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V.R. Muzumdar v/s Mysore Kirloskar Ltd.(in Liquation)

    Company Application 482 of 2005 Petition 166 of 2001

    Decided On, 27 September 2005

    At, High Court of Karnataka

    By, THE HONOURABLE MR. JUSTICE RAM MOHAN REDDY

    For the Appearing Parties: Deepak, G. Krishnamurthy, Advocates.



Judgment Text

(1) IN all these applications, common questions of law and that of fact arise for consideration. Hence, with the consent of the learned Counsel for the parties, the applications are clubbed, heard together and finally disposed of by this order. The reliefs, common in all these applications filed under Section 446 of the Companies Act, 1956 (for short the 'act'), are: (i) to call for the proceedings in the suits instituted by the applicants pending on the file of the Civil Judge (Sr. Dn.), Harihar, (ii) to direct the Official liquidator to execute and register the Sale-deeds in their favour in respect of the properties agreed to be conveyed. Alternatively, to permit the applicants to pursue the suits instituted by them and to stay the tender notification Annexure 'l' insofar as it relates to the schedule properties, subject-matter of agreements. In C. A. 481 and 482 of 2005, the applicants having not instituted Original Suits for specific performance of agreements have restricted the reliefs to a direction to the Official Liquidator to execute the sale deeds in respect of the properties, subject-matter of agreements of sale.

(2) FACTS in brief are :

(i) The respondent-company in liquidation, was incorporated on 7-4-1941 under the Companies act, 1913, with its main object of manufacture of machine tool products and foundry castings, for which purpose, the Company was allotted large tracts of land by the State Government. The company is said to have availed credit facilities from financial institutions such as ICICI, IDBI and SBI. The representative of ICICI was a nominated Director of the respondent-company. According to the applicants, the company having suffered huge losses, the networth of the company being eroded, impelled the Board of Directors to pass a resolution in their meeting dated 30-9-2000, Annexure C, to sell the non-performing assets, more particularly the quarters and vacant land not being a part of the undertaking, and to utilize the sale consideration, to bring about financial stability and to meet the day-to-day expenditure. According to the applicants, out of 203 acres and 15 guntas of land, excluding an area of 8 acres acquired by the Pollution control Board, the Company was in possession of 195 acres 15 guntas. From out of this extent, 90 acres is said to be utilised for establishing the factory and its allied units while 48 acres reserved as colony area, 54 quarters were constructed for its employees, in addition to Parks, sports zone, recreation facilities, golf courts, etc. , bifurcated by a compound wall and fence, as delineated in the plan Annexure 'a'. The particulars of the area comprising the factory premises, are set out in Annexure 'b'.

(3) THE applicants assert that consequent to the Board resolution dated 30-9-2000, the company entered into separate agreements during the months of August and September, 2000 with the applicants, its employees, for sale of the quarters in their possession for a valuable consideration. In terms of the agreement, some of the applicants are said to have made payment of the entire sale consideration, while others have agreed to pay the balance amount, at the time of registration of the sale deed. In addition, it is stated that the company entered into separate agreements with other purchasers as regards the vacant land and sites. According to the applicants, the company did mop up an estimate Rs. 150 lakhs as sale consideration under the agreements of sale.

(4) IN view of the lock out declared by the company, the resuscitation of the company, being the subject-matter of proceedings before the Board of Industrial and Financial Reconstruction, New delhi in No. 409/2000, the Sale Deeds were not executed by the company, in favour of the applicants. The failure of the respondent to execute the sale deeds impelled the applicants, except applicants in C. A. Nos. 481 and 482 of 2005, to institute original suits before the Civil Judge (Sr. Dn.), Harihar for relief of specific performance or in the alternative, to refund the amounts paid under the agreements, with interest, which are said to. be pending.

(5) THE BIFR, having opined that it is not conducive for the company to continue its business, coupled with the fact that certain creditors had presented winding up proceedings, this Court by order dated 1st April, 2004 Annexure-'g', ordered the respondent-company to be wound up. The official Liquidator in his report No. OLR 55/2005 in Company Petition No. 166/2001, having sought for permission to sell the assets of the Company in liquidation, this Court directed the sale by inviting sealed tenders from intending purchasers, causing advertisement of the notice of auction sale, which was carried out in the 'economic Times' dated 19-4-2005, Annexure-'l'.

(6) IT is the allegation of the applicants that the Official Liquidator ought to have excluded the properties agreed to be conveyed under the agreements of sale entered into between the applicants and the Company, while notifying the properties for sale. The applicants state that they were and are always ready and willing to perform their part of the contract, while it was the company which had committed breach of terms of contract. Hence, these applications.

(7) HAVING heard the learned Counsel for the parties and perused the pleadings, the question for decision making in these applications is, whether the applicants are entitled to the reliefs sought for in the applications?

(8) SRI G. Krishnamurthy, learned Counsel for the applicants drew my attention to the minutes of the meetings of the Board of Directors held on 30th September, 2000, Annexure-'c', to contend that the applicants have an unimpeachable claim, entitled to specific performance of the agreements since the company entered into agreements of sale, of the quarters, being non-performing assets and not a part of the undertaking, and utilized the sale consideration, for its financial stability and to meet its day-to-day expenditure. According to the learned Counsel, the applicants, though employees of the Company, are bona fide purchasers for value and not in the know how of indoor management of the Company and the acts of the Directors, cannot be said to be invalid as there is no allegation against the directors as contemplated under Section 290 of the Act, by which, the resolution dated 30-9-2000 of the Board of Directors could be declared invalid. In support of the said contention, learned Counsel places reliance on the decision of the Delhi High Court in the case of Eastern Linkers (P.) Ltd. v. Dina Nath Sodhi [1984] 55 Comp. Cas. 462. It is lastly contended that although Sub-section (2) of Section 536 of the Act, would invalidate the agreements, this Court, in the factual matrix, more particularly, in view of the claims of the ex-employees who are in possession of the quarters, in exercise of its discretion could hold the agreement of sale of the quarters as a valid commercial transaction.

(9) PER contra Sri Deepak, learned Counsel for the Official Liquidator contends that under Section 531 of the Act, the resolution dated 30-9-2000 of the Board of Directors is fraudulent as the company Petition No. 77/ 2000 was presented on 14-3-2000 for winding up of the respondent-company. Learned Counsel draws my attention to a clause in the resolution requiring approval of the Board of Directors of the company as also the approval of Banking Financial institutions having a charge of the properties, in addition to the approval of the Government of karnataka, for the sale of the lands which were granted by the State, to contend, that the agreements of sale, de hors the required permission, is invalid. It is next contended that the business of the Company was not to sell, lease or otherwise dispose of immovable properties belonging to it and therefore, the agreements of sale are not transactions for the purpose of the business of the company. It is lastly contended that the applicants are not invested with an unimpeachable claim so as to be entitled to a discretionary order at the hands of this Court. Learned Counsel would make reference to the decisions of the Supreme Court in the case of chittoor District Cooperative Marketing Society Ltd. v. Vegetols Ltd. 1987 (Suppl.) SCC 167 and in the case of Pankaj Mehra v. State of Maharashtra AIR 2000 SC 1953.

(10) THE object of winding up of a Company, in the words of LLNDLEX, LJ. , is "to put all unsecured creditors upon an equality and pay them pari passu" in Cockpits Colliery Co. , In re[l 882] 21 Ch. D. 322. It must necessarily follow that all proceedings against the company, by way of suit, execution or otherwise, ought to stop, so that there may be no scramble amongst the creditors to get at the assets. Hence, Section 446 of the Act, does not permit the continuance of the proceedings without the leave of the Company Court. Leave of the court is not automatic, but should be after an examination of the facts of each case arid exercise of discretion. Leave of the court could be unconditional or conditional. It is well-settled that unless the question at issue, in the action or proceeding, is one, which can be properly determined in the winding up, leave will be refused, as a corollary what cannot be gone into conveniently in the winding up, leave will be granted.

(11) THE claim of the applicants in the suit instituted by them is for specific performance of the agreements of sale or in the alternative to recover the part sale consideration. The basis of the claim being the Board Resolution referred to supra. The question of specific performance can be decided in this proceeding without having to secure the transfer of the proceedings in the suits to this Court.

(12) BEFORE proceeding to examine the said question, it is useful to refer to the two decisions of the Apex Court (i) In Chittoor District Co-operative Marketing Society Ltd. 's case (supra) - considering the power of the High Court under Section 536 (2) of the Act, in respect of payments made after the winding up order was passed, held thus:

. . . There is also no evidence to show that these payments were made in a bona fide manner under a commercial compulsion in the course of transactions necessitated for the running of the business. There is nothing to show that if the payments to the appellant society were not made the business could not have been run. In fact, the running of the business would result in loss of liquidity and its operations would have been hampered by making these payments. It is not shown that there was any compulsion and the payments were made either in order to save the property from being sold or that there was any commercial compulsion. . . . (p. 168)

(ii) The Supreme Court in Pankaj Mehta's case (supra), after having exhaustively considered a long line of decisions, including Chittoor District Co-operative Marketing Society Ltd. 's case (supra), observed thus:

20. It is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralysed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bona fide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. This consequence has been correctly voided by the Division bench in the impugned judgment.

21. If the payment is not ab initio void the company cannot contend that it is legally forbidden from making payment of the cheque amount when notice was issued by the payee regarding dishonour of the cheque. To circumvent this hurdle an endeavour was made by some of the appellants counsel to show that the very issuance of a cheque would amount to disposition of property. We arc unable to accept the said contention particularly in view of the definition of 'cheque' in the NI Act. 'a cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand'. (p. 1958)

(13) THE undisputed fact is that the respondent-company was ordered to be wound up, by order dated 1-4-2004, Annexure G, passed in Co. P. Nos. 77 and 78/2000 and connected petitions, of which Co. P. 77/2000 was presented on 14-3-2000. The alleged agreements of sale were said to be executed between the period from 29-8-2000 and 20-10-2000, during the pendency of the winding up petitions. The meeting of the Board of Directors is claimed to be held on 30-9-2000, authorising the sale of the immovable property of the company. The question is whether these agreements of sale of immovable properties of the respondent-company are void under Section 536 (2) of the Act.

(14) EVEN according to the applicants, the basis of their unimpeachable claim, is the resolution of the Board of Directors in their meeting held on 30-9-2000 Annexure C. From a careful examination of the minutes, what is discernible is that, a plan of restructuring was worked out for the company for consideration of the banks and financial institutions, which was at a preliminary stage of discussion. For the restructuring, the proposal was to sell the non-performing assets of the company and the proceeds to be partly used for working capital fund and partly to reduce long-term loan liabilities of the company. Out of 203 acres 15 guntas of land, barring 90 acres utilized for the factory, the Board resolved that 100. 05 acres in which staff quarters, amenities, etc. , were provided, be sold in two phases. The first phase was the staff quarters offered to employees, while the 2nd phase was the vacant land after converting it into sites. The left over was to be offered to members of the public. Priority, it was emphasised, had to be given to the employees. The said properties were treated as non-performing assets, as there was no economic return and maintenance would add to costs. The relevant portion of the resolution reads thus, however, it requires the approval of the Board of Directors of the company, apart from the approval of the banks and financial institutions, who are having a charge on the said properties. Further, the above lands owned by the company were either acquired under the Land Acquisition act, 1894 or Land Grant Act. Hence the approval of the Government of Karnataka for the sale of the said lands is required before the lands are sold to prospective buyers. [emphasis supplied]

(15) THE true copy of the resolution dated 6-10-2000 of the Board of Directors of the Company, discloses that the Board being of the opinion that the company was a sick industrial company within the meaning of the said term under the Sick Industrial Companies (Special Provisions)Act, 1985, based on the balance sheet made up to 31-5-2000 having regard to the accumulated losses of the company having exceeded its entire networth, for the financial year ending 31-5-2000, resolved to make a reference to the Board for industrial and financial reconstruction, for short BIFR. It is not disputed that pursuant to the BIFR's recommendation to wind up the company, coupled with the creditors' winding up petitions this Court ordered the company to be wound up.

(16) IN the premise of the above facts, the Board of Directors having the special knowledge that as on 31-5-2000, the accumulated losses exceeded the entire networth of the company, the sale of the assets of the company under the agreements, could hardly be said to be bona fide, proper and just. This would show that the sale was not made either under compulsion of circumstances, in order to save or protect the property of the company, or that there was a commercial compulsion to enable it to run its business. The question of business of the company being paralyzed and, there was an urgent contingency to be met by the company is far from truth.

(17) THERE is yet another reason as to why the transactions entered into between the applicants and the company cannot be validated. The Board, in its meeting held on 30-9-2000, recorded a plan for restructuring worked out for the company, which would, in fact, mean that the Board was aware of the financial position of the company i. e. , its accumulated losses had exceeded its entire networth. Even according to the Board, the plan was at a very preliminary stage of discussion with the Secured creditors, who had a charge over the properties of the company. In addition, the minutes of the meeting records that the approval of the financial institutions as well as that of the Government were required to be obtained before the sale of the quarters. The applicants have not placed before court any material to evidence the approvals. The sale of the quarters in terms of the agreement of sale entered into with the applicants, even prior to the board Resolution dated 30-9-2000, and thereafter, was not with the prior permission of this court though Company petitions were pending and the company was aware of the winding up petitions. In addition, more than one half of the entire immovable properties were sought to be sold, under the resolution. Sri Krishna Murthy, learned Counsel would emphasize that the employees had put in number of years of service while in the employment of the company and were in possession of the staff quarters, which could propel the Board of Directors to make over the quarters to the applicants, by way of sale and the further contention of the learned Counsel that the employees had pitched in their savings for the purpose of purchasing these quarters, in my considered view are contentions that do not merit consideration, in a proceeding under the act. If the Company did want to extend the benefit to the employees, for services rendered, it would have done so without even asking the employees to pay any money as sale consideration. The agreements smack of a commercial transaction and not as a benefit extended to the employees. Even according to the learned Counsel for the applicants, except for applicants in CA 380/05; CA 384/05; CA 387/ 05; CA 388/05; CA 397/05; the applicants in the other CAs entered into agreements of sale prior to the Board Resolution dated 30-9-2000. To my mind, in the admitted facts of the case, there appears to be sinister and oblique motive in the sale of assets of the company. In this view of the matter, it is rather difficult for this Court to hold, as valid, the agreements of sale in favour of the applicants.

(18) THE next contention of the learn

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ed Counsel for the applicants that the acts done by the directors of the Company are valid, notwithstanding the resolution in the meeting dated 30-9-2000, coupled with the execution of the agreements of sale, which may afterwards be discovered that the appointment of the directors were invalid by reason of defect or disqualification, is noticed only to be rejected. Section 290 of the Act deals with validity of acts of Directors. A plain reading of this section one can easily comprehend that it applies to cases of appointment of directors subsequently discovered to be invalid. Thus a stranger to a contract with the directors of the company, may rely upon this section if he has no knowledge of the irregularity. The facts of the present case are not that the appointments of the directors was subsequently discovered to be invalid. The decision in Eastern Linkers (P.) Ltd. 's case (supra), has no application to the facts of this case. (19) APPLYING the principles laid down by the Supreme Court in the aforesaid decisions and in the view that I have taken supra, I am of the considered opinion that the applicants have not established an unimpeachable claim so as to permit the applicants to prosecute the suit insofar as it relates to the relief of specific performance of the agreement, while being disentitled to the other reliefs in these applications. However, there is considerable force in the submission of Sri krishnamurthy that the applicants be permitted to prosecute the suit as regards the alternate prayer in the suit for recovery of the advance amount paid, with interest thereon. In the result, the applications except C. A. Nos. 481 and 482 of 2005 are allowed in part, permitting the applicants to prosecute the suits instituted by them, said to be pending on the file of the Civil Judge (Sr. Dn.), Harihar, insofar as it relates to the relief of recovery of the advance amount paid under the agreements of sale together with interest. C. A. Nos. 481 and 482 of 2005 stands rejected, reserving liberty to the applicants to lodge their claims as and when the Official liquidator invites claims.
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