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2018 (9) TMI 99 - HC - Companies LawPetition for winding up - proceedings deemed to have commenced - Held that - The weight of authority is clearly in favour of the view that winding up proceedings would be deemed to have commenced on the date of recommendation by the BIFR that a Company be wound up and respectfully agree with the said view. In any event, whether one were to take as the relevant date to commence the winding up proceedings, the date of recommendation, i.e., 22nd January 2007, the date of receipt by this Court of the recommendation, i.e., 5th July 2007, or the date of admission of the winding up proceedings, i.e, 27th August 2009, the Consent Decree dated 9th July 2009 falls within the period stipulated in Section 531 of the Companies Act, 1956 for an enquiry as to whether a transaction constitutes a fraudulent preference. Apart from the fact that the Consent Decree itself is liable to be set aside, applicant also acquired no title or interest in the Satara Property merely by virtue of the attachment. Applicant is no more than an unsecured creditor who has no prior right in law over any other lender for payment out of the sale proceeds of the Satara property. The interest of all stakeholders would therefore be far better served if leave as sought for by applicant is refused and the property is sold by the Official Liquidator. The cause of action in favour of Official Liquidator can be held to be complete only on his becoming aware, from the suit proceedings, of the nature of the fraud perpetrated by applicant in collusion with the Company. As such the directions sought by Official Liquidator are clearly within time. Refund of amounts withdrawn - It is applicant s case that Official Liquidator is, in any event, not entitled to apply for refund by applicant of the amounts withdrawn by it - The formulation of this argument is problematic. The distribution was effected not under orders passed by DRT - The order dated 21st April 2016 of this Court permitting such distribution was careful to qualify the order by the observation that it would be an interim arrangement subject to final outcome of the issue on status of the creditors of the Company (in liquidation) and that the order was being passed at the instance of Kotak Mahindra Bank and applicant and without prejudice to the rights and contentions of the Official Liquidator . As such, this order merely permitted an adhoc distribution of the sale proceeds and did not conclude any rights between the parties. Indeed, this issue regarding the illegality of the Consent Decree sought to be enforced by applicant was neither considered nor determined by either the DRT or this Court. (a) the leave sought by applicant under Section 446 of the Companies Act 1956 to enforce the Consent Decree dated 9th July 2009 is refused; (b) the Consent Decree dated 9th July 2009 is declared illegal and void as a fraudulent preference; and (c) applicant is directed to refund with interest at 12% p.a. the amount of ₹ 10,17,03,493/withdrawn by it from the sale proceeds of the Ambattur property.
Issues Involved:
1. Commencement of winding-up proceedings. 2. Validity of the Consent Decree under Section 531 of the Companies Act, 1956. 3. Remedy available to the Official Liquidator to challenge the Consent Decree. 4. Whether the attachment of the Satara property constitutes a charge. 5. Plea of limitation regarding the challenge to the Consent Decree. 6. Refund of amounts withdrawn by the applicant. Detailed Analysis: 1. Commencement of Winding-Up Proceedings: The Court had to determine when the winding-up proceedings against the Company commenced. The Official Liquidator contended that the proceedings commenced on the date of the BIFR's recommendation (22nd January 2007), while the applicant argued that they commenced on the date of the winding-up order (24th June 2011). The Court, relying on the Supreme Court's judgment in NGEF Limited and other precedents, held that the winding-up proceedings commenced on the date of the BIFR's recommendation. Thus, the Consent Decree dated 9th July 2009 fell within the period stipulated in Section 531 of the Companies Act, 1956, for determining fraudulent preference. 2. Validity of the Consent Decree under Section 531 of the Companies Act, 1956: The Court examined whether the Consent Decree constituted a fraudulent preference. It was found that: - The Company had misled the Court by not disclosing the BIFR's fresh recommendation for winding up. - The Consent Decree was entered into by a promoter group company (applicant) and the Company, favoring the applicant over other creditors. - The Loan Agreement did not stipulate any rate of interest, and no such rate was fixed by the BIFR. - The Consent Terms dramatically increased the applicant's entitlement without any justifiable basis. - The Power of Attorney used to sign the Consent Terms did not confer the authority to compromise or compound legal proceedings. The Court concluded that the Consent Decree was a fraudulent preference and thus invalid under Section 531. 3. Remedy Available to the Official Liquidator to Challenge the Consent Decree: The applicant argued that the Official Liquidator could not challenge the Consent Decree through a report or reply under Section 446. However, the Court held that a decree obtained by fraud could be set aside at any stage, even in collateral proceedings. The Court cited the Supreme Court's judgment in S.P. Chengalvaraya Naidu, emphasizing that a decree obtained by fraud is a nullity. The Court also noted that the Company Court has broad powers under Section 446 to entertain such challenges. 4. Whether the Attachment of the Satara Property Constitutes a Charge: The applicant claimed that the attachment of the Satara property constituted a charge, making it a secured lender. The Court rejected this argument, stating that an attachment does not create a charge. The Court relied on the Supreme Court's judgment in Kerala State Financial Enterprises Ltd., which clarified that an attachment only prevents the debtor from dealing with the asset but does not create a charge. 5. Plea of Limitation Regarding the Challenge to the Consent Decree: The applicant contended that the Official Liquidator's challenge to the Consent Decree was time-barred. The Court dismissed this argument, stating that the Limitation Act applies to the Official Liquidator, but the period of limitation would start from the date the Official Liquidator became aware of the fraud. The Official Liquidator only became aware of the fraudulent nature of the Consent Decree upon examining the suit proceedings in January 2017. Therefore, the challenge was within the limitation period. 6. Refund of Amounts Withdrawn by the Applicant: The applicant argued that the Official Liquidator could not seek a refund of the amounts withdrawn under the Consent Decree. The Court noted that the distribution of sale proceeds was an interim arrangement subject to the final outcome of the status of the creditors. Since the Consent Decree was declared fraudulent, the applicant was directed to refund the amount of ?10,17,03,493 with interest at 12% per annum. Conclusion: The Court refused the leave sought by the applicant under Section 446 to enforce the Consent Decree, declared the Consent Decree dated 9th July 2009 illegal and void as a fraudulent preference, and directed the applicant to refund the amount withdrawn with interest. The company application and the Official Liquidator's report were accordingly disposed of.
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