2018 (7) TMI 2073 - HC - Companies Law

Court denies enforcement of Consent Decree, deems it fraudulent preference, orders refund with interest.

Forbes and Company And Bord for Industrial and Financial Reconstruction (B.I.F.R.) Versus Coromandel Garments Ltd. & Ors.

The Court refused the leave sought by the applicant under Section 446 to enforce the Consent Decree, declared the Consent Decree illegal and void as a ... Grant of leave - execution of Consent decree - winding up proceedings - revival of sick company - amounts received from out of the sale proceeds of one of the Company’s properties - HELD THAT:- The leave sought by applicant under Section 446 of theCompanies Act 1956 to enforce the Consent Decree dated 9th July 2009 is refused. The Consent Decree dated 9th July 2009 is declared illegal and void as a fraudulent preference - applicant is directed to refund with interest at 12% p.a. theamount of ₹ 10,17,03,493/­ withdrawn by it from the sale proceeds of the Ambattur property - Application disposed off. Issues Involved:1. Commencement date of winding up proceedings.2. Validity of the Consent Decree under Section 531 of the Companies Act, 1956.3. Authority of the Official Liquidator to challenge the Consent Decree.4. Whether the attachment of the Satara property constitutes a charge.5. Plea of limitation regarding the challenge to the Consent Decree.6. Refund of amounts withdrawn by the applicant.Detailed Analysis:1. Commencement Date of Winding Up Proceedings:The Court determined that the winding up proceedings commenced on the date the BIFR recommended winding up, i.e., 22nd January 2007. This conclusion was supported by the judgment in *NGEF Limited* and other High Court decisions, which established that winding up proceedings commence from the date of the BIFR's recommendation rather than the date of the actual winding up order.2. Validity of the Consent Decree under Section 531 of the Companies Act, 1956:The Consent Decree dated 9th July 2009 was found to be a fraudulent preference under Section 531. The Court noted several factors indicating collusion and fraud:- The Company failed to disclose the BIFR's fresh recommendation for winding up to the Court.- The Loan Agreement did not stipulate a rate of interest, and the BIFR had not fixed any interest rate.- The Consent Terms dramatically increased the applicant's entitlement from Rs. 3.25 Crores to Rs. 12.49 Crores without any justification.- The Consent Decree was signed by an individual without proper authority, as the Power of Attorney did not survive the appointment of the Provisional Liquidator.3. Authority of the Official Liquidator to Challenge the Consent Decree:The Court held that the Official Liquidator could challenge the Consent Decree through a report filed before the Company Court. The judgment in *Indian Bank v. Official Liquidator* was distinguished as it concerned a case where leave had already been granted under Section 446. The Court reiterated that a decree obtained by fraud can be set aside at any stage, even in collateral proceedings, as affirmed in *S.P. Chengalvaraya Naidu v. Jagannath*.4. Whether the Attachment of the Satara Property Constitutes a Charge:The Court clarified that the attachment of the Satara property did not create a charge. An attachment merely prevents a debtor from dealing with the asset but does not confer any title or interest in favor of the creditor. This was supported by the judgment in *Kerala State Financial Enterprises Ltd. v. Official Liquidator*.5. Plea of Limitation Regarding the Challenge to the Consent Decree:The Court rejected the plea of limitation, noting that the Official Liquidator became aware of the fraudulent nature of the Consent Decree only upon examining the suit papers in January 2017. The challenge was thus within time, considering the fraudulent nature of the decree and the specific provisions of Section 458A of the Companies Act, 1956.6. Refund of Amounts Withdrawn by the Applicant:The Court directed the applicant to refund the amount of Rs. 10,17,03,493/- withdrawn from the sale proceeds of the Ambattur property with interest at 12% p.a. The Court emphasized that the distribution permitted by the DRT was an interim arrangement and did not conclude any rights between the parties.Conclusion:The Court refused the leave sought by the applicant under Section 446 to enforce the Consent Decree, declared the Consent Decree illegal and void as a fraudulent preference, and directed the applicant to refund the withdrawn amount with interest. The company application and Official Liquidator's Report were disposed of accordingly.