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TMI Blog2005 (10) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... re as follows: 2.1 R.P.S. Benefit Fund Ltd. is a company registered under the Companies Act. The said company had purchased the disputed property by a sale deed dated 10-8-1995. Subsequently, the said property was mortgaged to the Bank of Madura Ltd. by the company by way of deposit of title deeds for a loan amount of Rs. 60 lakhs. Since the company started facing pressure from the depositors as well as from the Bank of Madura, an advertisement was taken out for sale of such property, but, since there was no proper response, a further advertisement was taken on 21-3-1999. Pursuant to the latter advertisement dated 21-3-1999, the appellant had offered Rs. 165 lakhs and was willing to deposit 50 per cent by May, 1999. On 22-4-1999, the board of directors passed a resolution authorising the President to execute the sale deed in favour of the appellant for the said amount. An agreement was executed in favour of the appellant accordingly and an advance of Rs. 40 lakhs was received by the company towards part consideration. Subsequently, an application in Form 37-I under Chapter XX-C of the Income-tax Act, 1961 was filed before the appropriate Income-tax Authorities. On 13-7-1999, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2047 to 2052 of 2000 in pending C.P. Nos. 233 to 238 of 1999, seeking appropriate directions from the court. During pendency of such proceedings, the bank filed an application seeking permission to call sealed tenders for disposal of the property and thereafter an advertisement was issued on 12-2-2001 as per the direction of the court with an upset price of Rs. 225 lakhs, but no response was received. 3. In the report filed on behalf of the Official Liquidator, it was indicated as follows : 3.1 The property had been purchased by the company to run their corporate office. As per the report submitted by the Inspection Committee, it is shown that the property had been purchased out of borrowed funds and the interest on borrowings were shown as additions to the cost of the property; and as per the records, the cost of the property was shown as Rs. 3,18,57,889, but the sale was effected for Rs. 165 lakhs. The sale transaction was made beyond the date of balance sheet and was not reflected in the audited statements. The agreement dated 22-4-1999 was made within six months before the filing of the winding up petitions and was void under section 531A of the Companies Act. The sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increased by the Government from time to time; and since the document was to be released urgently, the appellant thought it best to pay the additional stamp duty under protest. The Income-tax Authorities had made enquiries and being convinced that there had been no undervaluation, granted permission to go ahead with the sale. The value of the property was at peak level in 1995, when the property was acquired by the company for Rs. 1,64,00,000 with registration charges of Rs. 23,00,000, and in the books of account, such amount along with interest at 23 per cent had been shown from year to year, and, therefore, the accumulated figure was shown as Rs. 3,18,00,000. However, there has been steep fall in the real property value after 1996. Moreover, the property had been mortgaged to the bank. Keeping in view these things, proper consideration had been paid. At the time of liquidation, the property in question was not in possession of the company. The company had advised for sale of the property long before filing of the petition for winding up; and as there were pressing necessities to the company to pay the depositors, who were pressing for refund of the money, and also for payment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty in question has been sold bona fide, in good faith and in the interest of the company ? ( c )Whether the property has been sold for a fair market price ? If not, whether it will reflect on the transaction as not bona fide; and whether there is any siphoning off of the funds in the transaction by the directors by selling it far below the market value ? ( d )Whether the sale has been effected with the intent to defeat the claims of the depositors and other creditors of the company and to benefit the applicant as well as the persons who were in management of RPSB ? ( e )Whether the applicants are entitled to an order as prayed for in all the applications ? ( f )Whether the sale transaction entered by the applicant is bona fide and valid and binding ? ( g )To what relief, if any ?" (p. 139) 9. Learned Single Judge found that : "( a )At the material point of time, the company was under heavy pressure and had been conducting its affairs not in the interest of the company or its depositors, but had been treating the assets of the company as if those were the private properties of P.G. Saranyan and his family members. ( b )The cost of the acquisition of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial sum has been paid by the applicant without protest towards additional stamp duty would not only show the market value, but also the transaction has been entered into far less than the purchaser market value, and it has been entered into collusively only with a view to deceive the creditors, to give preference to a set of creditors or director s choice. The fact that under section 47A without any demur, the entire deficit stamp duty has been paid on the very date on which sale deeds were presented itself, is a fact which reflects on the applicant. The contention that there is a steep fall in the real estate market cannot be countenanced at all. It may be that there may not be any shooting up of the prices. But there was no fall in prices, much less, as sought to be made out. The contention that the property was not a property of the company on the date of filing of the company petition is a misconception and it runs counter to the statutory provision, namely, section 531A of the Companies Act. Assuming for purposes that the entire sale consideration has been applied for discharge of certain depositors, and there is no fraud, but there is no material at all to show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther pointed out that apart from the above serious errors of record, and conjectures and surmises, the learned Single Judge has not kept in view the fact that the money paid by the appellant had been utilised by the company for repaying the creditors, and the company itself had advertised for sale of plot on two occasions much before the initiation of the proceedings for the winding up and the transaction was completed only pursuant to such advertisement, which clearly indicated that the appellant was a bona fide purchaser. It has been further contended that the mere fact that the guideline value was more or book value of the property was more cannot be considered as sufficient to come to a conclusion that the market value had not been indicated in the sale deed, more particularly, when there was a recession in the market value during the particular period. Learned counsel also pointed out that the observation of the learned Single Judge in paragraph 42 that the transaction had been entered with an intention to throw away the property and siphon off the difference for the benefit of the individual directors by pocketing a sizeable amount in cash and the applicant is a party to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as relied upon several decisions, particularly, including a few decisions under the Provincial Insolvency Act. 12.1 In N. Subramania Iyer v. Official Receiver AIR 1958 SC 1, it was observed : "(10) The finding on the question of consideration being entirely in favour of the appellant-mortgagee, the only other serious question which remains to be considered is whether the transaction was bona fide. We have already indicated that it is settled law not only of the Insolvency Act in England but also in this country that it is not necessary in annulment proceedings to prove that that the transferor who has been subsequently adjudged an insolvent should have been honest and straightforward in the matter of the transaction impeached. If he was really so, there would not be much difficulty in coming to the conclusion that the transaction as a whole was bona fide. Even if the mortgagors were wanting in bona fides and, assuming that to be so in the present case, the crucial question still remains to be answered. Unless it is found that the transferee was wanting in bona fides in respect of the transaction in question, he cannot be affected by the dishonest course of condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question which are sought to be validated have not been bona fide entered into for the purpose of running the concern and hence, these applications deserve to be rejected. It is not possible to agree with the aforesaid contention of the objecting creditors. It is now well-settled that the object of sub-section (2) of section 536 of the Act is to prevent improper disposition or dissipation of property so as to affect the assets otherwise available for distribution among the creditors of a company in winding-up. But the court has discretion to uphold all proper transactions. Accordingly, in the event of a winding-up order being made, all transactions since the commencement of the winding-up will be subjected to scrutiny by the liquidator who will take appropriate proceedings to have them declared void or valid by the court. The court usually validates transactions which are honest and in the ordinary course of the company s business. The expression unless the court otherwise orders casts a duty on the judge requiring that each case must be dealt with on its own facts and particular circumstances, special regard being had to the question of the good faith and honest intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53(1) of the Transfer of Property Act, it was observed : "17. . . .The narrow question is whether the plaintiff was a transferee in good faith. It was submitted on behalf of the appellant that the learned Judges of the High Court had directed the dismissal of the plaintiff s suit even without a definite finding that the plaintiff was a party to the fraud on the part of the transferor to defeat or delay the creditors. There might be some force in this submission that there is no specific finding to that effect, but that does not in any way assist the appellant. Where fraud on the part of the transfer or is established i.e. by the terms of paragraph (1) of section 53(1) being satisfied, the burden of proving that the transferee fell within the exception is upon him and in order to succeed, he must establish that he was not a party to the design of the transferor and that he did not share the intention with which the transfer had been effected but that he took the sale honestly believing that the transfer was in the ordinary and normal course of business. When once the conclusion is reached that the transfer was effected with the intent on the part of the transferor to convert the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parently called upon the purchaser to pay additional stamp duty and had withheld the document. Subsequently, the purchaser wrote a letter of protest to the Collector and paid the additional stamp duty and obtained the document from the Registration Office. Therefore, to the above extent, the observation of the learned Single Judge may not be strictly correct. However, the fact remains that when the purchaser was called upon to pay the additional stamp duty, even though he has written a letter indicating protest , additional stamp duty has been paid. Learned counsel for the appellant has submitted that as the appellant wanted to get the document without any further delay, the appellant had paid the amount. Such submission does not appear to be justified. If the appellant was actually convinced that the market value had been paid and the stamp duty had also been correctly paid by the appellant, the appellant could have taken legal steps to get custody of the document. The procedure contemplated under section 47A of the Stamp Act relating to demand and payment of additional stamp duty is quite well-known, and, in a series of decisions, it has been held that the registering authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value of the property, including the decisions reported in R. Sai Bharathi v. J. Jayalalitha AIR 2004 SC 692 and Jawajee Nagnatham v. Revenue Divisional Officer [1994] 2 JT 604. 23.1 In the latter decision, it was observed : ". . . It is, therefore, clear that the basic valuation register prepared and maintained for the purpose of collecting stamp duty has no statutory base or force. It cannot form a foundation to determine the market value mentioned thereunder in instrument brought for registration. Equally, it would not be a basis to determine the market value under section 23 of the Act, the lands acquired in that area or town or the locality or the Taluk etc." 23.2 The said decision was followed by a learned Single Judge of this Court in A. Vijayaraghavan v. Member Secretary, CMDA [1999] 2 LW 250. 24. In R. Sai Bharathi s case ( supra ) it was observed : "25. . . . It is clear, therefore, that guideline value is not sacrosanct as urged on behalf of the appellants, but only a factor to be taken note of, it at all available in respect of an area in which the property transferred lies. In any event, therefore, if for the purpose of Stamp Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company for a consideration of Rs. 164 lakhs about 5 years before the impugned transaction and the company had to pay about Rs. 23 lakhs towards stamp duty; and a further amount towards other incidental expenses. Therefore, the company had spent about Rs. 190 lakhs for acquisition of the property in the year 1995. In the absence of specific materials, we are not impressed by the submission made by the learned counsel for the appellant that there was recession in the real estate market, and, therefore, the present consideration amount of Rs. 165 lakhs should be taken as correct reflection of the market value. In the books of account of the company, the value of the property had been shown to be about Rs. 3.18 crores. This was mainly because of the fact that the property was acquired with the borrowed funds and the interest on borrowings were shown as additions to the cost of the property. The submission that an inflated amount had been shown in the books of account does not commend itself to us. However, even assuming that the books of account did not actually reflect the market value, by no stretch of imagination, can it be held that the company had acted in any prudent manner by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may be that the appellant was not in a position to bring on record the offers, if any, made by any other intending purchaser, but, if the appellant had made any offer, obviously, the appellant would be in possession of such document which could have been produced. 30. Learned Single Judge has concluded that the transaction was completed in a hurried manner. Certain tell-tale features clearly support such conclusion of the learned Single Judge. 31. Admittedly, the title deeds were with the Bank of Madura. Without bothering to obtain the title deeds, the appellant paid about Rs. 92 lakhs for completing the transaction. It is of course true that in the sale deed itself, there is a recital that the appellant had retained a sum of about Rs. 69 lakhs with an undertaking to pay such amount to bank and to obtain title deeds. Under normal circumstances, one would expect a prudent purchaser to get a clear title by repaying the loan of Bank of Madura and get the title deeds. Therefore, one could have expected the appellant to insist upon the clearance of the debt of Bank of Madura first and instead of paying to the company, the payment could have been made to Bank of Madura. 32. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, merely because a sale deed was effected after presentation of the winding up proceedings, such transaction should not be invalidated. If a person, who has entered into an agreement, wants specific performance of the contract against a company after winding up proceedings was started, the matter could be examined by the Court on the basis of the materials on record. The hurried attempt made by the appellant as well as the company to complete the transaction, obviously, is not a point in support of the claim of the good faith of the appellant. 34. Learned counsel for the appellant has also submitted that the amount paid by the appellant to the company had been in fact utilised for repaying the maturity value of various depositors/creditors, and, therefore, the transaction must be taken to be a bona fide transaction in the interest of the company. In the absence of any convincing materials on record, it is difficult to accept such submission. On the other hand, the report made by the Official Liquidator before the learned Single Judge indicated that at or about such time, lot of money had been withdrawn by the founder/ managing director of the company. In the absence of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion which would have the effect of protecting innumerable depositors. 38. Learned counsel for the appellant has also submitted that after filing of the winding up petition, the Bank of Madura had been called upon to advertise the property for sale, but no offers were forthcoming, and, therefore, the transaction made by the appellant is required to be upheld. When a matter comes to the court and the property becomes a disputed property, ordinarily, there would be hesitation on the part of the bidders to enter into any transaction because of fear of legal wranglings. From the mere fact that sufficient offers were not made or the offers made were not much higher than the amount indicated in the sale deed, is not a ground to uphold the transaction. 39. A contention was raised that in the absence of any application filed by the liquidator to invalidate the transaction, the transaction should be upheld and the appellant should be permitted to pay the amount to the bank and take return of the title deeds. Whether the appellant would pay the outstanding amount to the bank and get the original title deeds from the bank is a matter between the appellant and the bank which may n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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