2022 (6) TMI 1493 - HC - Companies Law

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

SHRI NR RAVI Versus THE OFFICIAL LIQUIDATOR OF M/s. SEM INDIA SYSTEMS PRIVATE LIMITED (IN LIQN.)

Karnataka HC ruled that Official Liquidator must pay rentals to landlord after taking possession of leased premises during company liquidation. Court held ... Payment of rentals - Direction to Official Liquidator to hand over the possession of the Schedule premises to the Application in the interest of justice and equity - direction to Official liquidator to pay the arrears of rents for the ground floor premises - direction to Official liquidator to pay the arrears of rents for the first floor premises - grievance of the Applicant is that though the Official Liquidator took over possession of the premises on 15.07.2014, no rentals have been paid by the Official Liquidator to the land owner, i.e., the Applicant. Whether upon the Official Liquidator taking possession of the premises belonging to a third party, which was in possession of the Company in liquidation, the Official Liquidator would be required to make payment of the rentals to such third party land owner or could the Official Liquidator contend that any claim of the landlord of the said premises would only be a preferential claim made by such landlord? HELD THAT:- It is clear from Section 476 of the Companies Act, 1956 that the amount payable by the Company in liquidation as rental due to the landlord until the Official Liquidator takes possession is only a preferential claim. On the Official Liquidator stepping into the shoes of the tenant and the Official Liquidator continuing in possession, the amounts payable would be cost of winding up. Though the Applicant has claimed that from the date on which the Official Liquidator took possession, i.e., 15.07.2014, the Official Liquidator is required to make payment of the rentals as sought, it is opined that whenever an Official Liquidator is appointed and takes over possession, the Official Liquidator would have to be given atleast a period of three months to ascertain whether the Official Liquidator is required to continue in possession or not. This being so for the reason that as on the date on which the Official Liquidator takes possession he is not aware of the requirement or otherwise of the property or otherwise, the inventory of the properties of the Company in liquidation and whether any storage facilities are available to store the movables and records of the Company in liquidation. From the minutes of the meeting, it is clear that it is at the instance of the Secured Creditor, that the movables were retained in the property and that the entire property was locked up. The Secured Creditor going to the extent of stating that the landlord could initiate proceedings for eviction against the Official Liquidator. The Secured Creditor was also well aware of the fact that if the property was locked up, the landlord would not be capable of exercising ownership right, on both the ground floor and the first floor. Hence, the Secured Creditor would also be liable to make payment of the said amounts. The Official Liquidator is granted liberty to proceed against the Secured Creditor for recovery of the amount held by the Secured Creditors for onward disbursal to the landlord - the Official Liquidator ought to have decided by 15.10.2014, if the Official Liquidator intended to continue in possession or not. Having chosen to continue in possession, post that date, it is opined that the Official Liquidator would have to make payment of the rentals to the landlord as cost of the winding up since the possession, which is continued by the Official Liquidator is only in furtherance of the winding up proceedings. Thus, upon the Official Liquidator taking possession of the premises belonging to a third party, which was in possession of the Company in liquidation, the Official Liquidator would be required to make payment of the rentals to such third party land owner as costs of winding p, the landlord being entitled to the rentals immediately as per the terms of the lease deed. Application allowed in part. 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 LiquidatorThe 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 PaymentsThe 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 CreditorThe 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.