2018 (12) TMI 96 - HC - Companies Law

Consent decree deemed fraudulent preference under Companies Act. Appellant must refund with interest.

The court upheld the decision that the consent decree dated 9th July 2009 was a fraudulent preference under Section 531 of the Companies Act, 1956. The ... Execution of consent decree - winding up petition - whether, after the commencement of the winding up proceedings, the appellant and the Company, could have entered into consent terms, secured a consent decree and on such basis appropriated amount of over ₹ 10 Crores from coffers of the respondent No.2 Company, in preference to the claims of several other creditors, who may have had claims, perhaps much more genuine than the appellant's claim qua the respondent No.2 Company not to mention claims to which the Companies Act affords statutory priorities? - Held that:- The impugned order, whilst declining leave to the appellant to enforce the consent decree dated 9th July 2009 had declared the consent decree dated 9th July 2009 illegal and void, being a fraudulent preference availed by the appellant in the teeth of the provisions of section 531 of the Companies Act. The issue as to whether the appellant had indeed advanced a loan to the Company and whether the appellant was liable to recover such amount with interest has not been foreclosed by the impugned order. The appellant, notwithstanding the impugned order, will always be at liberty to prove its claim before the Liquidator in the winding up proceedings. The impugned order merely prevents the appellant from claiming any fraudulent preference in the matter of recovery of its claims. Therefore, this is not a case where a consent decree has been set aside on the ground of fraud simplicitor. This is only a case where the attempt of the appellant to seek a fraudulent preference has been thwarted. Further, since, by virtue of fraudulent preference, the appellant recovered an amount of ₹ 10,17,03,493/- from the Company (from sale proceeds of Amabattur property), the learned Company Judge has quite correctly ordered the refund of this amount with interest at the rate of 12% per annum, so that such amount can be appropriately dealt with in the course of winding up proceedings by the Official Liquidator. Appeal dismissed. Issues Involved:1. Validity of the consent decree dated 9th July 2009.2. Whether the consent decree constituted a fraudulent preference under Section 531 of the Companies Act, 1956.3. The date of commencement of the winding-up proceedings.4. The appellant's entitlement to enforce the consent decree and recover the amount from the company in liquidation.5. The interest rate applicable to the loan advanced by the appellant to the company.Detailed Analysis:1. Validity of the Consent Decree:The appellant challenged the order dated 13th July 2018, which refused leave under Section 446 of the Companies Act, 1956, to enforce the consent decree dated 9th July 2009. The consent decree was declared illegal and void as a fraudulent preference. The appellant was directed to refund with interest the amount of Rs. 10,17,03,493/- withdrawn from the sale proceeds of the Ambattur property.2. Fraudulent Preference Under Section 531:The learned Company Judge found that the consent decree dated 9th July 2009 constituted a fraudulent preference. The appellant, holding a 22% stake in Swadeshi Mills Co. Ltd., a wholly owned subsidiary of the company in liquidation, had advanced a loan of Rs. 325 Lakhs. Despite the company's initial resistance, consent terms were filed, and the company agreed to a decree on admission for Rs. 12,49,27,897/- with interest at 15.76% per annum. The learned Company Judge noted several circumstances indicating fraudulent preference, including the aggressive opposition by the company followed by the sudden consent to the decree.3. Date of Commencement of Winding-Up Proceedings:The appellant argued that the winding-up proceedings commenced on 24th June 2011 or 27th August 2009. However, the court held that the proceedings commenced on 22nd January 2007, the date on which the BIFR recommended winding up. This was based on Section 441 of the Companies Act and Section 20 of SICA, which state that winding-up proceedings are deemed to commence from the date of the BIFR's recommendation.4. Appellant's Entitlement to Enforce the Consent Decree:The learned Company Judge declined the appellant's leave to enforce the consent decree, declaring it a fraudulent preference. The appellant had already recovered Rs. 10,17,03,493/- from the sale proceeds of the Ambattur property. The court emphasized that the proceedings for winding up are not the same as an intra-party suit for recovery of money, and any proceeds from the sale of assets must be disposed of in terms of the scheme under Sections 529A and 530 of the Companies Act.5. Interest Rate Applicable to the Loan:The Loan Agreement specified interest at bank rates, but the consent terms included an interest rate of 15.76% per annum with quarterly rests. The learned Company Judge found this stipulation onerous and indicative of fraudulent preference. The appellant's offer to scale down the interest rate to 5.28% per annum was deemed insufficient to negate the fraudulent preference.Conclusion:The court dismissed the appeal, upholding the learned Company Judge's order. The consent decree dated 9th July 2009 was declared illegal and void as a fraudulent preference. The appellant was directed to refund the amount withdrawn with interest at 12% per annum. The court emphasized that the appellant could still prove its claim before the Liquidator in the winding-up proceedings but could not claim any fraudulent preference in the recovery of its claims. The principles from DCM Financial Services Ltd. vs. Neel Kamal Plastics Ltd. were applied, affirming that the creditor's arrangement with the purchaser and the company receiving payment in another transaction amounted to a fraudulent preference.