Chetan K. Singh vs Citi Bank and Others

M.M. Kumar, J.—This appeal filed u/s 483 of the Companies Act, 1956 (for brevity "the Act") is directed against the order dated May 7, 2009, passed by the learned company judge in Company Application No. 803 of 2007 in C. P. No. 374 of 2002 Chetan K. Singh Vs. Citi Bank N.A. and Others, . The application filed by the appellant an ex-director of respondent No. 3 company (in liquidation) u/s 536 of the Act seeking post sale approval in respect of the property belonging to the company (in liquidation) has been dismissed doubting the bona fides of the sale made apart from other grounds.

The brief facts of the case are that a winding up petition was filed by the respondent-Citi Bank being C. P. No. 374 of 2002 on November 12, 2002, before this Court. The Allahabad Bank-respondent No. 2 six months prior in time had filed O. A. No. 117 of 2002 before the Debts Recovery Tribunal, New Delhi (for brevity "the DRT"). The property of respondent No. 3, i.e., M/s. Venire Industries Ltd. (in liquidation) was attached by the Debts Recovery Tribunal vide order dated July 19, 2002, which included the industrial plot which is the subject-matter of dispute in the present application. A copy of the order has been placed on record as annexure R11 with the written statement. Plot No. J15 Jagamara Bhubneshwar measuring about one acre was purchased by the respondent-company (in liquidation) which is situated at Bhubneshwar (Orissa) from the Government of Orissa by way of 90 years lease. The Allahabad Bank entered into a one-time settlement with the respondent-company (in liquidation) for a sum of Rs. 201 lakhs on March 23, 2005 (Al) and the Debts Recovery Tribunal vide its order dated October 12, 2004, had permitted the respondent-company (in liquidation) to seek a prospective buyer of the mortgaged property (A2). Consequently, the respondent-company found a buyer, namely, M/s. Siksha "O" Anusandhan having its principal office at 224, Dharam Vihar Khandagiri Bhubneshwar who agreed to purchase the aforesaid property for a sum of Rs. 200 lakhs. Accordingly, an agreement to that effect was entered into on March 3, 2005 (A3), i.e., prior to the date of one-time settlement. The respondent-company addressed a letter on March 31, 2005, to the Director of Estates, Government of Orissa to transfer the property in favour of M/s. Siksha "O" Anusandhan after the sale consideration was realised and paid to the Allahabad Bank (A4). On April 20, 2005, the Allahabad Bank wrote to the Director of Estates, Government of Orissa informing him that the mortgage had since been redeemed and Plot No. J15 was no longer subject to any charge (A5). The Allahabad Bank withdrew its recovery application since its claim had been settled and the original application was disposed of vide order dated August 22, 2005 (A6). The Government of Orissa permitted the transfer of the aforesaid property in favour of M/s. Siksha "O" Anusandhan vide memo dated July 21, 2007 (A7). The appellant-applicant has stated that tripartite deed is required to be executed for effecting the formal transfer in favour of M/s. Siksha "O" Anusandhan.

It has come on record that after the filing of C. P. No. 374 of 2002 on November 12, 2002, the winding up order was passed on February 23, 2007.

The application was opposed by the official liquidator by filing a detailed reply by stating that mere attachment did not confer any right on the attached creditor in respect of the property of the company in winding up. The purpose of attaching is to avoid private alienation of the said property and it continues to remain the property of the owner despite such attachment. The bona fides of the sale transaction have been doubted by the official liquidator by pleading that the one time settlement with Allahabad Bank was reached for a sum of Rs. 201 lakhs and the property was sold for almost the same amount of Rs. 200 lakhs. Accordingly it has been submitted that the transaction has to be regarded as a sham transaction with the object of disposing of the valuable property and assets of the company to defeat the winding up proceedings and to defraud the other creditors of the company. The amount of loan taken from the Allahabad Bank was secured by the personal guarantees of the two directors of the company which includes Chetan K. Singh who is the applicant-appellant. The whole transaction has been an attempt on the part of the ex-directors to avoid their personal guarantee by fraudulent sale of valuable assets of the company in winding up.

The learned company judge after examining the pleadings and the arguments raised has held that once the winding up proceedings have been initiated on November 12, 2002 and all events like one-time settlement and sale had taken place during the pendency of the petition for winding up before this Court, the sale without reference to the official liquidator could not be validated. Placing reliance on the judgment of the hon''ble Supreme Court in the case of Pankaj Mehra and Another Vs. State of Maharashtra and Others, , the learned company judge held that disposition of the property during the pendency of the winding up proceedings is not void ab initio as it is qualified with the expression used in the same section namely unless the court otherwise orders. Accordingly, if there is disposition of the property under the orders of the court by virtue of Section 536(2) of the Act then the disposition shall be valid. The provision of Section 537 of the Act is attracted only when such orders have not been obtained and the sale has taken place with leave of the court. The learned company judge further held that it is in the nature of one action following the other for, if the occasion for invoking Section 536(2) has already been exercised, there is no scope for applicability of Section 537. The learned company judge held that if such an approach is adopted then the company not approaching this Court for sanction of sale before it was undertaken, the sale effected would be seen as void by virtue of Section 537 of the Act. The learned company judge then examined the issue by adopting a restrictive approach with regard to the scope of Section 537(2) of the Act for rectification of post sale. The court has to be satisfied about the bona fides of the transaction. The learned company judge went on to hold as under (page 414 of 150 Comp Cas):

It is difficult to believe that a company, which had lost the entire property for the satisfaction of one creditor could ever urge the plea of bona fides. If any portion of the property had been salvaged for the benefit of the company or any portion was available in surplus for satisfaction of other unsecured creditors it may be possible to infer bona fides. If the property which is secured is allowed to be transferred for the exact amount, which was paid to a creditor, then it means the debtor was actually facilitating one secured creditor for, the earlier realisation of his own debt. Even if the company had not consented for the sale, it would have come to a similar result of the property being sold at the instance of the creditor whose debt was fully satisfied. By the one-time settlement, scaling down the debt had no meaning, for no benefit was obtained by the company. As stated above, the entire security was lost to the company for the satisfaction of the creditor who held the property as his exclusive security. Even in the absence of one-time settlement, the company could have realised the money by sale of the property and if there was still a shortfall and if there had been any personal liability of the directors, the personal remedy may have been available for the creditor. In such an event, the one-time settlement would have meant saving their own skin against personal liability but obtained no benefit to the company or its other creditors.

We have heard senior counsel for the appellant at a considerable length who has tried to persuade us to take a different view and hold that the sale to Siksha "O" Anusandhan is bona fide. He has also urged that there are no powers with the company court once there is an order of the Debts Recovery Tribunal.

Having heard learned senior counsel, we are of the considered view that this appeal is without any merit. The learned single judge has rightly found that the sale to Siksha "O" Anusandhan is not bona fide. The one-time settlement was entered into for a sum of Rs. 201 lakhs on March 23, 2005 and the plot was sold on March 31, 2005, for a sum of Rs. 200 lakhs. Moreover, an attempt has been made by the director to avoid personal liability as they stood personal surety to the loan advanced to the company. No benefit has been secured to the company or its other creditors as has been held by the learned company judge.

A perusal of the order dated October 12, 2004, passed by the Debts Recovery Tribunal would show that the property was required to be auctioned and a detailed order has been passed in that regard. According to order dated October 12, 2004 (A2) passed in O. A. No. 117 of 2002, the Debts Recovery Tribunal was conscious of interest of the Allahabad Bank as well as the interest of justice. Accordingly, it directed the bank to publish an advertisement for sale of the aforesaid property through auction within a period of two weeks. It also allowed the company to locate a prospective buyer who could pay the maximum price of the property as and when so notified to be sold through auction by the Allahabad Bank. The exercise was required to be completed within a span of two months which would take care of the litigation pending between the company and the Sales Tax Department, Bhubneswar. The Allahabad Bank was allowed to recover the advertisement and other incidental charges incurred by it in undertaking this exercise which would include publication in two leading news papers of which one should be vernacular circulating in Orissa and one in English daily the Pioneer. There is no whisper in the application with regard to publication of any notice or compliance with the directions issued by the Debts Recovery Tribunal. The conclusion reached by the learned company judge holding that the sale was not bona fide stands further fortified as the appellant has failed to show that the directions issued by the Debts Recovery Tribunal were not violated. Accordingly, it has to be held that the sale is fraudulent and it suffers from numerous lapses. Therefore, the post sale approval cannot be accorded and we find no legal infirmity in the impugned order dated May 7, 2009, passed by the learned company judge.

In view of the above, this appeal fails and the same is dismissed with costs which is quantified at Rs. 20,000.