Reserve Bank of India vs Ms JVG Finance Ltd.

Manmohan, J.

CA No. 2361/2011

Mr. Nagesh states that the company in liquidation had not only entered into an agreement to sell on 18th 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.

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

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.

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.

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 u/s 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.

On the other hand, Mr. Bahl, learned counsel for the Official Liquidator submits that this Court should not exercise its discretion u/s 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.

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:

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

Avoidance of certain attachments, executions, etc,. in winding up by Tribunal-

(1) Where any company is being wound up by Tribunal-

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.

The Calcutta High Court in In Re: J. Sen Gupta Private Ltd., (In Liquidation), while dealing with Section 536(2) of the Act has observed as

under:

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:

The Court has an absolute discretion to validate a transaction.

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

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.

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.

The Gujarat High Court in The Sidhpur Mills Company Limited, (1987) 1 Comp. L.J. 71 (Guj.) has stated as under:

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).

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.

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:

xxxx

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)

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

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 J.K. (Bombay) P. Ltd. Vs. New

Kaiser-I-Hind Spg. and Wvg. Co. Ltd. and Others, has held as under:

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. Tulsidas Jasraj Parekh Vs. The Industrial Bank of Western India, . 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.

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)

Moreover, this Court on 4November, 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

u/s 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.

Accordingly, the present application is dismissed but without any order as to costs. However, the applicant is also held entitled to simple

interest @ 4 per cent per annum on Rs. 68,154.05/-, the amount deposited with respondent company from the date of its deposit.

CA Nos. 2351, 2353, 2355/2011, 2357, 2359/2011

List on 8th December, 2011 at 2.15 p.m.