2008 (8) TMI 573 - HC - Companies Law

Protection of the property of respondent No. 1 company from being sold by respondent No. 2 in execution of the decree secured by respondent No. 3 against another company - Held that - Proceedings initiated by respondent No. 2 may be valid in so far against the properties and assets of the judgment debtors are concerned but by no stretch of imagination respondent No. 2 can be permitted to take over or sell the properties of the company (in liquidation) without the company being a debtor much less a judgment debtor. Since it has been brought to the notice of respondent No. 2 that the property sought to be attached belongs to the company (in liquidation) and respondent No. 2 has already issued notice to the official liquidator it has no business to sell the property without affording any opportunity to the official liquidator who represents the company (in liquidation) and has every right to object to the attachment and sale of the property of the company (in liquidation). Even though the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act 1993 have overriding effect and the Tribunal/Recovery Officer has exclusive jurisdiction to deal with the property and assets of the judgment debtor but nonetheless it has no authority under law even under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act 1993 to deal with the property of the company in liquidation not a party or judgment debtor before the Debts Recovery Tribunal and to that extent this court can exercise a limited jurisdiction to protect the property of the company (in liquidation). In view of the legal position direct respondent No. 2 to implead the official liquidator as a party to the proceedings before him and afford him reasonable and adequate opportunity to project the case on behalf of the company (in liquidation). Respondent No. 2 shall not proceed to sell any of the properties/assets of the company (in liquidation) without hearing the official liquidator till he decides the question of the status of the property of the company (in liquidation). The official liquidator shall keep this court informed about the proceedings before respondent No. 2.

Issues Involved:
1. Jurisdiction under Section 446 of the Companies Act, 1956.
2. Ownership and attachment of property belonging to the company in liquidation.
3. Rights and obligations of shareholders in relation to the company's property.
4. Applicability and precedence of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
5. Role and authority of the official liquidator.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 446 of the Companies Act, 1956:
The petitioner invoked Section 446 of the Companies Act, 1956, seeking protection of the property of M/s. Vedsons Engineers P. Ltd. (in liquidation) from being sold by the Recovery Officer (respondent No. 2) in execution of a decree against another company, M/s. Vedsons P. Ltd. The court noted that the winding-up proceedings for M/s. Vedsons Engineers P. Ltd. were still pending and that the official liquidator had taken possession of the assets. The court emphasized that the property of the company in liquidation could not be dealt with by the Recovery Officer without proper jurisdiction and without involving the official liquidator.

2. Ownership and attachment of property belonging to the company in liquidation:
The property in question, Anand Cinema, was leased to M/s. Vedsons Engineers P. Ltd. (in liquidation) and not to M/s. Vedsons P. Ltd., the judgment debtor in the decree. The court highlighted that M/s. Vedsons Engineers P. Ltd. was a distinct entity and not liable for the debts of M/s. Vedsons P. Ltd. The Recovery Officer's order for attachment was challenged on the grounds that it was based on incorrect facts and that the property belonged to the company in liquidation, not to any individual or the judgment debtor company.

3. Rights and obligations of shareholders in relation to the company's property:
The court referred to established legal principles, including the judgment in Mrs. Bacha F. Guzdar v. CIT, which clarified that shareholders do not have an interest in the company's property. Shareholders have a right to participate in profits and, upon liquidation, in the remaining assets, but they do not own the company's property. The court reiterated that the property held in the company's name belongs to the company itself, and shareholders cannot claim individual ownership or have their shares attached for personal debts.

4. Applicability and precedence of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993:
The court examined the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and the Supreme Court's judgment in Allahabad Bank v. Canara Bank, which established that the Tribunal and Recovery Officers have exclusive jurisdiction over debt recovery matters. However, the court clarified that this jurisdiction is limited to the properties of the judgment debtor and does not extend to properties of other entities, such as the company in liquidation, which were not party to the debt recovery proceedings.

5. Role and authority of the official liquidator:
The court underscored the role of the official liquidator in managing and protecting the assets of the company in liquidation. It directed the Recovery Officer to include the official liquidator as a party in the proceedings and to provide an opportunity to be heard before proceeding with the sale of any property claimed by the company in liquidation. The court asserted its limited jurisdiction to protect the property of the company in liquidation from unauthorized attachment and sale.

Conclusion:
The petition was disposed of with directions to the Recovery Officer to involve the official liquidator in the proceedings and to refrain from selling the property of the company in liquidation without proper adjudication of its status. The court emphasized the need to protect the assets of the company in liquidation and ensure that any actions taken were within the legal framework and jurisdictional boundaries.

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