2010 (1) TMI 567 - HC - Companies Law

Compromise and arrangement - whether the suit property can be said to have been validly disposed of by E Company in favour of the G Company? Held that - Both E Company and G Company will have to bring back the stated amount of ₹ 75 lakhs and ₹ 3.55 crores respectively (aggregate amount of ₹ 4.30 crores) along with interest at the rate of 18 per cent per annum to be computed from the dates referred to in Paragraph 50 above. The principal amount as well as interest amount shall be deposited within four weeks from today. If the said amount is deposited in time, the same will be made over to K Company. Thereafter, K Company would be free to avail of the amount so deposited without prejudice to its rights and contentions and remedy for recovery of loss and damages against the Directors of G Company and/or E Company and/or against respective companies, if so advised. The said proceedings will have to be decided on its own merits. In the event, E Company and G Company comply with the direction contained in clause (i), the property in question of E Company shall be disposed of by conducting Court Auction disregarding the two registered conveyances in favour of G Company and K Company respectively, which are illegal and non-existent in law. K Company will be entitled to participate in the Court Auction of the suit property, if so advised. The sale proceeds would be primarily used for settling the claims of all the creditors of the E Company. That will be without prejudice to the rights of the unsecured creditors of the E Company to proceed against the Directors of E Company and/or G Company or against either of the two companies for appropriate relief, as may be advised. The said proceedings will be decided on its own merits. However, if E Company and/or G Company fail to deposit the amount, as per clause (i) above, in that case, it is ordered that the suit property shall be disposed of by conducting Court Auction disregarding the two registered conveyances in favour of the G Company and K company respectively, which are illegal and non-existent in the eye of law. It will be open to K Company to participate in the said Court Auction of the suit property, if so advised. Out of the sale proceeds, the amount equivalent to principal amount of ₹ 4.30 crores will have to be set apart and/or adjusted against the bid amount offered by K Company, if it were to be the highest bidder, with liberty to the K company to proceed against the Directors of E Company and G Company and/or against the said two companies for claim of further damages and loss, if so advised. The said proceedings will have to be decided on its own merits. The residuary amount of the sale proceeds will be distributed amongst the unsecured creditors of the E Company in terms of the scheme. In case, K Company is not the highest bidder, the amount of ₹ 4.30 crores to be set apart from the sale proceeds will be made over to K Company with liberty to proceed against the Directors of K Company and G Company and/or against the said two Companies for claim of further damages and loss, if so advised. The said proceedings will be decided on its own merits. In addition, if the direction contained in clause (i) is not complied by E Company and/or G Company in whole or in part, all the assets of the concerned Company would stand attached under this order, so that the same can be realised and distributed amongst the unsecured creditors of E Company as per the scheme, to the extent of aggregate amount of ₹ 4.30 crores along with interest accrued thereon referred to in clause (i) above after deducting the residuary amount of the sale proceeds recovered from the sale of the property in question of the E Company left after setting apart ₹ 4.30 crores for K Company as per clause (iii) above. This will be without prejudice to the rights of the unsecured creditors to proceed against the Directors of E Company and/or G Company or against either of the two companies for appropriate reliefs, as may be advised. Those proceedings will be decided on its own merits. In the event any further amount is still available for distribution out of the sale proceeds of the property of the E Company and/or G Company, the Company Registrar shall submit his report for appropriate directions. The Prothonotary and Senior Master is ordered to take steps to initiate criminal action against the erring persons in the light of the observations made in this decision. Copy of this Judgment be placed before the Registrar General of this Court to initiate appropriate action against the then Company Registrar of this Court, who was appointed as the Chairman of the Committee in terms of order dated 12-2-2004, in view of observations made in this Judgment, in particular, Paragraph 48.

Summary

Issues Involved:
1. Validity of the sale of the property by "E" Company.
2. Compliance with the Court's order dated 12-02-2004.
3. Impact of the sale on unsecured creditors.
4. Legality of the transactions between "E" Company, "G" Company, and "K" Company.
5. Potential criminal action against the erring parties.

Issue-wise Detailed Analysis:

1. Validity of the Sale of the Property by "E" Company:
The Court found that the sale of the property by "E" Company to "G" Company was illegal and non-existent in law. The transfer was in direct violation of the Court's order dated 12-02-2004, which issued peremptory directions on how the property should be sold and the proceeds distributed. The sale was not conducted in the manner specified by the Court, making it void and conferring no right, title, or interest in the transferee.

2. Compliance with the Court's Order Dated 12-02-2004:
The Court's order dated 12-02-2004 required "E" Company to sell the property in a specific manner and distribute the proceeds among unsecured creditors. The order was treated as a judicial pronouncement with statutory force, binding on all parties involved. The sale by "E" Company to "G" Company and subsequently to "K" Company was in direct defiance of this order, rendering the transactions illegal.

3. Impact of the Sale on Unsecured Creditors:
The sale of the property by "E" Company adversely affected the unsecured creditors. The Court emphasized that the scheme sanctioned under Section 391 of the Companies Act had statutory force and was binding on all parties, including dissenting creditors. The unauthorized sale delayed and defeated the claims of the unsecured creditors, necessitating the Court's intervention to restore their rights.

4. Legality of the Transactions Between "E" Company, "G" Company, and "K" Company:
The transactions between "E" Company, "G" Company, and "K" Company were found to be fraudulent and collusive. The Court noted that the directors of "E" Company and "G" Company acted in connivance to overreach the Court's order and defeat the claims of creditors. The sale to "K" Company, although claimed to be in good faith, was tainted by the illegal and fraudulent actions of the previous transactions. The Court held that the transfers were void and did not confer any valid title or interest in the property.

5. Potential Criminal Action Against the Erring Parties:
The Court directed the initiation of criminal action against the erring directors and other involved parties. The fraudulent and collusive actions of the directors of "E" Company and "G" Company, which resulted in the illegal sale of the property, warranted criminal proceedings. The Court emphasized the need to uphold the rule of law and deter such conduct in the future.

Orders Issued:
1. "E" Company and "G" Company were directed to bring back the amounts received from the sale, along with interest, to be deposited within four weeks.
2. If the amounts were deposited, they would be made over to "K" Company, which could then pursue further remedies for loss and damages.
3. If the amounts were not deposited, the property would be sold through a Court auction, with "K" Company entitled to participate.
4. The Prothonotary and Senior Master was ordered to initiate criminal action against the erring persons.
5. The Registrar General was directed to initiate appropriate action against the then Company Registrar for his inaction.

The judgment comprehensively addressed the issues, ensuring that the rights of the unsecured creditors were protected, and the fraudulent actions of the directors were penalized.