2023 (6) TMI 1452 - HC - Indian Laws

Legality of the City Civil Court's order permitting liquidation of fixed deposits to pay statutory dues - breach of the order of NCLT to deposit the amount received towards rent, property taxes, repair cess - whether the City Civil Court correctly exercised the discretion to permit the liquidation of the investment of defendant No.4? - HELD THAT - Having found that the income of defendant No.4 was not appropriated towards the discharge of statutory dues, in priority, defendant No.4 was directed to open a separate bank account and the total rent/property tax/repair cess/any other amount collected was to be deposited and withdrawal therefrom was also made subject to the permission and satisfaction of NCLT. It was provided in black and white that MCGM shall have first charge over the receipt till the outstanding dues were squared-up - the manner in which the City Civil Court approached the issue deserves consideration. The learned Judge, City Civil Court, records that bills were raised on behalf of defendant No.4 under different heads i.e. property taxes/repair cess/rent. It was the responsibility of defendant No.1 to ensure that the statutory dues were deposited preferentially. The Court further noted that the direction for opening a separate bank account were not complied with by the defendants till 1st February, 2019, as noted in the order of NCLT. It went on to record that defendant No.1 did not faithfully disclose as to whether the directions of the NCLT were complied with. The very raison d etre of the directions of the NCLT was to ensure that the amount received from the tenants towards rent, charges and cess was primarily appropriated toward the outstanding property dues. NCLT went on to provide that the outstanding property tax dues would constitute a first charge on the said receipts. The situation is accentuated by the fact that the amounts were collected from the tenants under different heads including property taxes and repair cess. If that was the case, the failure to appropriate the said amount which was collected for the specific purposes is clearly inexplicable. The City Civil Court observed in no uncertain terms that neither the compliance of the order of NCLT was ensured nor the receipts were disclosed. In this view of the matter, the impugned order which does not take into account the prima facie blameworthy conduct of defendant Nos.1 and 2 and non-compliance of the order of NCLT, deserves to be interfered with. The fact that the City Civil Court had directed defendant Nos.1 and 2 to comply with the directions of NCLT, after liquidation of the assets of defendant No.4 and payment of the property taxes, is of no avail in infusing legality and validity into the impugned order. The impugned order is set aside - appeal allowed.

Summary

Issues Involved:

1. Legality of the City Civil Court's order permitting liquidation of fixed deposits to pay statutory dues.
2. Compliance with the National Company Law Tribunal (NCLT) orders regarding financial management and statutory dues.
3. Conduct of defendant Nos.1 and 2 in managing the affairs of defendant No.4.
4. Equitable relief considerations at an interim stage.
5. Preservation of company assets amidst statutory dues.

Issue-wise Detailed Analysis:

1. Legality of the City Civil Court's Order:

The appeal challenges the City Civil Court's decision allowing defendant No.1 to liquidate fixed deposits of defendant No.4 to pay property taxes and repair cess due to the Municipal Corporation of Greater Mumbai (MCGM). The appellant argued that this order was in direct violation of a previous High Court order dated 20th December 2013, which restrained alteration of fixed deposits. The City Civil Court's decision was critiqued for not adequately considering this restraint and for misapplying discretion by allowing liquidation without justification.

2. Compliance with NCLT Orders:

The NCLT had directed defendant Nos.1 and 2 to deposit rent, property tax, and repair cess into a separate escrow account, prioritizing the payment of statutory dues. The City Civil Court noted non-compliance with these orders, as defendant Nos.1 and 2 failed to provide an account of the receipts or ensure that the statutory dues were paid. The appeal highlighted this non-compliance as a significant oversight in the City Civil Court's decision to allow the liquidation of fixed deposits.

3. Conduct of Defendant Nos.1 and 2:

The conduct of defendant Nos.1 and 2 was scrutinized, with allegations of mismanagement and diversion of funds. The appellant argued that their failure to adhere to NCLT's directives and their handling of company finances disqualified them from receiving equitable relief. The appeal emphasized that their actions contributed to the financial predicament of defendant No.4, which should have been a critical factor in the City Civil Court's decision-making process.

4. Equitable Relief Considerations:

The appeal stressed the importance of considering the conduct of parties when granting equitable relief. The Supreme Court's precedent in Gujarat Bottling Co. Ltd. v. Coca Cola Co. was cited, emphasizing that a party seeking relief must demonstrate unblemished conduct. The City Civil Court's decision was criticized for overlooking the blameworthy actions of defendant Nos.1 and 2, which should have precluded them from obtaining relief.

5. Preservation of Company Assets:

The necessity to preserve the assets of defendant No.4, specifically Manek Mahal, was acknowledged. However, the appeal argued that the liquidation of fixed deposits should not be permitted without ensuring compliance with NCLT orders and accountability for past financial mismanagement. The court was urged to impose conditions on defendant Nos.1 and 2 to bring back misappropriated funds before allowing any liquidation of assets.

Conclusion and Order:

The appeal was partly allowed, setting aside the City Civil Court's order. The court directed defendant Nos.1 and 2 to disclose and deposit funds collected under the heads of rent, property taxes, and repair cess since the NCLT order. Only after these conditions are met, and if a shortfall remains, may the fixed deposits be liquidated to cover statutory dues. The City Civil Court was tasked with overseeing compliance and facilitating the payment of dues while preserving company assets. The decision underscores the importance of adhering to judicial and tribunal orders and maintaining transparency in financial management.