Macho Foods Private Ltd. vs Modiluft Ltd. And Ors.
2003 Latest Caselaw 78 Del

JUDGMENT

Mukul Mudgal, J.

1. The applicant is one of the creditors of the respondent company and filed this application on the basis of allegations regarding certain transactions pertaining to fraudulent practices for misappropriating assets and resources of almost rupees 36 crores by the company. The company had filed a proposed Scheme of Settlement with the creditors under Section 391 and 394 of the Companies Act being CA No. 797 of 2000 where directions were sought to convene a meeting of the creditors of the said company for entering into settlement with such creditors. The present application arises from the averments:

(a)that a right of offer was made by Modiluft of 2,42,000 equity shares of Rs.10/- each for cash at a premium of Rs.30/- per share totalling Rs.96,80,00,000.

(b)One of the conditions of the rights offer was that in case minimum subscription amount of 90 per cent was not received within 60 days from the closure of rights offer i.e. 24th November 1994, the entire subscription amount was to be refunded by the company.

(c)Three companies of S.K. Modi group, namely, Modi Overseas Investment Pvt. Ltd., Kesha Investments Pvt. Ltd. and Paradise Credits Pvt. Ltd. had applied for allotment of 1,15,49,272 shares on rights issue basis and paid Rs.10/- per share towards application money. M/s Kesha Investments also paid a sum of Rs.1,33,07,280/- towards allotment money. However, these three companies did not pay allotment and final sum amounting to Rs.33,31,70,880/-.

(d)M/s Agache Associates and respondent company entered into a lease agreement for a property in Calcutta in November 1995 by which Rs.36 crores was agreed to be paid by Modiluft to Agache Associates as security deposit and a rent of Rs.10,000/- per month was agreed to be paid for a premises which was occupied by 30 tenants and possession of which was never handed over to Modiluft.

(e)This artificial liability towards Agache was created in the books of Modiluft Ltd. so as to assign the liability of payment of security deposit to the investment company of S.K. Modi Group. This liability of Modiluft was manipulated and shown to be taken over by the said investment companies and consequently the partly paid shares held by the investment companies remained wrongly sown as fully paid up shares.

Thus the company lost the right to recover Rs.33.31 crores from the investment companies payable in cash and an artificial security deposit by manipulation and insertion of fictitious book entries of Rs.36 crores was managed in the books of accounts of the company.

2. In light of the fact that the company is facing more than 31 winding up petitions and there is a scheme of settlement with the creditors offering substantially reduced amounts even against the principal amount, the above transaction amounts to a fraudulent preference against the creditors and other contributories of the respondent company.

3. This application, therefore, prays as under:

i. that the respondent company should furnish the complete details of the above transactions;

ii. direct Mr. S.K. Modi, Mr. A.K. Gupta and Mr. D.K. Babbar to deposit the entire amount misappropriated by them with this Hon'ble Court;

iii. attach the shares of Modi Overseas Investment Private Ltd., Kesha Investments Pvt. Ltd. And Paradise Credits Pvt. Ltd. Made fully paid up under the transactions set out in this application.

iv. Attach the property allegedly taken on lease from agache Associates

v. Stay the proceedings in the CA 797 of 2000 during the pendency of this Company Application in as much as it shall make available to the creditors additional funds;

4. M/s Agache Associates, the respondent No. 7, in its reply submitted that it was being sought to be brought in needlessly as a offshoot of disputes in the management of Modiluft and RHSL and the said respondent No. 7 was not connected with the said disputes. It was inter alia pleaded as under:

(a) the applicant has no right to seek relief when no order under Section 391(1) of the Act have been passed by the Court

(b) the transaction is more than six years old as the present transaction took place in September 1995, more than 6 months prior to the filling of the winding up petition and, therefore, was barred by time under Section 531 of the Act.

(c) The property is valued by the HDFC at Rs.31.83 crores on 13th March 2000.

(d) the lease was executed on 11th September 1995 was for nine years on a security deposit of Rs.36 crores refundable on the termination of the lease agreement. There was a possibility of company purchasing the same from the answering respondent at a later stage.

(e) The property had been inspected by Mr. Werner Heesan, Senior Vice President and Director of Modiluft, a nominee of Lufthansa Airlines, at the time of execution of the lease agreement. At the time of execution of the lease it was informally agreed that the agreement would be of a long term nature with an option to purchase the property from M/s Agache Associates. This understanding was later recorded in writing in August 2001 when an agreement was executed between Modiluft and the answering respondent.

5. This lease agreement between Modiluft and the answering respondent was a legal, valid and bonafide transaction and allegations of fraud are wrong. The answering respondent is not harming the interest of M/s Modiluft Ltd. but has acted for the benefit of the company by getting a loan of Rs,5 crores from Peerless Capital Ltd.

Modiluft in its reply through counsel amices Jurisdiction supported the plea of the applicant and had stated that the transaction was manipulated and fraudulent;

6. The respondent No. 1, Modiluft in its reply through Dua Associates stated

(a) that the petition is not maintainable under Section 391(1) of the Act read with rule 67 of the Rules as this jurisdiction is only available either to issue summons contemplated under Section 391(1) or to reject the petition and the relief claimed in the application does not pertain to any of the matters provided by Rule 69.

(b) that the present application has been filed in collusion with Royal Holding Services Ltd. (hereinafter referred to as RHSL) as pleadings of suit No. 1829 of 2001 form the basis of this application.

(c) the phrase 'liable to be wound up' encompasses every company incorporated under the Act and consequently as held in Rossell Industries Ltd and another , the jurisdiction of the company court is specific to a given context and the reference to winding up in the context of sanction of scheme of management is misplaced.

7. On the merits of the plea while adopting a stand similar to Agache Associates, the respondent, Modiluft, has further raised the plea of collusion of the applicant with the RHSL. It has also been submitted that there is no misappropriation by either S.K. Modi, A.K. Gupta or D.K. Babbar. Reliance has been placed on Karachi Bank Ltd. vs. J.R. Castellino reported as AIR 1932 Sind 106 to contend that the provisions of Section 391(1) of the Act cannot be used to recover any money or asset which is allegedly part of a fraudulent preference. Both Dua Associates and amices Jurisdiction filed the reply purporting to be on behalf of the company Modiluft Ltd, which dispute I am not concerned with at this stage.

8. In so far as the plea of maintainability of the application is concerned, the learned counsel for the petitioner has relied upon provisions of Section 390(a) of the Act where the company has been defined as any company liable to be wound up in this Court. It is further submitted that while a scheme is pending before the Court the Company will certainly fall within the definition of a company which is liable to be wound up under the Act. Furthermore, reliance has also been placed on sections 443(1) and 536(2) of the Act to contend that the Court on hearing the winding up petition may make any interim order that it things fit and the present order is one such order. Sections 390(a), 391(1) and 443(1)(c) read as follows:

" 390. Interpretation of sections 391 and 393 - In sections 391 and 393 -

(a) the expression 'company' means any company liable to be wound up under this Act."

" 391.Power to compromise or make arrangements with creditors and members - (1) Where a compromise or arrangement is proposed -

(a) between a company and to creditors or any class of them; or

(b) between a company and its members or any class of them,

the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up of the liquidator, order a meeting of the creditors or class of creditors or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs."

"443 . Powers of court on hearing petition - (1) On hearing a winding up petition, the court may -

... .... ... ...

(c) make any interim order that it thinks fit, or

9. Learned counsel for the applicant further placed reliance on Section 536(2) and submitted that in case of winding up by or subject to supervision of the Court, any disposition of the property of the company made after the commencement of the winding up shall unless the court otherwise orders be void. Reliance has also been placed on section 531(1) of the Act which reads as under:

531. Fraudulent preference - (1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall be in the event of the company being would up, be deemed a fraudulent preference of its creditors and be invalid accordingly."

10. It is worthwhile to record that the first winding up petition No. CP 162 of 1996 was filed against the company in July 1996. Even the company auditor's report extracted hereinafter describes the lease to be for 9 years from April 1996. Since the first winding up petition was filed in July 1996 and the lease is stated to commence from April, 1996, the transaction is clearly covered under the prohibition imposed under Section 531(1) of avoidance of transactions six months prior to the presentation of the winding up petition in case of the company being wound up.

Furthermore, the company which is liable to be wound up, prima facie, would fall within the fold of Section 390(a) as it is a company in respect of which a winding up petition has been filed and the Scheme of Settlement is under consideration. Pendency of the consideration of the scheme leads me to the conclusion that the plea of winding up has some substance and is not frivolous. Furthermore Section 391(1) and Rule 69 cannot be given a narrow and restricted interpretation as sought to be given by the respondent company. Such a meaning suggesting constricted powers of a company court could frustrate a scheme and defeat the rights of creditors in case the property and the assets of the company are sought to be depleted in a fraudulent manner so as to avoid the liabilities of a Company.

11. In so far as the reliance on Karachi Bank Ltd. (supra) is concerned, in my view the said judgment is not applicable as the Court is not at the moment granting a request for return of money but is only seeking to preserve as an interim measure, what are termed by the creditors to be the assets of the Company. All the pleas raised in the application are not being decided at this juncture.

The observations made in para 12 of Rossell Industries (supra), relied upon by the respondent, read as under:

"12. In view of the various later judgments even of the Bombay High Court, I respectfully agree with later judgments that the said observation in Saksaria's case (supra) was merely an obiter dictum. In my opinion, the expression 'company' used in Section 390 of the Act applies to all companies which can be wound up under the Companies Act and is not confined only to companies which are presently in a position to be wound up i.e. As on the date of making of the application under Sections 391 to 394 of the Companies Act. In my opinion as on the date of the making of the application for merger or amalgamation the company may be quite prosperous and a profit making company. All that is meant to be included by the words "liable to be wound up" is that it must be a company which is subject to the laws of winding up as provided in the Companies Act i.e. tt must be liable to be wound up as and when the circumstances so arise.

These findings of the Calcutta High Court in my view were made in response to a plea by the share holder/objector to the scheme to the effect that powers under Sections 391 to 394 can not be exercised in respect of a solvent and profit-making company and the said provisions (Ss. 391 to 394) were only meant for companies which are liable to be wound up. These observations of the Calcutta High Court cannot be so construed so as to denude the Company Court of jurisdiction to preserve the properties of a company whose scheme is pending consideration. Merely because the provisions of Sections 391 to 394 have been held to apply even to prosperous companies, cannot ipso facto imply that they do not apply to companies which in order to avoid winding up are contemplating the approval from the Company Court of a scheme. Furthermore nothing in the provisions of the Companies Act has been pointed out to demonstrate any bar on the powers of the Company Court to pass an order for preservation of the property of the Company even in advance of orders under Section 391 of the Act. The Company Court can not be a mute witness to the depletion of the assets of the company merely because orders under Section 391(1) of the Act have not been passed, particularly, when a scheme is under consideration by the Company Court.

12. Both S.K. Modi Group and RHSL are claiming to be in control of the company which dispute is subject matter of protracted collateral litigation on the original side of this Court. Notwithstanding the internecine dispute of S.K. Modi Group with RHSL whose reply to this application fully supports fully the applicant, the interest of all the creditors does require that the amount of Rs.36 crores be preserved and secured. The related nature of Agache with the company and the nature of the transaction creates bona fide doubts and makes it necessary to issue an order to secure the interests of the creditors. Even if it was assumed that Macho Foods were instigated by RHSL, nevertheless the transaction complained of by them by virtue of this application is such that the orders must be passed in the interest of all the creditors of the company to preserve the company's assets.

13. It is clear that the convoluted transaction entered into by the Company with Agache Associates prima facie appears to be a stratagem devised to account for the allotment and call money payable for 1,15,49,272 shares valued at Rs. 33,31,80,880/- by three investment companies belonging to the S.K. Modi Group i.e. Modi Overseas Pvt. Limited., Keshsa Investments Pvt. Limited and Paradise Credits Pvt. Limited. The very fact that the rental for the premises is only Rs.10,000/- per month and the security deposit as large as Rs.36 crores is sufficient in my view to taint the transaction. No rational explanation has been given in the reply for this extraordinarily high security deposit given by the company. No company acting prudently and guided by any sense of commercial acumen would pay a such a disproportionately large security deposit for a property with such low rental. The transaction is further rendered suspicious by the fact that the Agache Associates is a related party. The reply of the S.K. Modi Group does not explain this huge discrepancy but attempts to give a facile reply not answering the germane issue. The reply waxes eloquent about the conduct of (RHSL) and further terms this application as mala fide and instigated and inspired by RHSL. The reflection of the lease agreement as one with a related party in the company's record is not sufficient to make the transaction bonafide. No satisfactory explanation has been given as to why this particular property was so valuable so as to invite a security deposit higher than its estimated purchase value even according to the S.K. Modi Group. Generally the security deposit has some relation to the rent for a year or at best two years but it is unheard of that the security deposit is higher than as the estimated value of the property. The explanation about the August 2001 agreement in writing giving a long term lease with an option to purchase to the company is clearly an afterthought as no rational explanation has been given by the company and Aghache for not having entered into such an agreement contemporaneously. The plea that there was such an understanding at the time of the transaction and it was only reduced to writing sometime in August 2001, can not stand scrutiny in view of the large sums of money involved. Strong reliance has been placed by the respondent S.K. Modi Group, on the disclosure of the transaction to M/s S.R. Batliboi & Co. as reflected in their report on balance sheet as at September 30, 1997. The comments of M/s S.R. Batliboi on this transaction are as under :

"9.2 Unsecured Security Deposit for long term lease of property Rs.360.00 million

Rs.360.00 million is outstanding as a deposit to Agache Associates Limited, a related party. This is connected with a property at Calcutta taken on a lease of nine years from Agache from April 1, 1996. The deposit is free of any interest and is refundable on handing back possession of the leased property at the end of the lease period. The Company is paying a nominal rent of Rs.10,000 per month as lease charges on this property. It was explained to us that the property was leased for administrative and training purposes at Calcutta in view of the proposed expansion of operations of the airline in North-East India. The company has not used the property and there are no present plans to do so. The property is mortgaged by Agache Associates Limited to Pearless General Finance & Investment Co. Ltd. as security for an inter-corporate loan for Rs.50.00 million, which was ultimately passed on by Agache to the Company (Refer Para 3.1 above). The company has recently had the property valued through Mr. D.K. Bose, valuer, and per his report, the valuation standsat Rs.385.00 million. We are unable to make any comment on the aforesaid valuation. In the absence of any recent financial statements of Agache Associates Limited, we are also unable to comment about the recoverability of the deposit of Rs.360.00 million. However, as the deposit does not carry any interest, we have discounted it at 15% p.a. As at September 30, 1997 and accordingly made an adjustment for Rs.238.40 million in the Proforma Balance Sheet as at September 30, 1997."

14. In my view these observations of the auditors do not carry the case of the company any further. Even this report declines to comment on the valuation by D.K. Bose Associates. Similarly the recent valuation got done by the company from HDFC shows the valuation at Rs.31.83 crores as of 13th March, 2000 considerably lower than the two valuations done by the D.K. Bose valuer who had valued the property at Rs.38 crores.

15. Accordingly as an interim measure, it is directed that the property described in detail in the lease deed dated 11th September 1995 annexed to this application at annexure E and bearing No. 15, Ratan Babu Road, Cossipore, Calcutta shall remain attached and shall not be disposed of in any manner or its possession parted with, without the leave of this Court. However, if the amount of Rs.36 crores given as security deposit by the company minus the rent up to date at Rs.10,000/- per month is deposited in this Court, the attachment is liable to be lifted forthwith. The Agache Associates, respondent No. 7 is also directed to give details of all rent collected since September 1995.

16. The rest of the prayers in this application shall be considered Along with the scheme.