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TMI Blog2008 (10) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... who is not put in possession of the property to lease. The counsel for the second defendant points out to the clause in the corporate guarantee that the power is granted to the bank to grant a lease. But, if at all the power could be exercised, it could be only under the term of the mortgage deed, after taking possession from the mortgagor. The mortgage in favour of the bank was only a mortgage by deposit of title deeds and possession had not passed on to the mortgagee. If the mortgagee himself could have taken possession by virtue of the special provision under section 13(4) and handed over possession to his assignee, such assignee may be able to lease the property and also put the lessee in possession. Without any of these acts, it will be impermissible for a private assignee such as the second defendant or the partnership firm to execute the valid lease and put the lessee in possession. Giving effect to such a lease or obtaining the lease for discharge of the loan contracted by the eighth defendant, becomes therefore a distant possibility mired in several legal obstructions. The receiver must be continued in possession of the property until further directions and he shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance : All the appeals have arisen out of the common order passed on January 4, 2008, in O.A. Nos. 1169 to 1172 of 2007 and Applications Nos. 6926 to 6930, 6935, 6936 of 2007 in C.S. No. 937 of 2007 and O.A. Nos. 1040 and 1041 of 2007 in C.S. No. 980 of 2007. The array of parties are as described in the first suit C.S. No. 937 of 2007. C.S. No. 937 of 2007 has been filed by an individual shareholder of the seventh defendant-company impugning certain transactions relating to the indebtedness of the seventh defendant and the eighth defendant-company through the creation of mortgages, assignment of mortgages, lease and sub-mortgage. C.S. No. 980 of 2007 has been subsequently instituted containing similar prayers as found in C.S. No. 937 of 2007 by the seventh defendant-company. A common order was passed on January 4, 2008, which found that the plaintiff had established a prima facie case by showing that all the four impugned transactions were not free from doubt in its opinion and that there were serious questions of allegations of fraud to be tried in the suit. The learned single judge took notice of the fact that the receiver was able to generate income of Rs. 29 to 30 lakhs p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. The seventh defendant, M/s. Aruna Theatre and Enterprises P. Ltd., hereinafter called the theatre company, stood corporate guarantee for the loan facility and created equitable mortgage of various assets and particularly theatre and the premises situate in an extent of 23 grounds 1,930 sq. ft. There were also personal guarantees by several directors of the theatre company. The mills company committed default in repayment of the loan that resulted in the bank initiating proceedings before the Debts Recovery Tribunal, Chennai in O.A. No. 18 of 2007 for Rs. 12.53 crores and odd with interest at 19.5 per cent. per. annum. The bank had itself filed an original application for the appointment of a receiver pending disposal of the original application and a retired judge of this court hon'ble Mr. Justice Swamidurai was appointed as the receiver. 4. Some of the directors of the mills company are the directors of the theatre company. Both the companies are private and the shareholders and the directors are all members of a Hindu family, whose common ancestor was Sankara Narayana Pillai. Two of the brothers had originally spanned out of Udaiyathur village of Tirunelveli District and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k benefited no one, especially when the persons who were in management did not properly account for the incomes and the receiver's possession guaranteed staving off immediate sale and further ensured the prevention of pocketing the sizeable income from the cinema theatre business only by the persons in actual management to the exclusion of others. III. Immediate cause for further litigations : 6. The second major phase that came about from the acts of ingenuity of Paramasivam Pillai, the second defendant, who wanted to ensure that by the action of the bank in its resort to SARFAESI Act did not result in distress sale of the cinema theatre complex. The plan of action that materialised took the shape of first satisfying the claim of the bank so that the imminent threat of sale was warded off. He did not have the money himself. He could not have therefore discharged the mortgage. He therefore came upon the idea of entering into a memorandum of understanding through a partnership firm M/s. Ashoka Associates hereinafter called the partnership firm in which he was himself a partner with the fourth defendant (in C.S. 980 of 2007) M/s. Lavanya and Co., on October 3, 2007. Another a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted one mortgagee by another and the prospect of loss of the property out of the hands of the family to a lessee for a period of 15 years with a liberty for further extension of 10 years. The scheme does not set out anywhere as to how the second defendant would pay back M/s. Lavanya Rs. 12.6 crores with interest within ten months period. In fact, the ten months have come and gone at the time of hearing before us, without paying up the sub-mortgage. If the sub-mortgagee would have his way, the threat of sale again hovers above one's head at his instance. IV. Imputations against the conduct of the second defendant : 7. One of the shareholders of the company who was the plaintiff in C.S. No. 937 of 2008 and the company itself had reasons to complain. According to them, the entire manoeuvre of the second defendant betrayed lack of bona fides. One secured creditor was supplanted by another creditor. The reason for further consternation was how in the process, the second defendant himself was able to take kickbacks when no benefits accrued either to the company or to the shareholders/members of the family. It was further possible for the second defendant and his cohorts who we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and responses : 9. At the time when the case was taken up for arguments, senior counsel Mr. T.V. Ramanujam, appearing for the plaintiffs, Mr. P.S. Raman, learned additional advocate general appearing for the lessee, Mr. A.R.L. Sundaresan, learned senior counsel appearing for the sub-mortgagee, Mr. Arvind Pandiyan, learned counsel appearing for the plaintiff in C.S. No. 937 of 2007, Mr. K. Sridhar learned counsel appearing for the eighth defendant expressed that even without adverting to the merits of the respective claims, the theatre company could be directed to be sold under the supervision of the court and the proceeds realised after discharge of loans could be distributed. 10. Mr. N.V. Subramanian, learned counsel appearing for the second defendant had strong objections to the same and urged that in the absence of unanimous decision relating to sale, the court would not be within its powers to pronounce on a direction for sale of the property. To him, the more important concern was to save the property from being sold and recover the property from the hands of the receiver and to put him in joint possession with the lessee. 11. Mr. T.R. Mani, learned senior couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of disposal of the interlocutory applications, especially when simultaneous applications are pending before the Company Law Board complaining of oppression and mismanagement and when there exists already an order of the High Court that no major decisions in relation to the company could be taken ? ( i ) In re : The nature and effect of impugned transactions : 12. The bona fides of the transactions involving assignment of mortgage and lease executed by the second defendant or at his instance assumes significance, for, that will leave us with scope for considering whether the civil court can assume jurisdiction. The basis of the suits and the strength of the respective plaintiffs' contentions shall be the starting point. The arsenal stands sharpened against the actions of the second defendant as they point out to the fact that no one benefits by the actions, except the second defendant himself and his immediate family. 13. The second defendant's contention is that as a founder-director of the company he has an overwhelming interest to ensure utmost protection of the property of the family and see that it is not lost completely. He makes reference to the scheme of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gets the rights of the mortgagee under the assignment itself even without recourse to section 140 of the said Act. 15. As far as the theatre company is concerned, no benefit has been obtained. The threat of sale has not been averted. The possession of the property has moved out of the company. Income is completely lost to the company. The bank which had filed the case for recovery before the Debts Recovery Tribunal has subsequently invoked section 19(18) of the Recovery of Debts Due to Banks and Financial Institutions Act for appointment of a receiver. If the second defendant had taken steps to discharge the debt to the bank and got back the property to be enjoyed by the company itself, it would have been different. However, he has brought about the transactions of assignment in his favour on October 9, 2007 and before the ink dried he has caused the assignment to the partnership firm in which he himself is a partner and on the same day, he has executed two more documents one of simple mortgage and another a deed of lease. By such process, he has only ensured that the property in the hands of the receiver could go to the hands of a lessee for a longer period. He has undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly be taxed ultimately on the estate when the sub-mortgagee or the lessee would include as costs for recovery of their debts. While we see that there is a transparent decision to stop the sale of the theatre premises, the scheme that the second defendant has evolved, is only a crafty machination and he has secured himself a personal benefit of Rs. 2.6 crores and found a device for taking over the control of the theatre premises from the company managed by the family members to himself. 17. The learned single judge who was dealing with these applications, while allowing the receiver appointed by the Debts Recovery Tribunal to continue has referred to all the above instances as creating suspicion in the bona fide transaction. 18. We were referring to the lack of bona fides of the second defendant only to apprise ourselves about the situation about how and where all his transactions have led the company into and how more vulnerable he has exposed the company to lose out any income from the property to reach any member of the family and at the same time, obtain the benefit only to himself and other members of his immediate family. 19. Mr. T.R. Mani, learned senior couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instance of the sub-mortgagee whose debt has not been discharged within the time stipulated. Perhaps he might contend that the pendency of the suit itself has brought about the difficulty of discharging the sub-mortgage within the time limit. We have already pointed out that the scheme which he professed did not envisage any particular income generating sources other than the theatre business itself. It could well be that the assignee of the mortgagee could also execute a lease of the property where the property was held in possession by the mortgagee. The Transfer of Property Act itself makes provision under section 65 recognising the mortgagor's power to lease. But, there is no power for the mortgagee who is not put in possession of the property to lease. The counsel for the second defendant points out to the clause in the corporate guarantee that the power is granted to the bank to grant a lease. But, if at all the power could be exercised, it could be only under the term of the mortgage deed, after taking possession from the mortgagor. The mortgage in favour of the bank was only a mortgage by deposit of title deeds and possession had not passed on to the mortgagee. (iii) R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for enforcement of its security on a fast track, as it were. The secured creditor has been defined under section 2( zd ) as follows : "( zd ) 'secured creditor' means any bank or financial institution or any consortium or group of banks or financial institutions and includes ( i ) debenture trustee appointed by any bank or financial institution ; or ( ii ) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction as the case may be ; or ( iii ) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance ;" 25. This definition takes in its wings only banks or financial institutions or any consortium or group of banks and excludes for its operation any private individual. The second defendant who was the original assignee and the partnership firm to which the mortgage is subsequently assigned cannot treat itself as a "secured creditor" to exercise all the powers under the SARFAESI Act. Consequently, pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons. It could probably be stated that the receiver holds his possession only under the supervision of the Debts Recovery Tribunal, for the benefit of both the mortgagor and the mortgagee. Even before the suit was instituted, the bank had initiated action before the Debts Recovery Tribunal. The bank has sought for appointment of a receiver by an application before the Debts Recovery Tribunal and the receiver has been appointed by the order of the Debts Recovery Tribunal on May 17, 2005. The receiver has also taken physical possession of the theatre premises from June 19, 2006, when the bank itself had passed a resolution offering to hand over the possession of the property to the receiver peacefully. 27. Mr. N.V. Subramanian, learned counsel for the second defendant contended that full satisfaction shall be directed to be recorded by the Debts Recovery Tribunal and having regard to the fact that the indebtedness to the bank has been discharged, the mandate of the receiver shall be terminated and the property shall be put in joint possession of the second defendant and M/s. Pyramid Saimira Ltd. While the termination of the receiver's mandate by the discharge of the loan in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets of the company and he has no locus standi to institute the suit ( Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1 ; [1955] 27 ITR 1 ; AIR 1955 SC 74). Now that another suit has been filed at the instance of the shareholder this objection does not obtain much weight. It is also their contention that the SARFAESI Act is a complete code in itself for enforcement of securities by securing creditors. Counsel relies on the decision in Transcore v. Union of India [2006] 5 CTC 753; [2007] 135 Comp. Cas. 1 (SC), Bank of India v. N. Natarajan [2007] 4 CTC 360, State Bank of Bikaner and Jaipur v. Ballabh Das and Co. [1999] 98 Comp. Cas. 219 (SC); [1999] 7 SCC 539, United Bank of India v. Debts Recovery Tribunal [1999] 96 Comp. Cas. 602 (SC); [2000] BC 662, Krishna Filaments Ltd. v. Industrial Development Bank of India [2004] 118 Comp. Cas. 356 (Bom) and Bank of India v. Manickam alias Sellakumarasamy [2006] 4 MLJ 914; [2007] 137 Comp. Cas. 330 (Mad), deals with the power of the court to transfer a case pending before a civil court when the SARFAESI Act was introduced. The issue was whether the civil court should adjudicate on the subsistence of the deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny way prevent the bank from enforcing its own right, if its debts shall still subsist under the procedure established in the SARFAESI Act. 33. These decisions refer to the exclusion of jurisdiction of the civil court in respect of action initiated by the financial institutions defined under that Act. Of them, the decisions of the Madras High Court in Bank of India v. Manickam alias Sellakumarasamy [2006] 4 MLJ 914 ; [2007] 137 Comp. Cas. 330 and Bank of India v. N. Natarajan [2007] 4 CTC 360, dealt with cases where averments had been expressly made attacking the transactions that were put through at the instance of the bank on the ground of fraud. Counsel for the second defendant refers the decision particularly to show that only by assailing the transactions as vitiated by fraud, it will not take away the jurisdiction of the Debts Recovery Tribunal and the SARFAESI Act. According to him, if the plaintiff has challenged the assignment made by the bank which is protected under section 13(4) the proper remedy of persons affected by such a decision would be only to prefer an appeal provided under section 17 of the Act. According to him, the decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have a relief under the SARFAESI Act, unless he himself is a secured creditor in the manner defined under section 2( zd ) of the said Act. We have already seen neither the second defendant nor the partnership firm could describe itself as such nor indeed M/s. Lavanya could have any relief pursued under the SAR-FAESI Act in its assumed right of subrogation or sub-mortgage, respectively. 35. A sub-mortgagee himself cannot redeem the mortgage for he has only derived title from the mortgagee and not from the mortgagor ([1966] 2 MLJ 308; [1966] 79 LW 400). It has been held that the sub-mortgagee has no priority of estate or contract with the original mortgagor (Ramanathan Chettiar v. V. Ry. Sethurama Madige Rao Saheb, AIR 1928 Mad 382). It will be therefore not possible for M/s. Lavanya to come to the succour of the eighth defendant and redeem itself out of the financial stringency that these transactions have involved the principal debtor or the cinema theatre complex. 36. Above all, when the action of the second defendant is questioned by means of suits and there exists ample prima facie proof that the transactions are a fraudulent ploy to wrest control of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indebtedness and the mode of enforcement of debt by a "secured creditor" defined under the SARFAESI Act or a "financial institution" defined under the RDB Act, there could be no exclusion of jurisdiction. 39. As a matter of fact, after payment of the amount of Rs. 13.5 crores to the bank, which it has received as one time settlement, nothing further remains to be done by the bank. Although, we are aware that the Debts Recovery Tribunal proceedings are not terminated formally by withdrawal of the petition or recording full satisfaction before the Tribunal, for all practical purposes, the bank's remedy before the Debts Recovery Tribunal has come to an end. It could be only a matter of time to formalise full satisfaction by the bank. The assignment that the bank has made in favour of the second defendant cannot by itself offer to the second defendant to have any relief under the Act and consequently, it does not lie in the mouth of the second defendant to deflect the proceedings taken before the civil court to the Debts Recovery Tribunal again. In the arguments before us, all the parties including counsel appearing for the plaintiffs, sound in unison that they do not desire to put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders, who are all members of the same family, with further acrimony and in-fights. This court has already given a direction in C. M. A. No. 1900 of 2007 not to take any major policy decision. In the meanwhile, the company has itself passed a resolution in its general body meeting that the property could be sold in public auction. 41. Mr. Arvind Pandian, learned counsel appearing for the plaintiff in C.S. No. 930 of 2007 and Mr. T.V. Ramanujam appearing for the company also affirm that they have decided to sell the cinema theatre complex, having regard to the present circumstances where there has been no income for them and many of the shareholders have been complaining that they have not received any dividends. We put it across to the parties to deliberate the proposal to sell the property to pay up the loans that have accrued and distribute the surplus proceeds. 42. Mr. P.S. Raman, learned senior counsel appearing for M/s. Pyramid Saimeera, Mr. AR. L. Sundaresan, learned senior counsel appearing for M/s. Lavanya have no objection to the property being sold, if only the respective amounts which they have advanced are repaid with reasonable interest. Their clients have paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the sale of the property of the eighth defendant and the petrol bunk would be sufficient to discharge the loans. Neither the property of the eighth defendant nor the petrol bunk are the subject-matter of any of the suits. There is no unanimity in the contentions of all the parries for sale of these properties and that the sales could garner sufficient resources to discharge the loans. In the circumstances, we are left with examining the decision whether the sale of theatre premises could be a viable proposition. 45. Two scenarios emerge : If the plaintiffs suit were to be decreed which would result in the annulment of transactions commencing from the assignment of mortgage deed by the bank to the second defendant, the assignment by the second defendant to the third defendant, the grant of lease to the fourth defendant and the mortgage in favour of the fifth defendant would stand nullified which would revive the deed in favour of the bank in which case, the amount of Rs. 13.5 crores which the bank had accepted as a one time settlement would no longer be available and it would be possible for the bank to scale up its demand on the contract rate of 19.5 per cent. from the initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en our anxious consideration to the various situations that may develop and if there is a process that could terminate the proceedings and leave all of them with a modicum of satisfaction, we adopt the course which our judicial conscience dictates to us. We will have no harm to come to anyone in the process. The bank debt will be taken as discharged right away by directing the full satisfaction to be recorded before the Debts Recovery Tribunal. The property of the company will be sold as per the decision taken by the majority of shareholders and exhibited through the resolution of the board. It will only be in tune with the corporate democracy that the will of the majority prevails and at the same time not harming the minority shareholders. 48. Mr. Arvind Pandian relied on the decision in Maxwell Dyes and Chemicals P. Ltd. v. Kothari Industrial Corporation Ltd. [1996] 85 Comp. Cas. 111, rendered by a Division Bench of this court, which, while exercising its company jurisdiction, recognised the primacy of resolution passed by the shareholders in a overwhelming majority and the court's keep-the-hands-off approach, if it was ultimately for the benefit of the company. The Divis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourts by clause 12 of the Letters Patent, is similar to the equity jurisdiction exercised by the English courts. M.C. Chagla, Acting C.J. (as he then was) wrote a separate judgment in the Division Bench, where the Bench were dealing with acts of misconduct with fraudulent intentions to gain control over the affairs of the defendant-company whose assets were outside its territorial jurisdiction. The court still exercised the jurisdiction by raising the question that the dominant purpose of the suit was to challenge the fraudulent conduct of the defendant and the relief being personal, the suit should be regarded as not for land and hence it had jurisdiction. The court exercising the equitable jurisdiction does not supplant the statutory law, it complements it, as in England. Consequent on the passing of the Supreme Court of Judicature Act, 1875, the High Court of Justice had amongst its divisions the chancery division. The following matters were assigned by the judicature at Chancery Division : ( i )The administration of the estates of deceased persons. ( ii )The dissolution of partnerships or the taking of partnership or other accounts. ( iii ) The redemption or foreclosure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single judge of this court in C.M.A. No. 1900 of 1998. ( d )The whole process shall be executed by a retired judge of this court. We have the consent of Justice Mr. K.P. Sivasubramaniam (Retd.) to be named as the commissioner for this delicate but onerous exercise. A separate warrant of commission will be issued setting out the terms of commission. ( e )The bank shall be at liberty to act on the payment received through the second defendant. It shall also initiate steps for withdrawal of proceedings before the Debts Recovery Tribunal in the manner known to law. ( f )The receiver appointed by the Debts Recovery Tribunal will continue in possession as receiver of this court. He shall continue in possession till the property is sold and made ready for delivery of possession to the purchasers. ( g )The parties shall be at liberty to circulate their respective suggestions for successful conduct of the sale through global tender process within two weeks before the commissioner appointed by the court. The commissioner will give appropriate directions to the auctioneers that he may choose from out of persons that may be suggested by the parties for the conduct of the sale within a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally or collectively they are not in a position to arrange for the huge fund required to complete the one-time settlement. In other words, even though all of them are impugning the transactions with fourth and fifth defendants by the second defendant, they have unanimously submitted that the one time settlement should not be allowed to fall through. They are also not in a position to repay the amount received from the fourth and fifth defendants. Senior counsel appearing for the bank has unequivocally stated that if the bank is forced to wait indefinitely, it will not be in a position to honour the one-time settlement and it will be forced to pursue its statutory remedy by completing the proceedings under the SARFAESI Act and realise the amount due to it along with the normal rate of interest by selling the property in question. Senior counsels appearing for the fourth and fifth defendants have also submitted that in case they are not able to enjoy the benefit of the transactions for which they had advanced huge amount, they would be forced to pursue their right by availing of legal remedy for refund of the amount paid by them with interest. In such a scenario, not only the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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