2019 (4) TMI 2009 - SC - Companies Law

Supreme Court rules on unearned increase payment in plot transfer due to demerger.

The Supreme Court held that the respondents are liable to pay 50% unearned increase (UEI) upon transferring the plot due to a demerger. The Court ... Unearned increase - transfer by demerger - clause 6(a) of the perpetual lease deed (consent and recovery of UEI) - policy instructions governing charge of UEI (clause 2(d)) - liability for transfers without considerationUnearned increase - transfer by demerger - clause 6(a) of the perpetual lease deed (consent and recovery of UEI) - policy instructions governing charge of UEI (clause 2(d)) - Validity of demand for 50% unearned increase where the lessee's rights in the leased plot stand transferred to another company pursuant to a court sanctioned demerger. - HELD THAT: - The Court held that clause 6(a) of the perpetual lease deed bars sale, transfer, assignment or otherwise parting with possession except with the lessor's prior written consent and, upon grant of consent, entitles the lessor to impose terms including recovery of fifty per cent of the unearned increase calculated on the difference between premium paid and market value. The demerger order of the Company Judge effectuated transfer of the specified assets to the transferee company; therefore the transaction amounted to a transfer within the meaning of clause 6(a). The contemporaneous policy instructions, in particular clause 2(d), operate to charge UEI even where the transferee company has common directors or where the new company is floated by the same group. The High Court Division Bench erred in treating the demerger as falling within clause 1(b) (which exempts certain reorganisations of partnership firms) and in holding that demerger necessarily avoided liability. The obligation to seek consent and to pay UEI flows primarily from the lease stipulation and is reinforced by the policy; the fact that the transferee is a group company with common control does not negate the transfer or the lessor's entitlement to recover UEI. [Paras 14, 15, 16, 17, 18]Demand for fifty per cent unearned increase was held to be valid as the demerger effected a transfer attracting clause 6(a) of the lease and clause 2(d) of the policy; the Division Bench's contrary view was set aside.Liability for transfers without consideration - unearned increase - clause 6(a) of the perpetual lease deed (consent and recovery of UEI) - Whether UEI can be recovered even where the transfer pursuant to demerger involved no consideration or no profit. - HELD THAT: - The Court interpreted clause 6(a) to mean that recovery of UEI is not contingent on the existence of sale consideration or actual profit. The lease contemplates calculation of UEI on the difference between premium paid and market value; this may be computed on actual or notional basis as appropriate. Consequently, a transfer effected by demerger without consideration does not by itself absolve the lessee from the obligation to pay UEI where the transfer falls within the lease and policy provisions. [Paras 11, 16, 17]UEI is recoverable even if the demerger/transfer was without consideration; lack of consideration does not defeat the lessor's entitlement under clause 6(a).Final Conclusion: The appeal is allowed; the Division Bench judgment is set aside and the Single Judge's order dismissing the writ petition is restored. The demand and show cause notices calling upon payment of unearned increase were held valid under clause 6(a) of the lease read with the Corporation's policy (clause 2(d)); no costs were ordered. Issues Involved:1. Liability to pay 50% unearned increase (UEI) on the market value of the plot upon transfer due to demerger.2. Interpretation of lease deed clause 6(a) regarding transfer and UEI.3. Applicability of policy instructions on UEI in cases of demerger.4. Validity of demand and show cause notices issued by the appellant.Issue-wise Detailed Analysis:1. Liability to pay 50% unearned increase (UEI) on the market value of the plot upon transfer due to demerger:The primary issue is whether the original lessee (respondent No.1) must pay 50% UEI to the appellant upon transferring the leased plot to another public limited company (respondent No.2) due to a demerger order. The Supreme Court held that the transfer of the plot resulting from the demerger order by the Company Judge constitutes a transfer under clause 6(a) of the Lease Deed, thus making the respondents liable to pay UEI. The Court emphasized that the transfer, even without consideration, mandates UEI payment based on the difference between the premium paid and the market value of the plot.2. Interpretation of lease deed clause 6(a) regarding transfer and UEI:Clause 6(a) of the Lease Deed prohibits selling, transferring, assigning, or otherwise parting with possession of the plot without the appellant’s prior written consent. The clause allows the appellant to impose conditions, including recovering 50% of the unearned increase. The Court clarified that the expansive terms 'sell, transfer, assign or otherwise part with the possession' include transfers without consideration, thus obligating the payment of UEI.3. Applicability of policy instructions on UEI in cases of demerger:The Court examined the policy instructions regarding UEI, particularly clause 2(d), which stipulates charging 50% UEI when a new company is formed, even if the directors remain the same. The Court found that this clause applies to the present case of demerger, rejecting the respondents' argument that clause 1(b), which exempts certain transfers from UEI, should apply. The Court emphasized that the policy does not specifically exempt demergers from UEI, and the respondents' case does not fall within the exempted categories.4. Validity of demand and show cause notices issued by the appellant:The appellant issued demand and show cause notices to the respondents for UEI payment. The respondents challenged these notices, but the Single Judge upheld them, which the Division Bench later set aside. The Supreme Court reinstated the Single Judge’s decision, affirming the validity of the notices. The Court ruled that the demand for UEI was consistent with clause 6(a) of the Lease Deed and the applicable policy instructions, thus making the notices legitimate and enforceable.Conclusion:The Supreme Court concluded that the respondents are liable to pay 50% UEI upon transferring the plot due to the demerger. The interpretation of clause 6(a) of the Lease Deed and the relevant policy instructions support the appellant's demand. The demand and show cause notices issued by the appellant were deemed valid, and the Division Bench's judgment was set aside, restoring the Single Judge’s decision.