TMI Blog2018 (9) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... as no prior right in law over any other lender for payment out of the sale proceeds of the Satara property. The interest of all stakeholders would therefore be far better served if leave as sought for by applicant is refused and the property is sold by the Official Liquidator. The cause of action in favour of Official Liquidator can be held to be complete only on his becoming aware, from the suit proceedings, of the nature of the fraud perpetrated by applicant in collusion with the Company. As such the directions sought by Official Liquidator are clearly within time. Refund of amounts withdrawn - It is applicant’s case that Official Liquidator is, in any event, not entitled to apply for refund by applicant of the amounts withdrawn by it - The formulation of this argument is problematic. The distribution was effected not under orders passed by DRT - The order dated 21st April 2016 of this Court permitting such distribution was careful to qualify the order by the observation that it would be an interim arrangement subject to final outcome of the issue on status of the creditors of the Company (in liquidation) and that the order was being passed at the instance of Kotak Mahindra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly supplemented the submissions of the counsel for Official Liquidator. 2 By its order dated 2nd June 1998, the Board for Industrial and Financial Reconstruction (BIFR) declared the Company (in liquidation) a sick unit under the provisions of The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and appointed Bank of Baroda as the Operating Agency for framing a scheme for revival of the Company. The said order contained several directions regarding such a scheme including, inter alia , that Any shortfall in cashflow projection shall be met by the promoters by bringing in interestfreefunds and not by diversion of working capital. The Company/Promoters were also directed under Section 22A of SICA not to dispose off any fixed or current assets of the Company without the consent of the BIFR. 3 As part of the revival process, the Promoters were required to make a contribution of ₹ 400 lakhs to pay off the workers of the Company under a voluntary retirement scheme floated by it. The Company sought the approval of the BIFR to the creation of a second charge on its mortgaged assets in favour of the Promoter Group Company/Companies bringing in the said contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property at Pachgani. The Borrower agrees that it shall not create any charge on the said property without prior approval of the Lender. . 5 The asset in respect of which a second charge was created in favour of applicant Company was land at Plot No.21, Industrial Estate, Ambattur, Tamil Nadu together with the structures standing thereon (Ambattur property). The Company also appears to have executed a Supplemental Memorandum of Deposit of Title Deeds, inter alia , recording the creation of the second charge in respect of the Ambattur property in favour of applicant. Further, the said second charge also appears to have been recorded in the register of charges maintained by the Registrar of Companies in this behalf. 6 Applicant appears to have advanced a sum of ₹ 3.25 Crores to the Company under the said Loan Agreement. The remaining amount of ₹ 75 lakhs, appears not to have been disbursed. Meanwhile, attempts to revive the Company failed. By its order dated 9th April 2002, BIFR confirmed that it would be in the public interest to wind up the Company. This order was communicated to this Court on 7th May 2002. On 31st October 2002, the Appellate Authority f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company application to recall the said order. However, in the meanwhile, on account of the appointment of Provisional Liquidator, the Company pleaded its inability to make any preferential payment to any creditors including applicant. 10 On 28th August 2008, the Company filed company application (L) No.951 of 2008 before this Court praying that the order dated 29th June 2006 be recalled. By an order dated 16th October 2008, this Court recalled the order dated 29th June 2006. In doing so, it noted: It now transpires that recommendation of BIFR was questioned by way of writ petition before Madras High Court, which in turn has set aside the opinion of the BIFR that the Company is incapable of being revived It necessarily follows that the basis on which this Court proceeded to pass order dated 29th June, 2006 was nonexistant In the circumstances, the appropriate course is to recall the Order dt. 29th June, 2006. While the company application made a reference to the subsequent recommendation of the BIFR dated 22nd January 2007 for winding up the Company, the same does not appear to have been brought to the notice of the Learned Company Judge at the time of the hearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith quarterly rests from 8th June 2009 till payment and/or realization. It was stipulated that if the Company paid applicant a sum of ₹ 10,00,00,000/within 3 months from the date of the consent terms, the decree would stand fully satisfied and that in the event of default to do so within the period stipulated, the entire decretal amount would become due and payable forthwith. The consent terms also declared that the decretal amount would be secured by the Ambattur property in respect of which a second charge had been created in favour of applicant under the Loan Agreement. Under the consent terms, the 1/3rd undivided interest of the Company in the Satara Property stood attached forthwith in execution of the decree . The said purported consent terms was signed on behalf of the Company by one Shri R. Venkateshwaran. He did so on the strength of a Power of Attorney dated 9th August 2002. The said Power of Attorney authorized the said Shri Venkateshwaran to do various acts on behalf of the Company as stipulated in the Power of Attorney. The Power of Attorney, however, provided that the exercise of the said powers shall be subject to the prior sanction of the Board and subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Court are duty bound to draw the attention of the Court to facts which are relevant for the purpose of deciding an issue by the Court which may have been set out in the affidavit/s of their clients. This Court directed that the recommendation of the BIFR dated 22nd January 2007 be treated as a petition for winding up and that the same stand admitted, returnable on 10th November 2009. This order was followed by a further order dated 24th June 2011 whereby the Company was wound up. At the hearing of winding up, the advocate appearing for the Company brought to the notice of the Court the purported liability of the Company towards applicant to the tune of ₹ 12.49 Crores and further interest thereon. Sometime in 2016, Kotak Mahindra Bank, applicant and Bank of Baroda arrived at an understanding for distribution of the sale proceeds received from the Ambattur property. In view of Official Liquidator s opposition to the said consent terms or in any event, his unwillingness to accept it, by an order dated 26th February 2016, the Learned Presiding Officer of the Debts Recovery Tribunal (DRT) directed Official Liquidator to seek directions from this Court regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all other creditors. On an application being made on behalf of Official Liquidator, this Court was pleased, by an order dated 4th January 2017, to direct applicant to furnish Official Liquidator with a copy of the papers and proceedings in Suit No.164 of 2009 in which the Consent Decree came to be passed. It is on examining these papers and proceedings, Shri Sen submitted that Official Liquidator formed the view that the Consent Decree constituted a fraudulent preference and was thus invalid. Official Liquidator accordingly filed Official Liquidator's Report No.84 of 2017 seeking directions in this behalf from this Court as well as opposing the grant of leave under Section 446 of the Companies Act, 1956 to execute the Consent Decree. 18 Shri Godbole for applicant submitted as under : (a) Official Liquidator cannot seek to impugn the Consent Decree by way of a report filed before this Court or by a reply filed in the application seeking leave under Section 446; (b) Even if the Consent Decree could be challenged by way of an Official Liquidator s Report, the directions sought by Official Liquidator from this Court are clearly barred by time. (c) The defence/plea of fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lokar Limited, Bangalore V/s. Kirloskar Institute of Advanced Management Studies (2015) SCC Online 9051 has held that the contention that the Limitation Act 1963 cannot be applied to a report/application made by Official Liquidator is not tenable. (f) While interpreting Article 59 of Limitation Act, the Hon ble Supreme Court in the case of Md. Noorul Hoda V/s. Bibi Raifunnisa Ors. (1996) 7 SCC 767 has clearly held that a suit filed for setting aside Decree obtained by fraud is governed by Article59, the starting point of limitation is the date of knowledge of alleged fraud, the remedy of plaintiff is to get a decree to set aside by filing a suit under Section 31 of the Specific Relief Act 1963. (g) Applicant has received 20% of the sale proceeds of the Ambattur property pursuant to directions issued by DRT, in the course of which proceedings Official Liquidator did not raise any contention that there was any infirmity in the Consent Decree dated 9th July 2009. Official Liquidator was thus precluded from seeking refund of the amounts so withdrawn. (h) This Court, in any event, has no jurisdiction to consider entertaining prayer ( b) in this OLR. Bank of Baroda had f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial Liquidator's Report. (j) In any event, the Consent Decree dated 9th July 2009 does not constitute a fraudulent preference on account of the fact that the winding up proceedings could be deemed to have commenced only on 24th June 2011, when the Company was ordered to be wound up. The Consent Decree dated 9th July 2009 was therefore entered into prior to the period stipulated in Section 531 of Companies Act 1956, viz., 6 months prior to the commencement of winding up proceedings. The contention regarding fraudulent preference under Section 531 of the Companies Act 1956 is also incorrect. Section 531(2) provides for a deeming fiction only in case of presentation of a petition for winding up by or subject to the supervision of the Court as an act of insolvency. The suit was instituted with leave under Clause 12 on 30th December 2008 after the order recalling appointment of Official Liquidator was passed on 16th October 2008. The Decree was passed on 9th July 2009 whereas the fresh order of winding up was passed on 24th June 2011. This is clearly beyond six months. The order dated 27th August 2009 does not really recall order dated 16th October 2008 or revive the original w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of applicant in the Company does not arise. The burden of proof is on Official Liquidator to prove fraud. Official Liquidator was aware about the consent terms/suit much before passing of order dated 4th January 2017 and hence is time barred. (l) None of the Sections viz., 531, 531A and 536 of the Companies Act 1956 apply. Subsection 2 of Section 531 deals only with presentation of petition for winding up. In that case, winding up is subject to the supervision of the Court or passing of resolution for winding up and there is deeming fiction that these two incidents shall be deemed to correspond to the act of insolvency in the case of an individual. This deemed fiction is obviously not attracted to an opinion of BIFR or AAIFR. In case of winding up, the supervision of the Court by or under Section 446 of the Companies Act 1956 accepts the Company Court and no other Court or authority can exercise any power in respect of the assets of the Company. But, in case of BIFR, as held in NGEF Limited V/s. Chandra Developers (P) Ltd. and Anr. (2005) 8 SCC 219 , the provisions of SICA 1985 overrides provisions of Companies Act 1956 and consequently, jurisdiction of the Company Court und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An order of attachment made prior to passing of an order of winding up may not be void, but then the executing proceedings must be allowed to continue with the leave of the court in terms of Section 446 of the Companies Act . (o) From Clause 6 of the Loan Agreement with the Company, it is evident that the Company had agreed not to create any charge over the Satara property at that particular time. This clearly evidences the intention of applicant to have charge over the same in future in the event the Company was unable to pay its dues under the Loan Agreement as it had only second charge over the Ambattur Property. The judgment in the case of Mahadev Sahu V/s. Thakur Prasad Singh and Ors. (1910) SCC Online Cal 60 relied upon by the counsel for Official Liquidator is completely inapplicable since it is not the case of applicant that either applicant has got a title to or charge over Satara property but submission is that there is a decree which has reached its finality and applicant is entitled to execute the same. (p) The principal defence taken by Official Liquidator in his report is that the order of winding up dated 24th June 2011 passed by Shri S. J. Kathawalla, J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing Company Ltd. Ors. 2009 SCC Online Guj. 10270 and Kamdar Ladat Simiti V/s. Nanikram Shobraj Mills Ltd. (2005) 125 Company Cases 740 , etc. Therefore, the winding up proceeding of the Company was initiated on 24th June 2011, when the Learned Company Judge of this Court applied his mind to reference dated 22nd January 2007 of BIFR ultimately ordering winding up of the Company. (t) The constituted attorney of the Company Shri R. Venkateswaran was duly authorised through a Power of Attorney dated 9th August 2002 and the same was attached alongwith the consent terms and therefore presumption can safely be drawn that the said person had the authority to execute the consent terms. In any event, the authority of Mr. Venkateswaran had not been challenged either by Official Liquidator in Official Liquidator's Report No.84 of 2017 nor the same had been questioned by anyone from 9th July 2009 till date. Applicant is entitled to claim benefit under Doctrine of Indoor Management for irregularities, if any, in affairs of the Company as per rule laid down in Royal British Bank V/s. Turquand (1856) 119 E.R. 886 . The person entering into a transaction with the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o made clear that there should not be diversion of funds by promoters. (c) the scheme of Operating Agency (BoB) being proposed on the basis of guidelines framed by BIFR, sought for promoter group to pumpin interest free promoter s contribution to which the BIFR gave its approval. (d) In view of the clear guidelines of BIFR and the Loan Agreement specifying that the loan shall carry interest at the Bank Rate subject to instructions of BIFR, the interest charged by applicant is unapproved of and cannot be permitted. 21 Before we proceed further, it will be useful to reproduce the Consent Terms dated 9th July 2009 in Suit No.164 of 2009, which is sought to be executed, for which leave is being sought. The same reads as under : 1. The defendants submit to the decree on admission in the sum of ₹ 12,49,27,897/( Rupees Twelve Crores Forty Nine Lacs Twenty Seven Thousand Eight Hundred Ninety Seven only) together with interest thereon at the rate of 15.76% per annum with quarterly rests from 8th June 2009 till payment and/or realization. 2. It is declared that the aforesaid sum of ₹ 12,49,27,897/( Rupees Twelve Crores Forty Nine Lacs Twenty Seven Thousand Eigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se that, in the absence of a petition for winding up, the winding up proceedings must be deemed to have commenced only on a winding up order being passed, i.e., on 24th June 2011. In support of his contention that the winding up proceedings commenced on the BIFR making a recommendation, Official Liquidator relied on the judgment of the Hon ble Supreme Court in NGEF Limited (Supra) and the judgments of various High Courts in Modi Stone (Supra) Kapri International Pvt. Ltd. 2013 SCC Online Del. 2176 and Indoco Remedies Ltd. V/s. Official Liquidator of Kay Packaging P. Ltd. Anr. (2009) 150 Company Cases 770 (b) Section 441 of the Companies Act 1956 provides that the winding up of the Company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up . Section 441 does not expressly address a situation where a Company is wound up not on a winding up petition filed by a creditor or other stakeholder, but on a recommendation made in this behalf by the BIFR under the provisions of SICA. Section 20 of SICA provides for the winding up of a sick industrial company and reads in relevant part: 20. Windingup of sick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up of the Company may not be correct. It may be true that no formal application is required to be filed for initiating a proceeding under Section 433 of the Companies Act as the recommendations therefor are made by BIFR or AAIFR, as the case may be, and, thus, the date on which such recommendations are made, the Company Judge applies its mind to initiate a proceeding relying on or on the basis thereof, the proceeding for winding up would be deemed to have been started; but there cannot be any doubt whatsoever that having regard to the phraseology used in Section 20 of SICA that BIFR is the authority proprio vigore which continues to remain as custodian of the assets of the Company till a windingup order is passed by the High Court. (e) While this observation was characterized as ambiguous by Shri Godbole, there is little doubt that the date of the winding up order was rejected by the Hon ble Supreme Court as the date on which the winding up proceedings would commence. In fact, this Court in its judgment in Modi Stone Limited (Supra) has, while relying on the judgment in NGEF Limited (Supra) , held that the date of recommendation by the BIFR would be considered the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a Provisional Liquidator appointed in respect of the Company. They did so on the basis that the earlier recommendation for winding up issued by the BIFR on 9th April 2002 had been set aside by an order dated 23rd February 2006 of the Madras High Court; (ii) When this application was argued on 16th October 2008, it was not brought to the notice of the Company Judge that in the interregnum a fresh recommendation had been made by the BIFR on 22nd January 2007 that the Company be wound up and that the Company had in fact withdrawn Appeal No.385 of 2007 filed before the AAIFR challenging the BIFR recommendation. In his order of admission dated 27th August 2009, Kathawalla, J. notes that if the later recommendation had been brought to the notice of the Company Court, it would surely have passed a fresh order admitting the Petition and appointing the Provisional Liquidator; (iii) After the order dated 16th October 2008 came to be passed in the aforementioned circumstances and the earlier order of admission was recalled, applicant on 30th December 2008 filed Suit No. 164 of 2009 claiming a sum of ₹ 13,92,45,091/and other ancillary reliefs; (iv) Applicant was a promoter g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulate any rate of interest and indeed required the BIFR to fix it which it never did; (ix) The Consent Terms were signed on behalf of the Company by one Shri Venkateshwaran. He is stated to have done so on the basis of a Power of Attorney dated 9th August 2002. The said Power of Attorney could not have been acted upon in so far as it could not have survived the appointment of the Provisional Liquidator by the order dated 29th June 2006 and the consequent displacement of the board of the Company. The setting aside of the Order dated 29th June 2006 would not revive the power which would have been required to be reconferred. There is no evidence of any such conferral. In any event, the Power of Attorney did not confer an express power to compromise or compound any legal proceeding. It is settled law that an agent would be entitled to compromise a proceeding only in the event such an express power has been conferred by the document constituting him an agent. In this behalf, Official Liquidator relied on the judgement of the Delhi High Court in Manmohan Singh Dahliwal V/s. Gurbax Singh 2002 AIHC 275 where the Court observed: 13. The interpretation of the word 'prosecut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless and until a specific power has been conferred upon the attorney, attorney is not free to arrogate the powers of dominus . (x) In any event, the exercise by Shri Venkateshwaran of the powers conferred under the Power of Attorney in question is expressly made subject to the sanction of the board. The scope of the powers permitted to be exercised by Shri Venkateshwaran appear to have been purely ministerial and as a matter of convenience. He does not appear to have had, under the Power of Attorney, any authority to take any decision which would significantly impact the outcome of any legal proceeding to which the Company was a party, leave alone the authority to compound it. (xi) The parties do not appear to have brought to the notice of the learned Single Judge considering the Consent Terms any of the aforementioned infirmities in the authority of Shri Venkateshwaran to bind the Company or to enter into a settlement. (c) In the aforementioned circumstances, that the events reveal an orchestrated attempt by applicant and the Company acting in conjunction to fraudulently prefer one creditor, viz, applicant, over the others. The Consent Terms has the effect of not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e application filed by the liquidator in the company court is not maintainable. (b) This judgment concerned a case where leave had already been granted under section 446 of the Companies Act to a creditor to prosecute the suit, in which Official Liquidator had been joined. A Decree in such a suit where Official Liquidator had participated was held to be binding on him. Official Liquidator could not have ignored such a Decree by a competent Court or sought to challenge it under Section 446 of the Companies Act 1956. It is in this context that the observations relied upon by applicant appear to have been made. In the present case, however, Official Liquidator was not a party to the said suit. The Indian Bank (Supra) judgment is certainly no authority for the proposition that a decree can never be set aside by the Company Court in exercise of its powers under section 446 of the Companies Act 1956. (c) It is in fact settled law that a Decree that has been procured by fraud can be set aside at any stage and in any proceedings, even a collateral one. The Hon ble Supreme Court has in fact affirmed this principle on several occasions including in its judgment in S.P. Chengalvar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the court which is winding up the company, its jurisdiction was enlarged to entertain petition amongst others for recovering the claims of the company. In the absence of a provision like Sec. 446 (2) under the repealed Indian Companies Act, 1913, Official Liquidator in order to realise and recover the claims and subsisting debts owed to the company had the unenviable fate of filing suits. These suits as is not unknown, dragged on through the trial court and Courts of appeal resulting not only in multiplicity of proceedings but would hold up the progress of the winding up proceedings. To save the company which is ordered to be wound up from this prolix and expensive litigation and to accelerate the disposal of winding up proceedings, the parliament devised a cheap and summary remedy by conferring jurisdiction on the court winding up the company to entertain petitions in respect of claims for and against the company. This was the object behind enacting Sec. 446 (2) and therefor, it must receive such construction at the hands of the court as would advance the object and at any rate not thwart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany applications or in the official liquidator's report, as the case may be, are the judicial orders and have equal force of law. Official Liquidator is not required to file a company application for seeking directions and/or reliefs before the Company Court for recovery of possession, assets and other things from the Exdirectors of the company in liquidation or from any third party. In my view, whatever may be the nomenclature of the proceedings i.e. whether by way of the official liquidator's report or by way of company application for seeking various directions including the relief for recovery of possession, powers of the Company Court are the same. (f) In fact, the judgment of the Division Bench of this Court in The Official Liquidator, High Court Bombay and the Liquidator of Kamani Brothers Private Limited (In Liquidation) V/s. Suryakant Natvarlal Surati (1986) 59 Company Cases 147 relied upon by applicant itself, is authority for the proposition that the Company Court may set aside or refuse to enforce a Decree. That was a case in which a Decree had been obtained confirming an unregistered charge which was void as against Official Liquidator on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to abandon its stand that the attachment would constitute a charge. If it did, it would in any event fall foul of both Sections 531 and 536 of the Companies Act 1956. However, applicant has continued to maintain that by virtue of the attachment, applicant was a secured lender and was entitled to priority of payment out of the sale proceeds from the Satara property. (b) There is nothing in law to support this proposition. In fact, the authorities are quite clear that an attachment does no more than prevent a debtor from dealing with an asset, thus ensuring that it would be available to satisfy any legitimate debt. Official Liquidator has relied in this behalf on the judgment of the Hon ble Supreme Court in Kerala State Financial Enterprises Ltd. V/s. Official Liquidator, High Court of Kerala (2006) 10 SCC 709 where the Court, inter alia , observed that an attachment itself does not create any charge in the property . Official Liquidator also relied on the judgment of the Hon ble Calcutta High Court in Mahadeo Saran Sahu (Supra) where the Court following the Full Bench ruling in Frederick Peacock V/s. Madan Gopal I.L.R. 29 Cal 428 and the dictum of the Judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Official Liquidator's Report are not time barred for two reasons, viz. applicant s argument loses sight of the fact that the Consent Decree impugned in the Official Liquidator's Report was procured by fraud. Any act of Court, which is the result of fraud ought be undone, regardless of the stage at which it is impugned and or before which forum and secondly, Official Liquidator became aware of the fraud only on coming into possession of the papers and proceedings in Suit No.164 of 2009 pursuant to the Order dated 4th January 2017 in the present company application. (c) Shortly thereafter, Official Liquidator filed a reply in the company application and an Official Liquidator's Report, in both of which he impugned the Consent Decree as constituting a fraudulent preference. Thus, in any view of the matter, the cause of action in favour of Official Liquidator can be held to be complete only on his becoming aware, from the suit proceedings, of the nature of the fraud perpetrated by applicant in collusion with the Company. As such the directions sought by Official Liquidator are clearly within time. 27 Refund of amounts withdrawn : (a) It is applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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