2017 (5) TMI 318 - HC - Companies Law

Void lease deed - prayer for an order and direction to hand over possession of the property of the company in liquidation to the official liquidator - Held that - The onus was on Modi Rubber Limited as well as Bharat Marketing to plead and prove that the said alleged sub-lease in favour of Bharat Marketing by Modi Rubber Limited was not only a bonafide transaction but was in the interest of the company in liquidation and also that the said transaction was carried out in ordinary course of business by the company in liquidation. It is not in dispute that it was not the business of the company in liquidation to grant property of the company on lease or sub-lease. Modi Rubber Limited as well as Bharat Marketing have failed to plead and prove that the transaction was a bonafide transaction and was in the interest of the company, for the benefit of the company in liquidation and was carried out in ordinary course of business. The Calcutta High Court in case of Prudential Capital Markets Limited (in liquidation) 2007 (10) TMI 393 - HIGH COURT OF CALCUTTA as considered the similar facts and has held that section 536(2) of the Companies Act, 1956 provides for preservation of all the assets of a company upon commencement of the winding up proceedings, for ultimate distribution thereof amongst the creditors following winding up. It is held that the disposition of its properties and the effects made by a company after commencement of the winding up is covered by section 536(2) of the Companies Act, 1956. The Calcutta High Court declared the lease as void and held that the respondent was not entitled to any protection to remain in possession of the shops in question and was also not entitled to any protection under Andhra Pradesh Rent Control Act. The Company Court accordingly, directed the respondent to deliver vacant possession of the shops to the Official Liquidator. For the aforesaid reasons, the sub-lease executed by Modi Rubber Limited on 20th May, 2002 in favour of Bharat Marketing is thus declared as void. The oral application made by Modi Rubber Limited and Bharat Marketing for validating the said sub-lease is rejected. The Official Liquidator has made out a case for an order and direction against Bharat Marketing to hand over vacant and peaceful possession of the property of the company in liquidation as prayed in prayer clause (b) of the Official Liquidator's Report.

Issues Involved:
1. Validity of the sub-lease dated 20th May 2002.
2. Commencement of winding up of Modi Stone Limited.
3. Applicability of Section 536(2) of the Companies Act, 1956.
4. Jurisdiction of the Company Court under Section 446(2) of the Companies Act, 1956.
5. Bona fide nature of the sub-lease transaction.
6. Rights and obligations under the lease deed dated 30th September 1997.
7. Consequences of non-registration of the sub-lease.

Issue-wise Detailed Analysis:

1. Validity of the sub-lease dated 20th May 2002:
The sub-lease in favor of Bharat Marketing was executed by Modi Rubber Limited without obtaining prior permission from the Company Court, which is required under Section 536(2) of the Companies Act, 1956. The sub-lease was executed after the commencement of winding up proceedings against Modi Stone Limited, making it void. The Court declared the sub-lease void and directed Bharat Marketing to hand over possession of the property to the Official Liquidator.

2. Commencement of winding up of Modi Stone Limited:
The winding up of Modi Stone Limited commenced on 25th April 2001, the date when the BIFR recommended winding up. The Court held that the winding up proceedings commence from the date of the BIFR's recommendation, not from the date when the winding up order was passed by the Court.

3. Applicability of Section 536(2) of the Companies Act, 1956:
Section 536(2) states that any disposition of the property of the company made after the commencement of winding up is void unless the Court orders otherwise. The Court found that the sub-lease dated 20th May 2002 and the permission granted by Modi Stone Limited on 4th May 2002 were after the commencement of winding up and thus void. The Court emphasized that the transaction must be bona fide and in the best interest of the company to be validated.

4. Jurisdiction of the Company Court under Section 446(2) of the Companies Act, 1956:
The Company Court has jurisdiction to entertain or dispose of any suit or proceeding by or against the company, any claim made by or against the company, and any question of priorities or any other question whatsoever that may relate to or arise in the course of winding up. The Court held that it could decide the issues raised in the Official Liquidator's report, including the validity of the sub-lease, without transferring the suit filed by Bharat Marketing in the Small Causes Court.

5. Bona fide nature of the sub-lease transaction:
The Court found that neither Modi Rubber Limited nor Bharat Marketing had pleaded or proved that the sub-lease was in the best interest of the company or that it was a bona fide transaction. The sub-lease was executed at a meager rent of ?50,000 per month for a prime property, indicating that the transaction was not at arm's length and was fraudulent.

6. Rights and obligations under the lease deed dated 30th September 1997:
The lease deed did not permit sub-letting without prior written consent from Modi Stone Limited. The alleged permission for sub-letting was granted on 4th May 2002, after the commencement of the winding up proceedings, making it void. The Court rejected the argument that the lease deed itself granted automatic permission for sub-letting.

7. Consequences of non-registration of the sub-lease:
The sub-lease dated 20th May 2002 was not registered, which is a requirement under the Transfer of Property Act, 1882. The Court held that the non-registration of the sub-lease further invalidated the transaction.

Conclusion:
The Court declared the sub-lease dated 20th May 2002 void and directed Bharat Marketing to hand over possession of the property to the Official Liquidator. The Court emphasized the importance of obtaining prior permission from the Company Court for any disposition of the property after the commencement of winding up proceedings and highlighted the jurisdiction of the Company Court under Section 446(2) of the Companies Act, 1956. The transaction was found to be fraudulent and not in the best interest of the company, and thus could not be validated.

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