2006 (8) TMI 527 - SC - Companies Law

Company deemed rightful property owner; Sarafs estopped from denial. Corporate veil lifted. Decree challenged despite suit withdrawal.

The court concluded that the company was the rightful owner of the property, which was acquired for its benefit by the promoters before incorporation. ... Whether the possession of the property had been handed over or not? Held that:- The property in suit for all intent and purport was acquired for the benefit of the Company. Only because at the time of acquisition of the property by Sarafs, the Company was unincorporated, the same would not mean that no title could have been passed in favour of the Company. In view of their conduct, Sarafs were estopped and precluded from denying and disputing the title of the Company over the property in dispute. Withdrawal of suit No. 1252 of 1982 by the appellants did not create any embargo in raising a contention that the award of the arbitrator and the consequent decree passed were void ab initio and of no effect.The agreement for sale dated 11.6.1984 was not a transaction for loan. Saraf's conduct was condemnable so far as they not only raised false and frivolous pleas but also initiated frivolous proceedings in courts of law. The subject matter of the agreement was not only the house in question but also the entire lands. Prima facie the demolition of the house took place at the instance of the appellants. However, it is not a case where the appellants are entitled to a decree for specific performance of contract. The respondents should refund the amount of advance of Rs.10,00,000/- (ten lakhs) with interest and furthermore pay compensation to the extent of Rs.50,00,000/- (fifty lakhs). Appeal allowed. Issues Involved1. Ownership of the Property2. Unincorporated Corporation Issue3. Estoppel Issue4. Lifting the Corporate Veil5. Effect of Withdrawal of Suit6. Nature of Transaction7. Subject Matter of the Agreement8. Demolition of the Building9. Discretionary ReliefDetailed AnalysisOwnership of the PropertyThe property in question was acquired by the promoters of the company, Sarafs, before the company's incorporation. The company was registered on 19.6.1979, and the property was shown as an asset in the company's balance sheet and other official documents. The company also paid a sum of Rs.2,22,500/- to Sarafs as consideration. The company mortgaged the property to the State Bank of India and later redeemed it using the advance received from the appellants. The court concluded that the company was the owner of the property, and Sarafs had consistently represented it as such.Unincorporated Corporation IssueThe property was purchased by the promoters before the company's incorporation, which is permissible under Indian law. Sections 15(h) and 19(e) of the Specific Relief Act allow promoters to enter into contracts for the benefit of the company before its incorporation, provided the company accepts the contract. The court held that the company had accepted the contract, and the property was for the company's benefit.Estoppel IssueSarafs had made representations that the company was the owner of the property in various official documents and court proceedings. The principle of estoppel applies, preventing Sarafs from denying the company's ownership. The court noted that Sarafs' representations had led third parties to alter their positions, thereby invoking estoppel.Lifting the Corporate VeilThe court applied the doctrine of lifting the corporate veil, noting that Sarafs were the alter ego of the company and had used the corporate entity for personal gains. The court found that Sarafs' actions were fraudulent and intended to further their own interests.Effect of Withdrawal of SuitThe appellants' withdrawal of a suit challenging the award and decree did not bar them from raising the issue of fraud in the specific performance suit. The court held that a decree obtained by fraud is a nullity, and the appellants were entitled to challenge it.Nature of TransactionThe court rejected the argument that the agreement dated 12.06.1984 was a loan transaction. The agreement contained a clause for refunding the advance money with interest in case of defects in title, which is common in sale agreements. The court found no basis for treating the agreement as a loan.Subject Matter of the AgreementThe court found that the agreement for sale included both the house and the land. The term 'house' was interpreted to include the land appurtenant to it, and the court rejected the respondents' argument that only the house was intended to be sold.Demolition of the BuildingThe court upheld the High Court's finding that the appellants were responsible for the demolition of the building. The sequence of events and the involvement of the appellants in various legal proceedings led the court to this conclusion.Discretionary ReliefBoth parties were found guilty of serious misconduct and abuse of the judicial process. The court declined to grant a decree for specific performance of the contract due to the conduct of both parties. Instead, the court awarded compensation to the appellants.Conclusion1. The property was acquired for the benefit of the company.2. The company's unincorporated status at the time of acquisition did not prevent it from owning the property.3. Sarafs were estopped from denying the company's ownership.4. Withdrawal of the suit did not bar the appellants from challenging the award and decree.5. The agreement for sale was not a loan transaction.6. Sarafs' conduct was condemnable.7. The agreement included both the house and the land.8. The appellants were responsible for the demolition.9. The appellants were not entitled to specific performance but were awarded compensation.The appeals were allowed to the extent of awarding compensation and refunding the advance with interest. Each party was ordered to bear its own costs.