M. Rajendra Naidu vs Sterling Holiday Resorts (India) Ltd. and Others

D. Murugesan, J.—The appellant in both the appeals is N. Rajendra Naidu. He has purchased 50 equity shares from the first respondent-company, namely, M/s. Sterling Holiday Resorts (India) Ltd., on July 15, 2005. On July 21, 2005, he approached this Court by filing Company Petition No. 140 of 2005 u/s 237(a)(ii) of the Companies Act, 1956, read with Rule 11(9) of the Companies (Court) Rules, 1959, seeking for a direction to declare that the affairs of the first respondent-company ought to be investigated by the inspector or inspectors appointed by the Central Government.

The grievance of the appellant is that managing director of the company by name R. Subramanian, the second respondent, was declared as an insolvent on June 12, 2000, on and after the said date he has no right to manage the affairs of the company. However, suppressing the fact that he was declared insolvent, he authorised one Mr. M.S. Suresh Achary on June 6, 2005, to take possession of the schedule mentioned property, namely, the land situate in survey No. 216/1A, Thimminaidupalam village, Chittoor district, to an extent of 2.028 acres plus 4.594 acres and 1.859 hectares. On the very same day, he entered into an agreement for sale of the suit property with the very same Mr. M.S. Suresh Achary for a total consideration of Rs. 1,34,00,000 to be paid within six months. The said authorisation dated June 6, 2005, as well as the agreement dated June 6, 2005, made by the second respondent is invalid. Strangely, a subsequent agreement dated June 13, 2005, was also entered into by one R. Mohan and the said M.S. Suresh Achary for sale and possession by fixing the sale consideration only at a sum of Rs. 99,00,000. Pursuant to the said sale agreement with possession, a sale deed dated December 27,2006, was executed. The above transaction is not in the interest of the company and, therefore, the investigation has to be carried on as to the affairs of the company by appointing inspector or inspectors of the Central Government. For the same reason, he also took out two applications in Application No. 1899 of 2007 seeking an order of interim injunction restraining the third respondent, the purchaser, her men, agent and nominees from in any manner dealing with the properties and another Application No. 1900 of 2007 to set aside the sale of the property conveyed under the sale deed dated December 27, 2006, registered in Document No. 91 of 2007 on the file of the Sub-Registrar of Assurances, Renigunta.

Both the applications were dismissed by the learned single judge by his order dated January 22, 2008. O.S.A. No. 202 of 2008 arises out of the order in Application No. 1899 of 2007 and O.S.A. No. 203 of 2008 arises out of the order in Application No. 1900 of 2007 ( M. Rajendra Naidu Vs. Sterling Holiday Resorts (India) Ltd. and Others, ).

Mr. AR. L. Sundaresen, learned senior counsel would submit that when the second respondent has been declared insolvent and he has nothing to do with the affairs of the company, he was disentitle to either appoint anybody to deal with the property or to enter into an agreement with the third respondent for the sale of the property. The entire transaction, namely, the agreement for sale as well as the sale deed were made without appropriate approval from the board. The appellant, as a shareholder of the company, is entitled to question such action which was not in the interest of the company. The property in question would fetch a sum of Rs. 10,00,00,000 and strangely it has been sold for a sum of Rs. 99,00,000. Hence, both the applications should have been ordered accordingly by the learned single judge.

Mr. C. Sundaram, learned Counsel appearing for the first and second respondents would however submit that though the second respondent was declared as an insolvent on June 12, 2000, at the instance of the Canara Bank in I. P. No. 124 of 1999, the second respondent was not aware of the said order and immediately on coming to know of the same on July 29, 2005, when a notice was issued by one Nageswara Raju with whom an earlier agreement for sale was entered into by the company in respect of the very same property, immediately, he filed an application and the second respondent was discharged from the said order on November 23, 2006 and hence, the order of discharge will relate back to the order of declaration of the second respondent as insolvent. If that be so, the agreement entered into by the second respondent on June 6, 2005, is valid. He would further submit that apart from the above, subsequent to the agreement entered into by the second respondent with M.S. Suresh Achary on June 6, 2005, the board in its resolution dated May 25, 2005, authorised R. Mohan, the vice president of the company to enter into an agreement and sell the property in question. Pursuant to the said resolution, the said R. Mohan entered into an agreement on June 13, 2005, with the very same M.S. Suresh Achary for sale of the property. As the said Nageswara Raju with whom an earlier agreement was entered into approached this Court for specific performance and as the matter is pending, though the property was sought to be sold for a sum of Rs. 134 lakhs by an agreement dated June 6, 2005, having regard to the interest of the company and also pending litigation, the vice president of the company had decided to fix the sale consideration at Rs. 99,00,000 and the remaining portion of the amount of Rs. 35,00,000 to be received by the company towards development charges and hence, no loss occurred to the company. He would also submit that the appellant is set up by Nageswara Raju. As the specific performance of suit in C. A. No. 830 of 2005 in the Company Petition No. 213 of 2005 filed by the Gujarat Industries Ltd., came to be dismissed on December 22, 2006, he made the appellant to purchase shares in the meantime and consequently made him to file the application within a period of seven days. The appellant has not approached this Court with bona fide reason and, therefore the appeals are liable to be rejected. Moreover, learned Counsel for the appellant would submit that the sale was in fact effected only pursuant to the agreement dated June 13,2005, entered into by the vice president of the company, who was empowered to do so, and not on the basis of the agreement dated June 6,2005, entered into by the second respondent. In fact, the agreement is also entered into by the very same vice president and there is nothing to speak about the involvement of the second respondent and therefore, the sale cannot be set aside.

Mr. Karthick Seshadri, learned Counsel appearing for the third respondent would also submit that in a petition u/s 237 of the Companies Act, 1956, seeking an investigation, a petition for setting aside the sale and for consequential relief cannot be sought. The scope of the petition is limited only as to seeking for a direction to the Central Government to appoint an inspector or inspectors to cause investigation into the affairs of the company and even if such order is passed by the Central Government, an investigation should be done and only if the report discloses any negative aspects of the company, a petition for winding up could be filed. Till such time, it must be presumed that the affairs of the company are carried on as per law and, therefore, a mere presumption that the sale has taken place to defeat the interest of the company cannot be a ground to set aside the sale even when the application u/s 237 is still pending, which is yet to be adjudicated and decided.

We have considered the above submissions. The sale deed which is sought to be set aside was executed on December 27, 2006, by one R. Mohan, the vice president of the company. It is not the contention of the applicant that R. Mohan, the vice president is not competent to execute the sale deed. The said sale deed was executed pursuant to a resolution passed by the board of directors on May 25,2005 and a copy of the same was filed before the learned single judge which he has referred to in the impugned order. Pursuant to the said authorisation, the said R. Mohan, vice president, had entered into an agreement dated June 13, 2005, for sale of the property. On the above facts, it could be seen that sale has not been effected pursuant to the agreement entered into by the second respondent R. Subramanian with Mr. M.S. Suresh Achary on June 6, 2005. Therefore, the question as to whether the said agreement could be a basis for the sale since the same was entered into by the second respondent when he was declared as insolvent does not arise at all. Once, we come to the conclusion that the sale was pursuant, to the agreement dated June 13, 2005, and R. Mohan, the vice president, had been authorised to enter into such agreement by the board in its resolution dated May 25, 2005, we cannot interfere with the sale deed solely on the ground that it was emanated from the agreement entered into by the second respondent on June 6, 2005.

There is yet another aspect to be considered as to the power of the court to order setting aside the sale and to pass consequential interim order in an application filed u/s 237 of the Companies Act, 1956. Section 237 of the Companies Act, 1956, reads as follows:

Investigation of company''s affairs in other cases.-Without prejudice to its powers u/s 235, the Central Government:

(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if:

(i) the company, by special resolution ; or

(ii) the court, by order,

declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

Even if an order is made u/s 237 of the Companies Act, 1956, the inspector or inspectors appointed are empowered to carry on the investigation in terms of Section 239 and by virtue of the powers conferred u/s 243, if the report requires further action against the company, a petition for winding up would be made for consideration of the company court. The scheme of the Act does contemplates that before an application for winding up is made u/s 243, on the basis of an application u/s 237 seeking for investigation of the affairs of the company, any report that is filed by the inspector or inspectors would be only a preliminary report and it cannot be considered to be final as the company court is empowered to go into the report and to decide whether winding up is necessary or not. Under these circumstances, when the petition for winding up itself is not filed or pending before the court, when only an application u/s 237 of the Companies Act was pending, the court would not be justified in setting aside the sale solely on the presumption that the board of directors or the person managing the affairs of the company is working against the interest of the company. Interim orders cannot be granted on presumption except on proved facts. However, the balance of convenience is in favour of the company as admittedly a case has been filed by one Nageswara Raju seeking for a specific performance in a company petition for winding up and both the petitions were dismissed with liberty for him to approach the competent civil court. In the absence of any order against the company, the persons empowered by the board would be certainly entitled to either enter into an agreement for sale or to execute a sale deed as such for conveyance of the property. We could also take note of the fact that though the appellants approached the court for redressal of their grievance, questioning the impugned sale deed, none of the directors of the board had filed any petition and thereby allowed the sale to take place. The question as to whether the sale consideration would be sufficient or not is also a matter which could be adjudicated before the inspector or inspectors appointed by the Central Government, in case appointed by the Central Government and the report will take care of such affairs. Under these circumstances, we find absolutely no ground to interfere with the order passed by the learned single judge. Accordingly, both the appeals are dismissed. Consequently, the connected miscellaneous petitions is also dismissed. No costs.