Official Liquidator must pay rent after taking possession of leased premises during company liquidation under Section 476

Karnataka HC ruled that Official Liquidator must pay rentals to landlord after taking possession of leased premises during company liquidation. Court held that while rental arrears before liquidator's possession constitute preferential claims under Section 476 of Companies Act 1956, rentals after liquidator assumes possession become winding-up costs. Liquidator granted three-month grace period from possession date to decide continuation. After this period, continued possession requires rental payments to landlord. Court directed liquidator to recover amounts from secured creditor who insisted on retaining locked premises, making creditor liable for rental payments.

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Issues Involved:
1. Whether the Official Liquidator is required to make payment of rentals to the landlord for the premises occupied by the Company in liquidation.
2. Classification of the rental payments as preferential claims or costs of winding up.
3. Responsibility of the Secured Creditor in the payment of rentals.

Detailed Analysis:

Issue 1: Payment of Rentals by Official Liquidator

The Applicant sought relief for the Official Liquidator to hand over possession of the premises and pay arrears of rent from 15.07.2014 to 31.12.2015, along with future rents until possession is handed over. The Applicant claimed ownership of the property leased to the Company in liquidation since 15.05.2008. Despite the lease expiring after eleven months, the Company continued to occupy the premises and ceased rental payments. The Official Liquidator took over the Company's assets on 15.07.2014. The Applicant's grievance was the non-payment of rentals by the Official Liquidator, leading to the filing of C.A.No.8 of 2016.

The Court noted that the possession was handed over on 08.05.2017, and the claim to be considered was regarding rental payments. The Official Liquidator argued that the Applicant's claim should be treated as a preferential claim along with other creditors. The Court directed the Applicant to file a claim, which was adjudicated, admitting Rs.23,30,807/- as a preferential claim and Rs.29,98,319/- as an ordinary claim, rejecting Rs.25,95,446/-.

Issue 2: Classification of Rental Payments

The Court examined whether the Official Liquidator, upon taking possession of the premises, is required to pay rentals as costs of winding up or treat them as preferential claims. The Official Liquidator had two options: return the premises or continue occupation for winding up purposes. Continuing occupation necessitates rental payments as costs of winding up. The Court held that the Official Liquidator, having chosen to continue in possession, must pay rentals as costs of winding up since the premises were used for storing the Company's movable properties.

The Court contrasted this with rentals due before the Official Liquidator's possession, which are preferential claims under Section 530 of the Companies Act, 1956. The Court emphasized the necessity of distinguishing costs of winding up from preferential debts, citing relevant legal provisions (Sections 476, 529-A, and Rule 338 of the Companies (Court) Rules, 1959).

Issue 3: Responsibility of the Secured Creditor

The Court observed that the Secured Creditor's insistence on locking the entire premises to safeguard the Company's movable properties prevented the landlord from renting out the first floor. The Secured Creditor suggested that the landlord could file an eviction suit against the Official Liquidator. The Court concluded that the Secured Creditor is also liable for rental payments due to their role in locking the premises.

The Court granted the Official Liquidator liberty to recover the rental amounts from the Secured Creditor for disbursal to the landlord. The Court determined that the Official Liquidator should have decided by 15.10.2014 whether to continue possession. Post this date, the Official Liquidator must pay rentals as costs of winding up.

Conclusion:

The Court held that upon taking possession of a third-party's premises, the Official Liquidator must pay rentals as costs of winding up. The rentals due before 15.10.2014 are preferential debts under Section 530 read with Section 529-A of the Companies Act, 1956. The Official Liquidator is directed to pay rentals from 15.07.2014 to the date of handing over possession within eight weeks, recovering the amount from the Secured Creditor if necessary. The Court's order ensures the landlord's entitlement to rentals as per the lease terms and clarifies the classification of rental payments in winding up proceedings.

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