IDBI Bank Limited v. The Administrator & Ors.

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 17-8-2009CORAMTHE HONOURABLE MR.JUSTICE M.CHOCKALINGAMANDTHE HONOURABLE MR.JUSTICE R.SUBBIAHO.S.A.No.284 of 2003IDBI Bank LimitedNow at Prestige PointNo.33, Haddows RoadChennai 600 006.(amended as per orderdated 2.9.2008 in CMP No.1444/2008).. Appellant vs1.The Administrator Kothari Orient Finance Limited Kothari Buildings 103, Uthamar Gandhi Salai Nungambakkam Chennai 600 034.2.The Official Liquidator Office of the OfficialLiquidator of Companies Chennai3.S.Ramaiah.. RespondentsOriginal side appeal preferred under Order XXXVI Rule 1 ofOriginal Side Rules read with Order XLI Rule 1 of C.P.C. and Clause15 of the Letters Patent against the order of this Court dated21.4.2003 in C.A.No.1208 of 2002 in C.P.No.179 of 2001.For Appellant: Mr.T.K.Seshadri Senior Advocate for M/s.Shivakumar & SureshFor Respondents: Mr.AR.L.Sundaresan Senior Advocate for Mr.S.R.Sundar for R2(O.L.)JUDGMENT(Judgment of the Court was delivered by M.CHOCKALINGAM, J.)This appeal challenges an order of the learned Single Judge ofthis Court made in Company Application No.1208 of 2002 an application https://hcservices.ecourts.gov.in/hcservices/ seeking a direction to the respondents to execute and register a saledeed in respect of the petition mentioned property pending thewinding up proceedings in C.P.No.179 of 2001 in respect of KothariOrient Finance Limited.2.The appellant/petitioner bank made an application underSec.446(2)(b) of the Companies Act seeking the said direction withthe averments that Kothari Orient Finance Limited was a constituentof the petitioner, which was provided with certain facilities duringthe year 1992; that the liability became irregular; that the companyowed to the petitioner a sum of Rs.60,55,055/- as on 31.3.1999; thatthe company approached the petitioner for one time settlement andoffered the property in question in respect of which execution ofsale deed is sought for at the market value; that the petitioner wasconstrained under the circumstances to enter into an agreement forsale dated 17.2.2000; that the consideration was fixed at Rs.105lakhs; that a sum of Rs.41 lakhs was paid by the petitioner asadvance at the time of agreement itself; that the balance wasentirely settled out of the amounts owed by the company to thepetitioner; that no objection certificate from the Income TaxDepartment dated 18.4.2000, was received; that on 6.11.2000, thepetitioner had taken possession of the said property; that as suchthe petitioner had rights to compel the winding up company to executeand register a sale deed; that on 6.11.2000, the transfer wascomplete; that the petitioner was also put in possession of the saidproperty; that only there was an obligation on the part of the vendorto execute and register the sale deed; that the sale deed could notbe registered since there was an income tax attachment which thepetitioner had taken up; that the company petition was filed onlyrecently; that however the transaction between the petitioner and thecompany was pursuant to the agreement dated 17.2.2000; that theentire advance was also paid and the balance was also adjusted; thatthe petitioner had not paid any other amount to the said company;that apart from that, the petitioner was neither aware of the incometax attachment which came to its light only at the time of thecompany having applied for the income tax clearance certificate atthe instance of the petitioner; that the petitioner had no knowledgeabout the financial crunch of the above company; that the petitionerwas a bonafide purchaser who was never aware of the arrears andclaims of the other creditors if any of the said company or theinterest of the other creditors; that under the circumstances, therewas no option than to approach this Court for suitable direction, andhence the application was to be ordered.3.The Administrator appointed by this Court filed his reportinter alia stating that the alleged agreement for sale dated17.2.2000 relied on by the petitioner, was a fraudulent preference infavour of the petitioner; that the petitioner is just as any othercreditor of the company; that when the company was in a financialcrunch, the petitioner appeared to have prevailed upon persons in themanagement of the company; that at that point of time, the petitionerentered into an agreement for purchase of the property at Rs.1.05crores and upon the said process had conveniently attempted to adjustthe outstanding receivable from the company while thousands of https://hcservices.ecourts.gov.in/hcservices/ creditors of the company whose moneys have been utilised for thepurpose of acquisition of the assets of the company, and who areentitled to due payments of the deposits, have been deprived of theirright to receive the deposits by due share of the proceeds in thesaid company; that it appears a sum of Rs.41 lakhs had been paid bythe petitioner as advance which was to be verified from the records;that even at the time when the agreement was alleged to have beenentered into the company was in default of payment to its depositorsand several other creditors; that even to the petitioner companythere was a due of nearly Rs.60 lakhs at that time and now thepetitioner company should not be allowed to state that they had noknowledge about the financial crunch of the company under winding up;that the mere fact of recording that the possession was delivered infavour of the petitioner would not in any way improve the case of thepetitioner; that it was nothing but a fraudulent preference done bythe persons in management of the company in favour of the petitioner;that from the records of the company, it would be quite clear thatonly a board resolution has been passed on 31.3.1999 authorising thedirectors of the Company to negotiate the business transaction andexecute the sale agreement and other documents; that no resolution ofthe general body of members of the company was passed; that undersuch circumstances, the very agreement for sale is null and voidwhich cannot be given any legal effect; that as any other creditorthe remedy open to the petitioner was against the company in themanner known to law for the recovery of the said dues and not in thecompany petition for winding up; that it should not be allowed sincethe agreement was a fraudulent preference and also collusive andapart from that, it would defeat the interest of thousands ofcreditors who have made deposits with the company under winding up,and under the circumstances the application was to be dismissed.4.The learned Single Judge after raising the question fordetermination, rejected the request of the appellant. Under thecircumstances, this appeal has arisen before this Court.5.Advancing arguments on behalf of the appellant, the learnedSenior Counsel Mr.T.K.Seshadri would submit that the order of thelearned Single Judge dismissing the application is erroneous andcontrary to the factual and legal position; that in the instant case,Kothari Orient Finance Limited who availed credit facilities from theappellant bank, was liable to pay Rs.60 lakhs and odd; but it wasunable to pay the same; that at that time, they came forward to makeone time settlement; that on 31.3.1999, a board resolution was alsopassed to sell the property pursuant to which it was Kothari OrientFinance Limited which sent a letter addressed to the appellant on2.2.2000, informing its intention to sell the property; that pursuantto the same, the agreement for sale was entered into on 17.2.2000wherein the total sale consideration is fixed at Rs.105 lakhs; andthat an advance of Rs.41 lakhs was paid by the bank. 6.The learned Senior Counsel pointing to the agreement for saleentered into between the parties, would submit that out of Rs.105lakhs, Rs.41 lakhs was paid as advance, and the rest of the amountnamely Rs.64 lakhs, was to be paid by the appellant bank to Kothari https://hcservices.ecourts.gov.in/hcservices/ Orient Finance Limited; that originally they could not; thatthereafter, no objection certificate from the Income Tax Departmentwas also sought for and issued on 18.4.2000; that it was KothariOrient Finance Limited which came forward with another letter dated30.10.2000, asking for the adjustment of the balance of Rs.64 lakhswhich amount it owed to the appellant; that the same was agreedpursuant to which on 6.11.2000, the possession of the property washanded over to the bank for adjustment of the loan amount towards thebalance of sale consideration; that all the documents pertaining tothe property were also handed over on the very day when possessionwas delivered in respect of which a letter was also given by KothariOrient Finance Limited to the appellant; that the petition forwinding up has been filed only on 2.7.2001; that it would be quiteclear that in the instant case, there was no need for theshareholders of the company to pass any resolution; and that theresolution made by the Board of Directors would be sufficient for theparties. 7.The learned Senior Counsel taking the Court to Sec.293 of theCompanies Act, would point out that a resolution by the shareholdersof the company is necessary in a case where the whole or substantialassets of the company were to be transferred; that in the instantcase only a meagre part was to be transferred, and under thecircumstances, the contention put forth by the other side before thelearned Single Judge that the resolution of the company was not madewas erroneous. 8.Pointing to Sec.431 of the Companies Act, the learned SeniorCounsel would submit that in the instant case, the sale agreement wasentered into on 17.2.2000 itself; that the company petition was filedon 2.7.2001, and thus the agreement was entered into one year andfour months before the presentation of the winding up proceedings ascontemplated under Sec.441 of the Companies Act; that under suchcircumstances, at no stretch of imagination, it could be called as afraudulent transfer; that even the learned Single Judge has notdetermined a question as to whether there was any collusion or not;but has raised the question as to whether the transaction was afraudulent preference or not; that in the instant case, all wouldclearly indicate that there was no fraudulent preference at all; andthat the learned Single Judge has erred in coming to the conclusionthat it was a fraudulent preference. 9.Added further the learned Senior Counsel that the appellanthad no knowledge about the financial crisis or crunch of KothariOrient Finance Limited at the relevant time; that apart from this, solong as it is not a fraudulent preference, it cannot be stated thatit was intended to defeat the interest of the depositors; that in thecase on hand, it cannot in any way affect the interest of thedepositors since the company is having all assets both movable andimmovable which were very well available; that under thecircumstances, it cannot be termed as fraudulent preference, andhence the order of the learned Single Judge has got to be set asideand a direction be issued for registration of the sale deed. https://hcservices.ecourts.gov.in/hcservices/

10.Contrary to the above contentions, it is contended by thelearned Senior Counsel for the second respondent that in the instantcase, Kothari Orient Finance Limited actually availed loan from theappellant bank; that as on 31.3.1999 the balance was actuallyRs.60,55,055/-; that apart from that, the appellant bank should havegone into the auditor's report and financial situation; that underthe circumstances, the appellant cannot be allowed to state that theydid not know about the financial crunch under which it was put; thatin the case on hand, the agreement was entered into on 17.2.2000;that as per the agreement, the sale consideration was fixed at Rs.105lakhs; that advance is also shown as Rs.41 lakhs; that the agreementwould clearly indicate that the possession and documents were to behanded over only at the time of execution of the sale deed; but inthe instant case, no sale deed was executed at all; that it ispertinent to point out that the bank was actually in possession ofthe property already, and therefore it was only a creation ofrecords; and that once it was clearly stipulated that handing over ofdocuments and possession should take place at the time of executionof the sale deed, there was no need for the management of the companyto hand over either the possession or the documents or give a lettertherefor on 6.11.2000. 11.Added further the learned Senior Counsel pointing to Sec.54of the Transfer of Property Act, that in a given case like this,entering into an agreement for sale will not create any right infavour of the appellant; and that the agreement for sale available inthe hands of the appellant would not clothe or create any right onthe appellant. The learned Senior Counsel would further add that itis the only immovable property available in the hands of KothariOrient Finance Limited and all others are liquid assets; that theentire balance as on 31.3.1999 is Rs.60,55,055/-; that Kothari OrientFinance Limited was not only liable to meet the demands of thecreditors who have made deposits, but also other banks such as StateBank of India, Small Industrial Development Bank, Bank of Madura andother Banks and they are liable to make payment in crores; that ifthe appellant bank is allowed to snatch away the property pursuant tothe agreement which was collusive and fraudulent preference, theinterest of the depositors and banks would be defeated; that it wouldbe against the public interest; that in appraisement of the abovecircumstances and legal position, the learned Single Judge has madethe order, and hence it has got to be sustained.12.The Court paid its anxious consideration on the submissionsmade and also looked into the materials and in particular the orderunder challenge.13.As could be seen above, the case of the appellant was thatKothari Orient Finance Limited, the company under winding up, owedRs.60,55,055/- to the appellant as on 31.3.1999; that pursuant to aboard resolution made on 31.3.1999, they sent a letter on 2.2.2000expressing its willingness to sell the property in question andentered into an agreement on 17.2.2000 whereby the consideration forsale was fixed at Rs.105 lakhs; that an advance of Rs.41 lakhs was https://hcservices.ecourts.gov.in/hcservices/ paid by the bank; that after obtaining the no objection certificatefrom the Income Tax Department, a letter has also emanated from thewinding up company that the balance could be adjusted in the saleconsideration and also handed over possession and also the documentsof title on 6.11.2000; that the contract of sale was partlyperformed; that it was also nearly about one year and four monthsprior to the winding up proceedings and under the circumstances, theAdministrator should be compelled to execute a sale deed. Thecounter plea put forth by the Administrator was that the agreementitself was collusive and a fraudulent preference and was violative ofthe provisions of the Companies Act. On consideration of the factualand legal position and the contentions put forth on either side, thisCourt is afraid whether it can order for execution of the sale deedas asked for by the appellant. 14.The appellant was a bank from whom the company under windingup availed credit facilities and owed a sum of Rs.60,55,055/- as on31.3.1999, and hence as a responsible banking institution, theappellant cannot be allowed to state that it had no idea about thefinancial crisis of the company under winding up since the winding uppetition has arisen in the year 2001. The entire case of theappellant rests on the agreement dated 17.2.2000, which was executedby the Director of Kothari Orient Finance Limited on the one side andthe appellant bank on the other whereby consideration was fixed atRs.105 lakhs, and a letter dated 6.11.2000, on which date thepossession of the property was handed over along with the documentsof title. At this juncture it would be more apt and appropriate tolook into the alleged agreement for sale. Clauses 1 and 6 of thealleged agreement for sale read as follows:"1.That the PURCHASER has paid a sum of Rs.41 lakhs (Rupeesforty one lakhs only) vide pay order No.177674, dated 17thFebruary 2000 drawn on The United Western Bank Ltd.,Broadway Branch, to the VENDOR as and by way of advancetowards sale consideration on signing of this Agreement andthe balance of the purchase money amounting to Rs.64 lakhs(Rupees sixty four lakhs only) shall be paid at the time ofcompletion of the transaction....6.The VENDOR has further agreed to produce necessarydocuments, title deeds, Resolutions as required by theCompanies Act 1956 to prove its clear, marketable title andits powers to execute Sale Deed in respect of Scheduleproperty more fully described hereunder to the PURCHASER toenable them to get necessary legal opinion to prepare theSale Deed."15.From the above, it is quite clear that the purchaser has paida sum of Rs.41 lakhs, and Rs.64 lakhs shall be paid at the time ofcompletion of transaction. The learned Senior Counsel pointing tothese two clauses, would submit that it was originally agreed thatthe balance of consideration of Rs.64 lakhs excepting the advance ofRs.41 lakhs, was to be paid at the time of completion of the https://hcservices.ecourts.gov.in/hcservices/ transaction. On the contrary, it was averred in paragraph 4 of theapplication; "A sum of Rs.41 lakhs was paid by the Applicant asadvance at the time of entering into the agreement. The balance wasentirely settled out of the amounts owed by the company to theApplicant." Nowhere it was stated in the application that thebalance of Rs.64 lakhs was liable to be paid at the time of executionof the sale deed. Thus the contention put forth by the appellant'sside that after the agreement was entered into, there was a letteremanated from the company on 30.10.2000 seeking adjustment of theliabilities to the balance of sale consideration. 16.Now at this juncture, it is pertinent to point out that evenaccording to the appellant, the company under winding up owed a sumof Rs.60,55,055/- as on 31.3.1999. The agreement was entered into on17.2.2000. In such circumstances, after getting an advance of Rs.41lakhs, the liabilities owed by the winding up company could have beenadjusted with the balance of consideration at that time itself.There was no need for making such a clause in the agreement as if thebalance of consideration of Rs.64 lakhs was liable to be paid by theappellant to Kothari Orient Finance Limited, company under windingup, who was actually under financial crisis. The learned SeniorCounsel for the appellant brought to the notice of the Court thateven this Rs.41 lakhs of advance had not gone to the company, and outof this amount, Rs.25 lakhs the major part, had actually gone to theDirectors and not to the Company. 17.The contention put forth by the learned Senior Counsel forthe appellant that it is not a case where the resolution of thecompany was necessary; but, the board resolution which was made on31.3.1999 for sale of the property was sufficient cannot becountenanced in view of the settled legal position. Sec.293 (1) ofthe Companies Act speaking of the restrictions on powers of Boardreads thus:"293.(1) The Board of directors of a public company, or ofa private company which is a subsidiary of a publiccompany, shall not, except with the consent of such publiccompany or subsidiary in general meeting,-(a) sell, lease or otherwise dispose of the whole, orsubstantially the whole, of the undertaking of the company,or where the company owns more than one undertaking, of thewhole, or substantially the whole, of any suchundertaking;"18.The very reading of the above provision would clearly place arestriction on the powers of the Board that the Board of Directors ofthe public company should not sell, lease or otherwise dispose of thewhole, or substantially the whole, of the undertaking of the company,or where the company owns more than one undertaking, of the whole, orsubstantially the whole, of any such undertaking without the consentof the public company. In the instant case, it is an admittedposition that there was no resolution made by the company. The Boardof Directors of the winding up company had made a resolution on31.3.1999 authorising one of the directors to negotiate for sale of https://hcservices.ecourts.gov.in/hcservices/ the property. The learned Senior Counsel for the second respondentbrought to the notice of the Court that this was the only immovableasset in the hands of the winding up company and all others are onlyliquid assets. When a question was raised to the appellant bank, theappellant bank on the contrary could not assert whether the companyunder winding up had got any other immovable property at all. Insuch circumstances, the contention put forth by the learned SeniorCounsel for the appellant that the property which is covered underthe agreement for sale is neither whole nor substantial asset cannotbe countenanced. If it was the only immovable asset available in thehands of the winding up company which was under financial crisis, andit was to meet the demand of number of banks referred to above andalso thousands of creditors, it would not be just or worthwhile toallow the sale transaction in question. 19.Apart from the above, what was all available in the hands ofthe appellant is only an agreement for sale dated 17.2.2000, and thisagreement by itself will not clothe the right. Needless to say thatan agreement for sale does not by itself create any interest in orcharge on the immovable property covered under the agreement forsale. It was also further contended by the appellant's side thatthere was a part performance of the agreement under Sec.53-A of theTransfer of Property Act, and under such circumstances, it becamenecessary to issue a direction to the Administrator to execute a saledeed. This contention cannot be countenanced in view of the agreemententered into between the parties and also the conduct of the partiesto the agreement. Clauses 8 and 10 of the agreement entered into on17.2.2000 read as follows:"8.The VENDOR has agreed to deliver all original title deedsand vacant possession of the schedule mentioned property onthe date of registration of Sale Deed to the PURCHASER....10.If the PURCHASER fails to complete the purchase of thesaid property within the time aforesaid, the VENDOR willhave the option to exercise either to refund to thePURCHASER, the advance of Rs. 41 lakhs (Rupees forty onelakhs only) without any interest, or exercise its right toenforce specific performance of the agreement by institutinglegal proceedings."20.The very reading of the above clauses would clearly indicatethat the Director of the company under winding up has agreed todeliver the original title deeds and also the vacant possession ofthe property only at the time of the registration of the sale deed tothe purchaser. In the instant case, it is contended that on6.11.2000, the possession of the property was handed over with allthe documents of title. Thus it would clearly indicate the intentionof the management of the company under winding up to make an unjustand preferential treatment in favour of the appellant. 21.Finally, the learned Senior Counsel for the appellant placingreliance on Section 531 of the Companies Act, would submit that it https://hcservices.ecourts.gov.in/hcservices/ cannot be termed as a fraudulent transfer since the petition forwinding up was filed six months after the transaction in question wasentered into between the parties; that the winding up proceedingswould commence at the time of presentation of the petition as perSec.441 of the Companies Act; that in the instant case, CP No.179 of2001 for winding up was presented on 2.7.2001; and that the agreementwas entered into even as early as 17.2.2000 nearly about one year andfour months earlier. Placing reliance on Sec.531 of the CompaniesAct, it is further contended by the appellant's side that thetransaction cannot be termed as a fraudulent preference since it wasdone six months prior to the presentation of the petition for windingup, and under the circumstances it cannot be stated that thetransaction was invalid because it was a fraudulent preference. Thiscontention cannot be countenanced. Section 531 (1) of the CompaniesAct speaking of the fraudulent preference reads as follows:"531. (1) Any transfer of property, movable or immovable,delivery of goods, by or against a company within sixmonths before the commencement of its winding up which, hadit been made, taken or done by or against an individualwithin three months before the presentation of aninsolvency petition on which he is adjudged insolvent,would be deemed in his insolvency a fraudulent preference,shall in the event of the company being wound up, be deemeda fraudulent preference of its creditors and be invalidaccordingly:"22.From the above provision, it is clear that if any transfer ofproperty is effected six months prior to the presentation of thewinding up proceedings, it cannot be termed as a fraudulent transfer.In the instant case, what was available in the hands of the appellantwas only an agreement for sale dated 17.2.2000, as referred to above.Under Sec.54 of the Transfer of Property Act, it would not clothe himany right or interest over the said property. So long asregistration of sale deed is not done, it cannot be said to be atransfer of property in the eye of law. Merely because thepossession and the documents were handed over, it cannot also clothehim any right to have the benefit under Sec.531 of the Companies Act.Had it been true that the handing over of documents and possessionwas made on 6.11.2000, and a letter therefor was also made that dayitself as contended by the appellant's side, the long and unexplaineddelay in filing the company petition could not have occasioned.Admittedly, the company petition was filed on 2.7.2001. This wouldbe indicative of the fact that the said letter has been createdpending the proceedings and also in order to avoid the transactionbeing called as a fraudulent preference. Thus, all the above factsand circumstances and also the conduct of the parties would clearlyindicate that in appraisement of the financial crisis, a resolutioncame to be passed by the board of directors authorising one of thedirectors who entered into an agreement for sale of the only oneimmovable property in favour of the appellant bank which, in theconsidered opinion of the Court, cannot but be termed as a fraudulentpreference, and that too when there are number of banks anddepositors in thousands to whom the company under winding up owed https://hcservices.ecourts.gov.in/hcservices/ crores of money. This Court is unable to notice any infirmity eitherfactually or legally, and hence the order of the learned Single Judgehas got to be sustained.23.In the result, this original side appeal is dismissedconfirming the order of the learned Single Judge. The parties aredirected to bear their costs. Sd/- Asst.Registrar/true copy/ Sub Asst.Registrar nsv/To:The Sub Assistant Registrar,Original Side,High Court, Madras-104.+1 cc to Mr.Shivakumar, Advocate, SR.No.39564+1 cc to Mr.S.R.Sundar, Advocate, SR.No.39070 OSA No.284 of 2003MBS {CO}TP/27.8.2009.