TMI Blog2018 (1) TMI 1223X X X X Extracts X X X X X X X X Extracts X X X X ..... 855.38/-.OL is yet to call for claims. There is, therefore, every likelihood that there may be other unsecured creditors whose claims qua Neptune may be outstanding. The impugned sale transaction were not, as held by the learned Single Judge, either carried out to benefit Neptune or, were transactions, which helped Neptune to conduct its day-to- day operations. Therefore, for all these reasons, we are disinclined to interfere with the impugned order. Accordingly, the appeal is dismissed. - Original Side Appeal No.348 of 2013 - - - Dated:- 22-12-2017 - MR. RAJIV SHAKDHER AND MR. N. SATHISH KUMAR, JJ. For The Appellant : Mr.T.V.Seshadri, SC For The Respondent : Mr.S.R.Sundar, Mr.V.Vijayachandran for M/s.Jayachandran Associates JUDGEMENT RAJIV SHAKDHER, J. 1. In this appeal, the only question that we are required to deal with is whether or not the learned Single Judge was right in dismissing the application filed by the appellant under Section 536(2) of the Companies Act, 1956 (hereafter referred to as the 1956 Act ) to validate the sale of the property in its favour by the company in liquidation. The property in issue is located at No.5/259, Old M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets. 4.4. In addition to clause 3, there were three more clauses incorporated in the loan agreement. These were clauses 4, 5 and 6. These clauses also provided that Neptune will, without hesitation provide the necessary securities in terms of its assets to the satisfaction of VGP, in consideration of dues payable. Likewise, clause 5 provided that Neptune will discharge the entire loan by means of sale of its assets, if necessary. Lastly, clause 6 provided that Neptune will execute separate agreements at the time of receipt of the loan amount. 4.5. As agreed, VGP and Neptune, did enter into agreements as and when amounts were loaned to the latter. The four loan agreements which were executed between VGP and Neptune are thus dated: 01.01.1996, 30.01.1996, 07.02.1996 and 10.01.1997. 4.6. Under the first loan agreement dated 01.01.1996, a sum of ₹ 10,00,000/- was advanced by VGP to Neptune. The loan carried an interest at the rate of 28% p.a., payable quarterly at the end of every quarter. Furthermore, the amount loaned was secured by issuances of personal guarantees of the Managing Director and Director of Neptune i.e Mr.Pradeep Ranganathan and S.N.Natarajan respectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 433(e) and (f) of the 1956 Act. 6.2. Therefore, quite clearly prior to the execution of the 4th loan agreement, which was as alluded to above, executed on 10.01.1997, winding up proceedings had already commenced qua Neptune. 6.3. For the sake of completion of the narrative, it may be relevant to note that the aforementioned winding up petition was in the first instance allowed by the Company Judge on 13.03.1998; an order, to be only set aside in appeal by the Division Bench vide its judgement dated 09.06.1998, passed in O.S.A.No.85 of 1998. The ground on which winding up order passed by the learned Single Judge was set aside by the Division Bench was that the said order had been passed without publication of an advertisement, as required under the provisions of Rule 24 read with Rule 96 of the Companies (Court) Rules, 1959. Consequently, the matter was remanded to the learned Company Judge, whereupon, a paper publication was effected on 21.11.1998. 6.4. Thereafter, once again, the learned Single Judge passed an order of winding up on 10.03.1999. This time around, the Division Bench vide its judgement dated 14.07.1999, confirmed the order of the learned Single Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claration which is apparently executed on a ten rupees stamp paper, inter alia, sets out that an equitable mortgage had been created to secure a loan of ₹ 65,20,000/- extended by VGP in favour of Neptune on various dates. 7.1. The declaration further states that the immovable properties were mortgaged as first charge in favour of VGP to secure the said loan amount. 7.2. In this behalf, the declaration went on to make a reference to the four loan agreements adverted to above by us i.e. agreements dated 01.01.1996, 30.01.1996, 07.02.1996 and 10.01.1997. The point to be noted here is that this declaration which adverted to the fact that an equitable mortgage had been created contradicted the mortgage deed of 27.01.1997. 7.3. This apart, on record are also copies of Form-8 and Form-13, apparently, filed with the Registrar of Companies (ROC). Form-8, was evidently, filed by Neptune to create a charge on the subject property. Neptune in this form, against the query, pertaining to, date and description of the instrument creating charge, has stated as follows: 31.01.1997: DEPOSIT OF TITLE DEEDS (NO AGREEMENT EXECUTED). 7.4. In so far as Form-13 is concerned, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed dated 11.02.1999, was 4359 Sq. Ft., which is, as indicated above, described in Schedule 'B'. 8.2. In the recitals, the reason for sale are indicated. The reason given is that, since Neptune was unable to pay the sum of ₹ 5,00,000/-, Schedule 'B' properties were being sold to VGP. Furthermore, in the recitals, a reference to the aforementioned mortgage deed was given and it was clearly stated that Neptune had mortgaged, schedule-A property which comprises of schedule-B property in favour of VGP. 8.3. It may be noted that in one section of the document, the date of the mortgage deed was given as 29.01.1997, while in the other, the correct date was given, which is, 27.01.1997. 8.4. In so far as the second sale deed was concerned, i.e. sale deed dated 16.02.1999, the recitals are identical to sale deed dated 11.02.1999. The only difference between the two sale deeds is that VGP was sold under sale deed dated 16.02.1999, a parcel of land described as schedule 'B' property, which ad-measured six (6) grounds and 1404 sq.ft, situate at Old No.148/New No.135, Mootaikaran Chavadi, Okkiam Thoraipakkam Village, Tambaram Taluk, Kancheepuram District, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding up order had been passed, without examining as to whether or not the sale could be validated. 9.4. The Division Bench, thus, while referring to the provisions of Section 536(2) of the 1956 Act, remanded the matter, as indicated above, to the learned Single Judge. The Division Bench also noted the fact that though the application on which orders have been passed by the learned Single Judge related to delivery of possession, what required examination by the learned Single Judge was whether or not the transactions ought to have been validated. 9.5. Upon remand, the learned Single Judge allowed C.A.No.1275 of 1999 and, went on to direct that the possession of subject property be handed over to VGP. This order was passed on 09.08.2005. This time around, it was the predecessorin- interest of ARCIL which preferred an appeal with the Division Bench. This appeal was filed on 17.08.2005 and, was numbered as: O.S.A.No.201 of 2005. 9.6. The Division Bench, however, went on to sustain the order of the learned Single Judge, whereby, C.A.No.1275 of 1999 was allowed. The order in this behalf was passed by the Division Bench on 09.09.2008. 9.7. It is in this background, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel referred to as the Master Loan Agreement), clearly stipulated that Neptune was required to provide security in the form of its assets, both present and future, in respect of monies which would be advanced to it. Therefore, it was inbuilt in the arrangement arrived at between VGP and Neptune that as and when loan amounts were disbursed and on demand by VGP, security in the form of immovable property would be offered by Neptune. (ii) The learned Single Judge also failed to take note of the fact that the first three loan agreements were executed prior to the date of institution of the winding up petition. Since, the subject property was bought by Neptune only on 16.02.1996, Neptune could mortgage the same only thereafter and, thus, after the 4th loan agreement dated 10.01.1997 was executed between VGP and Neptune, a mortgaged deed was executed on 27.01.1997. (iii) The learned Single Judge failed to appreciate that a major part of the loan facility extended to Neptune, in 1996 was for continuation of its day-to-day operations, and that, the security in the subject property was created in lieu of the vast consideration received by Neptune. Therefore, the conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deeds executed in its favour were in consideration of discharge of the loan amount availed of by Neptune. Since, the learned Single Judge failed to test VGP's bonafides, he, reached an erroneous conclusion. (xi) The learned Single Judge ought to have appreciated that VGP was a bonafide transferee of the subject property, which it had acquired for valuable consideration without knowledge of institution of the winding up petition, at least, on the date when the transfer of interest of title took place in the subject property. (xii) Since, the entire loan facility was extended in favour of Neptune for conducting its day-to-day business, the sale of the subject property, could not be construed as not being in its interest. (xiii) The learned Single Judge ought to have taken into account the fact that as on 31.03.1996, the value of land and building without claiming any depreciation was shown by Neptune in its balance sheet as an amount equivalent to ₹ 72,60,900/-. This value continued to remain constant till 10.03.1999, when balance sheet was drawn up for that year. The fact that under the four loan agreements, VGP had an outstanding of a larger amount was lost sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission advanced on behalf of VGP was that the learned Single Judge had misdirected himself in both law and facts. 12.2. In support of his submissions, the learned counsel relied on the following judgements: (i) Official Assignee of Madras Vs. Valliappa Chetti and Others (AIR 1992 Mad 144) (ii) N.Subramania Iyer Vs. Official Receiver, Quilon and Another (AIR 1956 SC 1) (iii) Sankar Ram and Co Vs. Kasi Naicker and Others (2003 AIR SCW 3732) (iv) M.K.Ranganathan and Another Vs. Government of Madras and Others (AIR 1955 SC 604) (v) Navjivan Mills Ltd In Re. (1986 Vol 59 CC 201) (vi) K.N.Narayana Iyer Vs. Commissioner of Income Tax (1993 Vol 78 CC 156) (vii) N.Babu Janardhanam and another Vs. Official Liquidator, Golden Cine Studios P Ltd. (1993 Vol 78 CC 490) (viii) Pankaj Mehra and another Vs. State of Maharashtra and Others (2000 2 SCC 756) (ix) Dr.Kathirvel Vs. Official Liquidator and another (2013 Vol 177 CC 187) (x) K.Periasamy Gounder Vs. Kothari Industrial Corporation Ltd (2010 (1) CTC 62) (xi) M.Lakshmi Narayana Choudhary Vs. Official Liquidator (CDJ 2013 MHC 2671) (xii) Thiruvengadam Pillai Vs. Navaneethammal and another (2008) 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated to protect VGP's financial exposure did not relate to the subject property. 14.6 In sum, what was sought to be portrayed, by the learned counsel was that the impugned transactions were suspect and that they were entered into only to defeat the interest of other creditors. 15. Likewise, Mr.S.R.Sundar, resisted the appeal. Learned counsel placed much reliance on the OL's report dated 19.11.2013 and buttressed the same with the following submissions: 15.1. First, even though the subject property was purchased by Neptune in 1996 for a sum of ₹ 7,72,000/-, it was sold via the impugned sale deeds for a cumulative value of ₹ 5,43,260/-, and that too, after a gap of three (3) years, when the price of the subject property ought to have risen, rather than fallen. 15.2. This apart, Mr.S.R.Sundar also relied upon the OLs earlier report dated 16.11.2010; based on which it was contended that the OL had voluntarily received claims, as on the date of the said report, from various statutory authorities as well as other creditors which included the predecessor-in-interest of ARCIL, which in all added upto ₹ 3,36,16,855.38. 15.3. The learned counsel submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my Gounder Vs. Kothari Industrial Corporation Ltd., and another (2010 (1) CTC 62) (vii).In re Gray's Inn Construction Co. Ltd. (1980) 1 WLR 711 (viii).Express Electrical Distributors Ltd Vs. Beavis and others (2016) 1 WLR 4783 Reasons 17. We have heard the learned counsel for the parties and perused the records. 18. Before we proceed further, what is required to be noticed, based on the judgements cited both before us and the learned Single Judge, as to the principles of law which govern the validation of the transaction involving disposition of property by a company after commencement of its winding up. 18.1. The measure which a Court generally applies while examining transactions involving disposition of property by a company qua which winding up has commenced are, broadly, as follows: (i) First and foremost what is to be borne in mind is that though Section 536 (2) of the 1956 Act states that any transaction involving disposition of property, which includes actionable claims, after the commencement of winding up, is void, the Court has the discretion to validate such transactions, if they are undertaken for the benefit of and in the interest of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest of the company and its creditors. (vii) The policy of law is that Court should not validate any transaction which will result in one or more pre-liquidation creditors being paid in full at the expenses of other creditors, albeit, in the absence of special circumstances. In determining whether the disposition of property should be validated or not, the principle of good faith and ordinary course of business should be applied. [ See Re:Gray's Inn Construction Co. Ltd., [1980 (1) All ER 814 (CA)] . (viii) In considering whether the transaction is bonafide or not all surrounding circumstances should be considered . In this behalf, what is required to be examined is : is the disposition of property carried out to keep the company operational. If the answer is in the affirmative, then, generally a Court would validate such a transaction, unless it is shown to be a sham transaction. (ix) While, the Court may validate a genuinely bonafide transaction carried out in the ordinary course of day-to-day business it will not allow disposition of property to take place which excludes other creditors from sharing the proceeds which would otherwise flow from sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fide, as claimed by Neptune, it would have in the ordinary course, called upon Neptune to secure its interest by creating a charge on the assets, which were, available at that point in time. 20.5. For some curious reason no such step was taken. The subject property were bought on 16.02.1996 via a registered sale deed (document No.818/1996) for a stated value of ₹ 7,72,000/-. VGP attempted to defend its actions and portray them as being bonafide by contending that since the subject property was bought only on 16.02.1996, security could be created only thereafter. 20.6. As is sought to be demonstrated above, it is not as if other assets were not available with Neptune qua which security could have been created to protect the interest of VGP if its intention was bona fide. It is only after the winding up petition was filed, that the 4th loan agreement dated 10.01.1997 was executed between VGP and Neptune, followed by execution of mortgage deed on 27.01.1997. This was accompanied by deposit of title deeds and creation of charge on 31.01.1997. 20.7. Neptune claims that all three events, that is, the execution of the 4th loan agreement dated 10.01.1997, the mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the property referred to therein has been shown as ₹ 6,79,572/-. There is no good reason furnished by VGP as to why when the market value of the property is shown in document as ₹ 6,79,572/-, it would have only an amount of ₹ 3,16,080/- adjusted towards outstanding loan. 22.1. Compare this with the fact that the subject property (which included the property which were sold via the impugned sale deeds were purchased on 16.02.1996) was purchased, admittedly, by Neptune for a stated sum of ₹ 7,72,000/-. Despite which, for reason best known to VGP the combined cumulative consideration that is reflected in the two sale deeds is a sum of ₹ 5,43,260/- (first sale deed: ₹ 2,37,180/- and second sale deed: ₹ 3,06,080/-). 22.2. The two (2) transactions i.e., the transaction by which Neptune had purchased the subject property and the dates on which they were sold are set apart by little over two (2) years and four (4) months. Preponderance of probability would have us believe that even by the most conservative estimate the stated value of the subject property ought to have risen, even if, marginally, rather than fallen. 23. Furthermore, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inexplicable as to how the market value of the subject property, even in the registered document hovers around a sum of rupees 6 to 7 lakhs. 24.2. To be noted, the subject property is a vacant site, as per the statement made under Rule 3(1) of the Stamp Rules. Thus, the value in the books of accounts of Neptune which is shown to be in excess of ₹ 72,00,000/- is, perhaps, closer to the market value than that which is reflected in the document such as the mortgage deed and the two impugned sale deeds. The real price of the subject property is to some extent shown in Form-8, whereby, a charge on the subject property is created, albeit, to the extent of ₹ 65,20,000/-. 25. Furthermore, as correctly argued by the learned counsel for ARCIL and OL, there is a vast difference in price in respect of two parcels of land which together comprise the subject property. The rate per sq.ft. vis-a-vis the first sale dated 11.02.1999 works out to ₹ 54.41/-, while the rate per sq.ft. vis-a-vis the second sale deed dated 16.02.1999, works out to ₹ 20 per sq.ft. 25.1. Mr.M.V.Suresh, sought to explain the difference in price by laying emphasis on the fact the two sale dee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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