner in which the repertoire of the company in liquidation has been sold by the subrogee was however not designed to secure this outcome. 39. The circumstances of the present case leave little doubt that the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that report, this Court shall consider the amount, if any, that Shashi Gopal would be liable to bring in to meet the amounts due to the workmen in such a distribution. e) Sony Music shall render accounts to the Official Liquidator of the revenue generated by it from the exploitation of the rights which are the subject matter of the Agreements in its favour. Any overflow which was payable to MMPL under the terms of the said Agreements shall be distributed pari passu among Shashi Gopal as a subrogee and the workmen of the Company in liquidation. f) On expiry of the tenure of the Agreements in favour of Sony Music; MMPL, Shashi Gopal and Sony Music shall hand over forthwith to the Official Liquidator all material and documents in respect of the repertoire which constitutes the hypothecated securities including but not limited to Masters, Link Agreements and publicity material. The Official Liquidator shall thereafter take steps under the directions and supervision of this Court to sell and/or license the rights which constitute the hypothecated securities. Any revenue generated by such sale/exploitation shall be distributed pari passu among Shashi Gopal and the workers of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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