2007 (4) TMI 371 - HC - Companies Law

Summary

Issues Involved:
1. Entitlement to priority in payment of rent/mesne profits as liquidation expenses.
2. Determination of whether the premises were retained for the purpose of liquidation.
3. Applicability of the Supreme Court judgment in Official Liquidators, U.P. Union Bank Ltd. v. Rameshwar Nath Agarwal.
4. Impact of termination of the lease prior to liquidation proceedings.

Detailed Analysis:

1. Entitlement to Priority in Payment of Rent/Mesne Profits as Liquidation Expenses:
The appellants contended that the amounts due to them should be considered as liquidation expenses and thus entitled to priority in payment. They argued that since the premises were used by the official liquidator to store assets of the company, the rent/mesne profits from 15-7-1999 to 29-12-2001 should be treated as part of the liquidation expenses under section 530(6) of the Companies Act, 1956. The official liquidator, however, disputed this claim, asserting that the premises were in possession in the usual course and not specifically for liquidation purposes, thereby classifying the payment as an ordinary debt.

2. Determination of Whether the Premises Were Retained for the Purpose of Liquidation:
The court examined whether the premises were retained by the official liquidator to facilitate the liquidation process. The official liquidator had argued that the premises were necessary to store the company's assets until they could be sold, as no other suitable premises were available. The court found that the official liquidator's retention of the premises was indeed for the purpose of ensuring a successful sale of the company's assets, thereby categorizing the retention as necessary for liquidation.

3. Applicability of the Supreme Court Judgment in Official Liquidators, U.P. Union Bank Ltd. v. Rameshwar Nath Agarwal:
The learned Single Judge had relied on this Supreme Court judgment to conclude that the appellants' claim should be treated as an ordinary debt, as they did not seek rescission of the contract post-liquidation. However, the appellants argued that their case was different because the lease had already been terminated before the liquidation process began. The Supreme Court had distinguished between properties retained for liquidation purposes and those merely held without active use in the liquidation process. The court in the present case found that the premises were actively used for liquidation, thus supporting the appellants' claim for priority.

4. Impact of Termination of the Lease Prior to Liquidation Proceedings:
The court noted that the lease had been terminated by a legal notice dated 17-7-1989, prior to the initiation of liquidation proceedings. This termination meant that there was no subsisting lease contract to rescind at the time of liquidation. The court held that the learned Company Judge erred in concluding that the appellants should have sought rescission of the contract, as the lease had already been terminated.

Conclusion:
The court concluded that the appellants' claim for mesne profits/rent from 15-7-1999 to 29-12-2001 should be treated as liquidation expenses, entitling them to priority in payment. The order dated 24-8-2006 was set aside, and the matter was remitted to the learned Company Judge for further proceedings in accordance with the law. The court emphasized that the official liquidator's retention of the premises was necessary for the successful conclusion of the liquidation process, thereby justifying the priority status of the appellants' claim.