TMI Blog2018 (7) TMI 2073X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Court under Section 446 of the Companies Act 1956 to execute the Consent Decree dated 9th July 2009 obtained in suit no.164 of 2009 by applicant against Coromandel Garments Limited (in liquidation). Coromandel Garments Limited (in liquidation) is hereinafter referred to as the Company. Official Liquidator has, on behalf of the Company, filed a reply opposing grant of such leave. Official Liquidator has also filed Official Liquidator s Report No.84 of 2017 seeking various directions from this Court including, inter alia, that the Consent Decree dated 9th July 2009 be set aside and that applicant be directed to bring back, along with interest, amounts received by it from out of the sale proceeds of one of the Company s properties. The company application has also been opposed by a few unsecured creditors of the Company (in liquidation) who have, in this behalf, filed company application (lodging) No.85 of 2018 (hereinafter Interveners ). The counsel appearing for Interveners basically 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the security for such loan, is agreed to by and between the Lender and the Borrower as detailed in Table A hereto. It is agreed to by and between the Lender and the Borrower as under: 3.. The amount of the loan provided under the terms of the agreement together with the interest and all other costs recoverable by the Lender from the Borrower, shall be secured by a charge which is hereby provided by the Borrower to the Lender as set out in table A hereto. 4.. The loan together with interest shall be repayable by the Borrower to the Lender as per such schedule as may be approved by BIFR. Pending issuance order by BIFR, the same shall be payable immediately on call by the Lender. 5.. The loan shall carry interest at the Bank Rate. However, this will be subject to the provisions of Sick Industrial Companies (Special Provisions) Act, 1985, order of BIFR and such instructions as may be issued by the operating agency viz. Bank of Baroda and BIFR. 6.. The Borrower owns 1/3rd undivided shares of the property at Pachgani. The Borrower agrees that it shall not create any charge on the said property without prior approval of the Lende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt on 5th July 2007. On 25th September 2007, Appeal No.58 of 2007 filed by the Bank of Baroda against the order dated 22nd January 2007 of BIFR was dismissed by AAIFR. Appeal No.85 of 2007 filed by the Company was withdrawn. These orders were not further tested. As such, the recommendation for winding up the Company became final. 9. By their letter dated 30th April 2008, applicant s advocates called upon the Company to repay the said sum of ₹ 3,25,00,000/ together with interest as agreed in terms of the Loan Agreement dated 29th September 2000 . By its reply dated 28th May 2008, the Company described the demand as being unreasonable and not sustainable in law. In doing so, the Company, inter alia, also noted that the Loan Agreement did not provide for any rate of interest, that the BIFR had not permitted any interest to be charged and that applicant was on that account disentitled to claim any interest under the said Agreement. The letter referred to the order dated 29th June 2006 appointing Provisional Liquidator and claimed that the Company was proposing to file a company application to recall the said order. However, in the meanwhile, on account of the appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant under the Loan Agreement. 12. By its reply dated 4th March 2009, the Company sought to resist the grant of the said reliefs. In doing so, the Company repeatedly asserted that applicant s claim for interest was not sustainable, in view of no rate of interest having been agreed upon in the Loan Agreement and no rate having been stipulated by the BIFR. 13. By an order dated 12th February 2009, this Court declined to appoint Court Receiver in respect of the Satara property, but merely restrained the Company from creating any third party rights in respect thereof. On 9th June 2009, when Suit No.164 of 2009 appeared on board, a submission was made on behalf of the parties that they proposed to file consent terms and that the dispute had been amicably resolved. The suit was accordingly stood over to 7th July 2009 for filing consent terms. 14. On 9th July 2009, applicant and the Company tendered consent terms and a decree was passed in respect thereof. Under the said consent terms, the Company submitted to a decree on admission in the sum of ₹ 12,49,27,897/ together with interest thereon @ 15.76% p.a. with quarterly rests from 8th June 2009 till pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt seeking setting aside of the order passed by this Court on 29th June, 2006 on the ground, that at the time when the said order was passed, the appeal of the respondent was pending before the AAIFR, which application was allowed. However, it appears that it was not pointed out to the Court that BIFR had again recommended on 22nd July 2007 that the respondent should be wound up and that the appeal preferred therefrom by the company was also withdrawn by the company on 25th September 2007. If this would have been pointed out to this Court, this Court would surely have again passed a fresh order admitting the petition and appointing the provisional liquidator of the respondent. 2.. Applicants have, therefore, submitted that appropriate orders be passed against the respondent. 3.. The learned Advocate for the respondent states that all the required / necessary facts were set out in the affidavit in support of the application pursuant to which the order dated 29th June, 2006 was set aside by an order dated 16th October 2019. In my view, the duty of an Advocate does not end with setting out of facts in Affidavits. The Advocates appearing before the Court are duty boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed at the instance of applicant and Respondent No.3 and without prejudice to the rights and contentions of Official Liquidator , Applicant and Respondent No. 3 being Kotak Mahindra Bank and applicant herein, respectively. At this stage, it is stated, the papers and proceedings in Suit No.164 of 2009 filed by applicant against the Company in which consent terms had been taken were not available with Official Liquidator. Official Liquidator had, accordingly, not raised before either the DRT or this Court any issue regarding the legality of the consent terms nor was such an issue considered or decided by either forum. 17. Pursuant to the order dated 21st April 2016, applicant received a sum of ₹ 10,17,03,493/ towards its 20% share in the distribution of sale proceeds. Meanwhile, applicant had filed the present company application no.341 of 2016 seeking the leave of this Court under section 446 of the Companies Act 1956 to proceed in execution to recover the balance decretal amount alleged to be due to it. The company application proceeds on the basis that applicant has a charge over the Satara property and as a secured lender is entitled to priority over all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h DRT passed order dated 21st May 2009 directing impleadment of applicant as one of the creditors of the Company. The limitation for applying to the Company Court for holding that the Decree is a fraudulent preference or filing a suit under Section 31 of the Specific Relief Act 1963 would therefore first commence on 27th August 2010, then on 24th June 2011. (d). In any case, the present application is not a collateral proceeding where the defence of the alleged nullity of the Decree can be raised by Official Liquidator. Shri Godbole relied upon Prem Singh Ors. V/s. Biebal Ors. (2006) 5 SCC 353). (e). Further assuming without admitting, that Official Liquidator's Report seeking reliefs against applicant is not a suit, but is in the nature of an application made to the Company Court under the Company (Court) Rules, 1959, the same is nevertheless an application made to Court and hence, is governed by Article 137 of the Schedule of Limitation Act 1963. Even in such cases, unless, such application is made within the period of limitation prescribed by the said Article, the same cannot be entertained by the Court and the Karnataka High Court in the case of Offici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RT, no other Court would have jurisdiction to do so. Any application/proceeding seeking recovery of alleged excess cannot be entertained. Once Kotak Mahindra Bank and Bank of Baroda being secured creditors are entitled to stand outside winding up to sell the property, which was done pursuant to the order of Madras High Court and DRT permitted to retain the same, except the liability to pay dues to workers under Section 529 of the Companies Act, 1956, no other claim can be entertained. Kotak Mahindra Bank and not Official Liquidator can claim as Kotak Mahindra Bank still has not recovered the entire amount owed to it in full satisfaction of its claim/charge. (i). Further, applicant is an undisputed second charge holder with respect to Ambattur property. In so far as prayer (a) for declaration that the decree is a nullity, the Hon'ble Supreme Court in the case of Indian Bank V/s. Official Liquidator (1998) 5 SCC 401) has clearly observed that the Company Court does not have power to declare a Decree of the competent Court void in an application made by Official Liquidator and such an application is not maintainable. Hence, this Court does not have jurisdiction to ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en on the principles of res judicata under Section 11 (Explanation 4) of the Civil Procedure Code 1908 and principles analogous thereto. Even otherwise, the Division Bench of Gujarat High Court in the case of Bank of Maharashtra V/s. Official Liquidator (1998) SCC Online Guj 370) has extensively considered the law in this regard and held that mere admission of an existing liability by a Company prior to its winding up can never amount to a fraudulent preference. (k). Section 531 of the Companies Act 1956 uses the word invalid and not void . Thus at the highest the Consent Decree against the Company would be voidable only at the instance of Official Liquidator. The difference between the terms invalid, voidable and void are judicially recognised in many judgments. It was observed by BIFR in its order dated 22nd January 2007 that the promoter Company M/s. Swadeshi Mills Company Limited, had been ordered to be wound up vide order dated 5th February 2001 (Bench I) and as such there was actually no promoter to revive the Company. Further, it is pertinent to mention that Swadeshi Mills Company Limited was wound up by this Court much prior to the consent terms dated 9th Jul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of submitting to a Consent Decree is void and if Official Liquidator ever desires to seek an order of submitting to such Decree, the only course was open to approach Board for Industrial and Financial Reconstruction (BIFR) of NCLT as SICA 1985 was repealed by Section 252 of the Insolvency and Bankruptcy Code, 2016 (IBC) w.e.f. 1st December 2016. This is strictly without prejudice to the contention that Section 536(2) of the Companies Act 1956 is even otherwise inapplicable since it was attachment in judgment and not disposal of property. (m). Even otherwise, the Consent Decree dated 9th July 2009 was entered into bona fide and did not constitute a fraudulent preference within the meaning of Section 531 of the Companies Act 1956; (n). The attachment by the said Consent Decree of the Satara property constitutes a charge in favour of applicant which entitles it to priority in payment over all other lenders; . Paragraph 13 in Kerala State Financial Enterprises Ltd. V/s. Official Liquidator, Kerala (2006) 10 SCC 709) provides : 13. Save and except certain special statues in relation to recovery of debts from the properties of a company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the Board in this regard without examining correctness of such opinion on hearing the concerned parties. This judgement has been subsequently approved by the Hon'ble Supreme Court in V.R. Ramaraju V/s. UOI (1997) 89 Company Cases 609) and it is held that High Court has to take into account the opinion, but it is not to abdicate its own function of determining the question of winding up. The Learned Single Judge in Modistone (Supra) (R.D. Dhanuka, J.), has relied upon the Hon'ble Supreme Court judgement in NGEF Limited (Supra) and the real issue involved in the said judgement of the Hon'ble Supreme Court was not regarding the date of commencement or deemed commencement for winding up. (r). The ratio of the judgment in NGEF Limited (Supra) was that the Board and Company Court exercise concurrent jurisdiction and the provisions of SICA have overriding effects and the inherent power of the Company Court does not exist in such cases. (s). The judgment of Madras High Court has been consistently followed in the cases of Ashok Alloy Steel Ltd. V/s. BIFR (2008) 142 Company Cases 915 HP), BIFR V/s. Unity Steels Ltd. (2002) 109 Company Cases 236) , Tata Ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property effected by the Consent Decree does not constitute a charge in favour of applicant and does not make it a secured lender entitled to any priority over other payments. (d). Applicant is therefore liable to refund the amount of₹ 10,17,03,493/ withdrawn by it from the sale proceeds of the Ambattur property along with interest at such rate as this Court may deem appropriate. (e). Even otherwise, applicant not having any prior charge inrespect to the Satara property, the leave sought by it to execute the Consent Decree and to put the Satara property to sale and execution ought to be refused and; (f). The interest of all stakeholders would be better served if the1/3rd undivided share of the Company in the Satara property were to be sold by Official Liquidator under the supervision of the Company Court. 20. Ms. Kumbhat, counsel appearing for Interveners apart from adopting the submissions of Shri Sen, counsel for Official Liquidator, submitted that : (a). The amount of ₹ 3.25 Crores provided by applicant to theCompany was by way of promoter s contribution without any interest as per the guidelines of BIFR. (b). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndivided share, right, titleand interest in Final Plot No.540 situate lying and being in the Village of Taighat Registration Sub District of Wai in the District of Satara together with structure standing thereon more particularly set out in Schedule Ex B hereto is hereby stand attached forthwith in execution of the decree and Defendants also undertake not to sell and dispose of or create any third party interets into the said property or any part thereof,. 6.. The Plaintiffs are at liberty to execute the decree on the basis of theMinutes of Consent Terms without sealing of decree and sealing of decree is dispensed with under Rule 314 of the High Court Original Side Rules, 1980. The Prothonotary and Senior Master is directed to act on the authenticated copy of the Minutes of Order and Consent Terms duly authenticated by the Associate and issuance of decree is expedited. 7.. 2/3rd of Institution fees be refunded to the Plaintiffs. 8.. Suit stand disposed of in the aforesaid terms with no order as to costs. 22. Date of commencement of winding up proceedings : (a) The first issue that arises for consideration is as to when the winding up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant relied on various judgments, both of the Hon bleSupreme Court and of various High Courts on the issue as to whether a recommendation by the BIFR to wind up a Company was conclusive or whether the High Court had any discretion in the matter. It is applicant s case that the High Court indeed has discretion in the matter of winding up a Company before it and was not bound to accept without reflection, the recommendation made in this behalf by the BIFR. However, this issue is of limited relevance since the Company has already been wound up. The only question that survives for consideration is the date when the winding up proceedings must be treated as having commenced. (d). The question as to when winding up proceedings must be deemed to have commenced when a Company is wound up pursuant to the recommendation by the BIFR has been considered by various Courts. This issue fell for consideration by the Hon ble Supreme Court in NGEF Limited (Supra) where, while overruling the opinion of the Division Bench of the Hon ble Gujarat High Court that a winding up proceeding arising out of a recommendation by the BIFR would commence only on the passing of an order of winding up, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Consent Decree and Section 531 : . (a) The next question that arises is as to whether the Consent Decree in question falls foul of section 531. Section 531 (1) reads as under : 531. FRAUDULENT PREFERENCE (1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly : Provided that, in relation to things made, taken or done before the commencement of this Act, this sub section shall have effect with the substitution, for the reference to six months, of a reference to three months. (b) It is the Official Liquidator s case as submitted by Shri Sen, with whom I agree, that the Consent Decree was collusive and a fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully aware that no interest was payable on the Promoter s contribution brought in by applicant. Both the letter and the Affidavit refer specifically to the absence of any interest being stipulated by the BIFR; (vii). a mere three months after the filing of the affidavit inreply opposing aggressively the grant of any interlocutory reliefs in favour of applicant in Suit No.164 of 2008 including a prayer for a decree on admission for a sum of ₹ 3.25 Crores, the Company is alleged to have agreed to a decree on admission for a much larger sum of ₹ 12,49,27,897/ along with interest thereon at the rate of 15.76% p.a. with quarterly rests from 8th June 2009 till payment and/or realization. There is nothing whatsoever on record to explain or justify this abrupt reversal in position by the Company. The only possible inference in the circumstances can be that the Company was attempting to favour applicant, a promoter group company, in preference to its other creditors; (viii). Applicant was fully aware of the recommendationdated 22nd January 2007 of the BIFR that the Company be wound up. In fact, there is a reference to it in the plaint. However, neither applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltimate conclusion. By no stretch of imagination the withdrawal or compromise of the suit without legal authority amounts to bringing the suit to ultimate conclusion. In ordinary sense, the terms ultimate conclusion connotes getting the suit decreed by making honest and bonafide efforts to prove the claim in the suit. If the suit is to be disposed of by way of compromise, it may loosely be termed as ultimate conclusion but for such a conclusion of the suit, specific authority has to be given to the attorney. Even otherwise in the power of attorney the words 'prosecute the suit' don't figure. There is only reference in the plaint. 15.. The attorney has only those powers which arespecified in the power of attorney and mere reference in the plaint that he is also authorised to prosecute the plaint does not mean that he is vested with the power to withdraw the suit or settle it by way of compromise. 19.. As is apparent these clauses gave the power to pursuethe suit. Pursue means to continue or proceed along a course of action and not to withdraw. 20.. Power of attorney is always to be interpreted strictlyin its terms. There is no scope for sea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich clearly controlled the Company (in liquidation). Applicant has been unable to explain the aforementioned circumstances which are plainly suspicious and allow no inference save that of a fraudulent preference. 24. Remedy Available to Official Liquidator : (a). Applicant, however, sought to contend that Official Liquidator was not entitled to challenge the Consent Decree, either by means of a report filed before the Company Court or by his reply to the application for leave under Section 446. Shri Godbole relied on the judgment of the Hon ble Supreme Court in Indian Bank V/s. Official Liquidator Chemmeens Exports (P) Ltd. Ors. (1998) 5 SCC 401) and in particular paragraph 12 thereof, which is reproduced hereinbelow: It may be noted that these provisions have no application to any proceeding pending in appeal before a High Court or the Supreme Court. From this what follows is when a suit is instituted in the court of competent jurisdiction with the leave of the court under sub section (1) and a decree is passed by that court whether on the basis of mortgage or otherwise, it would be binding on Official Liquidator and no plea inconsistent with the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he High Court, however, went haywire and made observations which are wholly perverse. We do not agree with the High Court that there is no legal duty cast upon the plaintiff to come to court with a true case and prove it by true evidence . The principle of finality of litigation cannot be pressed to the extent of such an absurdity that it becomes an engine of fraud in the hands of dishonest litigants. The courts of law are meant for imparting justice between the parties. One who comes to the court, must come with clean hands. We are constrained to say that more often than not, process of the court is being abused. Property grabbers, tax evaders, bank loan dodgers and other unscrupulous persons from all walks of life find the court process a convenient lever to retain the illegalgains indefinitely. We have no hesitation to say that a person, who's case is based on falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the litigation. (d). The Consent Decree in question, which has been procured by fraud can be set aside at any stage including in an application for leave to execute it or in an Official Liquidator s Report challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative direction and not for adjudication of the dispute is concerned, in my view, there is no merit in this submission of the learned senior counsel. Under Section 455 of the Companies Act, 1956 read with Rule 135 and 137 of the Companies (Court) Rules, 1959, Official Liquidator is empowered to submit a report in a case where the winding up order is made by the Company Court for appropriate directions and reliefs. Official Liquidator is not required to file any suit for seeking any reliefs which can be granted by the Company Court by exercising powers under Section 446(2) of the Companies Act, 1956. All contentious issues can be decided by the Company Court by exercising powers under Section 446(2) of the Companies Act, 1956 including any claims by or against the company in liquidation (including any claims by or against any of its branches in India. 116. Under Section 446(2)(d) of the Companies Act, 1956, the Company Court is also empowered to entertain or dispose of any question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. In my view, there is no substance in the submission of the learned senior co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From these provisions of the decree declaring the equitable mortgage and the charge created thereby and permitting redemption thereof within the stated period, we find that the unregistered charge created by the company in favour of the mortgagees is kept alive. The order of sale of the mortgage property under the decree is to operate only if by the stated period redemption has not been effected. Upon such sale the charge could be extinguished. The provisions of s. 125, therefore, apply to the unregistered charge created by the equitable mortgage and declared by the decree and it is void as against the Official Liquidator. The unregistered charge has no effect upon the property of the company in liquidation. The mortgagees cannot sell the mortgage property notwithstanding the decree obtained prior to the order winding up the company. 44.It was contended by Shri Tulzapurkar that Official Liquidator could not go behind the decree unless there be fraud or collusion. In view of the provisions of s. 125 Official Liquidator is entitled, if not obliged, to place before the executing court his objection based thereon. (g) The present case bears a striking resemblance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty is sold by the Official Liquidator. 26. Plea of Limitation : (a). Applicant has contended that the directions sought by Official Liquidator for setting aside the Consent Decree are time barred. Shri Godbole for applicant relied on the judgment of the Andhra Pradesh High Court in Official Liquidator, High Court V/s. Andhra Pradesh State Financial Corporation (2001 (3) ALT 334) in support of the proposition that the law of limitation would apply as much to Official Liquidator as to any other litigant and that an application of the nature brought by Official Liquidator was required to be brought within three years from when the cause of action accrued. The Consent Decree having been passed on 9 th July 2009, applicant contends that the reliefs sought in the Official Liquidator's Report were clearly barred by time. (b). The argument of applicant is misconceived. While the Limitation Act would undoubtedly apply to Official Liquidator subject to the qualification introduced in Section 458A (Section 458A : Exclusion of certain time in computing periods of limitation. Notwithstanding anything in the Indian Limitation Act, 1908 (9 of 1908) or in any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the said consent terms by DRT. Directions in this behalf were eventually sought by Kotak Mahindra Bank from this Court. (c). 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 Bank and applicant and without prejudice to the rights and contentions of the Official Liquidator . As such, this order merely permitted an ad hoc distribution of the sale proceeds and did not conclude any rights between the parties. (d). Indeed, this issue regarding the illegality of the Consent Decree sought to be enforced by applicant was neither considered nor determined by either the DRT or this Court. This was on account of the fact that the papers and proceedings in Suit No.164 of 2009, which induced Official Liquidator to form the view that the Consent Decree is a fraudulent preference, was not then in his possession. His omission in these circumstances to raise a specific plea that the Consen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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