Delhi High Court

Reserve Bank Of India vs Ms Jvg Finance Ltd. on 1 December, 2011

Author: Manmohan

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* IN THE HIGH COURT OF DELHI AT NEW DELHI

+      CO.PET. 265/1998

RESERVE BANK OF INDIA                      ..... Petitioner
                  Through:                 None

                      versus

MS JVG FINANCE LTD.                        ..... Respondent
                  Through:                 Mr. Rajiv Bahl, Adv. for OL
                                           Mr. P.Nagesh, Advocate for
                                           the applicants.

%                                 Date of Decision: 1st December, 2011

CORAM:
HON'BLE MR. JUSTICE MANMOHAN

                               JUDGMENT

MANMOHAN, J : (Oral)

CA No. 2361/2011

1. Mr. Nagesh states that the company in liquidation had not

only entered into an agreement to sell on 18 th March, 1998 but had

also handed over possession of plot no. B-532 in the J.V.G. Hills

Layout forming part of survey nos. 94 to 97 and part of 189,

admeasuring 500 square yards to Sri T. Chandra Sekhar Reddy prior

to the appointment of the Provisional Liquidator on 5th June, 1998.

He points out that the present applicant is the owner of the aforesaid

land by virtue of a gift deed registered in his favour on 31st January,

2008.

2. Since the agreement to sell, receipt of consideration and

handing over of possession by the company in liquidation are prior

to the injunction order as well as appointment of Provisional

Liquidator, issue notice to the Official Liquidator. Mr. Rajiv Bahl,

Advocate accepts notice on behalf of the Official Liquidator. He

prays for and is granted four weeks' time to file a reply affidavit.

List on 3rd January, 2012.

CA 2349/2011

1. Present application has been filed under Sections 536 and 537

of the Companies Act, 1956 (for short 'Act') challenging the Report

No. 200 submitted by Mr. J.P. Aggarwal in relation to plot No. C-

363 in survey No. 94, 95 and 97 at Kondapur Village, Ranga Reddy

District, Hyderabad.

2. The One Man Committee appointed by this Court has rejected

the applicant's claim after observing as under:-

"....As per the receipts placed on the record the claimant

deposited a sum of Rs. 51,864.05/- with M/s. JVG Finance Ltd. and a sum of Rs. 16,290/- with JVG Projects (A unit of M/s. JVG Industries Ltd.) before 05/06/1998 the date of appointment of the Provisional Liquidator. The claimant further deposited a sum of Rs. 75,000/- with JVG Projects after 05/06/1998. Thus the claimant deposited a total sum of Rs. 1,43,154.05/- towards the sale consideration. The photocopies of the receipts of Rs. 1,43,154.05/- are placed on the record (Ext P-1 to P-17). The vendor did not execute the sale deed in favour of the vendee for want of the balance amount...........

That so far as the agreement to sell is concerned, it does not, of itself create any interest or charge on the property. The vendee neither deposited the entire sale consideration nor got the sale deed registered in his favour before the commencement of winding up. The claimant in his statement has admitted that she did not pay the balance amount of Rs. 11,867/-. Moreover, the claimant deposited Rs. 75,000/- after 05/06/1998 the date of appointment of the Provisional Liquidator.

That from the facts stated above it is quite clear that the claimant had failed to deposit the entire sale consideration and to get the sale deed executed in her favour before the commencement of the winding up proceedings.

Consequently the vendee is not entitled to allotment of plot no. C-363 measuring 300 Sq. yds........

The claim of Smt. T.L. Bhavani is disposed of with the following observations.

a) The claimant shall not be entitled to the allotment of plot no. C-363 measuring 300 Sq. yds.

b) The claimant shall be entitled to refund of Rs. 68,154,05/- with interest as may be fixed by the Hon'ble Court or to the proportionate amount as the case may be.

c) The claimant may recover a sum of Rs. 75,000/- from the company (s) he deposited with after 05/06/1998 in accordance with law.

The claim of Smt. T.L. Bhavani is, accordingly, disposed of."

3. Mr. Nagesh, learned counsel for the applicant submits that as

the applicant is ready and willing to deposit the balance sale

consideration with interest and penalty, this Court should exercise its

discretion under Section 536(2) read with Section 537 (1)(b) of the

Act and order transfer of property in applicant's favour, by directing

the Official Liquidator to execute a sale deed in favour of the

applicant in respect of the aforesaid plot.

4. On the other hand, Mr. Bahl, learned counsel for the Official

Liquidator submits that this Court should not exercise its discretion

under Section 536(2) read with Section 537(1)(b) of the Act as the

alleged sale transaction had not been completed before the date of

appointment of the Provisional Liquidator. He further submits that

in case the relief as sought for by the applicant is granted, it would

amount to creation of a right which was not in existence on the date

when the Provisional Liquidator was appointed.

5. Having heard the parties at length, this Court is of the view

that the primary issue that arises for consideration in the present

proceedings is the scope and ambit of Section 536(2) and Section

537 (1) (b) of the Act. The said Sections are as under:-

"536. Avoidance of transfers, etc. after commencement of winding up-.

             xxxx         xxxx          xxxx         xxxx

       (2)    In the case of a winding up by [the Tribunal], any

disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall [unless the Tribunal] otherwise orders, be void."

"537. Avoidance of certain attachments, executions, etc,. in winding up by Tribunal- (1) Where any company is being wound up by Tribunal-

xxxx xxxx xxxx xxxx

(b)any sale held, without leave of the Tribunal of any of the properties or effects of the company after such commencement shall be void."

6. The Calcutta High Court in J. Sen Gupta Private Ltd. (In

Liquidation), AIR 1962 Cal. 405 while dealing with Section 536(2)

of the Act has observed as under:-

"12. It seems to me, therefore, upon considering various authorities on this subject that the following principles are doubtless applicable to sub-sec (2) of Sec. 536 of the Companies Act, 1956:

1. The Court has an absolute discretion to validate a transaction.

2. This discretion is controlled only by the general principles which apply to every kind of judicial discretion.

3. The Court must have regard to all the surrounding circumstances and if from all the surrounding circumstances it comes to the conclusion that the transaction should not be void, it is within the power of the Court under Sec. 536(2) to say that the transaction is not void.

4. If it be found that the transaction was for the benefit of and in the interests of the company or for keeping the company going or keeping things going generally, it ought to be confirmed."

7. The Gujarat High Court in The Sidhpur Mills Company

Limited, (1987) 1 Comp. L.J. 71 (Guj.) has stated as under:-

"12. It is trite position in law that the commencement of winding-up proceedings relates back to the presentation of the petition (see: section 441 of Companies Act, 1956). It should be recalled that the winding-up petition in which the order was made was company petition No.9 of 1979 which was presented on 22.2.1979. The winding-up order was made by this Court on October 18, 1979. In the circumstances, therefore, any transfer of shares of Siddhpur Mills Co. Ltd. made after the presentation of the winding-up would be void unless as otherwise directed by the Court. The Court has an absolute discretion as to validating the transaction after presentation of the winding-up petition. The discretion is to be exercised on recognized principles which guide the exercise of judicial discretion generally with particular attention to the interest of the company. The Court can validate such impugned transaction in those bona fide cases which demand protection of equitable consideration. (See B.B. Khanna v. S.N. Ghose 1976 Tax L.R. 1740)."

8. Keeping in view the aforesaid judgments as well as the

explicit language of the Sections reproduced hereinabove, this Court

is of the view that it has the discretion to validate any disposition of

the property made after passing of the winding up order, but the said

discretion is not an untrammeled one, as it has to be exercised on

sound judicial principles. In the opinion of this Court, while

validating any disposition of the property after the appointment of

the Provisional Liquidator, the Company Court, has to keep in view

all surrounding circumstances and if it finds that the transaction is a

bona fide one for the benefit of the company, then alone the same

would be validated.

9. In the present case, the Provisional Liquidator was appointed

by this Court on 5th June, 1998. The relevant portion of the order

appointing the Provisional Liquidator reads as under:-

" xxx xxx xxx On consideration of the averments made in the present application, I am satisfied that there are sufficient grounds in the present case for appointment of a Provisional Liquidator. Accordingly, I appoint the Official Liquidator who is attached to this Court as the Provisional Liquidator, who shall take charge of all the assets and properties of the company along with the books of accounts and other records of the company.

The Provisional Liquidator shall take immediate custody of all the assets as directed, if necessary shall also seek police assistance in executing the aforesaid order. The Provisional Liquidator will be entitled to seek assistance of a firm of Chartered Accountants in compilation of the accounts of the respondent company.

Till the next date, the respondent, its directors, servants and agents are restrained from disposing of, alienating and/or parting with possession of any of the assets of the company.

Dasti."

(emphasis supplied)

10. In fact, the Reserve Bank of India vide order dated 18 th

October, 1997, had prohibited the company in liquidation from

accepting deposits or alienating any assets without prior written

permission of the Reserve Bank of India except for the purpose of

repayment of deposits.

11. This Court is of the view that since in the present case, only a

sum of Rs. 68,154.05/- had been paid out of the total consideration

of Rs. 1,84,421/- prior to the appointment of the Provisional

Liquidator and consideration of Rs. 75,000/- paid after the

appointment of the Provisional Liquidator has not been accounted

for in the accounts of the company in liquidation, the present sale

should not be confirmed. Moreover, once a winding-up order is

passed, the creditors acquire a right to have the assets of the

company realized and distributed among them pari passu. No new

right can thereafter be created and no uncompleted right can be

completed, for doing so would be contrary to the creditors' right to

have the proceeds of the assets distributed among them pari passu.

In fact, if the present application were to be allowed, then the present

applicant would 'steal a march' over the creditors of the company

existing on the date of winding up. The Supreme Court in M/s. J.K.

(Bombay) Private Ltd. v. M/s. New Kaiser-I-Hind Spinning and

Weaving Co. Ltd. and others, AIR 1970 SC 1041 has held as

under:-

38. The effect of a winding-up order is that except for certain preferential payments provided in the Act the property of the company is to be applied in satisfaction of its liabilities pari passu. Pari passu distribution is to be made in satisfaction of the liabilities as they exist at the commencement of the winding-up. (cf. Sections 528 and 529 of the Act; Ghosh on Indian Companies Law, 11th Ed., Vol. 2, p. 1073). The effect of a winding-up order on rights already completed as against rights yet to be completed is succinctly stated by Lord Halsbury in Bank of Scotland v. Macleod, 1914 AC 311 at pp. 317, 318 as follows:

"Rights in security which have been effectually completed before the liquidation must still receive the effect which the law gives to them. But the company and its liquidators are just as completely disabled by the winding-up from granting new or completing imperfect rights in security as the individual bankrupt is by his bankruptcy. This, indeed, is the necessary effect of the express provisions of the Companies Act that the estate is to be distributed among the creditors pari passu. Every creditor is to have an equal share, unless any one has already a part of the estate in his hands, by virtue of an effectual legal right."(Cf. Tulsidas Jasraj v.

Industrial Bank of Western India, 32 Bom LR 953 at p. 967 = (AIR 1931 BOM 2 at pp.8-9)). Similarly, in Re Anglo- Oriental Carpet Manufacturing Co., (1903) 1 Ch 914 it was held that even where a company had executed a trust deed and issued debentures creating a charge on its assets but the charge had not been registered as required by the Companies Act by the time the company had passed an extra-ordinary resolution for voluntary winding-up the debenture holders were not, as against the joint body of creditors, secured creditors.

39. It is thus well established that once a winding-up order is passed the undertaking and the assets of the company pass under the control of the liquidator whose statutory duty is to realise them and to pay from out of the sale-proceeds its creditors. Such creditors acquire on such order being passed the right to have the assets realised and distributed among them pari passu. No new rights can thereafter be created and no uncompleted rights can be completed, for doing so would be contrary to the creditors' right to have the proceeds of the assets distributed among them pari passu..............."

(emphasis supplied)

12. Moreover, this Court on 4th November, 2011 in CCP(Co.)

5/2006 in CP 265/1998 while directing the Official Liquidator to

move an application before the Supreme Court in the cancellation of

bail proceedings of Mr. V.K. Sharma, former Director of the

company in liquidation had observed that "on a perusal of the report

of Serious Fraud Investigation Office (SFIO), a Central Government

investigating agency constituted under Section 237 of the Companies

Act, 1956 and after going through the claims preferred by various

claimants with regard to properties of company in liquidation, prima

facie this Court finds that the business modus operandi of M/s. JVG

Group under the management of Mr. V.K. Sharma was to buy very

valuable properties but at the same time create multiple title disputes

with regard to the same." Consequently, this Court, keeping in view

the surrounding circumstances, is of the view that the present

disposition of property should not be validated.