2015 (11) TMI 194 - HC - Companies Law

Sale after winding up - Deed of Assignment executed by exdirector - rights of secured creditor - whether Shashi Gopal, in his capacity as a subrogee, was entitled to sell any of the hypothecated securities without the leave of the Company Court? - whether the sale is liable to be set aside under Section 536(2) or 537(1)(b) of the Companies Act? - Held that - After the introduction of Section 529-A which gave workers a pari passu charge along with secured creditors in mortgaged or hypothecated securities in a winding up, it is no longer open for a secured creditor to contend that it is entitled to enforce its securities without reference to or the leave of the Company Court. It was then contended on behalf of MMPL that the Official Liquidator having failed to adjudicate the claims of the workmen, no pari passu charge in their favour could be said to exist which would limit the right of the subrogee to deal with the hypothecated securities. This argument is clearly misconceived. The mere fact that the Official Liquidator has not yet adjudicated the claims of workmen would not disentitle them to a pari passu charge or leave a secured creditor free to deal with a security as he chooses. The circumstances of the present case leave little doubt that the sale itself, without the leave of the court and given the manner in which it was effected, was unlawful. Thus following Order would meet the ends of justice a) The Deed of Assignment dated 14.03.2012 between Shashi Gopal and MMPL in respect of the hypothecated securities is set aside as illegal and void. b) MMPL shall on or before 2nd December,2015, deposit a sum of ₹ 25 lakhs with the Official Liquidator, being the difference between the amount already received by MMPL from Sony Music (₹ 1.75 crores) and the amount paid by MMPL to Shashi Gopal (₹ 1.5 crores). c) The Official Liquidator shall complete the adjudication of the claims of the workmen of the Company in Liquidation within a period of sixteen weeks from today. In doing so, the Official Liquidator shall also consider whether the claims are in fact by persons who are entitled to priority as workmen under Section 529-A of the Companies Act. He shall also verify the amounts paid by Shashi Gopal to UBI to which he is entitled to credit as a subrogee. d) On such adjudication and verification, the Official Liquidator shall place a report before this Court for a distribution pari passu of the amount so far generated from the hypothecated securities, i.e., ₹ 1.75 crores, between the workers and Shashi Gopal as subrogee. In that report, this Court shall consider the amount, if any, that Shashi Gopal would be liable to bring in to meet the amounts due to the workmen in such a distribution. e) Sony Music shall render accounts to the Official Liquidator of the revenue generated by it from the exploitation of the rights which are the subject matter of the Agreements in its favour. Any overflow which was payable to MMPL under the terms of the said Agreements shall be distributed pari passu among Shashi Gopal as a subrogee and the workmen of the Company in liquidation. f) On expiry of the tenure of the Agreements in favour of Sony Music; MMPL, Shashi Gopal and Sony Music shall hand over forthwith to the Official Liquidator all material and documents in respect of the repertoire which constitutes the hypothecated securities including but not limited to Masters, Link Agreements and publicity material. The Official Liquidator shall thereafter take steps under the directions and supervision of this Court to sell and/or license the rights which constitute the hypothecated securities. Any revenue generated by such sale/exploitation shall be distributed pari passu among Shashi Gopal and the workers of the company in liquidation. Any overflow shall be distributed in accordance with the Companies Act and the Company Court Rules.

Issues Involved:
1. Legality of the Deed of Assignment dated 14.03.2012 executed by Mr. Shashi Gopal.
2. Compliance with Sections 536(2) and 537(1)(b) of the Companies Act, 1956.
3. Rights and obligations of a subrogee.
4. Pari passu charge of the workmen under Section 529-A of the Companies Act.
5. Validity of the sale of hypothecated securities.
6. Role of the Official Liquidator in the sale of company assets.
7. Impact of non-adjudicated workmen claims on the sale of assets.
8. Fiduciary duty in the sale of hypothecated assets.
9. Determination of fair value and undervaluation of assets.
10. Equitable relief and distribution of sale proceeds.

Issue-wise Detailed Analysis:

1. Legality of the Deed of Assignment:
The Official Liquidator sought a declaration that the Deed of Assignment dated 14.03.2012 executed by Mr. Shashi Gopal in favor of MMPL is illegal and void. The Deed was executed without the leave of the Court, without valuation, and without inviting public offers, making it void under Sections 536(2) and 537(1)(b) of the Companies Act, 1956.

2. Compliance with Sections 536(2) and 537(1)(b) of the Companies Act, 1956:
The judgment emphasized that any sale of the assets of a company in liquidation, whether by the company itself or a third party, falls within the prohibitive ambit of Sections 536(2) and 537(1)(b). The sale by Mr. Shashi Gopal without the leave of the Company Court was deemed void.

3. Rights and Obligations of a Subrogee:
Mr. Shashi Gopal, as a subrogee, was entitled to the benefit of the securities held by the bank. However, he was not entitled to sell the hypothecated assets without reference to the Company Court. The judgment clarified that a subrogee stands in a fiduciary position and must secure the best possible price for the assets.

4. Pari Passu Charge of the Workmen under Section 529-A:
The judgment highlighted that after the introduction of Section 529-A, a secured creditor cannot enforce securities without the consent of the Official Liquidator and under the directions of the Company Court. The workmen's claims create a pari passu charge on the secured assets, and any sale must consider their interests.

5. Validity of the Sale of Hypothecated Securities:
The sale of hypothecated securities by Mr. Shashi Gopal was invalid as it was conducted without a valuation, public auction, or the leave of the Company Court. The sale to a related party at a randomly fixed price was deemed improper and void.

6. Role of the Official Liquidator in the Sale of Company Assets:
The Official Liquidator is a custodian of the company's assets and acts under the directions of the Court. The OL must be involved in any sale of hypothecated assets to ensure the best possible price and protect the interests of all stakeholders, including workmen and creditors.

7. Impact of Non-Adjudicated Workmen Claims on the Sale of Assets:
The mere fact that the Official Liquidator has not yet adjudicated the claims of workmen does not disentitle them to a pari passu charge. The secured creditor must apply to the Company Court for directions if workmen's claims have not been adjudicated.

8. Fiduciary Duty in the Sale of Hypothecated Assets:
The judgment emphasized that a pledgee or hypothecatee stands in a fiduciary position and must adopt every reasonable precaution to secure the best possible price. The sale by Mr. Shashi Gopal did not meet these standards, making it open to challenge.

9. Determination of Fair Value and Undervaluation of Assets:
The burden of proving that the sale was for the benefit of the company lies on the person seeking to maintain the sale. In this case, Mr. Shashi Gopal and MMPL failed to demonstrate that the consideration of Rs. 1.5 crores was a fair value for the hypothecated securities. The agreements with Sony Music indicated undervaluation.

10. Equitable Relief and Distribution of Sale Proceeds:
The judgment ordered MMPL to deposit Rs. 25 lakhs with the Official Liquidator, being the difference between the amount received from Sony Music and the amount paid to Mr. Shashi Gopal. The OL was directed to adjudicate the claims of the workmen and verify the amounts paid by Mr. Shashi Gopal. The sale proceeds were to be distributed pari passu among the workmen and Mr. Shashi Gopal.

Conclusion:
The Deed of Assignment dated 14.03.2012 was set aside as illegal and void. MMPL was ordered to deposit Rs. 25 lakhs with the Official Liquidator. The OL was directed to complete the adjudication of workmen's claims and verify the amounts paid by Mr. Shashi Gopal. The sale proceeds were to be distributed among the workmen and Mr. Shashi Gopal. The judgment emphasized the importance of securing the best possible price for hypothecated assets and protecting the interests of all stakeholders.

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