T. Vinayaka Perumal v. T. Balan

O R D E RThe appellant is the owner in possession of lands measuring 3acres and 54 cents in S.No.428/4A1A and 47 cents in S.No.428/8A,totaling 4.01 acres at Gummidipoondi, as detailed in the schedule,attached to the grounds of appeal. The appellant purchased theproperty from Thiru G.George, 6th respondent, vide sale deed dated05.01.2006, registered as Document No.48/2006 on the file of SROGummidipoondi. 2.The property purchased by the appellant was registered inthe name of Thiru G.George, and was in uninterrupted possession ofthe property.3.The appellant entered into agreement on 16.10.2006 tosell the schedule property to Mr.Mangilal on receipt of saleconsideration. The sale deed was to be executed by the appellantin favour of Mr.Mangilal. The appellant received a notice from theCompany Law Board in a proceeding under Sections 397 and 398 ofthe Companies Act, initiated by the respondents 1 to 4 againstrespondents 5 to 9, ordering the appellant to deal with theproperty only with liberty obtained from the Company law Board. 4.In obedience to the order passed by the Company LawBoard, the sale deed was not executed in favour of Mr.Mangilal. 5.The respondents 1 to 4 filed Company Application No.171of 2006 in C.P.No.7 of 2004 to set aside the sale, made by ThiruG.George in favour of the appellant, by claiming that the scheduleproperty belonged to M/s.Unicentre Agencies and EngineeringPrivate Limited, the 5th respondent, though it was registered inthe name of 6th respondent. This was for the reason that a sum ofRs.1,00,000/- (Rupees One Lakh only), forming part of the saleconsideration was paid by Thiru G.George from the funds of thecompany. Whereas a sum of Rs.1,50,000/- (Rupees One Lakh FiftyThousand only) was paid by Thiru G.George.6.The claim of the respondents 1 to 4 was that the lands tothe extent of same proportion i.e. 1.60 acres out of 4.01 acres tobe restored to the company.7.The appellant claims that he was the bona fide purchaserfor value without knowledge of any proceedings pending before theCompany Law Board with regard to oppression and mismanagement byone group.8.The case of the appellant is that sale of land owned byThiru G.George has no connection with the business of the company. https://hcservices.ecourts.gov.in/hcservices/ The case of the appellant, further is that the learned Company LawBoard has erroneously held that sale by 6th respondent to theappellant was not approved by the shareholders or the Board of thecompany, as also that the Company Law Board, without giving anyfinding, with regard to the sale consideration, wrongly held thatprice was inadequate and not beneficial to the company. Thejurisdiction of the Company Law Board to set aside the sale isalso questioned.9.The grounds of challenge by the appellant are that theCompany Law Board failed to notice that the land in dispute stoodin the name of individual and not in the name of company, so as tobring it within the ambit of mismanagement. The challenge is alsoon the ground that the learned Company Law Board exceeded thejurisdiction under Sections 402 and 403 of of the Companies Act,to set aside the sale by the Director in individual capacity. Theappellant also challenged the findings of the Company Law Board,that the sale by Thiru G.George in favour of the appellant was hitby lis pendense.10.The questions of law raised in this appeal are;i) Whether the Company Law Board is within its jurisdictionunder Sections 402 and 403 of the Companies Act, 1956, to setaside the sale fo immovable properties of an individual by suchperson in favour of the appellant?ii) Whether the Company Law Board exceeded its jurisdiction inordering restoration a portion of the subject property to thecompany and thereby wrongly assumed to itself the power of a CivilCourt?11.As already observed above, the respondents 1 to 4, whoheld 50% of the issued and paid up capital of M/s.UnicentreAgencies and Engineering Private Limited, filed petition underSections 397 and 398 of the Companies Act, alleging acts ofoppression and mismanagement by respondents 2 to 5. The reliefclaimed in the petition under Sections 397 and 398, reads asunder: a)to pass appropriate orders for the management,regulation and conduct of the affairs of the Company.b)to supersede the present Board of Directors of thecompany and appoint an administrator to manage, regulateand conduct the affairs of the Company.c)to surcharge the respondents 2 to 5 in accordancewith Schedule XI of the Act on account ofmisappropriation and misapplication of the Company'sfunds; and https://hcservices.ecourts.gov.in/hcservices/ d)to restore in favour of the Company the immovableproperties located at Gummidipoondi ("the properties")and purchased in the name of the second respondent out ofthe company's funds."12.The only relief, granted by the Company Law Board to therespondents 1 to 4, reads as under:"The properties have been purchased for a sum of Rs.2.50lakhs, which was met by the Company to a tune of Rs.1lakh, which works out to 40% of the total considerationof Rs.2.50 lakhs and the balance considerations was paidby the second respondent from and out of his resources.The Company would therefore be entitled for 40% of thetotal extent of the properties, registered in the name ofthe second respondent, accounting for 1.60 acres out ofthe total extent of 4.01 acres of land. The sale ofproperties having found to be irregular and oppressivemust be set aside, in the paramount interest of theCompany and its shareholders, upon which 1 acre and 60cents of the land shall be restored to the Company, asput forth on behalf of the petitioners, in the courseoral submissions, thereby enabling it to sell the saidextent, namely, 1 acre and 60 cents, free of anyencumbrances in accordance with law and deal with thesale process, as per the collective wisdom of theshareholders and the second respondent is at liberty todeal with the remaining properties amounting to 2 acresand 41 cents absolutely as he deems fit and proper. Thestatutory auditor will duly qualify the amounts to bebrought in by the second respondent on account of Kuwaitoperations, for the period between 06.09.1991 and05.11.1993 which will be credited to the account of theCompany. The whole process shall be completed within sixmonths, to be ensured by both parties. The Company aftermeeting all its existing liabilities, is at liberty todistribute the surplus amount among its shareholders inproportionate to their shareholding in the Company. TheCompany is not engaged in any business and therefore, theparties are free to resort to voluntary winding up, ifthey so desire, thereby bringing to an end the grievancesin the affairs of the company. The company shall ensurestatutory obligations and compliances till completion ofthe process of winding up of the Company in terms of thisorder. Ordered accordingly.With the above directions, the company petition and theconnected applications are disposed of. In view of this,the interim orders stand vacated. No order as to costs.Liberty to apply in the event of any difficulty inimplementation of the order." https://hcservices.ecourts.gov.in/hcservices/

13.Learned counsel for the appellant, vehemently contendedthat the property under the ownership of the appellant wasstanding in the name of 6th respondent at the time of purchase,therefore, it was not open to the Company Law Board to questionthe sale in favour of the appellant, as the jurisdiction to setaside the sale made in favour of the third party could only beadjudicated in the Civil Court and not before the Company LawBoard.14.The contention of the learned counsel for the appellantwas that even if the sale was hit by the principles of lispendense, still the sale executed in favour of the appellant couldhave been set aside by the Civil Court and not by the Company LawBoard. Therefore, the impugned part of the order granting reliefto the respondent nos. 1 to 4 is patently without jurisdiction.Learned counsel for the appellant also contended that theappellant was the bone fide purchaser for consideration withoutknowledge of pendency of the proceedings, therefore, sale in hisfavour could not be set aside even partly. 15.Though there is merit in the appeal, but the plea of bonafide purchaser is not available to the appellant, as the plea ofbona fide purchaser cannot be raised in the case of lis pendensepurchase. 16.There is force in the contention of the learned counselfor the appellant, that the sale in favour of the appellant couldnot be set aside by the Company Law Board, under the provisions ofSections 402 and 403 of the Companies Act. Under Section 402,thejurisdiction to set aside of any transfer, delivery of goods,payment, execution or other act relating to property made or doneby or against the company, can be exercised in case of sale madewithin three months before the date of the application underSection 397 or 398, that too in case the property is standing inthe name of the company. The power with the Company Law Board,therefore, is to the properties standing in the name of thecompany.17.Admittedly, in this case, right from the date ofpurchase, the company never came in possession or in ownership ofthe property. Even under Section 403, only interim injunction canbe granted.18.The Company Law Board, under Section 402 can certainlyset aside the sale, if the property was registered in the name ofthe company, but not otherwise, specially after enforcement ofBenami Transaction Act. https://hcservices.ecourts.gov.in/hcservices/

19.This finding also finds support from the stand taken bythe 6th respondent in this Court. The company in course of businesshad taken some loan from the bank, and to secure the loan, theproperty in dispute was mortgaged by way of collateral security bythe 6th respondent, showing it as his own property. This mortgagewas created on 10.05.1991, whereas, the petition under Section 397& 398 was filed for the first time in 2004. 20.This fact is proved from the finding recorded in theCivil Suit filed by the State Bank of India, against the companyas well as the respondents 1 to 4 (i.e. petitioners before theCompany Law Board) and other Directors. The suit was filed in theyear 1995, which clearly proved that respondents 1 to 4 had theknowledge of property, being in the name of 6th respondent. Whenthe suit was filed in 1995, by the State Bank of India, it was the6th respondent, who settled the suit and thereafter redeemed thisproperty, by paying a sum of Rs.7,47,000/- (Rupees Seven LakhsForty Seven Thousand only). Even in the balance sheet, filed bythe company in the year 1990, the property was not shown to beunder ownership of the company. The balance sheet was duly signedby respondent nos.1 to 4. 21.It was also the case of the 6th respondent, that even iffor the sake of argument, it is held that the Company Law Boardcould deal with the property, still the limitation prescribed isthree months, prior to the filing of the petition. In this case,the property was purchased in the name of 6th respondent in 1989,therefore, the Company Law Board had no jurisdiction to deal withthis property. The respondent nos.6,7, and 8, also supported theclaim of the appellant in this appeal for the reason stated hereinabove.22.Learned counsel appearing on behalf of the respondents 1to 4 supported the finding of the Company Law Board, by referringto the Board resolution, vide which, the 2nd respondent wasauthorized to execute the sale deed with respect of the propertyon behalf of the company, and not in personal name. He also placedreliance of the annual report dated 04.10.1989, wherein, it wasdisclosed that 4 acres of land valued at Rs.3,,00,000/- (RupeesThree Lakhs only) had been acquired near Gummidipoondi IndustrialArea. It was on 11.04.1991, that the Board of Directors decided tomortgage the property in favour of State Bank of India in order tosecure dues and guarantees. The 6th respondent was also authorizedto execute the mortgage deed on behalf of the company. Referencewas also made to the fax message dated 04.12.1993, wherein, theCompany Secretary sent the fax message, that the land in disputebelonging to the company will be sold at minimum price of Rs.3lakhs per acre, and amount paid to the company and other unsecuredloans due to the various parties. https://hcservices.ecourts.gov.in/hcservices/

23.Learned counsel for the respondents 1 to 4 also referredto the reply submitted by the respondents 1 to 3 in companypetitioner before the Company Law Board, wherein, it was statedthat the 6th respondent had no intention to claim property as hisown. Though it was proved that out of Rs.2,50,000/- (Rupees TwoLakhs Fifty Thousand only), Rs.1,50,000/- (Rupees One Lakh FiftyThousand only) was paid from his own resources.24.Learned counsel for the respondents 1 to 4 placed strongreliance, on the finding that the Company Law Board, which readsas under: The present company petition has been filed on04.02.2004, while the properties were sold during itspendency on 05.01.2006 by the second respondent in favourof TVP. This sale transaction has been challenged by thepetitioners, as being hit by the provisions of Section 52of the Transfer of Property Act, 1882, which is, however,resisted by the respondents as doctrine of 'lis pendens'which imposes a prohibition on transfer or otherwisedealing of any property during the pendency of a suit,however, on fulfilment of the conditions stipulatedtherein. In the light of the principles enunciated by theMadras High Court, with reference to Section 52 of TP Actin Narayana Venkatachalamiah vs. Putika Venkatiah andothers (supra) that the Registrar or the Authorityappointed by him under the Madras Act 6 of 1932 is aCourt for the purpose of Section 52 of the Transfer ofProperty Act, the CLB being a permanent body, constitutedunder a statute, with the trappings of the Court andvested with judicial powers and functions in terms ofSection 10(E) (4C) of the Act, cannot but be a Court forthe purpose of Section 52 of the TP Act. Even otherwise,the principle of Section 52 is based on, as held by theDelhi High Court in Lov Raj Kumar vs. Major Daya Shankar– AIR 1986 Delhi 364, justice equity and good conscienceand therefore, the doctrine of 'lis pendens' would applyeven where the TP Act, is inapplicable. The CLB exercisesequity jurisdiction under Section 397/398, while bringingto an end the grievances complained of in the affairs ofa company and it is a Court of equity as held by thisBoard in Arun Mehra vs. Durga Builders P.Ltd and others(supra) and it cannot, therefore, be argued that theprinciple of lis pendens is not applicable to the CLBproceedings. The object of doctrine of 'lis pendens' is(a) to thwart any attempts by the litigants to circumventthe jurisdiction of a Court, in which disputes inrelation to properties are pending, thereby removing thesubject matter of the litigation from the ambit of theCourt's power or frustrating its decree, as held by theSupreme Court in Rajendar Singh and others vs. Santa https://hcservices.ecourts.gov.in/hcservices/ Singh and others (supra); (b) to protect a property underlitigation, and © not to allow any litigant to giveothers any property under dispute causing prejudice tothe opposite party, in the light of the decision inChinnammal vs. Kuppusamy (supra), wherein the Courtdeclared that the sale of the properties by the litigantto several others, during the pendency of the suit, isnon-est in the eye of law. There is a statutory bar underSection 52 of the TP Act against alienation of anyproperty involved in a proceeding, without the authorityor the prior permission of the Court, as laid down inDhanalakshmi and others vs. P.Mohan and others (supra)and G.Krishnamoorthy vs. Sukumar and 4 others (supra).The privy council held in Puran Chand Nahatta vs.Monmothe Nath Mukherjee and others (supra) that anypurchaser of the property during the pendency of a suit,can enjoy the property subject to any order which may bepassed by the Court in the pending suit. The doctrine of'lis pendens', as elucidated by a number of decisionsdiscussed hereabove would lead to an irreversibleconclusion that the principle of Section 52 of the TP Actshall apply to the impugned sale transaction.Notwithstanding the applicability or otherwise of thedoctrine of 'lis pendens', the CLB has power underSection 397(2) to make such order as it thinks fit with aview to bring to an end (a) the matters complained ofunder Section 397(1), and (b) prevent the matterscomplained or apprehended under Section 398(1) as held inManish Mohan Sharma vs. Ram Bahadur Thakur Ltd. (supra)The jurisdiction of the CLB to grant appropriate reliefunder Section 397 of the Act is indisputably of wideamplitude and the CLB while exercising its discretion,not fettered by the terms of Section 402 of the Act, maygrant any relief, which may be warranted, in a particularsituation as held by the Supreme Court in Kamal KumarDutta and another vs. Ruby General Hospital Ltd. andothers (supra). The CLB, by virtue of Section 402 and 403has authority to regulate the management of a companyduring the pendency of a company petition under Sections397 and 398 as held in B.R.Kundra and others vs. MotionPictures Association and others and Chatterjee Petrochem(Mauritius) Co. and others vs. Halda Petrochemicals Ltd.and others (supra) and thereby, the CLB is empowered toexercise jurisdiction in relation to the disputed saletransaction, being an event which has occurred subsequentto the present company petition. There is absolutely nodoubt that the sale of properties during the pendency ofthe company petition without leave would frustrate anddefeat the very object of the pending action initiated bythe petitioners, seeking appropriate reliefs under https://hcservices.ecourts.gov.in/hcservices/ Section 397 and 398. In the light of the principle of lispendens as well as the unfettered powers enjoyed by theCLB, as reinforced and reiterated from time to time in anumber of decisions discussed supra, the CLB is notpowerless to go into the validity of the impugned saletransaction effected by the second respondent in favourof TVP and the further sale by TVP to Mangilal. It is onrecord that the properties comprising of 4.01 acres ofland at Gummidipundi were purchased as early as on15.05.1989 for a sum of Rs.2.50 lakhs. It was decided interms of a fax communication dated 14.02.1993 of thesecond respondent to sell the properties at a price ofRs.3 lakhs per acre, which would amount to Rs.12 lakhsfor the whole of properties. This would mean that theproperties valued Rs.12 lakhs as at February 1993 weresold after a period of 13 years during the pendency ofthe company petition on 05.01.2006 only for an amount ofRs.2.80 lakhs, which is highly improbable, in view of thegeneral increase in price of landed properties at therelevant time. I may point out that the purchaser,namely, TVP, who is none other than son of the poweragent of the second respondent, has further effected saleof the properties for Rs.4.12 lakhs in favour ofMangilal, gaining Rs.1.32 lakhs within a very short spanof time. The respondents did not choose to establish thecurrent market value of the properties by production ofany material, in the absence of which, the sale of entireproperties for a meagre profit of Rs.30,000/- after aperiod of 17 years cannot be considered to be a bonafidetransaction on the part of the second respondent or inthe paramount interest or for the benefit of the Company.The action of the second respondent in sale of propertiesfor Rs.2.80 lakhs to TVP, without either the consent ofthe Company and that too during the pendency of thecompany petition at a price not beneficial to theinterests of the Company is not only contrary to law, butalso burdensome and harsh with continuous and permanentadverse impact on the Company, notwithstanding thejurisdiction purforth by the respondents that theproperties could not be sold for the past several yearsand that there was no buyer for the properties. If theseacts of the respondents are not oppressive, I doubt verymuch, what else would constitute oppression in theaffairs of the Company, within the meaning of Section 397of the Act and therefore, the decision in NeedleIndustries (India) Ltd and others vs. Needle IndustriesNewey (India) Holding Ltd and others (supra) will not aidthe respondents. The further sale of properties by TVP infavour of Mangilal, in gross contravention of the CLBorder dated 27.11.2006 that ... ... "if the intended https://hcservices.ecourts.gov.in/hcservices/ respondent (TVP) deals with the property described in theapplication, by way of creation or any change orencumbrance or sale, the same shall be done only withleave of this Bench" in my considered view, is not-est inthe eye of law."25.The contention of the learned counsel for the respondents1 to 4, therefore, was that as regard to the ownership propertywas concerned, the same was admitted in the reply filed. Whereasthe sale in favour of the appellant was set aside, particularlyfor the reason that sale was hit by the principles of lispendense. Therefore, no ground is made out to challenge theimpugned order.26.In support of this contention, learned counsel for therespondents 1 to 4 placed reliance on the judgment of this Courtin the case of Narayana Venkatachalamiah vs. Putika Venkatiah andothers, AIR 1942 Madras 24, wherein, this Court was pleased tohold that the word "Court" in Section 52 of Transfer of PropertiesAct, is comprehensive enough to include the Registrar or thearbitrator appointed by him under the Madras Act. The contentionof the learned counsel for the respondents 1 to 4, therefore, wasthat the Company Law Board would also be the "Court", and theprinciples of lis pendense will be applicable.27.This contention cannot be disputed, but the question inthis case is as to whether the Company Law Board can set aside thesale deed. The provisions of Section 52 of the Transfer ofProperties Act was applied by this Court in a pending Civil suit,and not before the Registrar under the Madras Act. This judgment,therefore, has no application of the question in issue in thiscase.28.Learned counsel for the respondents 1 to 4, thereafter,placed reliance on the judgment of the Hon'ble Supreme Court inthe case of Kamal Kumar Dutta and another vs. Ruby GeneralHospital Ltd and others, (2006) 74 CLA 91 (SC) to contend that theDirectors of a Company are in a position of trustee. They shouldconform to probity and their conduct should be above suspicions.29.Reference on this judgment was placed to contend that theact of 6th respondent in getting the sale deed registered in hisname, was the act of breach of trust, which could not be sustainedin law, as he was acting as trustee on behalf of the company.30.This proposition again cannot be disputed. In the presentcase, admittedly, sale deed was executed in favour of the 6threspondent in the year 1989, while purchasing the land on behalfof the company. The property was mortgaged by the 6th respondent in https://hcservices.ecourts.gov.in/hcservices/ his individual capacity. The parties also came to know about theproperty being in the name of the 6th respondent, when the suit wasfiled and got settled by the 6th respondent, by redeeming theproperty. Therefore, it was not open to the company to challengethe sale, that too, in the Company Law Board, after lapse of 15years. It seems that the object of moving the Company Law Boardwas, that the respondents 1 to 4 thought that the civil suit forclaiming the property would not be competent, as the property notonly was registered in the name of 6th respondent, but he acted asthe absolute owner thereof throughout all these years, to theknowledge of the company and other Directors and members of thecompany. 31.Learned counsel for the respondents 1 to 4, thereafter,placed reliance on the judgment of the Hon'ble Delhi High Court inthe case of Lov Raj Kumar vs. Dr.Major Daya Shanker and others AIR1986 Delhi 364, to contend that even if the provisions of Section52 of the Transfer of Property Act, are not applicable, stillprinciple contained therein can be applied. 32.This contention of the respondents 1 to 4 deserves to benoticed to be rejected for the simple reason that the question inthis case is not whether lis pendense would apply or not, butwhether the sale in favour of the 6th respondent could bechallenged after lapse of so many years, that too before theCompany Law Board.33.On asking, learned counsel for the respondents 1 to 4 wasunable to read anything from the petition to show the date ofknowledge with regard to registration of sale deed in favour ofthe 6th respondent in stead of the company. Rather documents onrecord show that the respondent nos. 1 to 4 were knowing that theproperty was in the name of the 6th respondent as back as 10thDecember, 1991, that the property was mortgaged by the 6threspondent in favour of the Bank by way of collateral security byproclaiming himself to be the true owner of the property.34.Learned counsel for the respondents 1 to 4 has alsoplaced reliance on the judgment of the Hon'ble Delhi High Court inthe case of B.R.Kundra and others vs. Motion Pictures Associationand others, (1978) Vol.48 Comp.Cases. 564 to contend that theCompany Law Board is competent to deal with the situation arisingfrom events occurring during pendency of petition to contend, thatCourt can take into the transfer qua property of the company infavour of the appellant, during proceedings. 35.There can be no dispute with the proposition of law, butthe question in this case is whether the sale in favour of theappellant could be set aside, without setting aside the sale infavour of the 6th respondent and whether it fell within the https://hcservices.ecourts.gov.in/hcservices/ jurisdiction of the Company Law Board. This is where the CompanyLaw Board has gone wrong in granting relief to the respondent 1 to4, by treating the transfer to be for the first time in favour ofthe appellant, by completely ignoring that registered sale deedwas executed in favour of the 6th respondent in the year 1989itself. 36.Learned counsel for the respondents 1 to 4 also referredto above the decision of the Company Law Board, AdditionalPrincipal Bench, Chennai, in the case of V.G.Coelho and anothervs. Silver Cloud Estates (P) Ltd and others, to contend that delayand laches, on the part of a party, in approaching the Company LawBoard does not bar its transaction, if it has not caused anyprejudice to the respondents.37.The reliance of this also is misconceived, firstly, forthe reason that it is the decision of the Company Law Board, whichis not binding and secondly for the reason that in the presentcase, the respondents 1 to 4 challenged the sale in favour of the6th respondent after lapse of more than 15 years, which certainlycauses prejudice to the 6th respondent, as well as the appellant. 38.The finding of the Company Law Board, therefore, cannotbe sustained, as the reading of the impugned order shows that thelearned Company Law Board proceeded on presumption, that theproperty of the company has been sold to the appellant, during thependency of the proceedings, therefore, sale was hit by by theprinciples of 'lis pendense', which is fully wrong. The CompanyLaw Board does not have jurisdiction to set aside the sale infavour of the 6th respondent, as under Section 402, limitation todeal with the property to transfer is regarding the sale madethree months prior to filing of the company petition, or duringthe pendency of the proceedings.39.The Company Law Board failed to notice that the materialplaced on record showed that the respondents 1 to 4 was estoppedby their conduct to challenge the sale, as they permitted the 6threspondent to mortgage the property as collateral security byprojecting him to be the owner. Even in the suit filed in the year1995, the 6th respondent was shown to be the owner of the propertymortgaged to the Bank, but no steps were taken by the respondents1 to 4 to seek remedy of getting the sale set aside in favour ofthe 6th respondent. 40.The 6th respondent, being the registered owner, has soldthe property to the appellant in his individual capacity, and notas Director of the company.41.For the reasons stated above, this Company Appeal isallowed. The order passed by the Company Law Board is set aside.The petition, filed by the respondents 1 to 4 under Sections 397 https://hcservices.ecourts.gov.in/hcservices/ and 398 of the Companies Act, is ordered to be dismissed. Nocosts. Sd/- Asst.Registrar. /true copy/ Sub Asst.Registrar.arToThe Additional Principal BenchCompany law board, Chennai1 cc to Mr.V. John Acquinsas, Advocate, sr. 302351 cc to Mr.R. Varadarajan, Advocate, Sr. 305251 cc to MR.A.K. Ezhilmani, Advocate, Sr. 30356Comp.Appeal No.24 2009NG (CO)kk 9/5