TaxTMI 
TaxTMI 
2018 (9) TMI 99
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....as also filed Official Liquidator's Report No.84 of 2017 seeking various directions from this Court including, inter alia, that the Consent Decree dated 9th July 2009 be set aside and that applicant be directed to bring back, along with interest, amounts received by it from out of the sale proceeds of one of the Company's properties. The company application has also been opposed by a few unsecured creditors of the Company (in liquidation) who have, in this behalf, filed company application (lodging) No.85 of 2018 (hereinafter 'Interveners'). The counsel appearing for Interveners basically supplemented the submissions of the counsel for Official Liquidator. 2 By its order dated 2nd June 1998, the Board for Industrial and Financial Reconstruction (BIFR) declared the Company (in liquidation) a sick unit under the provisions of The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and appointed Bank of Baroda as the Operating Agency for framing a scheme for revival of the Company. The said order contained several directions regarding such a scheme including, inter alia, that "Any shortfall in cashflow projection shall be met by the promoters by bringing in interestfree....
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....the Lender as set out in table "A" hereto. 4. The loan together with interest shall be repayable by the Borrower to the Lender as per such schedule as may be approved by BIFR. Pending issuance order by BIFR, the same shall be payable immediately on call by the Lender. 5. The loan shall carry interest at the Bank Rate. However, this will be subject to the provisions of Sick Industrial Companies (Special Provisions) Act, 1985, order of BIFR and such instructions as may be issued by the operating agency viz. Bank of Baroda and BIFR. 6. The Borrower owns 1/3rd undivided shares of the property at Pachgani. The Borrower agrees that it shall not create any charge on the said property without prior approval of the Lender." ...." 5 The asset in respect of which a second charge was created in favour of applicant Company was land at Plot No.21, Industrial Estate, Ambattur, Tamil Nadu together with the structures standing thereon (Ambattur property). The Company also appears to have executed a Supplemental Memorandum of Deposit of Title Deeds, inter alia, recording the creation of the second charge in respect of the Ambattur property in favour of applicant. Furthe....
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....erms of the Loan Agreement dated 29th September 2000...". By its reply dated 28th May 2008, the Company described the demand as being 'unreasonable and not sustainable in law.' In doing so, the Company, inter alia, also noted that the Loan Agreement did not provide for any rate of interest, that the BIFR had not permitted any interest to be charged and that applicant was on that account disentitled to claim any interest under the said Agreement. The letter referred to the order dated 29th June 2006 appointing Provisional Liquidator and claimed that the Company was proposing to file a company application to recall the said order. However, in the meanwhile, on account of the appointment of Provisional Liquidator, the Company pleaded its inability to make any preferential payment to any creditors including applicant. 10 On 28th August 2008, the Company filed company application (L) No.951 of 2008 before this Court praying that the order dated 29th June 2006 be recalled. By an order dated 16th October 2008, this Court recalled the order dated 29th June 2006. In doing so, it noted: "It now transpires that recommendation of BIFR was questioned by way of writ petition before M....
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....rty rights in respect thereof. On 9th June 2009, when Suit No.164 of 2009 appeared on board, a submission was made on behalf of the parties that they proposed to file consent terms and that the dispute had been amicably resolved. The suit was accordingly stood over to 7th July 2009 for filing consent terms. 14 On 9th July 2009, applicant and the Company tendered consent terms and a decree was passed in respect thereof. Under the said consent terms, the Company submitted to a decree on admission in the sum of Rs. 12,49,27,897/together with interest thereon @ 15.76% p.a. with quarterly rests from 8th June 2009 till payment and/or realization. It was stipulated that if the Company paid applicant a sum of Rs. 10,00,00,000/within 3 months from the date of the consent terms, the decree would stand fully satisfied and that in the event of default to do so within the period stipulated, the entire decretal amount would become due and payable forthwith. The consent terms also declared that the decretal amount would be secured by the Ambattur property in respect of which a second charge had been created in favour of applicant under the Loan Agreement. Under the consent terms, the 1/3rd und....
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....ed a fresh order admitting the petition and appointing the provisional liquidator of the respondent. 2. Applicants have, therefore, submitted that appropriate orders be passed against the respondent. 3. The learned Advocate for the respondent states that all the required / necessary facts were set out in the affidavit in support of the application pursuant to which the order dated 29th June, 2006 was set aside by an order dated 16th October 2019. In my view, the duty of an Advocate does not end with setting out of facts in Affidavits. The Advocates appearing before the Court are duty bound to draw the attention of the Court to facts which are relevant for the purpose of deciding an issue by the Court which may have been set out in the affidavit/s of their clients." This Court directed that the recommendation of the BIFR dated 22nd January 2007 be treated as a petition for winding up and that the same stand admitted, returnable on 10th November 2009. This order was followed by a further order dated 24th June 2011 whereby the Company was wound up. At the hearing of winding up, the advocate appearing for the Company brought to the notice of the Court the purported....
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....by either forum. 17 Pursuant to the order dated 21st April 2016, applicant received a sum of Rs. 10,17,03,493/towards its 20% share in the distribution of sale proceeds. Meanwhile, applicant had filed the present company application no.341 of 2016 seeking the leave of this Court under section 446 of the Companies Act 1956 to proceed in execution to recover the balance decretal amount alleged to be due to it. The company application proceeds on the basis that applicant has a charge over the Satara property and as a secured lender is entitled to priority over all other creditors. On an application being made on behalf of Official Liquidator, this Court was pleased, by an order dated 4th January 2017, to direct applicant to furnish Official Liquidator with a copy of the papers and proceedings in Suit No.164 of 2009 in which the Consent Decree came to be passed. It is on examining these papers and proceedings, Shri Sen submitted that Official Liquidator formed the view that the Consent Decree constituted a fraudulent preference and was thus invalid. Official Liquidator accordingly filed Official Liquidator's Report No.84 of 2017 seeking directions in this behalf from this Court ....
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....suming without admitting, that Official Liquidator's Report seeking reliefs against applicant is not a suit, but is in the nature of an application made to the Company Court under the Company (Court) Rules, 1959, the same is nevertheless an application made to Court and hence, is governed by Article 137 of the Schedule of Limitation Act 1963. Even in such cases, unless, such application is made within the period of limitation prescribed by the said Article, the same cannot be entertained by the Court and the Karnataka High Court in the case of Official Liquidator of Mysore Kirlokar Limited, Bangalore V/s. Kirloskar Institute of Advanced Management Studies (2015) SCC Online 9051 has held that the contention that the Limitation Act 1963 cannot be applied to a report/application made by Official Liquidator is not tenable. (f) While interpreting Article 59 of Limitation Act, the Hon'ble Supreme Court in the case of Md. Noorul Hoda V/s. Bibi Raifunnisa & Ors. (1996) 7 SCC 767 has clearly held that a suit filed for setting aside Decree obtained by fraud is governed by Article59, the starting point of limitation is the date of knowledge of alleged fraud, the remedy of plainti....
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....of its claim/charge. (i) Further, applicant is an undisputed second charge holder with respect to Ambattur property. In so far as prayer ( a) for declaration that the decree is a nullity, the Hon'ble Supreme Court in the case of Indian Bank V/s. Official Liquidator (1998) 5 SCC 401 has clearly observed that the Company Court does not have power to declare a Decree of the competent Court void in an application made by Official Liquidator and such an application is not maintainable. Hence, this Court does not have jurisdiction to entertain either prayer ( a) or prayer ( b) in Official Liquidator's Report. (j) In any event, the Consent Decree dated 9th July 2009 does not constitute a fraudulent preference on account of the fact that the winding up proceedings could be deemed to have commenced only on 24th June 2011, when the Company was ordered to be wound up. The Consent Decree dated 9th July 2009 was therefore entered into prior to the period stipulated in Section 531 of Companies Act 1956, viz., 6 months prior to the commencement of winding up proceedings. The contention regarding fraudulent preference under Section 531 of the Companies Act 1956 is also in....
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....f Official Liquidator. The difference between the terms invalid, voidable and void are judicially recognised in many judgments. It was observed by BIFR in its order dated 22nd January 2007 that the promoter Company - M/s. Swadeshi Mills Company Limited, had been ordered to be wound up vide order dated 5th February 2001 (Bench - I) and as such there was actually no promoter to revive the Company. Further, it is pertinent to mention that Swadeshi Mills Company Limited was wound up by this Court much prior to the consent terms dated 9th July 2009 as such the question of any indirect interest of applicant in the Company does not arise. The burden of proof is on Official Liquidator to prove fraud. Official Liquidator was aware about the consent terms/suit much before passing of order dated 4th January 2017 and hence is time barred. (l) None of the Sections viz., 531, 531A and 536 of the Companies Act 1956 apply. Subsection 2 of Section 531 deals only with presentation of petition for winding up. In that case, winding up is subject to the supervision of the Court or passing of resolution for winding up and there is deeming fiction that these two incidents shall be deemed to corr....
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....ute a fraudulent preference within the meaning of Section 531 of the Companies Act 1956; (n) The attachment by the said Consent Decree of the Satara property constitutes a charge in favour of applicant which entitles it to priority in payment over all other lenders; Paragraph 13 in Kerala State Financial Enterprises Ltd. V/s. Official Liquidator, Kerala (2006) 10 SCC 709 provides : "13. Save and except certain special statues in relation to recovery of debts from the properties of a company which has been directed to be wound up, the provision of the Companies Act shall apply. An order of attachment made prior to passing of an order of winding up may not be void, but then the executing proceedings must be allowed to continue with the leave of the court in terms of Section 446 of the Companies Act". (o) From Clause 6 of the Loan Agreement with the Company, it is evident that the Company had agreed not to create any charge over the Satara property at that particular time. This clearly evidences the intention of applicant to have charge over the same in future in the event the Company was unable to pay its dues under the Loan Agreement as it had onl....
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....r deemed commencement for winding up. (r) The ratio of the judgment in NGEF Limited (Supra) was that the Board and Company Court exercise concurrent jurisdiction and the provisions of SICA have overriding effects and the inherent power of the Company Court does not exist in such cases. (s) The judgment of Madras High Court has been consistently followed in the cases of Ashok Alloy Steel Ltd. V/s. BIFR (2008) 142 Company Cases 915 HP, BIFR V/s. Unity Steels Ltd. (2002) 109 Company Cases 236, Tata Iron Steel Company V/s. Him Ispat Ltd. (2002) 108 Company Cases 537, Board Opinion V/s. Hathising Manufacturing Company Ltd. & Ors. 2009 SCC Online Guj. 10270 and Kamdar Ladat Simiti V/s. Nanikram Shobraj Mills Ltd. (2005) 125 Company Cases 740, etc. Therefore, the winding up proceeding of the Company was initiated on 24th June 2011, when the Learned Company Judge of this Court applied his mind to reference dated 22nd January 2007 of BIFR ultimately ordering winding up of the Company. (t) The constituted attorney of the Company Shri R. Venkateswaran was duly authorised through a Power of Attorney dated 9th August 2002 and the same was attached alongwith the consen....
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....he 1/3rd undivided share of the Company in the Satara property were to be sold by Official Liquidator under the supervision of the Company Court. 20 Ms. Kumbhat, counsel appearing for Interveners apart from adopting the submissions of Shri Sen, counsel for Official Liquidator, submitted that : (a) The amount of Rs. 3.25 Crores provided by applicant to the Company was by way of promoter's contribution without any interest as per the guidelines of BIFR. (b) BIFR in the proceedings held on 2nd June, 1998, laid down certain guidelines wherein the board ascertained the requirement of interest free promoters contribution and also made clear that there should not be diversion of funds by promoters. (c) the scheme of Operating Agency (BoB) being proposed on the basis of guidelines framed by BIFR, sought for promoter group to pumpin interest free promoter's contribution to which the BIFR gave its approval. (d) In view of the clear guidelines of BIFR and the Loan Agreement specifying that the loan shall carry interest at the Bank Rate subject to instructions of BIFR, the interest charged by applicant is unapproved of and cannot be permitted. 21 Befor....
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....n the authenticated copy of the Minutes of Order and Consent Terms duly authenticated by the Associate and issuance of decree is expedited. 7. 2/3rd of Institution fees be refunded to the Plaintiffs. 8. Suit stand disposed of in the aforesaid terms with no order as to costs. 22 Date of commencement of winding up proceedings : (a) The first issue that arises for consideration is as to when the winding up proceedings against the Company (in liquidation) commenced. It is the case of Official Liquidator that the winding up proceedings commenced on the date of recommendation by the BIFR that the Company be wound up while it is applicant's case that, in the absence of a petition for winding up, the winding up proceedings must be deemed to have commenced only on a winding up order being passed, i.e., on 24th June 2011. In support of his contention that the winding up proceedings commenced on the BIFR making a recommendation, Official Liquidator relied on the judgment of the Hon'ble Supreme Court in NGEF Limited (Supra) and the judgments of various High Courts in Modi Stone (Supra) Kapri International Pvt. Ltd. 2013 SCC Online Del. 2176 and Indoco Remedies Ltd....
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....n a Company is wound up pursuant to the recommendation by the BIFR has been considered by various Courts. This issue fell for consideration by the Hon'ble Supreme Court in NGEF Limited (Supra) where, while overruling the opinion of the Division Bench of the Hon'ble Gujarat High Court that a winding up proceeding arising out of a recommendation by the BIFR would commence only on the passing of an order of winding up, the Court observed: "50.We may, however, observe that the opinion of the Division Bench in BPL Ltd. to the effect that the windingup proceeding in relation to a matter arising out of the recommendations of BIFR shall commence only on passing of an order of winding up of the Company may not be correct. It may be true that no formal application is required to be filed for initiating a proceeding under Section 433 of the Companies Act as the recommendations therefor are made by BIFR or AAIFR, as the case may be, and, thus, the date on which such recommendations are made, the Company Judge applies its mind to initiate a proceeding relying on or on the basis thereof, the proceeding for winding up would be deemed to have been started; but there cannot be any doubt wh....
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....ts creditors and be invalid accordingly : Provided that, in relation to things made, taken or done before the commencement of this Act, this subsection shall have effect with the substitution, for the reference to six months, of a reference to three months." (b) It is the Official Liquidator's case as submitted by Shri Sen, with whom I agree, that the Consent Decree was collusive and a fraud on the Court and clearly a fraudulent preference within the meaning of Section 531. This would be apparent from the following : (i) The Company filed company application (L) No. 951 of 2008 to recall the order dated 29th June 2006, whereby the company petition had been admitted and a Provisional Liquidator appointed in respect of the Company. They did so on the basis that the earlier recommendation for winding up issued by the BIFR on 9th April 2002 had been set aside by an order dated 23rd February 2006 of the Madras High Court; (ii) When this application was argued on 16th October 2008, it was not brought to the notice of the Company Judge that in the interregnum a fresh recommendation had been made by the BIFR on 22nd January 2007 that the Company be wound....
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....he Company. The only possible inference in the circumstances can be that the Company was attempting to favour applicant, a promoter group company, in preference to its other creditors; (viii) Applicant was fully aware of the recommendation dated 22nd January 2007 of the BIFR that the Company be wound up. In fact, there is a reference to it in the plaint. However, neither applicant nor the Company appear to have brought this recommendation to the notice of the learned Single Judge considering the Consent Terms. The parties also appear not to have brought to the notice of this Court the orders of the BIFR which required promoter contribution to be interest free or the terms of the Loan Agreement which failed to stipulate any rate of interest and indeed required the BIFR to fix it which it never did; (ix) The Consent Terms were signed on behalf of the Company by one Shri Venkateshwaran. He is stated to have done so on the basis of a Power of Attorney dated 9th August 2002. The said Power of Attorney could not have been acted upon in so far as it could not have survived the appointment of the Provisional Liquidator by the order dated 29th June 2006 and the consequent ....
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....so authorised to prosecute the plaint does not mean that he is vested with the power to withdraw the suit or settle it by way of compromise. 19. As is apparent these clauses gave the power to pursue the suit. Pursue means to continue or proceed along a course of action and not to withdraw. 20. Power of attorney is always to be interpreted strictly in its terms. There is no scope for searching meanings or intentions. Nor is it permissible to stretch or provide elasticity to the meaning of the words such as "prosecute", "pursue", "proceed', "execute", "sign" etc. Mere execution of power of attorney does not mean that the attorney has been conferred with power to do all such acts which the executor of the attorney possesses. Unless and until a specific power has been conferred upon the attorney, attorney is not free to arrogate the powers of "dominus"." (x) In any event, the exercise by Shri Venkateshwaran of the powers conferred under the Power of Attorney in question is expressly made subject to the sanction of the board. The scope of the powers permitted to be exercised by Shri Venkateshwaran appear to have been purely ministerial and as a matter of c....
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....on to any proceeding pending in appeal before a High Court or the Supreme Court. From this what follows is when a suit is instituted in the court of competent jurisdiction with the leave of the court under subsection (1) and a decree is passed by that court whether on the basis of mortgage or otherwise, it would be binding on Official Liquidator and no plea inconsistent with the decree passed against Official Liquidator can be raised while deciding the questions of priorities under clause (d) of subsection (2). We wish to make it clear that under Section 446, no power is conferred on the company court to declare a decree of the competent court void a prayer which is made by Official Liquidator in the application out of which this appeal arises so to that extent the application filed by the liquidator in the company court is not maintainable." (b) This judgment concerned a case where leave had already been granted under section 446 of the Companies Act to a creditor to prosecute the suit, in which Official Liquidator had been joined. A Decree in such a suit where Official Liquidator had participated was held to be binding on him. Official Liquidator could not have ignored s....
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.... hesitation to say that a person, who's case is based on falsehood, has no right to approach the court. He can be summarily thrown out at any stage of the litigation." (d) The Consent Decree in question, which has been procured by fraud can be set aside at any stage including in an application for leave to execute it or in an Official Liquidator's Report challenging it. Even otherwise, the scope of the Company Court's power under Section 446 has been very broadly construed by the Hon'ble Supreme Court in Sudarsan Chits (I) Ltd. V/s. O. Sukumaran Pillai and Others (1984) 4 SCC 657, where the Court observed : "8.... Now at a stage when a winding up order is made the company may as well have subsisting claims and to realise these claims the Liquidator will have to file suits. To avoid this eventuality and to keep all incidental proceedings in winding up before the court which is winding up the company, its jurisdiction was enlarged to entertain petition amongst others for recovering the claims of the company. In the absence of a provision like Sec. 446 (2) under the repealed Indian Companies Act, 1913, Official Liquidator in order to realise and recover the claim....
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....laims by or against any of its branches in India. 116. Under Section 446(2)(d) of the Companies Act, 1956, the Company Court is also empowered to entertain or dispose of any question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company. In my view, there is no substance in the submission of the learned senior counsel for Modi Rubber Ltd. that only an administrative direction can be granted by the Company Court in the report submitted by Official Liquidator or that the evidence can be recorded only in the company application and not in the report submitted by the official liquidator. The powers exercised by the Company Court by issuing such directions and/or orders under various provisions of the Companies Act, 1956 whether passed in company applications or in the official liquidator's report, as the case may be, are the judicial orders and have equal force of law. Official Liquidator is not required to file a company application for seeking directions and/or reliefs before the Company Court for recovery of possession, assets and other things from the Exdirectors of the company in liquidation or from any third party....
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....dingup the company. 44. It was contended by Shri Tulzapurkar that Official Liquidator could not go behind the decree unless there be fraud or collusion. In view of the provisions of s. 125 Official Liquidator is entitled, if not obliged, to place before the executing court his objection based thereon." (g) The present case bears a striking resemblance to the facts considered by the Division Bench, save for the added feature that the Consent Decree that applicant seeks to enforce was procured by fraud. This would, of course, make the Decree more vulnerable rather than less. 25 Attachment not a charge : (a) The application proceeds on the basis that the attachment of the Satara property constitutes a charge in favour of applicant. In the course of the hearing, however, applicant has sought to abandon its stand that the attachment would constitute a charge. If it did, it would in any event fall foul of both Sections 531 and 536 of the Companies Act 1956. However, applicant has continued to maintain that by virtue of the attachment, applicant was a secured lender and was entitled to priority of payment out of the sale proceeds from the Satara property. ....
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.... (b) The argument of applicant is misconceived. While the Limitation Act would undoubtedly apply to Official Liquidator subject to the qualification introduced in Section 458A Section 458A : Exclusion of certain time in computing periods of limitation. Notwithstanding anything in the Indian Limitation Act, 1908 (9 of 1908) or in any other law for the time being in force, in computing the period of limitation prescribed for any suit or application in the name and on behalf of a company which is being wound up by the [Tribunal], the period from the date of commencement of the winding up of the company to the date on which the winding up order is made (both inclusive) and a period of one year immediately following the date of the winding up order shall be excluded of the Companies Act 1956 the reliefs sought in the Official Liquidator's Report are not time barred for two reasons, viz. applicant's argument loses sight of the fact that the Consent Decree impugned in the Official Liquidator's Report was procured by fraud. Any act of Court, which is the result of fraud ought be undone, regardless of the stage at which it is impugned and or before which forum and second....