TaxTMI 
TaxTMI 
2015 (11) TMI 194
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....ntertainment Pvt. Ltd. (hereinafter "Sony Music") to hand over the documents and assets which were the subject matter of the purported Deed of Assignment and also for directions to restrain MMPL and Sony Music from dealing with these assets. 2. It is the Official Liquidator's case that Shashi Gopal, in purported exercise of his rights as a Subrogee, has after the winding up order sold assets belonging to the Company (In Liqn.) without the leave of this Court, without valuation and without inviting public offers to a related party at a price randomly fixed by the Assignor (Mr. Shashi Gopal) and the Assignee (MMPL). It is submitted on this basis that the Assignment is void as contrary to Sections 536(2) and 537(1)(b) of the Companies Act, 1956. 3. The Company in liquidation had sometime in the late 1990s, availed of certain facilities from Union Bank of India (hereinafter "UBI"). In this connection, the Company had executed Three Deeds of Hypothecation dated 12.8.1998, 30.7.1999 and 28.7.2000 in favour of UBI in respect of the copyright in recordings containing the original music compositions rendered by various artistes and which were owned by the Company. Each of the Deeds of Hyp....
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....of a Recovery Certificate on 21.1.2008 for the balance amount of Rs. 212 lacs which remained unpaid. The Recovery Certificate in the sum of Rs. 212 lacs was thereafter issued on 30.4.2008. 7. On 15.5.2008, Shashi Gopal (an Ex Director of the Company in Liquidation and a guarantor) filed a Misc. Application before the DRT, inter alia, for purchase of the assets of the Company in Liquidation. The OL filed a reply dated 27.5.2008 in this Misc. Application where he noted that the assets may be sold by" public auction" only in one lot after publication of necessary sale notice and not by way of private treaty at any cost. On 20.6.2008, the said Shashi Gopal filed an application for withdrawal of his Misc. Application. The Misc. Application was thereafter disposed of as withdrawn. 8. Meanwhile, on 24.3.2009, the DRT issued a Warrant of Attachment in respect of the hypothecated assets of the Company in Liquidation. Thereafter, Mr. Shashi Gopal appears to have entered into a bargain with UBI for payment of the balance dues of the bank. Accordingly, Shashi Gopal paid over to UBI the sum of Rs. 212 lakhs then outstanding. On this payment being made, a Deed of Subrogation dated 25.6.2009 wa....
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....of Magnasound India Ltd if they have not already been paid." By this letter, Mr. Shashi Gopal sought a no objection letter from the OL in this regard. By his reply dated 21.1.2010, the OL fixed a meeting on 25.1.2010 to discuss Mr. Shashi Gopal's role as a Subrogee and the issue regarding the collection of any royalties payable, towards the use of the Masters of the Company in Liquidation. By this letter, the Subrogee was expressly told to "maintain status quo". Mr. Shashi Gopal did not attend the meeting so fixed. 12. Consequently, the OL addressed another letter dated 28.1.2010 fixing a meeting on 9.2.2010. On 10.2.2010 the said Mr. Shashi Gopal addressed a letter to the OL noting that he wished to withdraw his letter dated 6.1.2010 along with a request that no meeting be fixed in this regard. On 9.7.2010, a winding up order was passed in respect of the Company in Liquidation. It is the case of Mr. Shashi Gopal that a letter dated 9.5.2011 was addressed by him to the OL in which he informed the OL that he would sell/assign all the copyrights in the sound recordings in the music/literary works and master and "all the rights in audio, video and cinematograph films owned by the Com....
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....MMPL with respect to the assets mentioned in the public notice including the repertoire is free, clear and marketable as well as free from all encumbrances." The letter went on to assert that the Company in Liquidation was not the owner of the said repertoire and that the undertaking given by the representatives of Sony Music at the meeting held on 24.4.2012 was "wrongly taken and therefore stood withdrawn". By his reply dated 14.5.2012, the OL recorded that the attempt being made by Sony Music to withdraw their undertaking was ill conceived and called upon them to maintain status quo until the rights, if any, of MMPL in the catalogue/repertoire of the Company in Liquidation was ascertained. 16. By their Advocates' reply dated 6.6.2012, Sony Music claimed that UBI had disposed of the repertoire with the prior consent of the OL as recorded in an order of the DRAT and that in view of the entire repertoire being disposed of with prior consent as alleged, the Company in Liquidation was not the owner of the said Repertoire. The letter further claimed that the OL had travelled beyond his jurisdiction in taking an undertaking from Sony Music in relation to the said Repertoire and t....
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....of the Hon'ble Supreme Court in ICICI Bank Ltd. v. Official Liquidator for APS Star Industries Ltd. (2010) 10 SCC 1 (paras 29, 30 to 40 and 41 to 44). ; b) That in the present case, UBI does not appear to have done so. It has not assigned its debt, decretal or otherwise, to Mr. Shashi Gopal but has merely transferred in his favour the benefit of the securities held by them on account of his being a subrogee. This is a benefit to which Mr. Shashi Gopal would have been even 1 (2010) 10 SCC 1 (paras 29, 30 to 40 and 41 to 44). otherwise entitled by operation of law on payment being made by him in his capacity as a guarantor of amounts due from the principal debtor to the secured creditor; c) That Shashi Gopal is thus merely a Subrogee in respect of the amounts paid by him to UBI. He is in that capacity entitled to the benefit of any security that the bank held for recovery of the money paid by him. The principal debtor being a Company in liquidation, Mr Shashi Gopal is entitled as a subrogee only to the sum actually paid by him and not to any interest on the said amount unless there is an overflow after payment to all creditors. This is on account of the fact that the dues of the se....
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....ion, he relied on the Judgments of the Hon'ble Apex Court in Lallan Prasad v. Rahmat Ali & Anr. AIR 1967 SC 1322 (para 29); Jaya Singh Dnyanu Mhoprekar & Anr. v. Krishna Babaji Patil & Anr. AIR 1985 SC 1646 (para 9); h) That the law requires him to adopt every precaution in this respect including obtaining a valuation and selling the property by public notice. In this connection, he placed reliance on the Judgments of the Hon'ble Apex Court in Gajraj Jain v. State of Bihar & Ors. (2004) 7 SCC 151 (paras 12, 14); FCS Software Solutions Ltd. v. LA Medical Devices Ltd. & Ors. (2008) 10 SCC 440 (paras 33, 36); i) That any sale by a fiduciary to himself or a related party is in any event clearly void. In support of this contention, he relied on the Judgments of the Privy Council and the Apex Court in Achi Thayar Ammal & Ors. v. Balkis Nachial AIR 1931 PC 68 (70, col. 1); L. Janakirama Iyer & Ors. v. P.M. Nilkanta Iyer & Ors. AIR 1962 SC 633 (para 29); j) That any sale of the assets of a company in liquidation after the commencement of liquidation is void under Sections 536(2) and 537(1)(b) of the Companies Act, whether by the company itself or a third party. None of the Judgments cit....
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....Ors. (1987) 3 SCC 279, 288-290 ; the Judgment of the House of Lords in Attorney General v. H.R.H. Prince Ernest Augustus of Hanover [1957] 1 All E.R. 49, 53 and the definition of the word "disposition" in Black's Law Dictionary (9th Ed. West 2009) and the New Oxford English Dictionary of English (Clarendon Press 1998); b) That a secured creditor is entitled to stand outside the winding up and to enforce his security without the leave of the Company court. He relied in this behalf on the Judgments in M.K. Ranganathan & Anr. v. Government of Madras & Ors. [1955] SCR 374, 383-87, 390-91; MSFC v. Official Liquidator, Bombay AIR 1993 Bom 392, paras 6-22; Iftex Oil & Chemicals Pvt. Ltd. v. Official Liquidator of M/s. Dhake Dyes & Chemicals Pvt. Ltd. [1999] 101(2) Bom. L.R. 32, and SICOM v. MSFC (1988) 64 Com. Cas. 102 (Bom). Such a sale would not fall foul of Sections 536(2) or 537(1)(b); c) That Shashi Gopal as a subrogee was only required to issue a notice, of his intention to sell the hypothecated securities, to the Official Liquidator under Section 176 of the Indian Contract Act which was done in the present case; d) That in the absence of an adjudication by the Official Liquidato....
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....ee was therefore obliged to spend considerable time and money to restore the master tapes and photo cards to render them usable. He further contended that in any event, even if the hypothecated securities were capable of fetching more than Rs. 1.5 crores and had been sold by UBI under the consent decree in its favour, such overflow would have enured to the benefit only of UBI and not the workmen. 22. Mr. Amit Jamsandekar, Learned Counsel for Sony Music, submitted that his client had bonafide acquired rights from MMPL. He further urged that after acquisition of the rights, Sony Music had invested "tremendous amount of money, skills, labour and resources to commercially exploit the copyright" acquired by them. On this basis, he contends that it would be inequitable to set aside the Agreements executed by MMPL in their favour. 23. Arguments in the above matter were concluded on 30th April, 2015. Thereafter Advocates for the parties except Sony Music Entertainment India filed their written submissions on 13th May, 2015 i.e. during court vacations. Sony Music Entertainment India filed its written submissions on 11th June, 2015. I have considered the oral as well as written subm....
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....national Coach Builders (supra) and several judgments that follow it. As would be evident from the paragraphs reproduced hereinbelow, the Hon'ble Supreme Court in International Coach Builders (supra) has in no uncertain terms recognized that after introduction of Section 529A, a secured creditor would be entitled to enforce its security by sale only with the consent of the OL and under the directions of the Company Court: "14. It is contended on behalf of the SFCs that they are secured creditors and as such entitled to exercise their rights under the mortgage as also the statutory rights conferred on them by Section 29 of SFC Act without interference of courts. Hence,it is urged that the SFCs can sell the mortgaged and charged properties without reference to any court, much less the Company Court. Reliance is placed on the judgement of this Court in M.K. Ranganathan and Anr. v. Government of Madras and Ors.MANU/SC/0007/1955: [1955]2SCR374. That was a case arising under Section 232 of the Companies Act, 1913. This Court was required to consider the meaning of the provision "any sale held without leave of the Court of any of the properties" used in Section 232(1) of the Companies Ac....
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.... where the secured creditor, instead of relinquishing its mortgage and proving his debt, opts to stand outside the winding up proceedings and realise his security, the Official Liquidator shall be entitled to represent the workmen and enforce such charge and that any amount realised by enforcement of such charge shall be applied ratably by the Official Liquidator for the discharge of workmen's dues. It is true that even the amended proviso does not give the Liquidator an independent right of enforcing the charge by selling the security against which such charge is created. Nonetheless, it creates a 'pari passu' charge in favour of the workmen to the extent of their dues and makes the Liquidator the representative of the workmen to enforce such a charge. By reason of Clause (c) of the newly added proviso, so much of the debt due to the secured creditor opting to realise security as could not be realized because of the special created rights in favour of the workmen, or the amount of the workmen's portion in the security, whichever is less, shall rank pari passu with the workmen's dues under Section 529A. Section 529A provides for overriding preferential payments of workmen's dues an....
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.... their dues. 23. In support of their respective contentions, parties have referred to and relied upon judgments of different High Courts. The view taken by the commends itself to us. The Division Bench of the said High Court pointed out that, like a secured creditor, the official liquidator as a pari passu charge holder cannot independently bring the security to sale ignoring the secured creditor. He must, therefore, either obtain concurrence of the secured creditor for sale and take the Court's sanction, or he can apply for sanction of the Court after notice to the secured creditor. In either event, the Court while granting sanction may impose appropriate condition and give directions regarding the conduct of the sale, the fixing of the reserve bid, acceptance of the bid, confirmation of sale and distribution of sale proceeds. 24. We cannot be unmindful of the fact that every creditor is interested in realizing the security only for his benefit and to the extent necessary for recovery of his outstanding. Prior to 1985 it might have been possible for a secured creditor under Section 529 of the Companies Act, 1956, or its predecessor, Section 232 of the Companies Act, 1913 as in....
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.... Court and under its supervision." 25. Thus, after the introduction of Section 529-A which gave workers a pari passu charge along with secured creditors in mortgaged or hypothecated securities in a winding up, it is no longer open for a secured creditor to contend that it is entitled to enforce its securities without reference to or the leave of the Company Court. 26. It was then contended on behalf of MMPL that the Official Liquidator having failed to adjudicate the claims of the workmen, no pari passu charge in their favour could be said to exist which would limit the right of the subrogee to deal with the hypothecated securities. This argument is clearly misconceived. The mere fact that the Official Liquidator has not yet adjudicated the claims of workmen would not disentitle them to a pari passu charge or leave a secured creditor free to deal with a security as he chooses. 27. In the present case, there is some controversy as to whether some of the employees of the company who have filed claims with the Official Liquidator are workmen entitled to priority under Section 529-A of the Companies Act. The Official Liquidator has furnished a list of persons who have filed c....
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....ed to rely on the silence of the Official Liquidator to exercise a unilateral right of sale without reference to the Company Court. The Official Liquidator is merely an officer of the Court and acts under its directions. If the letter dated 9.5.2011 had come to his notice at the time of its receipt, he would have had little choice but to place the matter before the Company Court by means of a report for further directions. On such a report being placed, this Court would have had the opportunity to consider the question and to issue appropriate directions to safeguard the interests of the workers and other creditors of the Company. In the absence of any response from the Official Liquidator, Shashi Gopal as the subrogee was duty bound to move this Court for appropriate directions in the matter of sale of the hypothecated securities. He certainly was not entitled to assume that he was free to deal with the securities in any manner that he pleased. 30. The argument urged on behalf of MMPL that Shashi Gopal as a subrogee was merely required to issue notice under Section 176 of the Contract Act to the Official Liquidator, prior to a sale in any manner of his choosing, is entirely devoi....
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.... in Liquidation. He has in fact made a claim before the OL in that capacity for his outstanding dues. Given these facts, even if no leave were required to be obtained by the subrogee prior to the sale of the hypothecated securities, the sale in the present case was infirm and open to challenge by the OL. 32. The question then arises as to whether the sale is liable to be set aside under Section 536(2) or 537(1)(b) of the Companies Act. It has been contended on behalf of Mr. Shashi Gopal and MMPL that any sale of the assets of a Company in Liquidation by a third party would not fall within the ambit of Section 536(2) and that the section would apply only to cases of sale of its assets by the company itself after the commencement of winding up. However, none of the judgments cited in this behalf by the Subrogee involve cases where a third party sought to sell the assets of the company and the question arose as to whether such a sale would fall foul of Section 536(2). Any observations in these judgments have to be viewed in that context. The plain language of the Section would in fact indicate that even sales sought to be effected by third parties of the assets of a Company in Liquid....
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....f MMPL of the entire repertoire was for a sum of Rs. 1.5 crores, the agreements executed by MMPL in favour of Sony Music for part of the repertoire for a limited period is for a sum of Rs. 1.75 crores without even taking into account any revenue overflow in which MMPL was entitled to share. 35. It has been urged on behalf of Shashi Gopal in his Written Submissions (though not on affidavit) that the Master tapes were handed over to the OL in good condition when he took over the assets of the Company in Liquidation while their condition was very poor when they were handed over to Shashi Gopal pursuant to directions of the DRT. He further claims that he was constrained to devote considerable time and money to repairing/reconstructing the Master tapes. Similarly, Sony Media has claimed to have expended considerable resources on rendering the Master tapes usable. Apart from the fact that the claims made by the two parties are somewhat at odds, no material or particulars in support of these allegations including the amounts alleged to have been expended have been furnished by either party. 36. Shashi Gopal has also contended, in support of his submission that the sale ought not to be s....
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....cured, are protected. Further, the Deed of Subrogation would appear to indicate that apart from the hypothecated securities, there are other securities as well including a bungalow at Lonavala which have been handed over to Shashi Gopal in his capacity as a subrogee. It is entirely conceivable that the amount to which the subrogee is entitled would not exceed the value of all of these securities. It is therefore imperative that each security fetch the best possible price. The manner in which the repertoire of the company in liquidation has been sold by the subrogee was however not designed to secure this outcome. 39. The circumstances of the present case leave little doubt that the sale itself, without the leave of the court and given the manner in which it was effected, was unlawful. However, this leaves open the question as to what order would meet the ends of justice in the present case. The Official Liquidator not having in his possession the masters or the agreements or indeed any documents in respect of the repertoire which constitutes the hypothecated security, a valuation exercise to determine what ought to have been the fair value of the hypothecated security at the time ....