2008 (10) TMI 360 - HC - Companies Law

Sale of the property - power of court to order sale in interlocutory application - Whether the suits before the civil court are not maintainable by the exclusion of jurisdiction under the SARFAESI and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ? - rights of sub-mortgagee and lessee - Held that - We cannot enter into such controversy because the action for sale of the property did not originate from the second defendant, but from the bank. The bank as a creditor is always competent to make its own choice of property for sale for realisation of money. But one thing is clear that the second defendant by his manoeuvre is able to keep at bay any possible threat to the property of the eighth defendant and at the same time he could gain control over the theatre premises itself as a lessor to the exclusion of the seventh defendant whose principal asset is the cinema theatre complex. The Transfer of Property Act itself makes provision under section 65 recognising the mortgagor s power to lease. But, there is no power for the mortgagee who is not put in possession of the property to lease. The counsel for the second defendant points out to the clause in the corporate guarantee that the power is granted to the bank to grant a lease. But, if at all the power could be exercised, it could be only under the term of the mortgage deed, after taking possession from the mortgagor. The mortgage in favour of the bank was only a mortgage by deposit of title deeds and possession had not passed on to the mortgagee. If the mortgagee himself could have taken possession by virtue of the special provision under section 13(4) and handed over possession to his assignee, such assignee may be able to lease the property and also put the lessee in possession. Without any of these acts, it will be impermissible for a private assignee such as the second defendant or the partnership firm to execute the valid lease and put the lessee in possession. Giving effect to such a lease or obtaining the lease for discharge of the loan contracted by the eighth defendant, becomes therefore a distant possibility mired in several legal obstructions. The receiver must be continued in possession of the property until further directions and he should continue to render account in the manner in which it is being done. We have given directions for audit of the accounts from the day when the receiver has taken charge till the end of the financial year 2008-09 and for further periods also by separate order. The contention against the bank should be seen in the context that it has given a chain of actions which according to the respective plaintiffs is a part of a larger scheme of the second defendant to reach the assets of the seventh defendant-company and gain its control. The suits as framed are maintainable and amenable to civil court s jurisdiction. In directing the sale, we are trying to balance the equitable claims of several parties. The bank loan has to be discharged. The one-time settlement shall be affirmed. The parties who have advanced moneys to the second defendant and third defendant which have gone to discharge the bank loan shall have to be paid back their moneys. The indebtedness of the company has to be relieved. The shareholders have to be satisfied. We are reaffirming the principle laid down that Equity does not relieve against contracts which, owing to circumstances which might have been provided against, prove unexpectedly burdensome to one of the parties. In those cases, equity follows the law, and acts on the legal effect of the contract Under the circumstances, we affirm the decision of the learned single judge, as far as the merits of the claim of the plaintiffs are concerned. We however direct the expunction of the observations of the learned judge regarding the first defendant-bank in paragraphs 86, 87 and 107 that doubt the integrity of the bank. In view of the decision taken by us to endorse the proposal of the company for sale of the property, we shall direct the sale of the cinema theatre building complex by inviting global tenders by e-auction

Summary

Issues Involved:
1. Validity and fraudulence of impugned transactions.
2. Rights of sub-mortgagee and lessee.
3. Rights of assignee vis-a-vis SARFAESI Act.
4. Feasibility of continuing the Receiver.
5. Jurisdiction of the civil court and maintainability of present suits.
6. Power of the court to order sale of the property in interlocutory applications.

Detailed Analysis:

I. Validity and Fraudulence of Impugned Transactions:
The court examined the bona fides of transactions involving the assignment of mortgage and lease executed by the second defendant. The second defendant's actions were scrutinized, revealing that the transactions did not benefit the company but rather served the personal interests of the second defendant. The court highlighted the differences between redemption of mortgage and obtaining assignment of the mortgage, emphasizing that the second defendant's scheme was questionable and lacked a viable formulation for generating the necessary funds. The court found that the transactions were crafted to benefit the second defendant personally, resulting in a prima facie case of fraud.

II. Rights of Sub-Mortgagee and Lessee:
The court analyzed the rights of the sub-mortgagee and lessee, noting that the sub-mortgagee could bring the property to sale if the debt was not discharged within the stipulated time. The lessee's rights were also examined, particularly the validity of the lease executed by the second defendant. The court found that the second defendant's actions made the property vulnerable to sale by the sub-mortgagee, thus failing to avert the threat of sale as claimed.

III. Rights of Assignee vis-a-vis SARFAESI Act:
The court discussed the rights of the assignee under the SARFAESI Act, concluding that the second defendant or the partnership firm could not be treated as a "secured creditor" under the Act. Consequently, the assignee could not exercise the same powers as the original mortgagee under the SARFAESI Act. The court emphasized that the second defendant's scheme did not provide a lawful basis for creating a lease or sub-mortgage, rendering the transactions invalid.

IV. Feasibility of Continuing the Receiver:
The court considered whether the receiver appointed by the Debts Recovery Tribunal should continue in possession. Given the lack of bona fides in the second defendant's actions and the ongoing dissension among the company's management, the court found it just and convenient to continue the receiver's possession. The receiver had generated significant income, which could be used to discharge the company's debts.

V. Jurisdiction of the Civil Court and Maintainability of Present Suits:
The court addressed the contention that the suits were not maintainable under the SARFAESI Act. It clarified that the civil court's jurisdiction was not ousted, as the suits involved allegations of fraud and a series of transactions beyond the scope of the SARFAESI Act. The court held that the civil court had the jurisdiction to adjudicate the validity of the transactions and the alleged fraud.

VI. Power of the Court to Order Sale in Interlocutory Applications:
The court affirmed the learned single judge's decision that there was a prima facie case in favor of the plaintiffs. Given the ongoing disputes and the company's financial situation, the court found it equitable to order the sale of the cinema theatre complex through a global tender process. This decision aimed to balance the interests of all parties, discharge the company's debts, and distribute the surplus proceeds among the shareholders.

Conclusion:
The court affirmed the learned single judge's decision on the merits of the plaintiffs' claims and directed the sale of the cinema theatre complex through a global tender process. The proceeds from the sale would be used to repay the amounts advanced by the fourth and fifth defendants with interest, discharge the company's debts, and distribute the surplus among the shareholders. The court also directed the expunction of certain observations regarding the bank's integrity and emphasized the equitable principles guiding its decision. The appeals were disposed of accordingly, with no costs.