2009 (6) TMI 585 - HC - Companies Law

Winding up - seeking directions for releasing the property bearing Door No. 12-25-12, Ganeshwar Rao Street (Sivalayam Street), Kothapet, Guntur from the custody/possession of the Official Liquidator attached to this Court - Held that - It becomes crystal clear that fraud has been played by merely looking at the sale deed said to have been executed on 14-7-2005, pursuant to the decree passed by the Lok Adalat on 28-6-2005. The sale deed has been executed in favour of Sri Nasayam Mohammed Feroz, S/o. Mohd. Farook, Sri Pasapoina Nageswara Rao, S/o. China Venkata Swamy and Sri Arimandla Veera Reddy, S/o. Rami Reddy. They are plaintiff Nos. 1, 2 and 5 in the civil suit O.S. No. 20 of 2005. Plaintiff Nos. 3, 4 and 6 are now said to have dropped out of this sale transaction. No reasons are forthcoming as to why so immediately after a compromise decree has been entered into on 28-6-2005, they should loose their patience by not waiting for a couple of more weeks for the sale deed to be executed in their favour. No reasons are forthcoming as to how the amount of sale consideration, paid-up by those three individuals initially, was reconciled. It was asserted that they raised loans initially to pool up the sale consideration. When they realised that the debt burden is mounting day-by-day, they sold off this very property to Rev. K.V.K. Rao of Hyderabad. However, now in the additional material papers certificates from the Mandal Revenue Officer are produced to show that they were oozing with excessive cash yielded by their Horticulture Since no right or interest of title can ever pass in favour of the beneficiary of the fraud and further no action can be maintained which is founded in fraud, I declare that the decree passed by the Lok Adalat pursuant to a compromise entered into by and between the parties therein in civil suit O.S. No. 20 of 2005 on the file of the III Addl. District Judge at Guntur as a nullity. Consequently, no rights of any kind would ever pass to the hands of the present applicants vis-a-vis the property in question owned and belonging to the company.

Issues Involved:
1. Legitimacy of the sale transaction of the property by the company.
2. Allegations of fraud and misrepresentation in the sale transaction.
3. Validity of the compromise decree passed by the Lok Adalat.
4. Authority of the company director to execute the sale deed.
5. Financial capacity of the applicants to purchase the property.
6. Role of the Official Liquidator in taking possession of the property.

Detailed Analysis:

1. Legitimacy of the Sale Transaction of the Property by the Company:
The applicants sought directions for releasing the property from the custody of the Official Liquidator, claiming that the property was sold to them by the company through one of its directors. The property in question was sold for Rs. 50 lakhs, with Rs. 49,75,000 paid as advance and Rs. 25,000 to be paid at the time of registration. The sale deed was executed on 14-7-2005, but the Sub-Registrar kept it pending due to deficit stamp duty.

2. Allegations of Fraud and Misrepresentation in the Sale Transaction:
The court found that the sale transaction was fraudulent. The property, valued at approximately Rs. 3.5 crores, was sold for a mere Rs. 50 lakhs without any publicity or proper authorization. The applicants, described as young individuals with questionable financial capacity, managed to pool Rs. 49,75,000 in cash but failed to pay the remaining Rs. 25,000 promptly. The court noted inconsistencies in their ages and descriptions in various documents, suggesting deceitful intentions.

3. Validity of the Compromise Decree Passed by the Lok Adalat:
The compromise decree passed by the Lok Adalat on 28-6-2005 was found to be fraudulent. The court observed that the terms of the compromise were heavily skewed in favor of the plaintiffs (applicants), with no apparent benefit to the defendant (company). The court declared the decree as a nullity, stating that it was obtained by playing fraud on the court.

4. Authority of the Company Director to Execute the Sale Deed:
The court found no evidence of authorization given to the director, Sri D.R.K. Singh, to negotiate or execute the sale deed on behalf of the company. There was no resolution passed by the board of directors or the general body of the company authorizing the sale of the property, which is a requirement under sections 48 and 291 of the Companies Act, 1956.

5. Financial Capacity of the Applicants to Purchase the Property:
The applicants failed to demonstrate their financial capacity to pool Rs. 49,75,000 in cash. The court found the certificates provided by the revenue authorities regarding their financial status to be contradictory and unreliable. The applicants' claim of raising loans to purchase the property was not substantiated with credible evidence.

6. Role of the Official Liquidator in Taking Possession of the Property:
The Official Liquidator took possession of the property on 4-4-2007, following the winding-up order of the company on 4-12-2006. The court supported the actions of the Official Liquidator, noting that the applicants' attempt to secure the property was a method to defeat the winding-up process and the interests of the depositors who had been defrauded by the company.

Conclusion:
The court dismissed the application, declaring the sale transaction and the compromise decree as fraudulent. It emphasized that fraud vitiates every transaction and no rights can flow from such fraudulent acts. The court highlighted the need for the Lok Adalat to ensure that compromises are based on good faith and honest intentions, guided by principles of natural justice, equity, and fair play.

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