2011 (8) TMI 970 - HC - Companies Law

Trust ordered to vacate property, lease agreement deemed invalid. Damages awarded, new auction ordered.

Sri Krishnasamy Reddiar Educational Trust Versus Official Liquidator

The court directed the appellant, a trust running a Teachers' Training Institute, to hand over vacant possession of the property to the official ... Winding up – EMD was deposited by higher bidder - Property was occupied by appellant-trust under a lease agreement - after filing of the winding up petition, the second lease deed was executed for thirty years period on a meagre rent of Rs. 5,000 per month with minimal increase of 20 per cent – Held that:- Official Liquidator was collecting rent from appellant, it could not amount to attornment of tenancy nor it could amount to acceptance of leasehold right of appellant; and amount so collected could only be treated as damages for use and occupation of property - Keeping in view the interest of the company in liquidation, the secured creditors and the claims of the employees, it would be appropriate to direct the appellant to pay damages for use and occupation of the building and the surrounding land - appellant is granted time for vacating and handing over vacant possession of the building and vacant land Issues Involved:1. Legality of the direction to hand over vacant possession of the property.2. Validity of the lease agreement under Section 531A of the Companies Act, 1956.3. Entitlement to damages for use and occupation of the property.4. Validity of the auction sale and forfeiture of earnest money deposit.Detailed Analysis:Issue 1: Legality of the direction to hand over vacant possession of the propertyThe appellant, a trust running a Teachers' Training Institute, was directed by the court to hand over vacant possession of the property to the official liquidator. The appellant contended that as a lawful tenant, it could not be evicted except under due process of law. The court noted that the appellant participated in the auction and was aware of the sale proceedings. The court found the lease terms to be heavily tilted in favor of the lessee, raising doubts about the lease deed. The court concluded that the lease agreement did not confer any right upon the appellant and directed the appellant to hand over the property by July 2008.Issue 2: Validity of the lease agreement under Section 531A of the Companies Act, 1956The court examined the lease agreements dated January 22, 2000, and December 22, 2000. The second lease, being within one year prior to the winding-up petition, was scrutinized under Section 531A of the Companies Act, which renders such transfers void against the liquidator if not made in the ordinary course of business or in good faith. The court found the lease terms suspicious, given the meagre rent and the unregistered nature of the long-term lease. The court concluded that the lease was intended to deny assets to secured creditors and was void under Section 531A.Issue 3: Entitlement to damages for use and occupation of the propertyThe court observed that the appellant had been in possession of a large property for a nominal rent and directed the appellant to pay Rs. 25,000 per month as damages for use and occupation from July 2008 to September 2011. The court emphasized that the appellant's payment to the official liquidator was towards damages, not rent, and did not confer any tenancy rights. The court granted the appellant time until September 30, 2011, to vacate and hand over possession, failing which the official liquidator could take immediate possession.Issue 4: Validity of the auction sale and forfeiture of earnest money depositThe ninth respondent, the highest bidder in the auction, failed to pay the balance sale consideration. The court noted that the stay order did not excuse the respondent's failure to pay. The court set aside the auction sale and ordered a fresh auction to be conducted within three months, fixing the upset price at the present market value. The earnest money deposit paid by the ninth respondent was not to be refunded until the completion of the fresh auction, after which the respondent could seek its return.Conclusion:The court dismissed the appellant's request to withdraw the appeal and directed the appellant to pay damages for use and occupation. The auction sale was set aside, and a fresh auction was ordered. The court emphasized the need to protect the interests of the company's secured creditors and employees, ensuring the assets secured the best price. The appeal was disposed of with specific directions regarding the payment of damages and the conduct of a fresh auction.