2003 (1) TMI 534 - HC - Companies Law

Issues Involved:
1. Allegations of fraudulent practices and misappropriation of assets by the respondent company.
2. Scheme of Settlement under sections 391 and 394 of the Companies Act.
3. Right offer conditions and non-payment by S.K. Modi Group companies.
4. Lease agreement between Agache Associates and the respondent company.
5. Legal validity and bona fide nature of the lease transaction.
6. Maintainability of the application under section 391(1) of the Companies Act.
7. Preservation of company assets and interests of creditors.

Detailed Analysis:

1. Allegations of Fraudulent Practices and Misappropriation:
The applicant, a creditor of the respondent company, alleged that the company engaged in fraudulent practices to misappropriate assets worth approximately Rs. 36 crores. The allegations included manipulation of book entries and creation of artificial liabilities to misrepresent the company's financial position. These actions were claimed to be prejudicial to the interests of the creditors and other contributories of the respondent company.

2. Scheme of Settlement Under Sections 391 and 394 of the Companies Act:
The respondent company had proposed a Scheme of Settlement with its creditors, seeking directions to convene a meeting of the creditors for entering into the settlement. The application arose from the need to address the fraudulent transactions that could affect the proposed scheme.

3. Right Offer Conditions and Non-Payment by S.K. Modi Group Companies:
The right offer made by Modiluft involved the issuance of 2,42,000 equity shares, with a condition that 90% minimum subscription was required within 60 days. Three companies of the S.K. Modi Group applied for shares but did not pay the full allotment and final sums, resulting in a loss of Rs. 33.31 crores for the respondent company. This non-payment was alleged to be part of the fraudulent scheme.

4. Lease Agreement Between Agache Associates and the Respondent Company:
Agache Associates entered into a lease agreement with the respondent company, involving a security deposit of Rs. 36 crores for a property in Calcutta. The property was occupied by tenants, and possession was never handed over to Modiluft. The lease agreement was claimed to be a manipulated transaction to cover up the non-payment by the S.K. Modi Group companies.

5. Legal Validity and Bona Fide Nature of the Lease Transaction:
Agache Associates defended the lease agreement as legal, valid, and bona fide, asserting that it was executed for the benefit of the respondent company. However, the court found the transaction suspicious due to the disproportionately high security deposit and the low rental value, indicating a lack of commercial prudence.

6. Maintainability of the Application Under Section 391(1) of the Companies Act:
The respondent company argued that the application was not maintainable under section 391(1) and Rule 67, as the relief sought did not pertain to matters provided by Rule 69. However, the court held that the company fell within the definition of a company liable to be wound up under section 390(a), and the court had the jurisdiction to preserve the company's assets under sections 391(1) and 443(1)(c).

7. Preservation of Company Assets and Interests of Creditors:
The court emphasized the need to preserve the company's assets to protect the interests of the creditors. It issued an interim order to attach the property involved in the lease agreement and directed Agache Associates to provide details of rent collected. The court also allowed for the lifting of the attachment if the security deposit amount, minus the rent, was deposited in the court.

Conclusion:
The court found prima facie evidence of fraudulent practices and misappropriation by the respondent company. It issued interim measures to preserve the company's assets and protect the interests of the creditors, while the rest of the prayers in the application were to be considered along with the scheme. The court's jurisdiction under sections 391 and 394 was upheld, allowing it to intervene in the company's affairs to prevent depletion of assets.

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