TaxTMI 
TaxTMI 
2007 (10) TMI 393
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....s further directed not to sell, transfer, create any charge or mortgage or deal with its property or assets in any manner without the prior written permission of the Reserve Bank except for the purpose of repayment of the deposits held by the company on maturity. Such direction was issued in the context of the Reserve Bank having received complaints from depositors that the company was unable to repay the deposits accepted from the public. The Reserve Bank took the view that to allow the company to accept fresh deposits or to permit it to renew the existing deposits would be detrimental to the interests of the existing and prospective depositors. The Reserve Bank order requiring the company not to sell or otherwise deal with its properties, was in terms of section 45MB(2) of the 1934 Act and it was for a period of six months from the date of the order. 3. By another order of 14-5-1998, the Reserve Bank directed the company not to sell, transfer, create any charge or mortgage or deal with its property and assets in any manner except to repay deposits on maturity without the prior written permission of the Reserve Bank for a further period of six months. On 30-10-1998, the Reserve....
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....ned date. The official liquidator has submitted that the sum of Rs. 40,000 was deposited with him but he is not aware as to whether notice was served on the secured creditors and as to how C.A. No. 99 of 2002 was prosecuted thereafter. There were certain events that overtook the further progress of C.A. No. 99 of 2002 which, according to the official liquidator, renders useless any enquiry as to the ultimate fate of the application. 6. On 15-5-2002, the Reserve Bank filed a winding up petition under section 45MC of the 1934 Act, being C.P. No. 342 of 2002. The company affirmed an affidavit in such proceedings, a copy whereof has been appended by the official liquidator to a supplementary affidavit filed on his behalf in the present proceedings. An anomalous situation arose that is difficult to be reconciled in the context of the events. But before such anomaly is detailed, it is necessary to appreciate the stand taken in the company's affidavit filed in the Reserve Bank's winding up petition. 7. The company set out in its affidavit its principal objects of carrying on business of an investment trust company, to act as financial and management consultants, to act as an issue h....
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....nding the order of 25-2-2002, but a second order of winding up came to be passed as it does not appear that the company brought it to the notice of the court at the time the Reserve Bank's petition for winding up was taken up for final hearing that the company had already been wound up. It also appears that the official liquidator read the order of 25-2-2002, to be a continuing injunction on him from taking any further steps. Either the official liquidator did not appreciate the import of the last sentence of the order dated 25-2-2002, by which such order was to remain valid till the adjourned date which was set a week from the order; or the official liquidator interpreted such part of the order to imply that the injunction on him from taking further steps was to continue till the matter was disposed of or it was taken up for hearing. 10. However, the official liquidator took a cue from the direction contained in the order of 11-7-2003, requiring him to forthwith takeover the assets of the company in liquidation and construed such later order to undo the embargo, if at all it continued, of the order of 25-2-2002. According to the official liquidator, he attempted to take possess....
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....tion charges after deducting maintenance charges of Rs. 7,200 and a sum of Rs. 14,347 on account of property tax claimed to have been paid by the respondent to the Municipal Corporation of Hyderabad. 11. By a letter of 1-2-2005, the official liquidator returned the demand draft for Rs. 49,594 to the respondent's advocates and sought particulars as to the registration of the two documents on which the respondent relied. On 11-2-2005, the official liquidator called upon the respondent's advocates to impress on their clients to make over possession of the shop-rooms to the official liquidator claiming that the lease of 23-11-2001, was void. The official liquidator asserted that such agreement had been made after the date of presentation of the winding up petition by the creditor and during the period that winding up had commenced. The date of commencement of winding up proceedings was stated to be 7-4-2001. The official liquidator emphasised that "under section 531 of the Companies Act, 1956, any transfer of property movable and immovable made by a company in favour of a purchaser or encumbrance within a period of one year before the presentation of petition for winding up shall be....
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.... the knowledge of the company that it was made on its behalf and adjusted lease rents were thereafter tendered to the company. The respondent has made a similar claim on account of the rates and taxes paid to the municipal corporation and has relied on receipts issued by the corporation. 13. By October, 2001, the respondent claims, its business in Hyderabad had developed substantially and that it was desirous of setting up long-term business in the city and sought to exercise its option under the lease of 24-11-1998, by proposing to continue in occupation of the said premises for a period of 50 years. The respondent relies on the subsequent, document of 23-11-2001, which it claims in its affidavits to have been registered and asserts that the material terms reflected therein were the only transactions with the company prior to its liquidation and were reasonable and justified given the nature of the shop-rooms, the location and the market price. The respondent urges that the official liquidator's plea be rejected and the suspicion that is sought to be raised as to the bona fides of the transaction, is completely unfounded. 14. The lease of 24-11-1998, was for a period of thre....
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....oved from the pool of assets that the creditors of the company, including a large number of public depositors, could look to for sale and discharge of a part of their dues. The official liquidator relies on a letter dated 9-5-2006, issued by the official liquidator attached to the High Court of Andhra Pradesh under cover whereof a tentative assessment of the fair market rent of comparable premises has been forwarded. On local enquiry, it has been ascertained that the fair market rent in the area in May, 2006, was Rs. 50,000 per month per shop/shutter. The respondent here enjoys two shop-rooms at the lower ground floor basement of the Amurtha Mall. 16. The respondent belittles the assessment of fair market rent relied upon by the official liquidator by placing a report obtained from a retired employee of the Income-tax Department. The retired valuer of the Income-tax Department has opined that fair market value of authorised offices or commercial premises at the area was Rs. 1,200 per sq.ft. in November, 1998; Rs. 1,800 per sq.ft. in November, 2001; and Rs. 3,000 per sq.ft. in August, 2006. In his opinion, fair monthly rental value of the premises worked out to Rs. 3,675 in Novem....
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.... before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly : Provided that, in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months, of a reference to three months. (2) For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by the court, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual. 531A. Avoidance of voluntary transfer.-Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and....
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....up of 11-7-2003, passed on the Reserve Bank's petition filed on 15-5-2002. 19. The respondent is justified in its assertion that if section 531 were to apply the period would date back to 7-10-2000 (six months prior to commencement of the winding up proceedings on the creditor's petition which was filed on 7-4-2001). If the period under section 531A were to be reckoned, the period that would be covered would be from 8-4-2000, since the liquidator's year under section 531A begins a year before presentation of the winding up petition. If section 536(2) were to apply, any disposition of the property of the company in liquidation made after the commencement of the winding up would be void, unless otherwise ordered by court. The respondent relies on such dates as its entry into the said premises pursuant to the agreement of 24-11-1998, cannot be questioned under sections 531, 531A and 536(2) of the Act. The respondent has also been able to establish on the strength of the licence that it obtained from the Reserve Bank to carry on business from the said premises, that it entered into occupation of the said premises in or prior to January, 1999. 20. The respondent submits on the aut....
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....there was an application under section 446(2). It comes under clause (b) which relates to any claim made by or against the company and in any event it is certainly covered by clause (d) which includes any question whatsoever whether of law or fact which may relate to or arise in the course of the winding up of the company. In the present case, admittedly, the winding up proceedings have not come to an end. The company was not yet dissolved. It was still in the course of winding up. Further, in our opinion, it was certainly a question relating to or arising in the course of such winding up. In the course of the winding up, the official liquidator was directed to sell the mill premises to the purchaser who was the applicant before the learned Company Judge. This provided for handing over possession of the immovable properties to the purchaser. The order specifically directed the police authorities referred to therein to render police help in evicting the trespassers. A list of tenants and licensees was prepared. The others in occupation were the trespassers. The liquidator prepared a list showing whether the tenants are licensees or trespassers. This was challenged by the appellants ....
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....here is no provision under the Act to the effect that no order of winding up can be passed when an earlier order is already passed. In the decision of this Court in the case of Y.S. Spinners Ltd. v. Official Liquidator, Ambica Mills Ltd. [2000] 100 Comp. Cas. 547 , the order of winding up passed by this Court in Company Petition No. 121 of 1995 on 17-1-1997, was referred to which stated that it is an order in Company Petition No. 66 of 1988 (and other petitions including Company Petition No. 121 of 1995) which was filed on 12-4-1988, which was the earliest petition. That means the court had already passed similar orders in the other petitions in spite of the fact that it had already passed an order in the later petition. The only difference in the present case is that instead of the above order, the court had passed specific separate orders of winding up. However, this does not make any difference since in the said decision, the court should be taken to have passed separate orders in other petitions but the language used is somewhat different which has no significance to the question whether winding up orders can be passed for the same company which is ordered to be wound up in ano....
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....tion as impugned in those proceedings to be void and there was no question of any declaration of the nature envisaged by article 59 being sought by the official liquidator within a period of three years from the time that the facts entitling the official liquidator to have the relevant instrument cancelled or set aside or for cessation of the contract, came to his notice. The official liquidator had obtained a copy of the agreement in that case in March, 1979, and it was the admitted position that he had received some rents though some of the rent receipts bore the endorsement "without prejudice" and others did not. Despite the official liquidator's application in that case being made beyond the period of three years from the date of receipt of a copy of the agreement and despite the official liquidator having received rent, some of them without any reservation, the court passed an order of eviction. 27. The principles that apply under section 536(2) of the Act makes it irrelevant as to whether the transferee of a company's property is aware of the presentation of the winding up petition against the company. A disposition must not be validated merely because the transferee bona ....
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....nt on the part of the company at the time of discharging the debt is established. The respondent in this case is right in asserting that fraudulent preference implies that the impugned transaction is with a creditor of the company. The reference to the insolvency rules adds weight to such contention just as the immediate succeeding section, section 531A of the Act, indicates that transactions with persons other than creditors may be annulled and considered void against the liquidator under the later provision. There is considerable merit in the respondent's assertion that if section 531 were to be applied in relation to a transaction with a person other than a creditor, section 531A may be otiose. 30. The judgment in Madan Mohan Pathak v. Union of India [1978] 2 SCC 50, is placed by the respondent to emphasise on the jural relationship involved in a debt and the import of the concept of fraudulent preference as recognised by the privy purse case : "It would, therefore, seem that, according to the decision of the majority in R.C. Cooper v. Union of India [1970] 1 SCC 248, debts and other rights in personam capable of transfer or transmission are property which can form the sub....
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....arity of reasoning, the respondent urges that it should be the same onus that the official liquidator in this case should be required to discharge. 32. For the same effect, the respondent has relied on a Division Bench judgment of the Madras High Court in N. Babu Janardhanam v. Official Liquidator, Golden Cine Studios (P.) Ltd. [1993] 78 Comp. Cas. 490 and a judgment delivered by the Company Judge of the Bombay High Court in Monark Enterprises v. Kishan Tulpule [1992] 74 Comp. Cas. 89 . In the Madras case, it was held that under section 531A of the Act the initial burden is on the person who denies the transaction to establish that a transaction was not made in the ordinary course of business of the company or that it lacked good faith and only thereupon, when the onus is discharged, would the burden shift to the transferee. The Division Bench found that the Single Judge had committed an error of law in requiring the transferee to prove that the transaction had been entered into in good faith. In the Bombay case, sections 531, 531A, 536(2) and 537(1) were all considered. It was held, on the facts, that the impugned transaction was not vitiated by section 531 of the Act as the tr....
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....th edition, 3rd Rev.), volume 1, for the meaning of the word 'disposition' :- "To alienate or direct the ownership of property, as, disposition by will." 35. It is first necessary to assess the applicability of Biswabni (P.) Ltd.'s case (supra), principle invoked by the respondent in the context of the second agreement of 23-11-2001. The respondent is aware that such second agreement falls foul of section 531A even if the Reserve Bank's presentation of the petition is reckoned as the date of commencement of winding up. But it is, in fact, the date of presentation of the creditor's petition which marked the commencement of winding up in this case. It was incumbent on the company and the respondent to seek leave of court under section 536(2) of the Act in respect of the agreement of 23-11-2001, as the creditor's winding up petition was pending at that time and as, subsequently, section 536(2) came into play upon such creditor's petition for the winding up being allowed. 36. The mainstay of the respondent's defence is Biswabani (P.) Ltd.'s case (supra). The first agreement of 1998 is beyond the period covered by any of the provisions cited to avoid such agreement be it sectio....
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....rther option of renewal of the lease on the expiry of the period reserved under the lease. This consent decree incorporating the terms of a fresh lease to be effective as a valid lease required registration in view of the provisions contained in section 107 of the Transfer of Property Act read with section 17(1)(d) of the Registration Act, 1908, because the period reserved under the lease was exceeding one year. It is an admitted position that the instrument containing the terms of lease, i.e., either the consent terms or the consent decree was not registered as required by law. However, it is equally an admitted position that the company continued in possession and paid rent which was accepted by the lessors from the company from month to month. It appears that on 29-2-1960, i.e., the last day on which would expire the lease for a period of 5 years, the lessors respondent Nos. 1 and 2 entered into the demised premises and locked a portion thereof. 5. The questions that emerge for consideration in this appeal are :- 1. What would be the status and nature of possession of a person who was admittedly a tenant of the premises covered by the local Rent Restriction Act till the da....
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....onth by respondent Nos. 1 and 2 under the second lease and not what was determined by the court in rent fixation case No. 114/53 wherein the parties had filed a consent praecipe by which the parties invited the rent controller to fix the standard rent of the premises at Rs. 500 per month and Rs. 500 for use of the machinery, furniture and fixtures, in all Rs. 1,000 per month. In this connection, attention was drawn to receipt exhibit 10 issued by respondent Nos. 1 and 2 on 1-1-1960, in which it is stated that the amount is accepted as per terms of consent decree (solenama), but it could not be overlooked that this amount was determined by consent of parties in the case initiated by the appellant before the rent controller for of standard rent. If thus the appellant was already in possession as a tenant of the premises, an unsuccessful attempt to create a fresh lease would not change the nature of his possession as from a tenant to one in part performance under a void lease. The appellant continues to be in possession as tenant and no cloud is created over its title to remain in possession as tenant merely because the appellant and respondent Nos. 1 and 2 attempted to enter into a f....
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....l pending. If such undertaking continued which may have induced the Reserve Bank in not continuing the order or passing a fresh order restraining the company from dealing with its assets under section 45MB(2) of the 1934 Act, the company had no authority to deal with the Hyderabad proparty. 41. The power under section 45MB(2) has to be seen in the context of the public purpose that it seeks to achieve in securing the interest of public depositors :- "45MB. Power of bank to prohibit acceptance of deposit and alienation of assets.-(1)****** (2) Notwithstanding anything to the contrary contained in any agreement or instrument or any law for the time beeing in force, the bank, on being satisfied that it is necessary so to do in the public interest or in the interest of the depositors, may direct, the non-banking financial company against which an order prohibiting from accepting deposit has been issued, not to sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior written permission of the bank for such period not exceeding six months from the date of the order." 42. The authority under section 45MB(2) of the 1934 Act has ....
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....he rent for the 50-year period beginning November, 2001, was to remain unchanged with the lessor being obliged to pay maintenance and other charges which would obviously rise over the years. The authority sought to be granted to the lessee to sub-let the premises, the option given to the lessee to seek renewal for a further period of 50 years and the absence of any clause for enhancement of rent are all in-built instances of absolute bad faith and lack of consideration. In Biswabani (P.) Ltd.'s case (supra), the creation of the tenancy or the original lease was free from doubt, which is not the case here when the first agreement was entered into in derogation of the express undertaking given by the company to the Reserve Bank. Again in Biswabani (P.) Ltd.'s case (supra) the transferee was entitled to protection as a tenant under the rent laws as on the date of the relevant agreement being found void for want of registration. Under section 446(2) of the Act, the company court has the jurisdiction to go into the questions as to the transactions raised by the official liquidator. The scandalous transactions that the respondent seeks to defend, are indefensible on facts and in law. ....
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....ith. Again, even if there is adequate consideration, the official liquidator may attempt to establish that a valuable asset of the company was sought to be shielded against the claims of the company's creditors. The official liquidator's challenge would not pass muster if he cannot establish lack of bona fides on the part of the transferee. 47. In either case, whether under section 531 or under section 531A of the Act, for the rigours thereunder to apply and the transfer to be declared void, it must be evident that the company or the controlling mind thereof; was aware of the imminent winding up of the company, took out a valuable asset of the company from the general pool to be ultimately available to creditors and dealt with such asset by the impugned transaction. The test that has to be applied in either case has to be one that would hold good for the earliest date of the period covered by either section. 48. Section 536(2) of the Act provides for preservation of all assets of a company, upon commencement of winding up proceedings, for ultimate distribution thereof among the creditors following winding up. Section 536(2) contemplates leave being obtained subsequent to pres....
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....nding up petition by an unsecured creditor. Further, loans were sanctioned after the winding up petition was filed and the appellant and the company applied under section 536(2) of the Act seeking leave of the company court for allowing the disposition of the company's property "which may have to take place" as a consequence of the loans advanced. The Company Judge refused leave in respect of the transactions prior to the commencement of the winding up proceedings but allowed the application in part in respect of dispositions by the company for loans which were made subsequent to the commencement of winding up. The resultant appeal from the order of partial rejection was dismissed on the ground that the bank was seeking to convert itself from an unsecured creditor to a secured creditor in respect of the past transactions. The Division Bench also set aside the decision of the Company Judge insofar as it pertained to the loans obtained by the company subsequent to the commencement of winding up, though no appeal had been preferred therefrom. The Supreme Court agreed with the Division Bench as to the impropriety of the disposition relating to loans granted prior to the commencement of....
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....not fall for the Supreme Court's consideration in that case and it would be unwise to treat the judgment as a precedent on such issue. The respondent cites the judgment in Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector and ETIO [2007] 5 SCC 447, and places paragraph 155 thereof in support of its contention that it is only what has been decided that can be the authority of a binding precedent not what is logically deduced therefrom. The respondent has also relied on the judgment in Arnit Das v. State of Bihar [2000] 5 SCC 488, paragraph 20 thereof as to the rule of sub silentio. 54. The respondent may be right in its assertion that there was no challenge as to the transaction in the ICICI Ltd.'s case (supra), being one beyond what disposition under section 536(2) of the Act would include. Equally, it would be unwise to conclude that the Supreme Court allowed a disposition which could be no disposition at all within the meaning of section 536(2) of the Act. But one need not rely on the ICICI Ltd.'s case (supra) for the purport of the word "disposition" appearing in section 536(2) of the Act. It is, and has to be, wider than the transfer that is covered by sect....
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....liquidator has discharged the onus that section 536(2) contemplates, upon presenting the terms of the second agreement and the valuation that has been forwarded by the official liquidator attached to the Andhra Pradesh High Court. The terms of the second agreement are so appalling that any suggestion made by the respondent as to its bona fides and as to the valuable consideration must be rejected. Even if it is presumed that the respondent had no knowledge of the commencement of winding up, that by itself is not enough to justify its part in a transaction that is a veritable gift. 58. The matter may be tested from another angle. If the company through its erstwhile management had sought prior leave after commencement of winding up, to execute the agreement for transferring its Hyderabad property, no Company Judge would have accorded sanction without asking for the proposed terms and seeking the creditors', or at least the petitioning-creditor's, views on the proposed terms. If the company then carried these terms to court, no Company Judge would have found them worthy enough for the views of any creditor being sought thereon. 59. There is another aspect of the matter, though ....