TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 2073
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....pplicant 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 interest­free­funds and not by diversion of working capital." The Company/Promoters were also directed under Section 22A of SICA not to dispose off any fixed or current assets o....
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....ssuance 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. Further, the said second charge also appears to have been recorded in the register of charges maintained by the Registrar of Companies in this behalf. 6. Applicant appears to have advanced a sum of Rs. 3.25 Cr....
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....ompany, 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 Madras High Court, which in turn has set aside the opinion of the BIFR that the Company is incapable of being revived... It necessarily follows that the basis on which this Court proceeded to pass order d....
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.... 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 undivided interest of the Company in the Satara Property stood "attached forthwith in execution of the decree". The said purported consent terms was signed on behalf of the Company b....
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.... 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 liability of the Company towards applicant to the tune of Rs. 12.49 Crores and further interest thereon. Sometime in 2016, Kotak Mahindra Bank, applicant and Bank of Baroda arrived at an understandi....
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....icant 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 as well as opposing the grant of leave under Section 446 of the Companies Act, 1956 to execute the Consent Decree. 18. Shri Godbole for applicant submitted as under : (a). Official Liqu....
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....e 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 (1996) 7 SCC 767) 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 plaintiff is to get a decree to set aside by filing a suit under Section 31 of the Specific Relief Act 1963. (g). Applicant has received 20% of the sale proceeds of the Ambattur property pursuant to directions issued by DR....
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....ourt 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 incorrect. Section 531(2) provides for a deeming fiction only in case of presentation of a petition for winding up by or subject to the supervision of the Court as an act of insolvency. The suit was instituted with leav....
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....wadeshi 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 correspond to the act of insolvency in the case of an individual. This deemed fiction is obviously not attracted to an opinion of BIFR or AAIFR. In case of winding up, the supervision of the Court by or under Section 446 of the....
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....les 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 only second charge over the Ambattur Property. The judgment in the case of Mahadev Sahu V/s. Thakur Prasad Singh and Ors. (1910) SCC Online Cal 60) relied upon by the counsel for Official Liquidator is completely inapplicable si....
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....nd 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 consent terms and therefore presumption can safely be drawn that the said person had the authority to execute the consent terms. In any event, the authority of Mr. Venkateswaran had not been challenged either by Official Liqui....
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....ns of Shri Sen, counsel for Official Liquidator, submitted that : (a). The amount of Rs. 3.25 Crores provided by applicant to theCompany 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. Before we proceed further, it will be useful to reproduce the Consent Terms dated 9th July 2009 in Suit No.164 of 2009, which is sought to be executed, for which leave is being sought. The same reads as under : 1.. The defendants submit to the decree on admiss....
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.... 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. V/s. Official Liquidator of Kay Packaging P. Ltd. & Anr. (2009) 150 Company Cases 770). (b) Section 441 of the Companies Act 1956 provides that the winding up of the Company by the Court "shall be deemed to commence at the time of the presentati....
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....t 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 whatsoever that having regard to the phraseology used in Section 20 of SICA that BIFR is the authority proprio vigore which continues to remain as custodian of the assets of the Company till a winding­up order is passed by the High Court." (e) While this observation was....
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....al 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 of2008 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 up and that the Company had in fact withdrawn Appeal No.385 of 2007 filed before the AAIFR challenging the BIFR recommendation. In his order of admission dated 27th August 2009, Kathawalla, J. notes that if the later recommendation had been brought to the notice of the Company Court, it would surely have pas....
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....eference 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 theCompany 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 displacement of the board of the Company. The setting aside of the Order dated 29th June 2006 would not revive the power which would have been required to be re­conferred. There is no evidence of any such conferral. In any event, the Power of Attorney did not confer an express power to compromise or compound any legal proceeding. It is s....
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.... 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 thepowers 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 convenience. He does not appear to have had, under the Power of Attorney, any authority to take any decision which would significantly impact the outcome of any legal proceeding to which the Company was a party, leave alone the authority to compound it. (xi). The parties do not appear to have brought to the noticeof the learned Single Judge considering the Consent Terms any of the aforemen....
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....inst 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 such a Decree by a competent Court or sought to challenge it under Section 446 of the Companies Act 1956. It is in this context that the observations relied upon by applicant appear to have been made. In the present case, however, Official Liquidator was not a party to the said suit. The Indian Bank (Supra) judgment is certainly no authority for the proposition that a decree can never be set....
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....herwise, 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 claims and subsisting debts owed to the company had the unenviable fate of filing suits. These suits as is not unknown, dragged on through the trial court and Courts of appeal resulting not only in multiplicity of proceedings but would hold up the progress of the winding up proceedings. To save the company which is ordered to be wound up from this prolix and expensive litigation and to accelerate the ....
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....n 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. In my view, whatever may be the nomenclature of the proceedings i.e. whether by way of the official liquidator's report or by way of company application for seeking various directions including the relief for recovery of possession, powers of the Company Court are the same." (f). In fact, the judgment of the Division Bench of this Court in The Official Liquidator, High Court Bombay and the Liquidato....
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....or 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. (b). There is nothing in law to support this proposition. In fact, the authorities are quite clear that an attachment does no more than prevent a debtor from dealing with an asset, thus ensuring that it would be available to satisfy any legitimate debt. Official Liquidator has relied in this behalf on the judgment of the Hon'ble Supreme Court in Kerala State Financial Enterprises Ltd. V/s. Official Liquidator, High Court of Kera....
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....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 secondly, Official Liquidator became aware of the fraud only on coming into possession of the papers and proceedings in Suit No.164 of 2009 pursuant to the Order dated 4th January 2017 in the present company application. (c). Shortly thereafter, Official Liquidator filed a reply in the company application and an Official Liquidator's Report, in both ....