BHAGUDEO FLOUR MILLS PVT.LTD. v. O.L. OF DISHA AGRO INDUSTRIES LIMITED. & Ors.

the first time , after more than four years in the said Civil Application, the applicant company has filed its affidavit in reply dated 6th March 2005. GSFC has also filed its affidavit in reply.

11.During the pendency of Special Civil Application No. 750 of 2000 and Civil Application No. 215 of 2005 this Court, on 20.07.2005 passed winding up order in the case Disha Agro Industries and appointed the Official Liquidator as the liquidator of Disha Agro Industries. The liquidator was directed to take charge of the assets of Disha Agro COMA/337/2005 JUDGMENT Industries in exercise of powers conferred upon him under the provisions of the Companies Act 1956. Pursuant to the winding up order dated 20th July 2005, the officers of the Official Liquidator visited the property on 5th October 2005 to take charge of the assets of Disha Agro Industries. The applicant company informed the officers of the Official Liquidator that they are in possession of the premises/ property since September 2000, in view of having purchased the same from GSFC. The possession was not taken on that day. However, the applicant company was apprehending that the possession might be taken from them filed Company Application No. 337 of 2005 before this Court. This Court has issued notice dated 14th October 2005 and since, the possession was not taken by the Official Liquidator the direction regarding interim relief was not considered. On 22nd November 2005, this Court directed the Official Liquidator to examine the matter and submit its detailed reply within four weeks. By way of interim measure it was directed that in relation to the possession of the property in dispute the parties shall maintain status quo. The applicant was also directed not to create any charge or encumbrance over the property or alienate the COMA/337/2005 JUDGMENT same without any further order.

12.The Official Liquidator has filed his report on 19th December 2005 wherein an issue was raised by the Official Liquidator that the sale was conducted by GSFC one month prior to the presentation of the petition and hence, in view of the provisions contained in Section 531 of the Companies Act, 1956, the sale transaction entered into by GSFC with the applicant company is fraudulent. The Official Liquidator therefore requested the Court to direct the applicant to hand over the possession of the assets of the company to the Official Liquidator. The Official Liquidator has also requested this Court to direct GSFC to transfer the sale proceeds so realized by GSFC. The Official Liquidator has also sought for direction with regard to the advertisement for the purpose of inviting claims of all classes of creditors and workers of the company. The Court thereafter passed order on 20th December 2005 for impleadment of respondent No. 2, 3 and 4.

13.During the pendency of Company Application NO. 337 of 2005, Disha Agro Industries preferred Misc. Civil COMA/337/2005 JUDGMENT Application No. 123 of 2005 to recall the judgment and order /winding up order dated 20th July 2005 passed in Company Petition No. 264 of 2000 and to revive the said Company Petition. This court has however, rejected the said application. In Company Application No. 337 of 2005 this Court has passed order on 12th April, 2006 observing therein that as the Company under liquidation has challenged the action of GSFC in taking the possession of the property and put the same to auction, it would be prudent to await the final judgment in Special Civil Application No. 750 of 2000. The Court however, passed further order directing the applicant not to change the nature of property nor to raise any new construction nor to demolish any part of the property. The Court has also directed the Official Liquidator to appoint someone to make inspection of the property and to submit his report since this order has adversely affected the interest of the applicant, and Special Civil Application No. 750 of 2000 with Civil Application No. 5262 of 2000 was ordered to be notified. The order passed by this Court on 28th April 2006 directing to delete the name of learned advocate who appeared for Disha Agro Industries and to show the COMA/337/2005 JUDGMENT name of Official Liquidator and the Court has made it very clear that if the Official Liquidator would not take any action, the matter would be disposed of on merits. Since the Official Liquidator did not take any action nor anyone appeared, the Court has not extended the interim relief and Civil Application was accordingly disposed of. By the order passed by this Court on 27th April 2006, the interim order dated 5th July 2000 by which this Court observed that the action of GSFC would abide by further order, stood vacated. The applicant therefore, filed Company Application No. 279 of 2006 praying for a direction to the Official Liquidator to execute the sale deed in their favour.

14.In Company Application 279 of 2006, Gujarat State Financial Corporation has filed affidavit on 22nd November 2006 stating therein that the amount of Rs 74,62,262/- is outstanding against the applicant as on 30th June 2006. This Court thereafter passed an order dated 12th July 2007 disposing of Special Civil Application No. 750 of 2000 filed by the company. While passing the said order, the Court has observed that since the sale deed was not executed by the GSFC in COMA/337/2005 JUDGMENT favour of the purchaser and at this stage the company was ordered to be wound up and the company Court is to look after the action of the Official Liquidator who is in charge of the company and functions under the supervision of this Court, the Company Court can examine the legality and validity of the transaction of sale by taking care of interest of everybody including secured creditors, dues of workmen, other creditors etc. The Court therefore did not record any conclusion and observed that the sale in question was subject to scrutiny and finalization by this court in its jurisdiction under the Companies Act. The Company Court has also passed an order on the same day i.e 12th July 2007 directing the applicant to deposit the amount of Rs 72,00,000/- together with interest accrued thereon and remained un-paid, at the rate of 18 % per annum with the Official Liquidator within a period of four weeks from the date of the said order and on that condition interim injunction granted earlier was ordered to be continued. The Court has made it very clear that on failure of the applicant to deposit the said amount with the Official Liquidator, the Official Liquidator would be entitled to take possession of the premises after drawing panchnama of the COMA/337/2005 JUDGMENT properties. The rights and contentions of all secured creditors including GSFC were ordered to be finalised at the later stage when the matter would be finally considered.

15.Pursuant to the aforesaid order the amount of Rs 72 lacs with interest at the rate of of 18% was deposited with the Official Liquidator. The applicant has thus paid the total amount of Rs 1,96,62,190.10 ps. by way of sale consideration. The Court has recorded this fact in its order dated 19th September 2007 and further directed GSFC as well as the Official Liquidator to furnish certain details. GSFC was directed to file Valuation Report if any, taken by GSFC before the offer of the applicant was accepted. The Official Liquidator was directed to invite claims of the creditors and workers by issuing advertisements and he was further directed to file report with regard to the value of the property on the date of filing such report. State Bank of India was also directed to submit details of the amount, if any, realised out of the disposal of the movable property. Pursuant to the order dated 19th September 2007, advertisements were published in the newspaper. However, no claims COMA/337/2005 JUDGMENT were received by the Official Liquidator. GSFC has filed affidavit on 9th October 2007 along with which valuation report dated 29th April 2000 was placed on record. On 23rd October 2007 the Official Liquidator has placed on record the valuation report of Amrut Gajjar and Associates determining the market value of land with factory premises at Rs 42,20,000/- and building at Rs 1,00,24,000/-. An affidavit is filed by Mr Falgun Patel, Power of Attorney holder of Ms Nita U Choksi, ex- Director of the company in liquidation raising certain objections of the valuation report submitted by GSFC and Official Liquidator and reiterating the submissions that the property of the company was disposed of by GSFC for an amount of Rs 1,11,11,111/- as against the total value of plant and machinery of Rs 3.08 crores. One more affidavit is filed by the said Mr. Phalgun Patel dated 5th December 2007 along with certificate dated 1st December 2007 issued by Shri Paresh V. Shah, architect Engineer. On behalf of State Bank of India an affidavit is filed on 4th December 2007 stating therein that the counter claim filed by the company was dismissed for want of prosecution. COMA/337/2005 JUDGMENT

16.It is in the above background and in light of the above factual scenario, both these applications are taken up for hearing.

17.Mr. A. S. Vakil, learned advocate appearing for the applicant in both these applications has submitted that the applicant has purchased the property in question through auction held by the Gujarat State Financial Corporation in exercise of its power under Section 29 of the State Financial Act. The auction was held after following due process of law and the applicant being the highest bidder, the sale was effected in favour of the applicant. The applicant has paid the entire sale consideration along with interest @ 18% p.a. and hence, the sale deed is required to be executed in favour of the applicant. He has further submitted that since the sale was effected prior to the date of winding up order and also in exercise of powers under Section 29 of the State Financial Corporation Act, the provisions of Section 531 & 531-A of the Companies Act, 1956 are not applicable as it is not a transfer by the Company in liquidation nor it is a transfer to the Creditor of the Company. It is further submitted that Section 531-A applies only when the COMA/337/2005 JUDGMENT transfer of the assets is made voluntarily and by the Company and the burden lies on the Official Liquidator to show that the transfer is not in good faith and not for valuable consideration. It is further submitted that when the transfer is made by the State Financial Corporation in exercise of its power under Section 29 of the Act, either within six months and/or one year, immediately preceding the date of presentation of winding up petition, Section 531 & 531-A of the Companies Act, 1956 are not attracted.

18.Reliance is placed on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Financial Corporation V/s. Electrothermic (P) Limited and another, (1997) 5 COMPANY LAW JOURNAL 418 (AP), Sporolac Laboratories (P) Limited V/s. A.P. State Financial Corporation and others, (2000) 4 COMPANY LAW JOURNAL 372 (AP), A.P. State Financial Corporation V/s. T.G.L. Quick Foods Limited, (2000) 3 COMPANY LAW JOURNAL 61 (AP), Shivalik Agro Poly Products Ltd. V/s. Disco Electronics Ltd. (In Liquidation) and another, 114 Company Cases 398, Rajasthan State COMA/337/2005 JUDGMENT Financial Corporation V/s. Official Liquidator, (2005) 128 Company Cases 387. On the basis of this settled legal position and considering the entire facts and circumstances of the case, he strongly urged that the prayers made by the applicant in both these applications are required to be granted.

19.Mr. J. S. Yadav, learned advocate appearing for the Official Liquidator has submitted that winding up petition was presented by the petitioner on 16.09.2000 and the winding up order was passed by this Court on

20.07.2005. The sale was conducted by GSFC within one year prior to the presentation of the winding up petition. He has, therefore, submitted that considering the provisions contained in Section 531 of the Companies Act, 1956, the transaction entered into by GSFC and the applicant is fraudulent against the Official Liquidator. He has, therefore, submitted that the applicant may be directed to hand over the possession to the Official Liquidator and sale deed may not be executed in favour of the applicant. He has also submitted that the sale proceeds realized by GSFC are directed to be handed over to the Official Liquidator in view of the decision of COMA/337/2005 JUDGMENT the Apex Court in the case of Rajasthan State Financial Corporation and others V/s. Official Liquidator and others.

20.Mr. Pranav G. Desai, learned advocate appearing for the respondent No.2 i.e. State Bank of India has on the basis of the affidavit filed on behalf of the Bank submitted that State Bank of India has assigned its debts to Kotak Mahindra Bank Limited on 23.03.2006 by Deed of Assignment and hence, from that date onwards, the said Kotak Mahindra Bank Limited is entitled to receive its share on distribution of the sale proceeds amongst the Secured Creditors. It is further submitted that Original Application No.376 of 1998 was pending before the Debts Recovery Tribunal at Ahmedabad at the relevant point of time and the Debts Recovery Tribunal has appointed Manager of State Bank of India as Receiver on

10.11.2000, with a direction to keep the movables which were hypothecated with the Bank and to take steps to sell the same by giving advertisements in the newspaper and to place the offers before the Tribunal. Pursuant to the said order, the Valuer was engaged and copy of the list of assets and inventory was prepared on 21.10.2000. COMA/337/2005 JUDGMENT GSFC was having first charge over the land, building and fixed assets of the Company in liquidation and the applicant addressed a letter dated 16.03.2001 informing that Item Nos. 1 to 8 in the list belonging to the Company in liquidation and the other items in the list belonging to them. The Valuer had visited the site and found that item Nos. 1 to 8 of the inventory were lying in the open ground in damaged condition. The Valuer, therefore, valued the same and submitted report dated

17.03.2001. The Receiver found that the Valuer could not value the goods as the goods were in very bad shape and the expenses to be incurred are in excess of realisable value of goods. Original Application No. 376 of 1998 was finally heard by the DRT and after hearing both the parties, the DRT passed an order on

30.04.2005. No further appeal was preferred by the Company in liquidation against the said order of the DRT. The Company in liquidation has filed Civil Suit by way of counter claim. However, DRT vide its order dated

21.09.2006 disposed of the said Civil Suit No. 07 of 1999 which was numbered as Transfer Application No. 1211 of 2006 and the same was disposed of by default. No further appeal was filed against the dismissal of the said COMA/337/2005 JUDGMENT counter claim.

21.Mr. R. D. Dave, learned advocate appearing for the respondent No.4 i.e. GSFC has submitted that there is no substance in any of the allegations made by the respondent No.5 in his pleadings before this Court. The Company in liquidation is a chronic defaulter and was not in a position to repay the loan taken by the Company from GSFC as well as other financial institutions and Banks. GSFC has sold the assets of the Company after following due process of law and the respondent No.5 being the defaulter has no right to challenge the said action of GSFC. He has further submitted that the action of GSFC cannot be challenged in the present proceedings as the sale was effected prior to the winding up order passed by this Court and even otherwise, there is settled position in law that the sale is effected by GSFC in exercise of its power under Section 29 of the State Financial Corporation Act and the same cannot be challenged before the Company Court on the ground that such sale is hit by the provisions contained in Section 530 & 531 of the Companies Act, 1956. The factory was closed since 1998 and necessary notices were issued COMA/337/2005 JUDGMENT under Section 29. Thereafter, possession was taken and after due advertisement in newspaper, the sale was effected. Since no higher offer was received by GSFC, the sale was effected in favour of the applicant and hence, no fault can be found with GSFC if the sale is effected below the value determined by the Valuer in his valuation report. Even otherwise, the challenge was made by the respondent No.5 against sale of the properties in favour of the applicant in a writ petition being Special Civil Application No.750 of 2000 and the said petition is dismissed by the Court and hence, it is not open for the respondent No.5 to raise all these issues once again before this Court in the present proceedings.

22.Mr. Shirish Joshi, learned advocate appearing for the respondent No.5 has referred to and relied upon the various affidavits filed by the respondent No.5, during the pendency of these two applications. He has referred to the facts stated and averments made in the affidavit- in-reply dated 06.08.2007, affidavit-in-sur-rejoinder dated 12.09.2007, further affidavit dated 30.10.2007, further affidavit dated 05.12.2007 and the documents attached along with these affidavits and further COMA/337/2005 JUDGMENT affidavits. He has submitted that neither the Company nor any one on its behalf including Ms. Nita U. Choksi or Mr. Falgun K. Patel, the Power of Attorney Holder of Ms. Nita U. Choksi was aware about the winding up petition No. 264 of 2000 having been filed before this Court. He has further submitted that the properties of the Company in liquidation were sold by GSFC to the applicant at Rs.1.11 Crores as against the valuation report of Rs.1.39 Crores. Thus, admittedly there is a loss of about Rs.28 Lacs. He has further submitted that the Company was sanctioned a loan of Rs.208 Lacs on

30.05.1996. Some more amount of loan was made available to the Company and, therefore, a proposal was made on 24.02.1997 along with detailed report by the concerned department before the Board of Directors on

29.03.1997. The proposal was titled as a “Cost over run and reallocation of sanctioned loan in case of Disha Agro Industries Limited”. The revised value of items shown with the building was worth Rs.144.03 Lacs, machinery worth Rs.142 Lacs and total value as revised, was put at Rs.471.17 Lacs. He has, therefore, submitted that the properties worth Rs.471.17 Lacs were sold for just Rs.1.11 Crores. He has further submitted that the COMA/337/2005 JUDGMENT Company has taken loan from Visnagar Nagarik Sahakari Bank Limited and the raw-material as well as finished goods were hypothecated with the said Bank. The Bank used to file regularly stock statements and as per the statement for the month of October 1999 to January, 2000, goods lying with the Company were worth more than Rs. 1.05 Crores. The said goods were gifted away by GSFC to the applicant. When possession was handed over by GSFC to the applicant on 01.09.2000 nobody was informed and letters were directly written to Visnagar Nagarik Sahakari Bank Limited and State Bank of India to remain present on 01.09.2000 and to lift the goods which were lying hypothecated with the Banks. As against the value of property of Rs.471.17 Lacs, GSFC has obtained the valuation report for Rs. 1.39 Crores only in the month of March 2000. No detailed public notice was given with a real valuation of the assets and ultimately, the properties were sold at throw away price of Rs. 1.11 Crores to the applicant.

23.Mr. Joshi has further submitted that in the public advertisement given for sale of the property, it was nowhere mentioned that the purchaser would be shown COMA/337/2005 JUDGMENT to pay only 33% in cash and for the balance amount, the corporate guarantee is to be furnished. The applicant had not paid the entire amount and only 33% was paid and for balance amount, the corporate guarantee was furnished. He has, therefore, submitted that a very dishonest action has been taken by GSFC and without taking due care and without procuring true and correct market price of the assets, namely, plant, machinery and building, GSFC has, in collusion with the applicant, sold away the assets at a throw away price. He has, therefore, submitted that the action of the GSFC cannot be confirmed and the property is required to be put to sale again.

24.Having heard learned advocates appearing for the respective parties and having gone through their pleadings and documents attached therewith and having considered the entire transaction in light of the statutory provisions and decided case law on the subject, the Court is of the view that there is no much substance in the objections raised either by the Official Liquidator or by the respondent No.5. From the pleadings, it appears that many objections are in relation to applicability of the COMA/337/2005 JUDGMENT provisions contained in Section 530 & 531 of the Companies Act, 1956 to the transaction entered into by GSFC with the applicant whereby the properties in question were sold and secondly, the manner and method in which the properties were sold to the applicant.

25.As far as the first objection is concerned, it is true that the properties were sold by GSFC to the applicant within a month prior to the date of presentation of the winding up petition and hence, as per the provisions contained in Sections 531 & 531-A of the Act, if any transaction takes place, within six months and/or within one year prior to the date of the presentation of winding up petition, provisions of Section 531 & 531-A, as the case may be, are applicable. Under Section 531 of the Act, if the transaction of transfer amounts to a fraudulent transfer, under the Bankruptcy law or Insolvency law and if it is entered into within a period of six months prior to the commencement of winding up, then alone the transaction in question can be treated as void under Section 531 (1) of the Act. It is, however, not only to show that preference was shown to a particular Creditor, COMA/337/2005 JUDGMENT it also must be shown that it was done with a view to give him favoured treatment. It must be established that both the transferor and the transferee had joined hands to defraud the Creditors. It is also well settled that to set aside a transaction under Section 531, fraud must be clearly alleged, proved and established. Mere general allegations, using statutory words or language, but lacking material particulars would not suffice. In the present case, the material difference is that the sale is effected by GSFC. Neither the Company nor any of its Directors was involved in sale of the assets of the Company. It is an admitted position that the transfer was not made by the Company nor by any of the Directors of the Company. It was made by GSFC in exercise of powers under Section 29 of the State Financial Corporation Act.

26.Even under Section 531-A, a transaction which is made within one year prior to the date of presentation of the winding up petition, if made for valuable consideration and in good faith, is saved. The fact that the transfer falling within Section 531-A is void as against the Liquidator implies that it is not a nullity in the absolute COMA/337/2005 JUDGMENT sense. Since it is void only as against the Liquidator, it means the Court will invalidate or ignore the transfer only if the relief is sought by the right person, namely, the Liquidator and in appropriate circumstances. Though the Liquidator, in the present case, has raised this issue in his report, the circumstances found do not warrant this Court to draw an inference that the transfer was made without valuable consideration or it was not in good faith. The decisions relied upon by the applicant squarely cover the issue. The Delhi High Court in the case of Shivalik Agro Poly Products Ltd. (supra) has gone one step further and took the view that Section 32- E of the State Financial Corporation Act provides that where the management of an industrial concern which is a Company has been taken over by the Corporation, no proceedings for winding up of such concern shall lie in any Court except with the consent of the Financial Corporation and the winding up proceedings could not have continued in view of the prior action of the Corporation. All other decisions cited by Mr. A.S. Vakil support the view taken by this Court. Under Sections 529 & 529-A of the Act, Liquidator's role comes into play only to the extent of enforcing the pari passu charge in COMA/337/2005 JUDGMENT favour of the workmen and to ensure that the amount realized was applied ratably for the discharge of the workmen's' dues. At the time of disbursement and/or appropriation of the amount realized, it becomes necessary for the Court to intervene and impose conditions for the realization of the pari passu charge in favour of the workers. In the present case, the sale of the assets of the Company in liquidation is already effected prior to the presentation of the winding up petition and amount of Rs.72 Lacs has already been received by GSFC. The balance amount is lying with the Official Liquidator. This entire amount is, however, subject to the claims that may be made by the Official Liquidator towards workmen's dues in proportion to the pari passu charge. Subject to this, the objections raised by the Official Liquidator or by the respondent No.5 is not sustainable.

27.As far as the valuation is concerned, it is true that the properties were sold for Rs.1.11 Crores as against the valuation of Rs.1.39 Crores. Apparently, it appears that the properties were sold below the valuation. However,it was a distress sale and no other persons have offered COMA/337/2005 JUDGMENT any higher price. Proper procedure was followed by GSFC. Advertisements were given, offers were invited and after considering the offers so received, the applicant was found to be the highest bidder and sale was effected in their favour. Many a times it happens that the properties may not fetch the value shown in the valuation report and any further delay in disposal of the assets would deteriorate the properties and further loss may take place. To prevent such deterioration of assets, sometimes properties are to be sold below the valuation and hence, simply on that ground, sale cannot be set aside. The submission made by Mr. Joshi on the basis of revised project under which the value of the properties was put at Rs.421.37 Crores does not seem to be convincing. This was merely an estimate and no documentary evidence was placed on record. It is the normal practice that to avail more limits or facilities, the values are inflated. Such estimated cost of the project can never be the basis of the actual realisable value of the properties. The Court, therefore, cannot disturb the sale effected by GSFC on the basis of cost over run project or valuation report obtained by the Official Liquidator. Even otherwise, sale was challenged by the COMA/337/2005 JUDGMENT respondent No.5 before this Court in Special Civil Application No.750 of 2000 and the said petition was dismissed by the Court. It is true that while dismissing the said petition and while passing an order under the present Company Application on the same day, this Court has observed that as per the provisions of the Companies Act, this Court exercising power under the Company jurisdiction can examine the illegality and validity of the transaction of sale by taking care of interest of everybody including of Secured Creditors, workmen dues, other Creditors etc. The Court, therefore, examined this aspect in the present applications and having found that no illegality was committed by GSFC while effecting sale in favour of the present applicant, it cannot be said that the said sale is required to be quashed and set aside.

28.It is true that GSFC has accommodated the present applicant to some extent and as against the entire sale consideration, only 33% of sale consideration was taken in cash and for the balance amount, the applicant was allowed to furnish corporate guarantee. However, the applicant was made liable to pay interest @ 18% which COMA/337/2005 JUDGMENT the applicant has already paid pursuant to an order of this Court and as against total consideration of Rs.1.11 Crores, the applicant has paid more than Rs. 1.96 Crores. The alleged loss caused for late payment was duly compensated by way of interest @ 18%, which in fact was never the Bank rate during the period in question.

29.In view of the aforesaid discussion and considering the totality of the facts and circumstances of the case, the Court is of the view that there is no illegality or infirmity in the sale effected by GSFC in favour of the present applicant and hence, the applicant is entitled to relief prayed for in the present applications. Since the possession is already with the applicant, the only relief which is required to be granted now is in respect of the execution of sale deed in favour of the applicant. Since GSFC has effected the sale in favour of the applicant, GSFC is hereby directed to execute the sale deed in favour of the applicant within two weeks from today. While executing the sale deed, the value of the land, building, plant and machineries is to be shown separately and in proportion to the value shown in the COMA/337/2005 JUDGMENT valuation report.

30.As far as the appropriation of the amount is concerned, the Court will pass appropriate order in the pending matters and the applicant is not concerned nor the said issue is involved in the present two applications and hence, the present two applications are accordingly disposed of with the aforesaid direction. The sale deed will be executed within a period of two weeks from today and the Official Liquidator will sign as a confirming party since he is supposed to be in charge of the assets of the Company in liquidation. The Sale Deed will be executed at the cost of the applicant.

31.With this direction and observation, both these Company Applications are accordingly disposed of. Sd/- [K. A. PUJ, J.]

32.As soon as the judgment is pronounced, Mr. Shirish Joshi, learned advocate appearing for respondent No.5 has prayed for stay against the operation, implementation and execution of this judgment and order for two weeks. Mr. A. S. Vakil, learned advocate COMA/337/2005 JUDGMENT appearing for the applicant has seriously objected to this request. Having regard to the facts and circumstances of the case and considering the fact that the applicant has already paid entire sale consideration with interest and sale deed is still not executed, the request for stay is rejected. Savariya Sd/- [K. A. PUJ, J.]