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TMI Blog2018 (7) TMI 2073X X X X Extracts X X X X X X X X Extracts X X X X ..... leave of this Court under Section 446 of the Companies Act 1956 to execute the Consent Decree dated 9th July 2009 obtained in suit no.164 of 2009 by applicant against Coromandel Garments Limited (in liquidation). Coromandel Garments Limited (in liquidation) is hereinafter referred to as the Company. Official Liquidator has, on behalf of the Company, filed a reply opposing grant of such leave. Official Liquidator has also filed Official Liquidator's Report No.84 of 2017 seeking various directions from this Court including, inter alia, that the Consent Decree dated 9th July 2009 be set aside and that applicant be directed to bring back, along with interest, amounts received by it from out of the sale proceeds of one of the Company's properties. The company application has also been opposed by a few unsecured creditors of the Company (in liquidation) who have, in this behalf, filed company application (lodging) No.85 of 2018 (hereinafter 'Interveners'). The counsel appearing for Interveners basically supplemented the submissions of the counsel for Official Liquidator. 2. By its order dated 2nd June 1998, the Board for Industrial and Financial Reconstruction (BIFR) declared the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or such loan, is agreed to by and between the Lender and the Borrower as detailed in Table 'A' hereto. It is agreed to by and between the Lender and the Borrower as under: … 3.. The amount of the loan provided under the terms of the agreement together with the interest and all other costs recoverable by the Lender from the Borrower, shall be secured by a charge which is hereby provided by the Borrower to the Lender as set out in table "A" hereto. 4.. The loan together with interest shall be repayable by the Borrower to the Lender as per such schedule as may be approved by BIFR. Pending issuance order by BIFR, the same shall be payable immediately on call by the Lender. 5.. The loan shall carry interest at the Bank Rate. However, this will be subject to the provisions of Sick Industrial Companies (Special Provisions) Act, 1985, order of BIFR and such instructions as may be issued by the operating agency viz. Bank of Baroda and BIFR. 6.. The Borrower owns 1/3rd undivided shares of the property at Pachgani. The Borrower agrees that it shall not create any charge on the said property without prior approval of the Lender." …." 5. The asset in respect of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bank of Baroda against the order dated 22nd January 2007 of BIFR was dismissed by AAIFR. Appeal No.85 of 2007 filed by the Company was withdrawn. These orders were not further tested. As such, the recommendation for winding up the Company became final. 9. By their letter dated 30th April 2008, applicant's advocates called upon the Company to repay the said sum of ₹ 3,25,00,000/"together with interest as agreed in terms of the Loan Agreement dated 29th September 2000…". By its reply dated 28th May 2008, the Company described the demand as being 'unreasonable and not sustainable in law.' In doing so, the Company, inter alia, also noted that the Loan Agreement did not provide for any rate of interest, that the BIFR had not permitted any interest to be charged and that applicant was on that account disentitled to claim any interest under the said Agreement. The letter referred to the order dated 29th June 2006 appointing Provisional Liquidator and claimed that the Company was proposing to file a company application to recall the said order. However, in the meanwhile, on account of the appointment of Provisional Liquidator, the Company pleaded its inability to make any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany sought to resist the grant of the said reliefs. In doing so, the Company repeatedly asserted that applicant's claim for interest was not sustainable, in view of no rate of interest having been agreed upon in the Loan Agreement and no rate having been stipulated by the BIFR. 13. By an order dated 12th February 2009, this Court declined to appoint Court Receiver in respect of the Satara property, but merely restrained the Company from creating any third party rights in respect thereof. On 9th June 2009, when Suit No.164 of 2009 appeared on board, a submission was made on behalf of the parties that they proposed to file consent terms and that the dispute had been amicably resolved. The suit was accordingly stood over to 7th July 2009 for filing consent terms. 14. On 9th July 2009, applicant and the Company tendered consent terms and a decree was passed in respect thereof. Under the said consent terms, the Company submitted to a decree on admission in the sum of ₹ 12,49,27,897/ together with interest thereon @ 15.76% p.a. with quarterly rests from 8th June 2009 till payment and/or realization. It was stipulated that if the Company paid applicant a sum of ₹ 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the said order was passed, the appeal of the respondent was pending before the AAIFR, which application was allowed. However, it appears that it was not pointed out to the Court that BIFR had again recommended on 22nd July 2007 that the respondent should be wound up and that the appeal preferred therefrom by the company was also withdrawn by the company on 25th September 2007. If this would have been pointed out to this Court, this Court would surely have again passed a fresh order admitting the petition and appointing the provisional liquidator of the respondent. 2.. Applicants have, therefore, submitted that appropriate orders be passed against the respondent. 3.. The learned Advocate for the respondent states that all the required / necessary facts were set out in the affidavit in support of the application pursuant to which the order dated 29th June, 2006 was set aside by an order dated 16th October 2019. In my view, the duty of an Advocate does not end with setting out of facts in Affidavits. The Advocates appearing before the Court are duty bound to draw the attention of the Court to facts which are relevant for the purpose of deciding an issue by the Court which may h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licant' and 'Respondent No. 3' being Kotak Mahindra Bank and applicant herein, respectively. At this stage, it is stated, the papers and proceedings in Suit No.164 of 2009 filed by applicant against the Company in which consent terms had been taken were not available with Official Liquidator. Official Liquidator had, accordingly, not raised before either the DRT or this Court any issue regarding the legality of the consent terms nor was such an issue considered or decided by either forum. 17. Pursuant to the order dated 21st April 2016, applicant received a sum of ₹ 10,17,03,493/ towards its 20% share in the distribution of sale proceeds. Meanwhile, applicant had filed the present company application no.341 of 2016 seeking the leave of this Court under section 446 of the Companies Act 1956 to proceed in execution to recover the balance decretal amount alleged to be due to it. The company application proceeds on the basis that applicant has a charge over the Satara property and as a secured lender is entitled to priority over all other creditors. On an application being made on behalf of Official Liquidator, this Court was pleased, by an order dated 4th January 2017, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that the Decree is a fraudulent preference or filing a suit under Section 31 of the Specific Relief Act 1963 would therefore first commence on 27th August 2010, then on 24th June 2011. (d). In any case, the present application is not a collateral proceeding where the defence of the alleged nullity of the Decree can be raised by Official Liquidator. Shri Godbole relied upon Prem Singh & Ors. V/s. Biebal & Ors. (2006) 5 SCC 353). (e). Further assuming without admitting, that Official Liquidator's Report seeking reliefs against applicant is not a suit, but is in the nature of an application made to the Company Court under the Company (Court) Rules, 1959, the same is nevertheless an application made to Court and hence, is governed by Article 137 of the Schedule of Limitation Act 1963. Even in such cases, unless, such application is made within the period of limitation prescribed by the said Article, the same cannot be entertained by the Court and the Karnataka High Court in the case of Official Liquidator of Mysore Kirlokar Limited, Bangalore V/s. Kirloskar Institute of Advanced Management Studies (1996) 7 SCC 767) has held that the contention that the Limitation Act 1963 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors are entitled to stand outside winding up to sell the property, which was done pursuant to the order of Madras High Court and DRT permitted to retain the same, except the liability to pay dues to workers under Section 529 of the Companies Act, 1956, no other claim can be entertained. Kotak Mahindra Bank and not Official Liquidator can claim as Kotak Mahindra Bank still has not recovered the entire amount owed to it in full satisfaction of its claim/charge. (i). Further, applicant is an undisputed second charge holder with respect to Ambattur property. In so far as prayer (a) for declaration that the decree is a nullity, the Hon'ble Supreme Court in the case of Indian Bank V/s. Official Liquidator (1998) 5 SCC 401) has clearly observed that the Company Court does not have power to declare a Decree of the competent Court void in an application made by Official Liquidator and such an application is not maintainable. Hence, this Court does not have jurisdiction to entertain either prayer (a) or prayer (b) in Official Liquidator's Report. (j). In any event, the Consent Decree dated 9th July 2009 does not constitute a fraudulent preference on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Bank of Maharashtra V/s. Official Liquidator (1998) SCC Online Guj 370) has extensively considered the law in this regard and held that mere admission of an existing liability by a Company prior to its winding up can never amount to a fraudulent preference. (k). Section 531 of the Companies Act 1956 uses the word'invalid' and not 'void'. Thus at the highest the Consent Decree against the Company would be voidable only at the instance of Official Liquidator. The difference between the terms invalid, voidable and void are judicially recognised in many judgments. It was observed by BIFR in its order dated 22nd January 2007 that the promoter Company - M/s. Swadeshi Mills Company Limited, had been ordered to be wound up vide order dated 5th February 2001 (Bench - I) and as such there was actually no promoter to revive the Company. Further, it is pertinent to mention that Swadeshi Mills Company Limited was wound up by this Court much prior to the consent terms dated 9th July 2009 as such the question of any indirect interest of applicant in the Company does not arise. The burden of proof is on Official Liquidator to prove fraud. Official Liquidator was aware about the consent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econstruction (BIFR) of NCLT as SICA 1985 was repealed by Section 252 of the Insolvency and Bankruptcy Code, 2016 (IBC) w.e.f. 1st December 2016. This is strictly without prejudice to the contention that Section 536(2) of the Companies Act 1956 is even otherwise inapplicable since it was attachment in judgment and not disposal of property. (m). Even otherwise, the Consent Decree dated 9th July 2009 was entered into bona fide and did not constitute a fraudulent preference within the meaning of Section 531 of the Companies Act 1956; (n). The attachment by the said Consent Decree of the Satara property constitutes a charge in favour of applicant which entitles it to priority in payment over all other lenders; . Paragraph 13 in Kerala State Financial Enterprises Ltd. V/s. Official Liquidator, Kerala (2006) 10 SCC 709) provides : "13. Save and except certain special statues in relation to recovery of debts from the properties of a company which has been directed to be wound up, the provision of the Companies Act shall apply. An order of attachment made prior to passing of an order of winding up may not be void, but then the executing proceedings must be allowed to continue wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has to take into account the opinion, but it is not to abdicate its own function of determining the question of winding up. The Learned Single Judge in Modistone (Supra) (R.D. Dhanuka, J.), has relied upon the Hon'ble Supreme Court judgement in NGEF Limited (Supra) and the real issue involved in the said judgement of the Hon'ble Supreme Court was not regarding the date of commencement or deemed commencement for winding up. (r). The ratio of the judgment in NGEF Limited (Supra) was that the Board and Company Court exercise concurrent jurisdiction and the provisions of SICA have overriding effects and the inherent power of the Company Court does not exist in such cases. (s). The judgment of Madras High Court has been consistently followed in the cases of Ashok Alloy Steel Ltd. V/s. BIFR (2008) 142 Company Cases 915 HP), BIFR V/s. Unity Steels Ltd. (2002) 109 Company Cases 236) , Tata Iron Steel Company V/s. Him Ispat Ltd. (2002) 108 Company Cases 537), Board Opinion V/s. Hathising Manufacturing Company Ltd. & Ors. (2009 SCC Online Guj. 10270) and Kamdar Ladat Simiti V/s. Nanikram Shobraj Mills Ltd. (2005) 125 Company Cases 740) , etc. Therefore, the winding up pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ambattur property along with interest at such rate as this Court may deem appropriate. (e). Even otherwise, applicant not having any prior charge inrespect to the Satara property, the leave sought by it to execute the Consent Decree and to put the Satara property to sale and execution ought to be refused and; (f). The interest of all stakeholders would be better served if the1/3rd undivided share of the Company in the Satara property were to be sold by Official Liquidator under the supervision of the Company Court. 20. Ms. Kumbhat, counsel appearing for Interveners apart from adopting the submissions of Shri Sen, counsel for Official Liquidator, submitted that : (a). The amount of ₹ 3.25 Crores provided by applicant to theCompany was by way of promoter's contribution without any interest as per the guidelines of BIFR. (b). BIFR in the proceedings held on 2nd June, 1998, laid down certain guidelines wherein the board ascertained the requirement of interest free promoters contribution and also made clear that there should not be diversion of funds by promoters. (c). the scheme of Operating Agency (BoB) being proposed on the basis of guidelines framed by BIFR, sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spose of or create any third party interets into the said property or any part thereof,. 6.. The Plaintiffs are at liberty to execute the decree on the basis of theMinutes of Consent Terms without sealing of decree and sealing of decree is dispensed with under Rule 314 of the High Court Original Side Rules, 1980. The Prothonotary and Senior Master is directed to act on the authenticated copy of the Minutes of Order and Consent Terms duly authenticated by the Associate and issuance of decree is expedited. 7.. 2/3rd of Institution fees be refunded to the Plaintiffs. 8.. Suit stand disposed of in the aforesaid terms with no order as to costs. 22. Date of commencement of winding up proceedings : (a) The first issue that arises for consideration is as to when the winding up proceedings against the Company (in liquidation) commenced. It is the case of Official Liquidator that the winding up proceedings commenced on the date of recommendation by the BIFR that the Company be wound up while it is applicant's case that, in the absence of a petition for winding up, the winding up proceedings must be deemed to have commenced only on a winding up order being passed, i.e., on 24th June ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this behalf by the BIFR. However, this issue is of limited relevance since the Company has already been wound up. The only question that survives for consideration is the date when the winding up proceedings must be treated as having commenced. (d). The question as to when winding up proceedings must be deemed to have commenced when a Company is wound up pursuant to the recommendation by the BIFR has been considered by various Courts. This issue fell for consideration by the Hon'ble Supreme Court in NGEF Limited (Supra) where, while overruling the opinion of the Division Bench of the Hon'ble Gujarat High Court that a winding up proceeding arising out of a recommendation by the BIFR would commence only on the passing of an order of winding up, the Court observed: "50.We may, however, observe that the opinion of the Division Bench in BPL Ltd. to the effect that the windingup proceeding in relation to a matter arising out of the recommendations of BIFR shall commence only on passing of an order of winding up of the Company may not be correct. It may be true that no formal application is required to be filed for initiating a proceeding under Section 433 of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly : Provided that, in relation to things made, taken or done before the commencement of this Act, this subsection shall have effect with the substitution, for the reference to six months, of a reference to three months." (b) It is the Official Liquidator's case as submitted by Shri Sen, with whom I agree, that the Consent Decree was collusive and a fraud on the Court and clearly a fraudulent preference within the meaning of Section 531. This would be apparent from the following : (i). The Company filed company application (L) No. 951 of2008 to recall the order dated 29th June 2006, whereby the company petition had been admitted and a Provisional Liquidator appointed in respect of the Company. They did so on the basis that the earlier recommendation for winding up issued by the BIFR on 9th April 2002 had been set aside by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admission for a much larger sum of ₹ 12,49,27,897/ along with interest thereon at the rate of 15.76% p.a. with quarterly rests from 8th June 2009 till payment and/or realization. There is nothing whatsoever on record to explain or justify this abrupt reversal in position by the Company. The only possible inference in the circumstances can be that the Company was attempting to favour applicant, a promoter group company, in preference to its other creditors; (viii). Applicant was fully aware of the recommendationdated 22nd January 2007 of the BIFR that the Company be wound up. In fact, there is a reference to it in the plaint. However, neither applicant nor the Company appear to have brought this recommendation to the notice of the learned Single Judge considering the Consent Terms. The parties also appear not to have brought to the notice of this Court the orders of the BIFR which required promoter contribution to be interest free or the terms of the Loan Agreement which failed to stipulate any rate of interest and indeed required the BIFR to fix it which it never did; (ix). The Consent Terms were signed on behalf of theCompany by one Shri Venkateshwaran. He is stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise in the power of attorney the words 'prosecute the suit' don't figure. There is only reference in the plaint. 15.. The attorney has only those powers which arespecified in the power of attorney and mere reference in the plaint that he is also authorised to prosecute the plaint does not mean that he is vested with the power to withdraw the suit or settle it by way of compromise. 19.. As is apparent these clauses gave the power to pursuethe suit. Pursue means to continue or proceed along a course of action and not to withdraw. 20.. Power of attorney is always to be interpreted strictlyin its terms. There is no scope for searching meanings or intentions. Nor is it permissible to stretch or provide elasticity to the meaning of the words such as "prosecute", "pursue", "proceed', "execute", "sign" etc. Mere execution of power of attorney does not mean that the attorney has been conferred with power to do all such acts which the executor of the attorney possesses. Unless and until a specific power has been conferred upon the attorney, attorney is not free to arrogate the powers of "dominus"." (x). In any eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the judgment of the Hon'ble Supreme Court in Indian Bank V/s. Official Liquidator Chemmeens Exports (P) Ltd. & Ors. (1998) 5 SCC 401) and in particular paragraph 12 thereof, which is reproduced hereinbelow: "It may be noted that these provisions have no application to any proceeding pending in appeal before a High Court or the Supreme Court. From this what follows is when a suit is instituted in the court of competent jurisdiction with the leave of the court under subsection (1) and a decree is passed by that court whether on the basis of mortgage or otherwise, it would be binding on Official Liquidator and no plea inconsistent with the decree passed against Official Liquidator can be raised while deciding the questions of priorities under clause (d) of subsection (2). We wish to make it clear that under Section 446, no power is conferred on the company court to declare a decree of the competent court void a prayer which is made by Official Liquidator in the application out of which this appeal arises so to that extent the application filed by the liquidator in the company court is not maintainable." (b). This judgment concerned a case where leave had alread ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are constrained to say that more often than not, process of the court is being abused. Propertygrabbers, taxevaders, bankloandodgers and other unscrupulous persons from all walks of life find the courtprocess a convenient lever to retain the illegalgains indefinitely. We have no hesitation to say that a person, who's case is based on falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the litigation." (d). The Consent Decree in question, which has been procured by fraud can be set aside at any stage including in an application for leave to execute it or in an Official Liquidator's Report challenging it. Even otherwise, the scope of the Company Court's power under Section 446 has been very broadly construed by the Hon'ble Supreme Court in Sudarsan Chits (I) Ltd. V/s. O. Sukumaran Pillai and Others (1984) 4 SCC 657), where the Court observed : "8.… Now at a stage when a winding up order is made the company may as well have subsisting claims and to realise these claims the Liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the court w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Court by exercising powers under Section 446(2) of the Companies Act, 1956. All contentious issues can be decided by the Company Court by exercising powers under Section 446(2) of the Companies Act, 1956 including any claims by or against the company in liquidation (including any claims by or against any of its branches in India. 116. Under Section 446(2)(d) of the Companies Act, 1956, the Company Court is also empowered to entertain or dispose of any question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. In my view, there is no substance in the submission of the learned senior counsel for Modi Rubber Ltd. that only an administrative direction can be granted by the Company Court in the report submitted by Official Liquidator or that the evidence can be recorded only in the company application and not in the report submitted by the official liquidator. The powers exercised by the Company Court by issuing such directions and/or orders under various provisions of the Companies Act, 1956 whether passed in company applications or in the official liquidator's report, as the case may be, are the judicial orders and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and declared by the decree and it is void as against the Official Liquidator. The unregistered charge has no effect upon the property of the company in liquidation. The mortgagees cannot sell the mortgage property notwithstanding the decree obtained prior to the order windingup the company. 44.It was contended by Shri Tulzapurkar that Official Liquidator could not go behind the decree unless there be fraud or collusion. In view of the provisions of s. 125 Official Liquidator is entitled, if not obliged, to place before the executing court his objection based thereon." (g) The present case bears a striking resemblance to the facts considered by the Division Bench, save for the added feature that the Consent Decree that applicant seeks to enforce was procured by fraud. This would, of course, make the Decree more vulnerable rather than less. 25 . Attachment not a charge : (a). The application proceeds on the basis that the attachment of the Satara property constitutes a charge in favour of applicant. In the course of the hearing, however, applicant has sought to abandon its stand that the attachment would constitute a charge. If it did, it would in any event fall foul o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be brought within three years from when the cause of action accrued. The Consent Decree having been passed on 9th July 2009, applicant contends that the reliefs sought in the Official Liquidator's Report were clearly barred by time. (b). The argument of applicant is misconceived. While the Limitation Act would undoubtedly apply to Official Liquidator subject to the qualification introduced in Section 458A (Section 458A : Exclusion of certain time in computing periods of limitation. Notwithstanding anything in the Indian Limitation Act, 1908 (9 of 1908) or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application in the name and on behalf of a company which is being wound up by the [Tribunal], the period from the date of commencement of the winding up of the company to the date on which the winding up order is made (both inclusive) and a period of one year immediately following the date of the winding up order shall be excluded.) of the Companies Act 1956 the reliefs sought in the Official Liquidator's Report are not time barred for two reasons, viz. applicant's argument loses sight of the fact that the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeds and did not conclude any rights between the parties. (d). 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. This was on account of the fact that the papers and proceedings in Suit No.164 of 2009, which induced Official Liquidator to form the view that the Consent Decree is a fraudulent preference, was not then in his possession. His omission in these circumstances to raise a specific plea that the Consent Decree was fraudulently procured cannot preclude Official Liquidator, being more fully informed, from raising that plea now. 28. In these circumstances, (a). the leave sought by applicant under Section 446 of theCompanies 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. theamount of ₹ 10,17,03,493/ withdrawn by it from the sale proceeds of the Ambattur property. 29. Company application no.341 of 2016 and Official Liquidator's Report acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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