TaxTMI 
TaxTMI 
2013 (4) TMI 893
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....the auction purchaser and Mr. Arvind Shukla, learned official liquidator. 2. The sequence of events that have led to the filing of the above application, can be summarised in the chronological order as follows: (a) M/s. Easun Engineering Co. Ltd., was the sole and absolute owner of two pieces of land, one measuring 52,507 sq. ft. (21 grounds and 2,107 sq. ft.) and another measuring 6,360 sq. ft. (2 grounds and 1,560 sq. ft.), both bearing Municipal Door No. Old No. 35/5 and New No. 476, Anna Salai, Nandanam, Chennai-600 035; (b) Out of the aforesaid land to the total extent of 58,867 sq. ft. (24 grounds and 1,267 sq. ft.), the original owner M/s. Easun Engineering Co. Ltd., granted a lease in respect of small extents, out of one portion measuring about 9 grounds in favour of different lessees, with a view to enable all of them to jointly put up a multi storied complex, known as Temple Towers/Meenakshi Plaza; (c) By a registered lease dated March 30, 1990 (registered as document No. 3256 of 1990 in the office of the District Registrar of Madras South), M/s. Easun Engineering Co. Ltd., granted a lease of an extent of 354 sq. ft. of land, out of the great....
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....od of 993 years commencing from April 1, 1996. It is strange that the date of commencement of lease was fixed as April 1, 1996, when clause (1) of the lease deed indicated a conveyance only in present and did not record as though the lease had already been orally created even before the date of execution of the deed; (h) In pursuance of the said deed of transfer of lease dated January 30, 1997, lessee M. Lakshmi Narayana Choudhary, who is the applicant in the above application, also entered into a builder's agreement with M/s. R.K. Investments on April 17, 1997. Actually, there was already a builder's agreement between the company in liquidation and R.K. Investments for putting up a construction of a built up area of 1,297 sq. ft. with reference to the land to the extent of 354 sq. ft. and that builder's agreement was dated April 9, 1990. Yet, after the transfer of the leasehold rights by the company in liquidation to the applicant herein, the applicant entered into a second builder's agreement dated April 17, 1997, for constructing an office space of 2,648 sq. ft. in the very same fifth floor of the proposed complex, namely, Temple Towers. Interestingly, t....
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....resented on August 18, 1993; (ii) on September 3, 1993, the company petition was admitted and notices were ordered to be published in the Notice Board and also served on the company in liquidation and on the Registrar of Companies. However, publication was not ordered; (iii) on February 15, 1996, advertisement was ordered; (iv) on April 23, 1996, R. Jayasimha Babu J. passed an order to the following effect: Counsel for the company says that the assets belonging to the company is in the process of being sold; that the bank has also agreed in principle to set apart a portion of the sale proceeds for being paid to the petitioner herein. The respondent shall not sell the assets of the company without the permission of this court. The matter is adjourned to second week of June, 1996"; and (v) Subsequently, on December 10, 1999, the order for winding up was passed; (m) Therefore, it is clear that an interim order prohibiting the company in liquidation from alienating its assets was passed on April 23, 1996. This appears to be reason why the company in liquidation executed a deed of transfer of lease on January 30, 1997, in f....
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....suing an auction sale notice. It appears that the auction sale notice was issued towards the end of August, 2009, inviting offers by September 15, 2009 and indicating the date of auction as September 24, 2009. After seeing the auction notice, the applicant filed an affidavit of protest with the Recovery Officer of the Debts Recovery Tribunal. In the affidavit of protest, the applicant made certain claims. Those claims are to be noted at this stage, before proceeding further. They were as follows: (i) that he got the transfer of leasehold rights from the company in liquidation under the deed dated January 30, 1997, in respect of the land measuring 354 sq. ft. with a right to put up a construction in the first floor; (ii) that he entered into a builders agreement to construct 2,648 sq. ft.; (iii) that he had thereafter become the absolute owner of the commercial space measuring 2,697 sq. ft. in the fifth floor; (iv) that for the above land and building, he had paid a total amount of Rs. 30 lakhs to the State Bank of India for the release of the mortgage and also paid Rs. 7,44,088 to the builder R.K. Investments and further paid a sum of Rs. 2,68,08....
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....a and against the company in liquidation, praying for a decree of declaration that the auction conducted on April 29, 2010, was null and void and for a permanent injunction restraining the bank from confirming the sale. He also prayed for a mandatory injunction to direct the bank to return the original lease deed dated March 30, 1990. The relief prayed in paragraph 20(c) of the suit C.S. No. 531 of 2010, should be taken note of, as it has something to do with the stand now taken by the applicant. The relief sought in the said paragraph is for a mandatory injunction to direct the bank to return the original lease deed dated March 30, 1990, entered into between M/s. Easun Engineering Co. Ltd., and the company in liquidation. The suit was actually filed on May 11, 2010; (aa) It appears that as per the auction notice dated March 19, 2010, the successful bidder was obliged to remit 25 per cent of the bid amount (less EMD) immediately on the sale being knocked down. The balance amount, in addition to poundage fee, was to be paid within 15 days. This condition could be found at serial No. 3 in the auction notice dated March 19, 2010; (ab) However, it appears that the fou....
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....lication for leave to sue under clause 12 of the Letters Patent. The applicant obtained leave of this court on November 24, 2010, when his first suit C.S. No. 531 of 2010 on the very same cause of action, was actually pending before the Fast Track Court in O.S. No. 7532 of 2010; (ah) It is only after filing an application for leave to sue under clause 12 and obtaining the leave on November 24, 2010, that the applicant herein moved the Fast Track Court with an application in I.A. No. 148 of 2010 under Order 23, rule 1(3) of the Code of Civil Procedure, 1908, for leave to withdraw the first suit with liberty to file the next suit. This application was actually filed on November 25, 2010, after obtaining leave to institute the second suit; (ai) When the application for leave to withdraw the first suit with liberty was actually pending before the Fast Track Court, the applicant moved an application for injunction in the second suit C.S. No. 970 of 2010. In that application for injunction O.A. No. 1239 of 2010, a learned judge of this court granted an injunction restraining the bank, the Recovery Officer and the auction purchaser from confirming the sale. This order wa....
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....l No. 7 of 2010, pending disposal of the transfer petition Company Application No. 940 of 2011. 4. By an order dated March 19, 2013, I allowed Company Application No. 940 of 2011, transferring the appeal filed by the applicant herein on the file of the Debts Recovery Tribunal in Appeal No. 7 of 2010 to the file of this court. Thereafter, I heard arguments in the transferred appeal (Tr. Company Application No. 511 of 2013) also. By a separate order the transferred appeal is also being disposed of today. 5. Mr. T.K. Seshadri, learned senior counsel appearing for the applicant, formulated his contentions broadly under four foundations. They are: (i) A transaction entered into by a company facing liquidation proceedings, after the filing of the petition for winding up, is not always void, but can be ratified by the court in view of the express language used in section 536(2) of the Companies Act, 1956 and in view of the interpretation given by various courts, including the Supreme Court. All that the court should see while considering an application for ratification of the transaction is whether the transaction was entered into in the ordinary course of business of the c....
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....it of proof of debt on April 20, 2006, three other secured creditors, namely, Bank of Baroda, Sundaram Finance Ltd. and Sakthi Finance Ltd., had lodged claims with the official liquidator; (ii) that since the proceedings for winding up would relate back to the date of filing of the petition, namely, August 18, 1993, in terms of section 441, all the assets and liabilities of the company shall be deemed to be in the custody of this court even from the said date, in terms of section 456(2), making the transaction in question invalid; (iii) that since the proceedings for winding up commenced on August 18, 1993 and the transaction in question happened only on January 30, 1997, it is null and void under section 536; (iv) that in an application filed by the third respondent-bank in Company Application No. 1445 of 2009, this court allowed the applicant to get impleaded and thereafter, passed an order on November 26, 2009, permitting the bank to proceed before the Debts Recovery Tribunal and also allowing the applicant to work out his remedies before the Debts Recovery Tribunal and hence, the applicant cannot now come before this court; (v) in any case, t....
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....g on both sides, it appears that the following questions arise for consideration: (i) Whether the application of the applicant under section 536(2) is barred by delay and laches or limitation? (ii) Whether, on merits, the applicant is a bona fide transferee and hence, entitled to have the transaction ratified, on the ground that it is not a void transaction, but only voidable under section 536(2)? (iii) Whether the mortgage in favour of the State Bank of India is a valid mortgage, when the original title deeds were not allegedly deposited with them? (iv) Whether the discrepancies in the description of the property, would make the mortgage as well as the sale invalid? and (v) Whether the failure of the auction purchaser to remit the balance sale consideration within the time stipulated in the auction notice, would make the sale invalid? Issue of limitation 10. Since the State Bank of India, which is the third respondent herein, has raised the issue of limitation, it is necessary to consider the same in the first instance, before dealing with the merits of the case. It is the contention of Mr. M. Devarajan, learned counsel for the St....
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.... the applicant, calling upon him to hand over the property within ten days. The official liquidator again wrote another letter on January 17, 2001; (g) On February 1, 2001, the applicant gave a reply through his lawyers, to the official liquidator, claiming that he was a bona fide purchaser for valuable consideration and that he was not aware of the presentation of the winding up petition and hence, the transfer is not hit by section 536(2); (h) On August 30, 2004, the Debts Recovery Tribunal passed a final order leading to the issue of a certificate of recovery in D.R.C. No. 148 of 2004 on November 1, 2004; (i) On January 5, 2007, the Recovery Officer of Debts Recovery Tribunal ordered the attachment of the property in question; (j) In 2009, the bank came up with an application in Company Application No. 1445 of 2009 before this court seeking permission to sell the property through the Debts Recovery Tribunal, in pursuance of the certificate of recovery issued by the Debts Recovery Tribunal. During the pendency of the said application, the applicant came up with an application in Company Application No. 1694 of 2009 seeking to implead himself as....
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....twithstanding anything contained in the Indian Limitation Act or any other law for the time being in force. 16. Coming to section 536, it is seen that the provisions therein are just declaratory in nature. While sub-section (1) declares the transfer of shares and any alteration in the status of the members of the company, made after the commencement of the proceeding for winding up, void, in the case of a voluntary winding up, sub-section (2) makes a similar declaration in respect of any disposition of property, in the case of winding up by the court. In other words, sub-section (1) deals with voluntary winding up and the declaration contained therein is confined only to transfer of shares and alteration in the status of the members of the company. Sub-section (2) relates to winding up by the court and it covers any disposition of property as well as transfer of shares or alteration in the status of its members. 17. What is important to be noted is that section 536 does not prescribe any procedure either for a declaration of a transaction to be void or for the declaration of a transaction to be valid. Though, in practice, applications are filed by the official liquidator in t....
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.... defence. But, this is subject to the provisions of sections 4 to 24, both inclusive. The expression "application" is defined under section 2(b) to include a petition. Section 29(2) of the Limitation Act, 1963, states that where any special or local law prescribes, for any suit, appeal or application, a period of limitation different from the one prescribed by the Schedule to the Limitation Act, the provisions of section 3 shall apply, as if such period were prescribed by the Schedule. Sub-section (3) of section 29 excludes any suit or other proceeding under any law relating to marriage and divorce, from the application of the provisions of the Limitation Act. 22. Article 137 in the Schedule to the Limitation Act, 1963, contains a residuary clause. It prescribes three years as the period of limitation for any application for which no period of limitation is provided elsewhere in that division. But, time would begin to run only from the date on which the right to apply accrues. Therefore, in so far as matters covered by special enactments are concerned, the period of limitation prescribed for initiating any proceeding, under those enactments, are covered by section 29(2). 23. ....
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.... is prescribed, that a period of limitation for adopting the procedure would also be prescribed. When there is no procedure for filing an application for validating or invalidating a transaction under section 536, there could also be no period of limitation prescribed therefor. 29. Section 29(2) of the Limitation Act starts with the sentence "where any special or local law prescribes for any suit, appeal or application, a period of limitation". Therefore, it can be inferred that section 3 of the Limitation Act would come into operation, only when the special or local law (the Companies Act, in this case) prescribes a period of limitation, for the proceeding in question. If no period of limitation is prescribed for a particular action under the special or local law, the invocation of section 3 of the Limitation Act becomes doubtful. If the applicability of section 3 is doubtful, the computation of the period by applying sections 4 to 24 would also become doubtful. 30. Coining to article 137, it actually corresponds to article 181 of the Indian Limitation Act, 1908. Article 181 of the Schedule to the Indian Limitation Act, 1908, was held by courts to apply only to applications ....
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....ire Products v. Kohinoor Rolling Shutters and Engineering Works [2002] 112 Comp Cas 606: [2003] 1 SCC 76 that section 458A merely excludes the period during which a company was being wound up by the court, from the date of commencement of proceedings till the order of winding up is made and an additional period of one year immediately following the date of winding up. But, the Supreme Court made it clear that for the application of section 458A, there must be a legally enforceable debt on the date of commencement of winding up proceedings. The court made it clear that section 458A would not resurrect a time barred debt or claim, which was not enforceable on the date of winding up. 35. In Best and Crompton Engineering Ltd. v. Official Liquidator [1995]82 Comp Cas 77; AIR 1995 Mad 20, a Full Bench of this court approved the ratio laid down by a Division Bench in Official Liquidator, Radel Services P. Ltd. v. Southern Screws P. Ltd. [1988] 63 Comp Cas 749 (Mad), to the effect that article 137 of the Limitation Act is not the article that could be applied in all cases. The passage found in the decision of the Division Bench, which was quoted with approval by the Full Bench is as fol....
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....chaser. I must fairly mention here that learned senior counsel cited decisions, where such transactions were not only validated, but also cases where such transactions were not validated by the court. But, the principles of law that learned senior counsel advanced, are reflected in those decisions, without any conflicting view. The decisions relied upon by learned senior counsel are as follows: (i) N. Subramania Iyer v. Official Receiver, AIR 1958 SC 1; (ii) Sankar Ram and Co. v. Kasi Naicker, AIR 2003 SC 4156; (iii) Official Assignee of Madras v. Valliappa Chetti, AIR 1922 Mad 144; (iv) Mercantile Bank of India Ltd. v. Official Assignee, Madras ILR 1916 39 Mad 250; (v) Chetan K. Singh v. Citi Bank N.A. [2009]150 Comp Cas 409 (P & H); (vi) Travancore Rayons Ltd. v. Registrar of Companies [1988] 64 Comp Cas 819 (Ker); (vii) Escorts Finance Ltd. v. Fidelity Industries Ltd. [2003] 117 Comp Cas 282 (Mad); (viii) Administrator, MCC Finance Ltd. v. Ramesh Gandhi [2005] 127 Comp Cas 85 (Mad); and (ix) Archean Granites P. Ltd. v. R.P.S. Benefit Fund Ltd.: [2007] 139 Comp Cas 191 (Mad). 40. From a careful perusal ....
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....30, 1990, M/s. Easun Engineering Co. Ltd., grants a lease in favour of the company in liquidation, of the land of the extent of 354 sq. ft., with a right to have an office space constructed thereon, at the premises bearing Old No. 35/5 and New No. 476, Anna Salai, Nandanam, Chennai-600 035, for a period of 999 years, commencing from April 1, 1990; (b) On April 9, 1990, the company in liquidation enters into a builder's agreement with a builder by name M/s. R.K. Investments, for putting up an office space in the fifth floor of the proposed complex of an extent of about 1,279 sq. ft.; (c) On January 30, 1991, the company in liquidation deposited the documents of title, with the State Bank of India, with a view to create a charge on the property for the loan availed from the bank; (d) On December 31, 1991, the company in liquidation also files necessary form, namely, Form 8, with the Registrar of Companies, in terms of sections 125 and 135, since they had already created a charge over other properties. The charge was registered with Registration No. 6945 on January 29, 1992; (e) On August 18, 1993, the company petition for winding up was present....
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....registration on April 17, 1997. The deed of transfer does not indicate anywhere that it was a record of the past transaction. The deed of transfer does not indicate anywhere that the parries had a prior agreement and that in pursuance of such a prior agreement, the applicant (transferee) was put in possession on April 1, 1996, itself. Therefore, the date April 1, 1996, had obviously been chosen by the transferee, namely, the applicant herein and the transferor, namely, the company in liquidation, only with a view to overreach the order of injunction granted by this court on April 23, 1996. Otherwise, there is no rhyme or reason for the deed of transfer dated January 30, 1997, to take effect retrospectively from April 1, 1996. It must be noted that the company in liquidation was aware of the interim prohibitory order. It was passed in their presence. Therefore, the applicant, as a transferee, cannot reap the benefit of a transaction that was entered into in total violation of an order of injunction and whose sole purpose was to make the injunction infructuous; (m) I am not able to think that the applicant is ignorant of the injunction order passed on April 23, 1996. If he w....
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....nsfer. I shall deal with them separately. 44. The consideration part of the transaction makes the ground murkier and murkier. I have already pointed out that the total sale consideration mentioned in the deed of transfer of lease executed by the company in liquidation, in favour of the applicant on January 30, 1997, is stated to be Rs. 2,68,080.21. This consideration, as seen from clause 1 of the deed was stated to have been paid on the date of execution of the deed. Once it is accepted that the consideration was paid on the date of execution, namely, January 30, 1997 and once clause 1 of the deed states "The transferor do by these presents grant...", there is no question of any retrospective effect to the lease from April 1, 1996. This also I have already pointed out. 45. After having stated in clause 1 of the deed of transfer that the sale consideration was Rs. 2,68,080.21 the transferor and transferee declared the mortgage value of the property conveyed to be only Rs. 1,18,000 towards the end of the deed of transfer. I am not trying to make that as an issue. 46. After stating the consideration for the deed of transfer to be around Rs. 2.68 lakhs, the applicant stated th....
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....wo cheques dated April 17, 1997, for Rs. 20 lakhs and Rs. 10 lakhs, drawn by Henkel Spic India Ltd. It is on the basis of these documents that the applicant claims to have paid Rs. 30 lakhs to the State Bank of India for the discharge of the dues of the company in liquidation, for the purpose of a one-time settlement. 51. But, the following points falsify the theory floated by the applicant: (i) The cheques were issued not by the company in liquidation, nor by the applicant. The cheques were issued by Henkel Spic India Ltd., purportedly towards advance for the fifth floor in the complex Temple Towers; (ii) The cheques were not even handed over to the State Bank of India by Henkel Spic India Ltd., through the applicant. The cheques were handed over to the company in liquidation, as seen from the name of the addressee contained in the memo dated April 17, 1997, of Henkel Spic India Ltd.; and (iii) Therefore, it is clear that neither the money was routed through the applicant, nor the money belonging to the applicant routed through anybody else to the State Bank of India. The memo and the cheques disclose that the money paid to the State Bank of India was....
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....s to be a bona fide purchaser, namely, the payment of Rs. 30 lakhs to the State Bank of India, stands completely exposed as a myth. Hence, even on merits, I hold that the transaction between the applicant and the company in liquidation, is bereft of any bona fides. The applicant can be anybody, but, certainly not a bona fide purchaser. 55. I have not tested the bona fides of the transaction on the strength of the conduct or character of the company in liquidation. I have tested only the applicant's conduct to see if he is a bona fide purchaser. I find that by no stretch of imagination, the applicant could be termed as a bona fide purchaser. Hence, the second issue is answered accordingly. Issue of validity of the mortgage in favour of the State Bank of India 56. According to the applicant, the State Bank of India cannot have any right over the property and that they cannot be treated as a mortgagee. This, according to learned senior counsel for the applicant, is due to the fact that the original title deeds relating to the property were not deposited by the company in liquidation with the bank. 57. At the outset, I should point out that the applicant is not competen....
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....ing of the law and further stated that the original title deeds are not available. Paragraph 12 of the counter affidavit of the bank reads as follows: With respect to the averment made in paragraph 8 of the affidavit it is submitted that the settled position of law for creating equitable mortgage is deposit of the documents evidencing title to the property and not the original title documents. In view of the various transactions and the transfer of accounts and handling of the documents by various persons, the original is not available as such the certified copy of the lease deed would be given. 63. All that the bank has stated is that the original is not available with them due to the handling of the documents by various persons. The bank has not stated that the originals were never deposited with them. If originals had been deposited and if mortgage had been created, the fact that the bank lost possession of those documents subsequently, would not mean that the mortgage itself is invalid. The applicant could have sustained his plea if the bank had agreed that the original documents were never deposited. It is one thing to say that the originals are not available as on date.....
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.... Officer is only an instrument of the Debts Recovery Tribunal and his order of attachment cannot eclipse or supersede the mortgage decree and certificate of recovery issued by the Tribunal. Therefore, I reject the contention that there was no valid mortgage created by the company in liquidation in favour of the State Bank of India. Issue of discrepancies in the description of the property 69. According to learned senior counsel for the applicant, the undivided share of land conveyed by the company in liquidation to the applicant under the deed of transfer dated January 30, 1997, was 354 sq. ft. This is indicated in Schedule "C" to the deed of transfer dated January 30, 1997. There is no discrepancy about this. 70. As per the builder's agreement dated April 17, 1997, entered into by the applicant with M/s. R.K. Investments, the office space to be constructed on the fifth floor was 2,648 sq. ft., as seen from Schedule "D" to the builder's agreement. Schedule "C" to the builder's agreement indicated the extent of land only to be 354 sq. ft. 71. In Schedule "A" to the plaint filed by the bank in C.S. No. 2117 of 1995, the extent of land is indicated as 354 sq. f....
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.... got a lease of 354 sq. ft. of land from the company in liquidation under the deed dated January 30, 1997. At that time, he had already obtained a lease directly from the original owner M/s. Easun Engineering Co. Ltd., way back on August 14, 1995, in respect of the land to the extent of 167 sq. ft. This is perhaps the reason why the applicant entered into a builder's agreement with M/s. R.K. Investments for constructing 2,967 sq. ft. under the builder's agreement dated April 17, 1997. But, while doing so, the applicant committed a mistake. In Schedule "C" to the builder's agreement dated April 17, 1997, the applicant did not show both these extents, namely (i) 167 sq. ft. obtained directly from M/s. Easun Engineering Co. Ltd., on August 14, 1995; and (ii) 354 sq. ft. obtained from the company in liquidation on January 30, 1997. In the builder's agreement dated April 17, 1997, the applicant chose to show only 354 sq. ft. in Schedule "C" and got the built up area mentioned as 2,967 sq. ft. in Schedule "D", without reference to 167 sq. ft., which he already had. Therefore, this is something for which the applicant has to blame himself. If cumulatively taken, the transf....
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....e civil suit filed by the applicant in C.S. No. 970 of 2010. In other words, the auction purchaser wants to get out of the mess into which he had buried his head, if it was found that the sale was liable to be set aside. Learned counsel in the presence of his client, who was present in court, requested that in the event of my coming to the conclusion that the sale was liable to be set aside, the bank may be directed to re-pay his money. 78. Therefore, I have to consider now whether the sale in favour of the fourth respondent is liable to be set aside for non payment of the bid amounts within the time stipulated in condition No. 3 of the auction notice or not. Primarily, there is no dispute about the fact that the terms and conditions stipulated in the auction notice, prescribed a period of 15 days from the date of auction, for payment of the balance sale consideration, namely, 75 per cent after remitting 25 per cent of the amount on the date of the auction. There is no dispute about the fact that the successful bidder paid the balance amount over a period of four months, thereby, violating condition No. 3 stipulated in the auction notice. Therefore, the question that arises for ....
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....inks fit, after defraying the expenses of the sale, be forfeited to the Government, and the property shall be re-sold, and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may subsequently be sold. 82. Therefore, it is clear that the fourth respondent/auction purchaser committed default in payment of the balance amount, as stipulated not only in condition No. 3 of the auction notice, but also as stipulated in rule 57(2) of the Second Schedule to the Income-tax Act. 83. In M.V. Janardhan Reddy v. Vijaya Bank [2008] 144 Comp Cas 1 : [2008] 7 SCC 738, the Supreme Court pointed out that if the confirmation of sale by the Recovery Officer was made in violation of an order passed by the company court, the order of confirmation has no validity in law and that it creates no right in favour of the party in whose favour the sale was confirmed. The same logic would hold good, even when there is a violation of the statutory prescription. 84. The only case in which the Supreme Court put a real of approval on the deposit of 25 per cent of the bid amount on the date following the date of auction sale was in V. Rosali v. TAICO Bank [....