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TMI Blog2014 (6) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board, had directed the liquidator to release the said land to the Board and the appeal by the appellant against this order has been dismissed by the Division Bench of the High Court, not on merits but for want of locus standi of the appellant to question the orders. The appellant herein is questioning the veracity of the orders on the ground that it was the property of the Company which could not have been released in favour of the Board. 4. Before we mention about the credentials and locus standi of the appellant, we deem it appropriate to cull-out the seminal facts from the record leading to the passing of the impugned order. The Board had leased 13,657 sq. mtrs. of land in Plot No. 19 (A+B) of Sadramangala Industrial Area to the Company under the Lease Agreement dated 21.12.1984, on certain terms and conditions, for the purpose of establishing an industry for manufacture of AH/ FM Radio, Audio Tape Recorder in combination with radio. The Board executed lease-cum-Sale agreement ("Agreement") in favour of the Company in respect of Plot No. 19 (A+B), measuring 13,657 sq. m. (3.5. acres) situated in Sadarmangala Industrial Area, Krishnarajapuram, Bangalore South. The consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .9.2009 allowing the said application and directing the OL to handover the possession of the industrial plots to the Board. In support, the Company Judge gave the following reasons:- (a) KIADB had taken steps and measures as required under the provisions of the Act in placing the Company in liquidation on notice of its breach and its intention to resume the industrial plots after cancellation of the allotment. (b) The benefit of industrial plots cannot be granted to a Company in liquidation to enhance its assets. The enrichment of the Company in liquidation at the cost of KIADB is not just and legal. Hence the termination of allotment by KIADB is proper. 8. The Official Liquidator did not contest the order of the Company Judge. However, the appellant herein, who claims to be the promoter/ shareholder of the Company, challenged this order by filing appeal before the Division Bench. His submission was that he is a bona fide person as promoter/ shareholder of the Company and is evincing genuine interest to revive this Company and for this purpose retention of land is very crucial. This conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d even willing to agree to the condition not to alienate the land in question. 10. Since it was agreed by and between the Counsel for the parties that in case the appeal filed by the appellant before the Division Bench of the High Court is held to be competent by this Court, then this Court itself should consider and decide the matter on merits, instead of remitting the case back to the High Court, we have heard the Counsel for the parties on merits as well. 11. As already pointed out above on an application filed by the Board, the Company Judge permitted the Board to resume the aforesaid two industrial plots which were allotted to the Company. Mr. Andhyarujina, learned Senior Counsel, drew our attention to the reply which was filed by the O.L. before the Company Judge opposing the aforesaid application of the Board. This reply shows that OL had contested the application on two grounds namely: (i) There could not have been any termination of Lease Agreement by the Board without seeking prior permission of the Company Court, since the Company was under liquidation. (ii) The two pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; "10. While the aforesaid direction will dispose of the appeal, we would like to say, having heard counsel on the merits of the appeal, that we are not satisfied that the Division Bench appreciated the purpose of the provisions of Section 535 of the Companies Act. Thereunder the High Court may give leave to the Official Liquidator to disclaim land of any tenure which is part of the property of the Company in liquidation if it is burdened with onerous covenants. The intention of Section 535 is to protect the creditors of the Company in liquidation and not mulct them by reason of onerous covenants. The power under Section 535 is not to be lightly exercised. Due care and circumspection have to be bestowed. It must be remembered that an order permitting disclaimer, while it frees the Company in liquidation of the obligation to comply with covenants, puts the party in whose favour the covenants are, to serious disadvantage. The Court must therefore, be fully satisfied that there are onerous covenants, covenants which impose a heavy burden upon the Company in liquidation, before giving leave to disclaim them. 11. We are of the view that the High Court ought to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 15. Mr. Andhyarujina, further mentioned that on 11.1.2010, Mr. Mohan Rao had offered to revive the Company and pay off the debts of the Company. In this behalf he also drew our attention to the orders dated 19.7.2009, 16.8.2010 and 11.2.2011 passed in the present case. In this context, his submission was that there was every chance of the Company to be revived and, therefore, a valuable asset of the Company should not be allowed to be frittered away. 16. Mr. Patil, Senior Advocate, appearing for the Board stoutly refuted the aforesaid submissions. His argument was that the plots in question were allotted by the Board to the Company on lease-cum-sale basis with clear stipulation that the Company was to construct factory thereupon and complete the project within 24 months .The Company had miserably failed to implement the project in time for which show cause notices were given and all these happened much before the passing of the winding up order of the Company by the High Court. He further submitted that on failure of the Company to complete the project, lease-cum-sale agreement dated 21.12.1984 gave categorical right to the Board to resume the land. He, thus, submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be taken which was done in the present case. He further referred to the provisions of the Lease Agreement dated 21.12.1984 and submitted that the allotment was on certain terms and conditions with specific purpose, viz. to set up industry. Since this could not be accomplished by the Company, action of the Board in resuming the land was justified. In such a scenario, the payment of money in the form of rental by the Company to the Board was totally immaterial. He further pointed out that resumption order was of the year 1992 i.e. before the winding up order was passed which was even challenged up by the Company by filing Writ Petition in the High Court and the said writ petition was dismissed. Thereafter, keeping in view the spirit of M/s Hanuman Silk's case, termination notice was given which is duly reflected in the show cause notice/ termination letter itself. This termination was never challenged by the Company or the O.L. He thus argued that in this manner once the termination is found to be valid, the Company Judge did not commit any error in allowing the Board to resume the land. 18. We have given our considered thoughts to the various issues involved on which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l deposit/ premium and it was also to pay the yearly rent of Rs. 6,921/- for the period of lease which was 11 years, computed from 4.8.1984. Clause 2 of the Lease Agreement stipulated various others covenants. Having regard to the nature of functions which the Board performs, which has been constituted for industrial development in that area, the plots in question were given to the Company exclusively for the purpose of establishing an industry/ factory for manufacture of AH/ FM Radio Audio Tape Recorder in combination with radio. The lease provided that the premises shall be used only for the aforesaid purpose and not for any other purpose. The lease also provided that the civil construction work and erection of factory shall be completed within stipulated period which was 24 months from the date of letter of allotment i.e. 21.02.1983. This time, however, could be extended in writing for good and sufficient reasons furnished by the Company. On extension being given, the Company was to complete the number of works within the extended period. For this purpose time bound schedule was provided in clause 2(P)(1) of the Lease Agreement which is reproduced below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company was to be adjusted towards the sale consideration so fixed and on payment of the balance amount of the value of the property within 1 month, the sale was to be effected, as provided in Clause 9. Amount of Rs. 3,07,102/- was to be kept by the Board as security for any loss of expenses that the Board may put to in connection with any legal proceedings including proceedings that may be taken against the Company. 23. It is not in doubt that while construing an agreement, it is not the nomenclature but the substance thereof needs to be looked into. Therefore, mainly because the agreement in question is termed as "Lease Agreement" that by itself will not be the sole determinative factor. However, various clauses of the agreement also clearly manifest that it was an agreement vide which lease for 11 years period was created in favour of the Company. However at the same time, it was also not a Lease Agreement simplicitor. It did not provide that on expiry of the lease period, the demised property is to be reverted back to the Board. Under this very lease agreement, certain rights were to accrue in favour of the Company, albeit on fulfilling various obligations imposed upon the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, cannot accept the contention of the learned Senior Counsel for the appellant that the Company had become the owner of the plots in question. Q.2 Re: Validity of termination notice 26. As mentioned above, on the failure of the Company to complete the project within the specified period, the Board served resumption letter dated 6.5.1992 upon the Company stating that the land would be resumed on 8.6.1992 for failure to implement the project in time. On the same date in respect of second plot, a show cause notice was also issued by the Board to the Company to show cause within 15 days as to why action be not taken to cancel the allotment for failure to execute the agreement and to implement the project. The Company submitted its reply dated 28.5.1992, inter alia, stating that development of the two plots could not be viewed independently more so when the Board itself had allotted the second plot as part of a consolidated project. It was further stated that the project involved an investment of Rs. 9 crores and the Company had already invested nearly Rs. 5 crores on the project by availing financial assistance from the financial institutions after pledging both the plots. The res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the following order: "When the matter came up today, learned counsel for the petitioner and the respondents submitted that the petitioner Company has been wound up in pursuance of the order of this court in Company Petition No. 18 of 1994 and, therefore, this petition may be dismissed, as having become infructuous. Petition is dismissed accordingly." 29. On 19.1.2002, the Board passed the orders terminating the lease in respect of both the plots. In this termination order, after giving the past history of events which have already been noted above and mentioning that the Company had failed to construct the factory building and implement the industrial projects on the main land within the extended period and to execute lease agreement in respect of additional land, thereafter it was also stated that pursuant to the earlier resumption order, a writ petition was filed and because of the stay orders passed therein the Board could not resume the land. This writ petition was dismissed on 14.9.1999. Though the Board could act thereafter, however in the meantime High Court of Karnataka had passed orders dated 10.4.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial plot in favour of Anco by the Karnataka State Electronics Development Corporation (Corporation) on lease-cum-sale basis for which an agreement was executed. As per the said agreement, the Company was to establish its manufacturing unit within two years from the date of allotment of the Industrial Plot. In the meantime, the said Anco went into liquidation and winding up orders dated 8.6.2000 were passed. Much after the winding up orders, the corporation cancelled the lease-cum-sale deed on 28.6.2003 and took "paper possession" of the industrial plot. Thereafter, the Corporation filed the application in the Company Petition requesting the Company Judge to declare the Cancellation Order passed by the Corporation to be valid and direct the O.L. not to interfere with its paper possession. The Company Judge rejected the said application keeping in view the language employed in Section 537 of the Companies Act. The Corporation filed appeal which came to be dismissed by the Division Bench. The Division Bench was not impressed with the arguments that the Corporation was not aware of the winding up proceedings and for this reason it had resumed the possession of the industrial plot, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are to be read in the factual context of the aforesaid case. As noted above, the Corporation had not only cancelled the lease but had even resumed the land by taking "paper possession". Further, in the application filed before the Company Court, it did not pray for permission to take possession. On the contrary, the Corporation took up the stand that it already had the possession which should be declared as validly taken and the prayer made was to direct the Official Liquidator not to interfere with the possession. It is in this context that the High Court held that same could not be done without the leave of the court. We are of the opinion that the observations are to be read giving restricted meaning that possession could not be taken without the prior leave of the court. It may not be correct to hold that the law requires that prior permission of the Company Judge is mandated even for cancellation of the lease. In fact, question of resumption of land or taking possession thereof could have arisen only after the cancellation of the lease. We will dilate on this aspect further after discussing the judgment in M/s. Hanuman Silks (Supra). 34. In M/s. Hanuman Silks (supra) the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recourse to the provisions of the Public Premises Act or by filing a Civil Suit for possession and not otherwise. 36. It, thus, becomes clear that even though order of re-entry or resumption can be passed by the Board, but for taking possession the Board is supposed to have recourse to legal proceedings act in accordance with law. However, this was a case where the Company had not gone into liquidation and, therefore, the question of applicability of Section 537 of the Companies Act could not arise. 37. In the present case, we are confronted with a situation where Company is in liquidation. Thereafter, we have to understand the implication of the provisions of Section 537, which reads as under: "537. Avoidance of certain attachments, executions, etc., in winding up by Tribunal.- (1) Where any Company is being wound up by Tribunal- (a) any attachment, distress or execution put in force, without leave of the Tribunal against the estate or effects of the Company, after the commencement of the winding up; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find action of the Board to be illegal or blemished. The land was allotted to the Company for specified project which the Company failed to establish. Let us examine the Scheme of the KIAD Act at this point of time, KIAD Act is enacted to make special provisions for securing the establishment of industrial areas in the State and generally to promote the establishment and orderly development of industries therein, and for that purpose, to establish an Industrial Areas, Development Board, and for purposes connected with such matters. Chapter II deals with the declaration and alteration of Industrial Areas. Chapter III deals with establishment and constitution of the Board. Chapter IV deals with functions and powers of the Board and Chapter V deals with Finance, Accounts and Audit of the Board. Chapter VI deals with application of Public Premises Act and non-application of Karnataka Rent Control Act, 1961 to the premises of the Board. Chapter VII deals with Acquisition and disposal of land. Chapter VIII contains the supplementary and miscellaneous provisions. Section 13 in Chapter IV defines the functions of the Board as generally to promote and assist in the rapid and orderly estab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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