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Forbes And Company Limited … vs Coromandel Garments Ltd on 13 July, 2018

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION

COMPANY APPLICATION NO.341 OF 2016
WITH
OFFICIAL LIQUIDATOR’S REPORT NO.84 OF 2017
WITH
COMPANY APPLICATION (L) NO.85 OF 2018
IN
COMPANY PETITION NO.505 OF 2006

Forbes and Company ….Applicant
IN THE MATTER BETWEEN :
Bord for Industrial and Financial
Reconstruction (B.I.F.R.) ….Petitioner
Vs.
Coromandel Garments Ltd. Ors. ….Respondents
—-
Shri Girish Godbole a/w. Shri Sajjed Shamim I/b. Shamim and Co. for
applicant in CA/341/2016.
Ms. Sunanda Kumbhat for applicant in CAL/85/2018.
Shri J.P. Sen, senior advocate a/w. Shri Shushrit Desai for Official
Liquidator.
Shri Mahendhar Aithe, Company Prosecutor for Official Liquidator present.
—-
CORAM : K.R.SHRIRAM, J.
RESERVED ON : 20th JUNE 2018
PRONOUNCED ON : 13th JULY 2018
P.C.:

1 This application is filed seeking leave of this Court under

Section 446 of the Companies Act 1956 to execute the Consent Decree

dated 9th July 2009 obtained in suit no.164 of 2009 by applicant against

Coromandel Garments Limited (in liquidation). Coromandel Garments

Limited (in liquidation) is hereinafter referred to as the Company. Official

Liquidator has, on behalf of the Company, filed a reply opposing grant of

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such leave. Official Liquidator has also filed Official Liquidator’s Report

No.84 of 2017 seeking various directions from this Court including, inter

alia, that the Consent Decree dated 9th July 2009 be set aside and that

applicant be directed to bring back, along with interest, amounts received by

it from out of the sale proceeds of one of the Company’s properties. The

company application has also been opposed by a few unsecured creditors of

the Company (in liquidation) who have, in this behalf, filed company

application (lodging) No.85 of 2018 (hereinafter ‘Interveners’). The counsel

appearing for Interveners basically supplemented the submissions of the

counsel for Official Liquidator.

2 By its order dated 2nd June 1998, the Board for Industrial and

Financial Reconstruction (BIFR) declared the Company (in liquidation) a

sick unit under the provisions of The Sick Industrial Companies (Special

Provisions) Act, 1985 (SICA) and appointed Bank of Baroda as the

Operating Agency for framing a scheme for revival of the Company. The

said order contained several directions regarding such a scheme including,

inter alia, that “Any shortfall in cash-flow projection shall be met by the

promoters by bringing in interest-free-funds and not by diversion of working

capital.” The Company/Promoters were also directed under Section 22A of

SICA not to dispose off any fixed or current assets of the Company without

the consent of the BIFR.

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3 As part of the revival process, the Promoters were required to

make a contribution of Rs.400 lakhs to pay off the workers of the Company

under a voluntary retirement scheme floated by it. The Company sought the

approval of the BIFR to the creation of a second charge on its mortgaged

assets in favour of the Promoter Group Company/Companies bringing in the

said contribution. By an order dated 16 th September 1999, BIFR sanctioned

the proposed creation of the second charge and recorded the consent of

Bank of Baroda, the first charge holder, in this behalf.

4 Pursuant to the said order, applicant (then Forbes Gokak

Limited) appears to have entered into a Loan Agreement dated

21st September 2000 with the Company. The purpose of the loan, the terms

on which it was granted and the relationship between applicant and the

Company were reflected in the Loan Agreement, the salient portions of

which are reproduced hereinbelow:

“…Whereas the Borrower is a wholly owned subsidiary of The Swadeshi
Mills Co. Ltd. having its registered office at Swadeshi Mills Compound,
Sion, Mumbai – 400 022 and whereas The Swadeshi Mills Co. Ltd. is a
Sick Company registered with the Board for Industrial and Financial
Reconstruction (BIFR) and whereas the Borrower is also a sick company
registered with BIFR.

And whereas the Lender holds a significant portion of the share capital of
the Swadeshi Mills Co. Ltd. and whereas the Borrower has finalized a
scheme of VRS for its employees and for the purpose, has entered into a
settlement with the Unions of its employees and whereas the Borrower
has made an application to BIFR for availing of loan from the Lender
and BIFR had approved availing of such Loan and providing security and
the security for such loan, is agreed to by and between the Lender and
the Borrower as detailed in Table ‘A’ hereto.

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It is agreed to by and between the Lender and the Borrower as under:

3. The amount of the loan provided under the terms of the agreement
together with the interest and all other costs recoverable by the Lender
from the Borrower, shall be secured by a charge which is hereby provided
by the Borrower to the Lender as set out in table “A” hereto.

4. The loan together with interest shall be repayable by the Borrower to
the Lender as per such schedule as may be approved by BIFR. Pending
issuance order by BIFR, the same shall be payable immediately on call by
the Lender.

5. The loan shall carry interest at the Bank Rate. However, this will be
subject to the provisions of Sick Industrial Companies (Special
Provisions) Act, 1985, order of BIFR and such instructions as may be
issued by the operating agency viz. Bank of Baroda and BIFR.

6. The Borrower owns 1/3rd undivided shares of the property at
Pachgani. The Borrower agrees that it shall not create any charge on the
said property without prior approval of the Lender.”

….”

5 The asset in respect of which a second charge was created in

favour of applicant Company was land at Plot No.21, Industrial Estate,

Ambattur, Tamil Nadu together with the structures standing thereon

(Ambattur property). The Company also appears to have executed a

Supplemental Memorandum of Deposit of Title Deeds, inter alia, recording

the creation of the second charge in respect of the Ambattur property in

favour of applicant. Further, the said second charge also appears to have

been recorded in the register of charges maintained by the Registrar of

Companies in this behalf.

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6 Applicant appears to have advanced a sum of Rs.3.25 Crores to

the Company under the said Loan Agreement. The remaining amount of

Rs.75 lakhs, appears not to have been disbursed. Meanwhile, attempts to

revive the Company failed. By its order dated 9 th April 2002, BIFR confirmed

that it would be in the public interest to wind up the Company. This order

was communicated to this Court on 7th May 2002. On 31st October 2002, the

Appellate Authority for Industrial Financial Reconstruction (‘AAIFR’)

dismissed an appeal filed by the Company challenging the order dated

9th April 2002 of the BIFR recommending that it be wound up. However, the

BIFR recommendation was set aside by an order dated 23 rd February 2006

passed by the Hon’ble Madras High Court in Writ Petition Nos.34837 and

34838 of 2003 filed by the Company. The matter was remanded back for

re-consideration to the BIFR. By the said order, the Hon’ble Madras High

Court sanctioned the sale of the Ambattur property for a sum of Rs.27.86

Crores to one Sugal and Damani Lottery Agency Private Limited. The sale

proceeds were deposited with Bank of Baroda in a no lien account.

7 On 29th June 2006, this Court passed an order directing that the

communication dated 7th May 2002 of the BIFR recommending that the

Company be wound up be treated as a petition. By the said order, the

petition was admitted and Official Liquidator, High Court, Bombay was

appointed as Provisional Liquidator of the Company. The order of the

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Hon’ble Madras High Court setting aside the recommendation does not

appear to have been brought to the notice of this Court.

8 On 22nd January 2007, BIFR passed a fresh order

recommending that the Company be wound up. The said order was

communicated to this Court on 5th July 2007. On 25th September 2007,

Appeal No.58 of 2007 filed by the Bank of Baroda against the order dated

22nd January 2007 of BIFR was dismissed by AAIFR. Appeal No.85 of 2007

filed by the Company was withdrawn. These orders were not further tested.

As such, the recommendation for winding up the Company became final.

9 By their letter dated 30th April 2008, applicant’s advocates

called upon the Company to repay the said sum of Rs.3,25,00,000/-

“together with interest as agreed in terms of the Loan Agreement dated

29th September 2000…”. By its reply dated 28th May 2008, the Company

described the demand as being ‘unreasonable and not sustainable in law.’ In

doing so, the Company, inter alia, also noted that the Loan Agreement did

not provide for any rate of interest, that the BIFR had not permitted any

interest to be charged and that applicant was on that account disentitled to

claim any interest under the said Agreement. The letter referred to the order

dated 29th June 2006 appointing Provisional Liquidator and claimed that the

Company was proposing to file a company application to recall the said

order. However, in the meanwhile, on account of the appointment of

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Provisional Liquidator, the Company pleaded its inability to make any

preferential payment to any creditors including applicant.

10 On 28th August 2008, the Company filed company application

(L) No.951 of 2008 before this Court praying that the order dated 29 th June

2006 be recalled. By an order dated 16th October 2008, this Court recalled

the order dated 29th June 2006. In doing so, it noted:

“It now transpires that recommendation of BIFR was questioned by way
of writ petition before Madras High Court, which in turn has set aside
the opinion of the BIFR that the Company is incapable of being revived…
It necessarily follows that the basis on which this Court proceeded to pass
order dated 29th June, 2006 was non-existant…In the circumstances, the
appropriate course is to recall the Order dt. 29th June, 2006….”

While the company application made a reference to the

subsequent recommendation of the BIFR dated 22nd January 2007 for

winding up the Company, the same does not appear to have been brought

to the notice of the Learned Company Judge at the time of the hearing of

the company application. As for the appeal filed by the Company against the

recommendation of the BIFR and subsequently withdrawn, no reference was

made to it either in the company application or in the course of the hearing.

11 Shortly thereafter, on 30th December 2008, applicant filed Suit

No.164 of 2009 before this Court, inter alia, for a declaration that the

Company owed applicant a sum of Rs.13,92,45,091/- along with further

interest thereon, for a declaration that the said amount was secured by a

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second charge on the Ambattur property and for a declaration that the

Ambattur property and its sale proceeds stand duly charged to secure

applicant’s alleged dues. The said figure of Rs.13,92,45,091/- was arrived

at, as evident from the particulars of claim annexed to the plaint, by

computing interest at a rate of 18% p.a. compounded quarterly. On

31st December 2008, applicant filed Notice of Motion No.372 of 2009 in the

said suit seeking, inter alia, a decree on admission to the extent of

Rs.3.25 Crores as well as appointment of Court Receiver, High Court,

Bombay as Receiver in respect of the Satara property described in Exhibit ‘B’

to the plaint. This was a property in respect of which no charge had been

created in favour of applicant under the Loan Agreement.

12 By its reply dated 4th March 2009, the Company sought to resist

the grant of the said reliefs. In doing so, the Company repeatedly asserted

that applicant’s claim for interest was not sustainable, in view of no rate of

interest having been agreed upon in the Loan Agreement and no rate having

been stipulated by the BIFR.

13 By an order dated 12th February 2009, this Court declined to

appoint Court Receiver in respect of the Satara property, but merely

restrained the Company from creating any third party rights in respect

thereof. On 9th June 2009, when Suit No.164 of 2009 appeared on board, a

submission was made on behalf of the parties that they proposed to file

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consent terms and that the dispute had been amicably resolved. The suit

was accordingly stood over to 7th July 2009 for filing consent terms.

14 On 9th July 2009, applicant and the Company tendered consent

terms and a decree was passed in respect thereof. Under the said consent

terms, the Company submitted to a decree on admission in the sum of

Rs.12,49,27,897/- together with interest thereon @ 15.76% p.a. with

quarterly rests from 8th June 2009 till payment and/or realization. It was

stipulated that if the Company paid applicant a sum of Rs.10,00,00,000/-

within 3 months from the date of the consent terms, the decree would stand

fully satisfied and that in the event of default to do so within the period

stipulated, the entire decretal amount would become due and payable

forthwith. The consent terms also declared that the decretal amount would

be secured by the Ambattur property in respect of which a second charge

had been created in favour of applicant under the Loan Agreement. Under

the consent terms, the 1/3rd undivided interest of the Company in the Satara

Property stood “attached forthwith in execution of the decree”. The said

purported consent terms was signed on behalf of the Company by one

Shri R. Venkateshwaran. He did so on the strength of a Power of Attorney

dated 9th August 2002. The said Power of Attorney authorized the said

Shri Venkateshwaran to do various acts on behalf of the Company as

stipulated in the Power of Attorney. The Power of Attorney, however,

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provided that the exercise of the said powers shall be “subject to the prior

sanction of the Board and subject to such restrictions, conditions and limits

as may be imposed by the Board or were permitted by a committee of the

Board”. While the said Power of Attorney conferred on

Shri Venkateshwaran, subject to the limitations referred to hereinabove, the

power to commence, prosecute, enforce, defend, answer or oppose various

legal proceedings and to represent and appear for the Company before the

Government of India and statutory authorities, it did not confer upon him

specifically the power to compound or compromise any action or proceeding

to which the Company may be a party.

15 By an order dated 27th August 2009, on an application moved

by Kotak Mahindra Bank Limited (claiming rights as a purported assignee of

Bank of Baroda), this Court admitted winding up proceedings against the

Company and once again appointed Official Liquidator, High Court, Bombay

as its Provisional Liquidator. In doing so, the Learned Company Judge

referred in the following terms to the failure of the Company to bring to the

notice of the earlier Company Judge the recommendation dated

22nd January 2007 of the BIFR :

“xi) On 16th October 2008 an application being application (lodging)
No. 951 of 2008 was filed before this Court by the respondent seeking
setting aside of the order passed by this Court on 29th June, 2006 on the
ground, that at the time when the said order was passed, the appeal of
the respondent was pending before the AAIFR, which application was
allowed. However, it appears that it was not pointed out to the Court

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that BIFR had again recommended on 22nd July 2007 that the
respondent should be wound up and that the appeal preferred therefrom
by the company was also withdrawn by the company on 25 th September
2007. If this would have been pointed out to this Court, this Court would
surely have again passed a fresh order admitting the petition and
appointing the provisional liquidator of the respondent.

2. Applicants have, therefore, submitted that appropriate orders be
passed against the respondent.

3. The learned Advocate for the respondent states that all the required /
necessary facts were set out in the affidavit in support of the application
pursuant to which the order dated 29 th June, 2006 was set aside by an
order dated 16th October 2019. In my view, the duty of an Advocate does
not end with setting out of facts in Affidavits. The Advocates appearing
before the Court are duty bound to draw the attention of the Court to
facts which are relevant for the purpose of deciding an issue by the Court
which may have been set out in the affidavit/s of their clients.”

This Court directed that the recommendation of the BIFR dated

22nd January 2007 be treated as a petition for winding up and that the same

stand admitted, returnable on 10th November 2009. This order was followed

by a further order dated 24 th June 2011 whereby the Company was wound

up. At the hearing of winding up, the advocate appearing for the Company

brought to the notice of the Court the purported liability of the Company

towards applicant to the tune of Rs.12.49 Crores and further interest

thereon. Sometime in 2016, Kotak Mahindra Bank, applicant and Bank of

Baroda arrived at an understanding for distribution of the sale proceeds

received from the Ambattur property. In view of Official Liquidator’s

opposition to the said consent terms or in any event, his unwillingness to

accept it, by an order dated 26th February 2016, the Learned Presiding

Officer of the Debts Recovery Tribunal (DRT) directed Official Liquidator to

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seek directions from this Court regarding the proposed compromise.

16 Aggrieved by the said order, Kotak Mahindra Bank Limited filed

Appeal No.80 of 2016 before the Debts Recovery Appellate Tribunal, Delhi

Bench (DRAT, Mumbai being unavailable). By an order dated 23 rd March

2016, the said appeal was allowed and the matter was remitted for

reconsideration to the DRT, Mumbai. However, the said consent terms were

not tendered to, or taken on record by the DRT. Kotak Mahindra Bank

Limited chose the alternative course of filing company application (L)

No.258 of 2016 before this Court seeking directions in the matter. By an

order dated 21st April 2016, this Court directed that a sum of

Rs.1,33,64,389/- out of the sum of Rs.51 Crores (approximately) lying with

Kotak Mahindra Bank Limited be paid over to Official Liquidator to secure

the claim of the workmen of the Company (in liquidation), with the balance

to be distributed in the ratio of 80% to Kotak Mahindra Bank and 20% to

applicant herein. However, the order noted that this would be an interim

arrangement and “subject to final outcome of the issue on status of the

creditors of the Company in Liquidation including Kotak Mahindra Bank

Limited.” The order also noted that it was being passed “at the instance of

applicant and Respondent No.3 and without prejudice to the rights and

contentions of Official Liquidator”, ‘Applicant’ and ‘Respondent No. 3’ being

Kotak Mahindra Bank and applicant herein, respectively. At this stage, it is

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stated, the papers and proceedings in Suit No.164 of 2009 filed by applicant

against the Company in which consent terms had been taken were not

available with Official Liquidator. Official Liquidator had, accordingly, not

raised before either the DRT or this Court any issue regarding the legality of

the consent terms nor was such an issue considered or decided by either

forum.

17 Pursuant to the order dated 21st April 2016, applicant received

a sum of Rs.10,17,03,493/- towards its 20% share in the distribution of sale

proceeds. Meanwhile, applicant had filed the present company application

no.341 of 2016 seeking the leave of this Court under section 446 of the

Companies Act 1956 to proceed in execution to recover the balance decretal

amount alleged to be due to it. The company application proceeds on the

basis that applicant has a charge over the Satara property and as a secured

lender is entitled to priority over all other creditors. On an application being

made on behalf of Official Liquidator, this Court was pleased, by an order

dated 4th January 2017, to direct applicant to furnish Official Liquidator

with a copy of the papers and proceedings in Suit No.164 of 2009 in which

the Consent Decree came to be passed. It is on examining these papers and

proceedings, Shri Sen submitted that Official Liquidator formed the view

that the Consent Decree constituted a fraudulent preference and was thus

invalid. Official Liquidator accordingly filed Official Liquidator’s Report

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No.84 of 2017 seeking directions in this behalf from this Court as well as

opposing the grant of leave under Section 446 of the Companies Act, 1956

to execute the Consent Decree.

18 Shri Godbole for applicant submitted as under :

(a) Official Liquidator cannot seek to impugn the Consent

Decree by way of a report filed before this Court or by a reply filed in the

application seeking leave under Section 446;

(b) Even if the Consent Decree could be challenged by way of

an Official Liquidator’s Report, the directions sought by Official Liquidator

from this Court are clearly barred by time.

(c) The defence/plea of fraudulent preference raised by Official

Liquidator on the assumption that the Decree was allegedly obtained by

fraud and was therefore nullity is barred by limitation. This is because

Official Liquidator had knowledge of the Decree at least on 26 th August

2010 and in any case on 24th June 2011. Official Liquidator could have and

ought to have filed suit under Section 31 of the Specific Relief Act 1963 for

rescission of the Decree within 3 years from the date of the knowledge. Such

suit could have been governed either by Article 58 or 59 or 113 of the

Schedule II of Limitation Act 1963, which would be 3 years and the starting

point under Article 58 and Article 113 would be “when the right to sue first

accured”, under Article 59 would be “when the facts entitling the Plaintiff to

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have the instrument or decree cancelled or set aside or the contract rescinded

first becomes known to him”. The plea of illegal decree having been raised

for the first time on 11th April 2017 by filing Official Liquidator’s Report

No.84 of 2017 is clearly beyond 3 years. Even otherwise, Official Liquidator

was a party in O.A. No.27 of 2008 filed by Kotak Mahindra Bank Limited in

which DRT passed order dated 21 st May 2009 directing impleadment of

applicant as one of the creditors of the Company. The limitation for

applying to the Company Court for holding that the Decree is a fraudulent

preference or filing a suit under Section 31 of the Specific Relief Act 1963

would therefore first commence on 27th August 2010, then on 24th June

2011.

(d) In any case, the present application is not a collateral

proceeding where the defence of the alleged nullity of the Decree can be

raised by Official Liquidator. Shri Godbole relied upon Prem Singh Ors.

V/s. Biebal Ors.1.

(e) Further assuming without admitting, that Official

Liquidator’s Report seeking reliefs against applicant is not a suit, but is in

the nature of an application made to the Company Court under the

Company (Court) Rules, 1959, the same is nevertheless an application made

to Court and hence, is governed by Article 137 of the Schedule of Limitation

Act 1963. Even in such cases, unless, such application is made within the

1. (2006) 5 SCC 353

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period of limitation prescribed by the said Article, the same cannot be

entertained by the Court and the Karnataka High Court in the case of

Official Liquidator of Mysore Kirlokar Limited, Bangalore V/s. Kirloskar

Institute of Advanced Management Studies2 has held that the contention

that the Limitation Act 1963 cannot be applied to a report/application made

by Official Liquidator is not tenable.

(f) While interpreting Article 59 of Limitation Act, the Hon’ble

Supreme Court in the case of Md. Noorul Hoda V/s. Bibi Raifunnisa

Ors.3 has clearly held that a suit filed for setting aside Decree obtained by

fraud is governed by Article-59, the starting point of limitation is the date of

knowledge of alleged fraud, the remedy of plaintiff is to get a decree to set

aside by filing a suit under Section 31 of the Specific Relief Act 1963.

(g) Applicant has received 20% of the sale proceeds of the

Ambattur property pursuant to directions issued by DRT, in the course of

which proceedings Official Liquidator did not raise any contention that there

was any infirmity in the Consent Decree dated 9 th July 2009. Official

Liquidator was thus precluded from seeking refund of the amounts so

withdrawn.

(h) This Court, in any event, has no jurisdiction to consider

entertaining prayer – (b) in this OLR. Bank of Baroda had first charge by

2. (2015) SCC Online 9051

3. (1996) 7 SCC 767

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registered mortgage and had agreed to cede the second charge in favour of

applicant with the consent of BIFR and this second charge is duly registered

under Section 125 of the Companies Act 1956. Bank of Baroda and its

assignee Kotak Mahindra Bank were entitled to stand out of liquidation

proceedings and recover the dues which is precisely what they did by filing

O.A. No.27 of 2008 before the DRT in which Company, Bank of Baroda and

applicant were impleaded. The provisions of the Recovery of Debts Due to

Banks and Financial Institutions Act 1993 (RDDB Act) overrides Companies

Act 1956 as held in Allahabad Bank V/s. Canara Bank Anr. 4. Applicant

had received money under consent terms with Kotak Mahindra Bank in

proceedings before DRT. The consent terms in DRT are valid and subsisting

and is a result of commercial arrangement between applicant and Kotak

Mahindra Bank and are outside the purview of this Court. Even for sake of

argument, it is assumed that applicant has received excess money and is

required to return it even in that case only Kotak Mahindra Bank can have

cause of action. Even otherwise, except DRT, no other Court would have

jurisdiction to do so. Any application/proceeding seeking recovery of alleged

excess cannot be entertained. Once Kotak Mahindra Bank and Bank of

Baroda being secured creditors are entitled to stand outside winding up to

sell the property, which was done pursuant to the order of Madras High

Court and DRT permitted to retain the same, except the liability to pay dues

4. (2000)4 SCC 406

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to workers under Section 529 of the Companies Act, 1956, no other claim

can be entertained. Kotak Mahindra Bank and not Official Liquidator can

claim as Kotak Mahindra Bank still has not recovered the entire amount

owed to it in full satisfaction of its claim/charge.

(i) Further, applicant is an undisputed second charge holder

with respect to Ambattur property. In so far as prayer – (a) for declaration

that the decree is a nullity, the Hon’ble Supreme Court in the case of Indian

Bank V/s. Official Liquidator5 has clearly observed that the Company Court

does not have power to declare a Decree of the competent Court void in an

application made by Official Liquidator and such an application is not

maintainable. Hence, this Court does not have jurisdiction to entertain

either prayer – (a) or prayer – (b) in Official Liquidator’s Report.

(j) In any event, the Consent Decree dated 9 th July 2009 does

not constitute a fraudulent preference on account of the fact that the

winding up proceedings could be deemed to have commenced only on

24th June 2011, when the Company was ordered to be wound up. The

Consent Decree dated 9th July 2009 was therefore entered into prior to the

period stipulated in Section 531 of Companies Act 1956, viz., 6 months

prior to the commencement of winding up proceedings. The contention

regarding fraudulent preference under Section 531 of the Companies Act

5. (1998) 5 SCC 401

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1956 is also incorrect. Section 531(2) provides for a deeming fiction only in

case of presentation of a petition for winding up by or subject to the

supervision of the Court as an act of insolvency. The suit was instituted with

leave under Clause 12 on 30th December 2008 after the order recalling

appointment of Official Liquidator was passed on 16 th October 2008. The

Decree was passed on 9th July 2009 whereas the fresh order of winding up

was passed on 24th June 2011. This is clearly beyond six months. The order

dated 27th August 2009 does not really recall order dated 16 th October 2008

or revive the original winding up order dated 29 th June 2006. The fresh

winding up order dated 24th June 2011 is, therefore, not within the ambit of

Section 531 of the Companies Act 1956 and therefore, there cannot be

fraudulent preference of applicant. In any case, even in order dated

24th June 2011, the Court had clearly taken cognizance of Decree of

Rs.12.49 Crores plus interest in favour of applicant and even at that stage,

the defence of fraudulent preference or related party transaction had not

been raised by Official Liquidator. The defence/plea of fraudulent

preference could have been/ought to have been raised by Official Liquidator

at the time of passing of order dated 27 th August 2009 and in any case, on

or before 24th June 2011 since applicant had filed an intervention

application in the winding up proceeding which was allowed on 26 th August

2010 after hearing Official Liquidator. Even the Learned Single Judge being

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aware of the factual position did not think it fit to nullify the Decree on the

ground of fraudulent preference under Section 531 of the Companies Act

1956. The contention about the fraudulent preference is therefore not open

on the principles of res judicata under Section 11 (Explanation 4) of the

Civil Procedure Code 1908 and principles analogous thereto. Even

otherwise, the Division Bench of Gujarat High Court in the case of Bank of

Maharashtra V/s. Official Liquidator6 has extensively considered the law

in this regard and held that mere admission of an existing liability by a

Company prior to its winding up can never amount to a fraudulent

preference.

(k) Section 531 of the Companies Act 1956 uses the word

‘invalid’ and not ‘void’. Thus at the highest the Consent Decree against the

Company would be voidable only at the instance of Official Liquidator. The

difference between the terms invalid, voidable and void are judicially

recognised in many judgments. It was observed by BIFR in its order dated

22nd January 2007 that the promoter Company – M/s. Swadeshi Mills

Company Limited, had been ordered to be wound up vide order dated

5th February 2001 (Bench – I) and as such there was actually no promoter to

revive the Company. Further, it is pertinent to mention that Swadeshi Mills

Company Limited was wound up by this Court much prior to the consent

terms dated 9th July 2009 as such the question of any indirect interest of

6. (1998) SCC Online Guj 370

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applicant in the Company does not arise. The burden of proof is on Official

Liquidator to prove fraud. Official Liquidator was aware about the consent

terms/suit much before passing of order dated 4th January 2017 and hence

is time barred.

(l) None of the Sections viz., 531, 531A and 536 of the

Companies Act 1956 apply. Sub-section 2 of Section 531 deals only with

presentation of petition for winding up. In that case, winding up is subject

to the supervision of the Court or passing of resolution for winding up and

there is deeming fiction that these two incidents shall be deemed to

correspond to the act of insolvency in the case of an individual. This deemed

fiction is obviously not attracted to an opinion of BIFR or AAIFR. In case of

winding up, the supervision of the Court by or under Section 446 of the

Companies Act 1956 accepts the Company Court and no other Court or

authority can exercise any power in respect of the assets of the Company.

But, in case of BIFR, as held in NGEF Limited V/s. Chandra Developers (P)

Ltd. and Anr.7, the provisions of SICA 1985 overrides provisions of

Companies Act 1956 and consequently, jurisdiction of the Company Court

under Section 446 of the Companies Act 1956 is also taken away, meaning

thereby Sub-section 2 of Section 531 of the Companies Act 1956 does not

apply. In such cases of deeming fiction, the statute cannot be expanded to

mean something more than the legislature has intended. Section 531A of

7. (2005) 8 SCC 219

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the Companies Act 1956 is not applicable because attachment of property at

Satara by judgment is not transfer of property. Assuming without admitting

that the winding up petition is deemed to have been admitted on

22nd January 2007, when the opinion of BIFR was expressed or on 5 th July

2007, when it was received, the Decree having been passed on 9 th July 2009

(assuming that the attachment in judgment is transfer as alleged by Official

Liquidator and intervenors), Section 531A of Companies Act 1956 would, in

any case, be inapplicable. Section 536(1) of the Companies Act 1956 is per

se inapplicable as it deals with transfer of share of a company. Section

536(2) is also not applicable for the same reason. Since in view of the

Hon’ble Supreme Court judgment in NGEF Limited (Supra), the Company

Court does not have jurisdiction to hold that the act of submitting to a

Consent Decree is void and if Official Liquidator ever desires to seek an

order of submitting to such Decree, the only course was open to approach

Board for Industrial and Financial Reconstruction (BIFR) of NCLT as SICA

1985 was repealed by Section 252 of the Insolvency and Bankruptcy Code,

2016 (IBC) w.e.f. 1st December 2016. This is strictly without prejudice to the

contention that Section 536(2) of the Companies Act 1956 is even otherwise

inapplicable since it was attachment in judgment and not disposal of

property.

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(m) Even otherwise, the Consent Decree dated 9 th July 2009

was entered into bona fide and did not constitute a fraudulent preference

within the meaning of Section 531 of the Companies Act 1956;

(n) The attachment by the said Consent Decree of the Satara

property constitutes a charge in favour of applicant which entitles it to

priority in payment over all other lenders;

Paragraph 13 in Kerala State Financial Enterprises Ltd. V/s.

Official Liquidator, Kerala8 provides :

"13. Save and except certain special statues in relation to recovery of
debts from the properties of a company which has been directed to be
wound up, the provision of the Companies Act shall apply. An order of
attachment made prior to passing of an order of winding up may not
be void, but then the executing proceedings must be allowed to
continue with the leave of the court in terms of Section 446 of the
Companies Act".

(o) From Clause 6 of the Loan Agreement with the Company, it

is evident that the Company had agreed not to create any charge over the

Satara property at that particular time. This clearly evidences the intention

of applicant to have charge over the same in future in the event the

Company was unable to pay its dues under the Loan Agreement as it had

only second charge over the Ambattur Property. The judgment in the case of

Mahadev Sahu V/s. Thakur Prasad Singh and Ors. 9 relied upon by the

counsel for Official Liquidator is completely inapplicable since it is not the

8. (2006) 10 SCC 709

9. (1910) SCC Online Cal 60

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case of applicant that either applicant has got a title to or charge over Satara

property but submission is that there is a decree which has reached its

finality and applicant is entitled to execute the same.

(p) The principal defence taken by Official Liquidator in his

report is that the order of winding up dated 24th June 2011 passed by

Shri S. J. Kathawalla, J. relates back to the date of reference issued by BIFR

on 22nd January 2007. Thus according to Official Liquidator, winding up

proceeding is deemed to have commenced from 22nd January 2007. To

support this contention, Official Liquidator has relied upon the judgement

delivered by Shri R.D. Dhanuka, J. in the matter of "Modi Stone Ltd. (in

liquidation)10" However, the said order is challenged before Hon'ble

Division Bench under two separate Appeals, viz., Appeal No.359 of 2017

and Appeal No.34 of 2018. Thus, the said judgement has not attained

finality.

Without prejudice, the said judgement is contrary to the

binding precedents and hence per incuriam.

(q) While considering the validity of Section 20 of SICA 1985,

Division Bench of Madras High Court in J.M. Malhotra V/s. UOI11 has

clearly held that Section 20(2) of SICA merely dispenses with the

procedural requirements of Section 349 or 440 of the Companies Act 1956

10. (2017) 202 Company Cases 551

11. (1994) SCC Madras 349

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and it is not obligatory on the part of High Court to wind up a sick Company

once it receives an opinion from the Board in this regard without examining

correctness of such opinion on hearing the concerned parties. This

judgement has been subsequently approved by the Hon'ble Supreme Court

in V.R. Ramaraju V/s. UOI12 and it is held that High Court has to take into

account the opinion, but it is not to abdicate its own function of determining

the question of winding up. The Learned Single Judge in Modistone (Supra)

(R.D. Dhanuka, J.), has relied upon the Hon'ble Supreme Court judgement

in NGEF Limited (Supra) and the real issue involved in the said judgement

of the Hon'ble Supreme Court was not regarding the date of commencement

or deemed commencement for winding up.

(r) The ratio of the judgment in NGEF Limited (Supra) was that

the Board and Company Court exercise concurrent jurisdiction and the

provisions of SICA have overriding effects and the inherent power of the

Company Court does not exist in such cases.

(s) The judgment of Madras High Court has been consistently

followed in the cases of Ashok Alloy Steel Ltd. V/s. BIFR13, BIFR V/s. Unity

Steels Ltd.14, Tata Iron Steel Company V/s. Him Ispat Ltd.15, Board

Opinion V/s. Hathising Manufacturing Company Ltd. Ors. 16 and

12. (1997) 89 Company Cases 609

13. (2008) 142 Company Cases 915 HP

14. (2002) 109 Company Cases 236

15. (2002) 108 Company Cases 537

16. 2009 SCC Online Guj. 10270

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Kamdar Ladat Simiti V/s. Nanikram Shobraj Mills Ltd. 17, etc. Therefore,

the winding up proceeding of the Company was initiated on 24 th June 2011,

when the Learned Company Judge of this Court applied his mind to

reference dated 22nd January 2007 of BIFR ultimately ordering winding up

of the Company.

(t) The constituted attorney of the Company - Shri R.

Venkateswaran was duly authorised through a Power of Attorney dated

9th August 2002 and the same was attached alongwith the consent terms

and therefore presumption can safely be drawn that the said person had the

authority to execute the consent terms. In any event, the authority of

Mr. Venkateswaran had not been challenged either by Official Liquidator in

Official Liquidator's Report No.84 of 2017 nor the same had been

questioned by anyone from 9th July 2009 till date. Applicant is entitled to

claim benefit under Doctrine of Indoor Management for irregularities, if

any, in affairs of the Company as per rule laid down in Royal British Bank

V/s. Turquand18. The person entering into a transaction with the Company

only needed to satisfy himself that his proposed transaction is not

inconsistent with the articles and memorandum of the Company. He is not

bound to see the internal irregularities of the Company and if there are any

internal irregularities then the Company will be liable as the person has

17. (2005) 125 Company Cases 740

18. (1856) 119 E.R. 886

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acted in good faith and he did not know about the internal arrangement of

the Company. The rule is based upon obvious reason of convenience in

business relations. The articles of association and memorandum are public

documents and they are open to public for inspection.

19 It is Official Liquidator's case that :

(a) The winding up proceedings in respect of the Company

commenced on 22nd January 2007, when the BIFR recommended that the

Company be wound up.

(b) The Consent Decree dated 9th July 2009, which was entered

into after the commencement of the winding up proceedings, constitutes a

fraudulent preference within the meaning of Section 531 of the Companies

Act 1956 and is ex-facie illegal and void.

(c) In any event, the attachment in respect to the Satara

property effected by the Consent Decree does not constitute a charge in

favour of applicant and does not make it a secured lender entitled to any

priority over other payments.

(d) Applicant is therefore liable to refund the amount of

Rs.10,17,03,493/- withdrawn by it from the sale proceeds of the Ambattur

property along with interest at such rate as this Court may deem

appropriate.

(e) Even otherwise, applicant not having any prior charge in

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respect to the Satara property, the leave sought by it to execute the Consent

Decree and to put the Satara property to sale and execution ought to be

refused and;

(f) The interest of all stakeholders would be better served if the

1/3rd undivided share of the Company in the Satara property were to be sold

by Official Liquidator under the supervision of the Company Court.

20 Ms. Kumbhat, counsel appearing for Interveners apart from

adopting the submissions of Shri Sen, counsel for Official Liquidator,

submitted that :

(a) The amount of Rs.3.25 Crores provided by applicant to the

Company was by way of promoter's contribution without any interest as per

the guidelines of BIFR.

(b) BIFR in the proceedings held on 2 nd June, 1998, laid down

certain guidelines wherein the board ascertained the requirement of interest

free promoters contribution and also made clear that there should not be

diversion of funds by promoters.

(c) the scheme of Operating Agency (BoB) being proposed on

the basis of guidelines framed by BIFR, sought for promoter group to pump-

in interest free promoter's contribution to which the BIFR gave its approval.

(d) In view of the clear guidelines of BIFR and the Loan

Agreement specifying that the loan shall carry interest at the Bank Rate

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subject to instructions of BIFR, the interest charged by applicant is

unapproved of and cannot be permitted.

21 Before we proceed further, it will be useful to reproduce the

Consent Terms dated 9th July 2009 in Suit No.164 of 2009, which is sought

to be executed, for which leave is being sought. The same reads as under :

1. The defendants submit to the decree on admission in the sum of
Rs.12,49,27,897/- (Rupees Twelve Crores Forty Nine Lacs Twenty Seven
Thousand Eight Hundred Ninety Seven only) together with interest
thereon at the rate of 15.76% per annum with quarterly rests from
8th June 2009 till payment and/or realization.

2. It is declared that the aforesaid sum of Rs.12,49,27,897/- (Rupees
Twelve Crores Forty Nine Lacs Twenty Seven Thousand Eight Hundred
Ninety Seven only) together with interest as set out in clause - 1 above is
secured by charge by way of mortgage on the land situate at Plot No.21,
Industrial Estate, Ambattur, Chennai together with buildings, structures,
plant and machinery standing thereon more particularly described in
Schedule - Ex-A hereto including sale proceeds thereof together with
interest thereon.

3. However, if the Defendants pay to the Plaintiffs Rs.10,00,00,000/-
(Rupees Ten Crores only) with three months from the date hereof the
decree shall be marked fully satisfied.

4. In the event of default in the payment of Rs.10,00,00,000/- (Rupees
Ten Crores only) within the period limited by clause - 3 above the entire
decretal amount as per clause - 1 shall become due and payable
forthwith and the Plaintiffs shall be at liberty to execute the decree for
the entire decretal amount as per clause - 1 above then outstanding.

5. The immovable property being one-third undivided share, right, title
and interest in Final Plot No.540 situate lying and being in the Village of
Taighat Registration Sub-District of Wai in the District of Satara
together with structure standing thereon more particularly set out in
Schedule - Ex-B hereto is hereby stand attached forthwith in execution of
the decree and Defendants also undertake not to sell and dispose of or
create any third party interets into the said property or any part thereof,.

6. The Plaintiffs are at liberty to execute the decree on the basis of the
Minutes of Consent Terms without sealing of decree and sealing of decree
is dispensed with under Rule 314 of the High Court Original Side Rules,
1980. The Prothonotary and Senior Master is directed to act on the
authenticated copy of the Minutes of Order and Consent Terms duly
authenticated by the Associate and issuance of decree is expedited.

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7. 2/3rd of Institution fees be refunded to the Plaintiffs.

8. Suit stand disposed of in the aforesaid terms with no order as to costs.

22 Date of commencement of winding up proceedings :

(a) The first issue that arises for consideration is as to when the

winding up proceedings against the Company (in liquidation) commenced.

It is the case of Official Liquidator that the winding up proceedings

commenced on the date of recommendation by the BIFR that the Company

be wound up while it is applicant's case that, in the absence of a petition for

winding up, the winding up proceedings must be deemed to have

commenced only on a winding up order being passed, i.e., on 24 th June

2011. In support of his contention that the winding up proceedings

commenced on the BIFR making a recommendation, Official Liquidator

relied on the judgment of the Hon'ble Supreme Court in NGEF Limited

(Supra) and the judgments of various High Courts in Modi Stone (Supra)

Kapri International Pvt. Ltd.19 and Indoco Remedies Ltd. V/s. Official

Liquidator of Kay Packaging P. Ltd. Anr.20

(b) Section 441 of the Companies Act 1956 provides that the

winding up of the Company by the Court "shall be deemed to commence at

the time of the presentation of the petition for the winding up". Section 441

does not expressly address a situation where a Company is wound up not on

19. 2013 SCC Online Del. 2176

20. (2009) 150 Company Cases 770

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a winding up petition filed by a creditor or other stakeholder, but on a

recommendation made in this behalf by the BIFR under the provisions of

SICA. Section 20 of SICA provides for the winding up of a sick industrial

company and reads in relevant part:

"20. Winding-up of sick industrial company: -

(1) Where the Board, after making inquiry under section 16 and after
consideration of all the relevant facts and circumstances and after giving an
opportunity of being heard to all concerned parties, is of opinion that the
sick industrial company is not likely to make its net worth exceed the
accumulated losses within a reasonable time while meeting all its financial
obligations and that the company as a result thereof is not likely to become
viable in future and that it is just and equitable that the company should be
wound up, it may record and forward its opinion to the concerned High
Court.

(2) The High Court shall, on the basis of the opinion of the Board, order
winding-up of the sick industrial company and may proceed and cause to
proceed with the winding-up of the sick industrial company in accordance
with the provisions of the Companies Act, 1956 (1 of 1956).
............."

(c) Applicant relied on various judgments, both of the Hon'ble

Supreme Court and of various High Courts on the issue as to whether a

recommendation by the BIFR to wind up a Company was conclusive or

whether the High Court had any discretion in the matter. It is applicant's

case that the High Court indeed has discretion in the matter of winding up a

Company before it and was not bound to accept without reflection, the

recommendation made in this behalf by the BIFR. However, this issue is of

limited relevance since the Company has already been wound up. The only

question that survives for consideration is the date when the winding up

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proceedings must be treated as having commenced.

(d) The question as to when winding up proceedings must be

deemed to have commenced when a Company is wound up pursuant to the

recommendation by the BIFR has been considered by various Courts. This

issue fell for consideration by the Hon'ble Supreme Court in NGEF Limited

(Supra) where, while overruling the opinion of the Division Bench of the

Hon'ble Gujarat High Court that a winding up proceeding arising out of a

recommendation by the BIFR would commence only on the passing of an

order of winding up, the Court observed:

"50.We may, however, observe that the opinion of the Division Bench in BPL
Ltd. to the effect that the winding-up proceeding in relation to a matter
arising out of the recommendations of BIFR shall commence only on passing
of an order of winding up of the Company may not be correct. It may be true
that no formal application is required to be filed for initiating a proceeding
under Section 433 of the Companies Act as the recommendations therefor
are made by BIFR or AAIFR, as the case may be, and, thus, the date on which
such recommendations are made, the Company Judge applies its mind to
initiate a proceeding relying on or on the basis thereof, the proceeding for
winding up would be deemed to have been started; but there cannot be any
doubt whatsoever that having regard to the phraseology used in Section 20
of SICA that BIFR is the authority proprio vigore which continues to remain
as custodian of the assets of the Company till a winding-up order is passed by
the High Court."

(e) While this observation was characterized as ambiguous by

Shri Godbole, there is little doubt that the date of the winding up order was

rejected by the Hon'ble Supreme Court as the date on which the winding up

proceedings would commence. In fact, this Court in its judgment in Modi

Stone Limited (Supra) has, while relying on the judgment in NGEF Limited

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(Supra), held that the date of recommendation by the BIFR would be

considered the date of commencement of winding up. This view is also

shared by the Delhi High Court in Kapri International (Supra) and the

Gujarat High Court in Indoco Remedies Limited (Supra). As such, the weight

of authority is clearly in favour of the view that winding up proceedings

would be deemed to have commenced on the date of recommendation by

the BIFR that a Company be wound up and I respectfully agree with the said

view. In any event, whether one were to take as the relevant date to

commence the winding up proceedings, the date of recommendation, i.e.,

22nd January 2007, the date of receipt by this Court of the recommendation,

i.e., 5th July 2007, or the date of admission of the winding up proceedings,

i.e, 27th August 2009, the Consent Decree dated 9 th July 2009 falls within

the period stipulated in Section 531 of the Companies Act, 1956 for an

enquiry as to whether a transaction constitutes a fraudulent preference.

23 The Consent Decree and Section 531 :

(a) The next question that arises is as to whether the Consent

Decree in question falls foul of section 531. Section 531 (1) reads as under :

"531. FRAUDULENT PREFERENCE

(1) Any transfer of property, movable or immovable, delivery of goods,
payment, execution or other act relating to property made, taken or done
by or against a company within six months before the commencement of its
winding up which, had it been made, taken or done by or against an
individual within three months before the presentation of an insolvency
petition on which he is adjudged insolvent, would be deemed in his

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insolvency a fraudulent preference, shall in the event of the company being
wound up, be deemed a fraudulent preference of its creditors and be invalid
accordingly :

Provided that, in relation to things made, taken or done before the
commencement of this Act, this sub-section shall have effect with the
substitution, for the reference to six months, of a reference to three
months."

(b) It is the Official Liquidator's case as submitted by Shri Sen,

with whom I agree, that the Consent Decree was collusive and a fraud on

the Court and clearly a fraudulent preference within the meaning of Section

531. This would be apparent from the following :

(i) The Company filed company application (L) No. 951 of
2008 to recall the order dated 29th June 2006, whereby the
company petition had been admitted and a Provisional
Liquidator appointed in respect of the Company. They did so
on the basis that the earlier recommendation for winding up
issued by the BIFR on 9th April 2002 had been set aside by an
order dated 23rd February 2006 of the Madras High Court;

(ii) When this application was argued on 16th October 2008, it
was not brought to the notice of the Company Judge that in
the interregnum a fresh recommendation had been made by
the BIFR on 22nd January 2007 that the Company be wound
up and that the Company had in fact withdrawn Appeal
No.385 of 2007 filed before the AAIFR challenging the BIFR
recommendation. In his order of admission dated 27th August
2009, Kathawalla, J. notes that if the later recommendation
had been brought to the notice of the Company Court, it

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would surely have passed a fresh order admitting the Petition
and appointing the Provisional Liquidator;

(iii) After the order dated 16th October 2008 came to be
passed in the aforementioned circumstances and the earlier
order of admission was recalled, applicant on 30th December
2008 filed Suit No. 164 of 2009 claiming a sum of
Rs.13,92,45,091/- and other ancillary reliefs;

(iv) Applicant was a promoter group company of the
Company in liquidation. This would be evident, both from
the orders passed by the BIFR as well as the Loan Agreement
itself. It is an admitted position that applicant was a
substantial stakeholder (22%) of Swadeshi Mills Limited, of
which the Company in Liquidation was a wholly owned
subsidiary;

(v) The order dated 2nd June 1998 of the BIFR required
promoter contribution for the revival of the Company to be
interest free. The Loan Agreement, apart from making an
obtuse reference to interest being levied at a 'bank rate', did
not stipulate any rate of interest and contemplated a fixing
by BIFR of such rate of interest at a future date. It is an
admitted position that no such rate of interest was fixed by
the BIFR;

(vi) It is clear, both from the correspondence addressed and
pleadings filed by the Company in Liquidation, that they
were fully aware that no interest was payable on the
Promoter's contribution brought in by applicant. Both the

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letter and the Affidavit refer specifically to the absence of any
interest being stipulated by the BIFR;

(vii) a mere three months after the filing of the affidavit in
reply opposing aggressively the grant of any interlocutory
reliefs in favour of applicant in Suit No.164 of 2008
including a prayer for a decree on admission for a sum of
Rs.3.25 Crores, the Company is alleged to have agreed to a
decree on admission for a much larger sum of
Rs.12,49,27,897/- along with interest thereon at the rate of
15.76% p.a. with quarterly rests from 8th June 2009 till
payment and/or realization. There is nothing whatsoever on
record to explain or justify this abrupt reversal in position by
the Company. The only possible inference in the
circumstances can be that the Company was attempting to
favour applicant, a promoter group company, in preference
to its other creditors;

(viii) Applicant was fully aware of the recommendation
dated 22nd January 2007 of the BIFR that the Company be
wound up. In fact, there is a reference to it in the plaint.
However, neither applicant nor the Company appear to have
brought this recommendation to the notice of the learned
Single Judge considering the Consent Terms. The parties also
appear not to have brought to the notice of this Court the
orders of the BIFR which required promoter contribution to
be interest free or the terms of the Loan Agreement which
failed to stipulate any rate of interest and indeed required
the BIFR to fix it which it never did;

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(ix) The Consent Terms were signed on behalf of the
Company by one Shri Venkateshwaran. He is stated to have
done so on the basis of a Power of Attorney dated 9th August
2002. The said Power of Attorney could not have been acted
upon in so far as it could not have survived the appointment
of the Provisional Liquidator by the order dated 29 th June
2006 and the consequent displacement of the board of the
Company. The setting aside of the Order dated 29 th June
2006 would not revive the power which would have been
required to be re-conferred. There is no evidence of any such
conferral. In any event, the Power of Attorney did not confer
an express power to compromise or compound any legal
proceeding. It is settled law that an agent would be entitled
to compromise a proceeding only in the event such an
express power has been conferred by the document
constituting him an agent. In this behalf, Official Liquidator
relied on the judgement of the Delhi High Court in
Manmohan Singh Dahliwal V/s. Gurbax Singh21 where the
Court observed:

"13. The interpretation of the word 'prosecute' provides by
the learned counsel for the defendants that the power to
prosecute includes the power to withdraw or effect a
compromise is entirely misconceived and
miscomprehended. The power conferred upon the
attorney to 'prosecute' the suit or proceedings is to pursue
it and not to withdraw or compromise it unless specific
power to withdraw or compromise the suit has been
bestowed upon the attorney. To say that the power to
prosecute includes the power to effect the ultimate
conclusion of the suit by way of compromise or
withdrawal is erroneous and highly untenable as such a

21. 2002 AIHC 275

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power is special power can be exercised by the attorney
only when he is authorised to do so.

14. Black's Law Dictionary itself shows that the meaning
of the word 'prosecute' is to follow up an action or other
judicial proceedings which includes ultimate conclusion.
By no stretch of imagination the withdrawal or
compromise of the suit without legal authority amounts
to bringing the suit to ultimate conclusion. In ordinary
sense, the terms "ultimate conclusion" connotes getting
the suit decreed by making honest and bonafide efforts to
prove the claim in the suit. If the suit is to be disposed of
by way of compromise, it may loosely be termed as
"ultimate conclusion" but for such a conclusion of the
suit, specific authority has to be given to the attorney.
Even otherwise in the power of attorney the words
'prosecute the suit' don't figure. There is only reference in
the plaint.

15. The attorney has only those powers which are
specified in the power of attorney and mere reference in
the plaint that he is also authorised to prosecute the
plaint does not mean that he is vested with the power to
withdraw the suit or settle it by way of compromise.

19. As is apparent these clauses gave the power to pursue
the suit. Pursue means to continue or proceed along a
course of action and not to withdraw.

20. Power of attorney is always to be interpreted strictly
in its terms. There is no scope for searching meanings or
intentions. Nor is it permissible to stretch or provide
elasticity to the meaning of the words such as "prosecute",
"pursue", "proceed', "execute", "sign" etc. Mere execution of
power of attorney does not mean that the attorney has
been conferred with power to do all such acts which the
executor of the attorney possesses. Unless and until a
specific power has been conferred upon the attorney,
attorney is not free to arrogate the powers of "dominus"."

(x) In any event, the exercise by Shri Venkateshwaran of the
powers conferred under the Power of Attorney in question is

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expressly made subject to the sanction of the board. The
scope of the powers permitted to be exercised by
Shri Venkateshwaran appear to have been purely ministerial
and as a matter of convenience. He does not appear to have
had, under the Power of Attorney, any authority to take any
decision which would significantly impact the outcome of
any legal proceeding to which the Company was a party,
leave alone the authority to compound it.

(xi) The parties do not appear to have brought to the notice
of the learned Single Judge considering the Consent Terms
any of the aforementioned infirmities in the authority of Shri
Venkateshwaran to bind the Company or to enter into a
settlement.

(c) In the aforementioned circumstances, that the events reveal

an orchestrated attempt by applicant and the Company acting in

conjunction to fraudulently prefer one creditor, viz, applicant, over the

others. The Consent Terms has the effect of not only enhancing dramatically

the entitlement of applicant from Rs.3.25 Crores to Rs.12.5 Crores

approximately, but also affirms that the Ambattur property would constitute

a security in favour of applicant for the entire enhanced amount. This was

clearly a fraudulent preference and plainly illegal.

(d) Applicant has attempted to defend the Consent Terms on

the basis that applicant did not enjoy a controlling interest in the Company,

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holding as it did only 22% of the shares of the parent, i.e., Swadeshi Mills

Limited. It was sought to be suggested on this basis that the parties were not

related and that the Consent Terms was an arms length transaction.

However, it is apparent, both from the orders of the BIFR and the terms of

the Loan Agreement, that applicant was an entity belonging to the Promoter

Group which clearly controlled the Company (in liquidation). Applicant has

been unable to explain the aforementioned circumstances which are plainly

suspicious and allow no inference save that of a fraudulent preference.

24 Remedy Available to Official Liquidator :

(a) Applicant, however, sought to contend that Official

Liquidator was not entitled to challenge the Consent Decree, either by

means of a report filed before the Company Court or by his reply to the

application for leave under Section 446. Shri Godbole relied on the

judgment of the Hon'ble Supreme Court in Indian Bank V/s. Official

Liquidator Chemmeens Exports (P) Ltd. Ors.22 and in particular

paragraph 12 thereof, which is reproduced hereinbelow:

"It may be noted that these provisions have no application to any
proceeding pending in appeal before a High Court or the Supreme Court.
From this what follows is when a suit is instituted in the court of
competent jurisdiction with the leave of the court under sub-section (1)
and a decree is passed by that court whether on the basis of mortgage or
otherwise, it would be binding on Official Liquidator and no plea
inconsistent with the decree passed against Official Liquidator can be
raised while deciding the questions of priorities under clause (d) of sub-
section (2). We wish to make it clear that under Section 446, no power is

22. (1998) 5 SCC 401

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conferred on the company court to declare a decree of the competent
court void - a prayer which is made by Official Liquidator in the
application out of which this appeal arises - so to that extent the
application filed by the liquidator in the company court is not
maintainable."

(b) This judgment concerned a case where leave had already

been granted under section 446 of the Companies Act to a creditor to

prosecute the suit, in which Official Liquidator had been joined. A Decree in

such a suit where Official Liquidator had participated was held to be binding

on him. Official Liquidator could not have ignored such a Decree by a

competent Court or sought to challenge it under Section 446 of the

Companies Act 1956. It is in this context that the observations relied upon

by applicant appear to have been made. In the present case, however,

Official Liquidator was not a party to the said suit. The Indian Bank (Supra)

judgment is certainly no authority for the proposition that a decree can

never be set aside by the Company Court in exercise of its powers under

section 446 of the Companies Act 1956.

(c) It is in fact settled law that a Decree that has been procured

by fraud can be set aside at any stage and in any proceedings, even a

collateral one. The Hon'ble Supreme Court has in fact affirmed this principle

on several occasions including in its judgment in S.P. Chengalvaraya Naidu

V/s. Jagannath23 where it observed:

23. (1994) 1 SCC 1

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"Fraud avoids all judicial acts, ecclesiastical or temporal" observed Chief
Justice Edward Coke of England about three centuries ago. It is the
settled proposition of law that a judgment or decree obtained by playing
fraud on the court is a nullity and non est in the eyes of law. Such a
judgment/decree by the first court or by the highest court has to be
treated as a nullity by every court, whether superior or inferior. It can be
challenged in any court even in collateral proceedings."

5. The High Court, in our view, fell into patent error. The short question
before the High Court was whether in the facts and circumstances of this
case, Jagannath obtained the preliminary decree by playing fraud on the
court. The High Court, however, went haywire and made observations
which are wholly perverse. We do not agree with the High Court that
"there is no legal duty cast upon the plaintiff to come to court with a true
case and prove it by true evidence". The principle of "finality of litigation"
cannot be pressed to the extent of such an absurdity that it becomes an
engine of fraud in the hands of dishonest litigants. The courts of law are
meant for imparting justice between the parties. One who comes to the
court, must come with clean hands. We are constrained to say that more
often than not, process of the court is being abused. Property-grabbers,
tax-evaders, bank-loan-dodgers and other unscrupulous persons from all
walks of life find the court-process a convenient lever to retain the illegal-
gains indefinitely. We have no hesitation to say that a person, who's case
is based on falsehood, has no right to approach the court. He can be
summarily thrown out at any stage of the litigation."

(d) The Consent Decree in question, which has been procured

by fraud can be set aside at any stage including in an application for leave to

execute it or in an Official Liquidator's Report challenging it. Even

otherwise, the scope of the Company Court's power under Section 446 has

been very broadly construed by the Hon'ble Supreme Court in Sudarsan

Chits (I) Ltd. V/s. O. Sukumaran Pillai and Others24, where the Court

observed :

"8.... Now at a stage when a winding up order is made the company may
as well have subsisting claims and to realise these claims the Liquidator
will have to file suits. To avoid this eventuality and to keep all incidental
proceedings in winding up before the court which is winding up the

24. (1984) 4 SCC 657

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company, its jurisdiction was enlarged to entertain petition amongst
others for recovering the claims of the company. In the absence of a
provision like Sec. 446 (2) under the repealed Indian Companies Act,
1913, Official Liquidator in order to realise and recover the claims and
subsisting debts owed to the company had the unenviable fate of filing
suits. These suits as is not unknown, dragged on through the trial court
and Courts of appeal resulting not only in multiplicity of proceedings but
would hold up the progress of the winding up proceedings. To save the
company which is ordered to be wound up from this prolix and expensive
litigation and to accelerate the disposal of winding up proceedings, the
parliament devised a cheap and summary remedy by conferring
jurisdiction on the court winding up the company to entertain petitions
in respect of claims for and against the company. This was the object
behind enacting Sec. 446 (2) and therefor, it must receive such
construction at the hands of the court as would advance the object and at
any rate not thwart it."

(e) The position that Official Liquidator can invite the Company

Court to exercise its powers under Section 446 by way of a report seeking

directions and is not required to file a company application in that behalf is

also firmly established. This question fell for consideration by this Court in

Modi Stone Limited (Supra), where the Court observed:

"115. In so far as the submission of the learned senior counsel for the
Modi Rubber Ltd. that the directions sought by Official Liquidator for
recovery of possession from sub-lessee cannot be granted by this Court in
the report submitted by Official Liquidator but can be considered if at all
in the company application on the ground that the report submitted by
Official Liquidator is in the nature of an administrative direction and not
for adjudication of the dispute is concerned, in my view, there is no merit
in this submission of the learned senior counsel. Under Section 455 of the
Companies Act, 1956 read with Rule 135 and 137 of the Companies
(Court) Rules, 1959, Official Liquidator is empowered to submit a report
in a case where the winding up order is made by the Company Court for
appropriate directions and reliefs. Official Liquidator is not required to
file any suit for seeking any reliefs which can be granted by the Company
Court by exercising powers under Section 446(2) of the Companies Act,
1956. All contentious issues can be decided by the Company Court by
exercising powers under Section 446(2) of the Companies Act, 1956
including any claims by or against the company in liquidation (including
any claims by or against any of its branches in India.

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116. Under Section 446(2)(d) of the Companies Act, 1956, the Company
Court is also empowered to entertain or dispose of any question
whatsoever, whether of law or fact, which may relate to or arise in
course of the winding up of the company. In my view, there is no
substance in the submission of the learned senior counsel for Modi
Rubber Ltd. that only an administrative direction can be granted by the
Company Court in the report submitted by Official Liquidator or that the
evidence can be recorded only in the company application and not in the
report submitted by the official liquidator. The powers exercised by the
Company Court by issuing such directions and/or orders under various
provisions of the Companies Act, 1956 whether passed in company
applications or in the official liquidator's report, as the case may be, are
the judicial orders and have equal force of law. Official Liquidator is not
required to file a company application for seeking directions and/or
reliefs before the Company Court for recovery of possession, assets and
other things from the Ex-directors of the company in liquidation or from
any third party. In my view, whatever may be the nomenclature of the
proceedings i.e. whether by way of the official liquidator's report or by
way of company application for seeking various directions including the
relief for recovery of possession, powers of the Company Court are the
same."

(f) In fact, the judgment of the Division Bench of this Court in

The Official Liquidator, High Court Bombay and the Liquidator of

Kamani Brothers Private Limited (In Liquidation) V/s. Suryakant

Natvarlal Surati25 relied upon by applicant itself, is authority for the

proposition that the Company Court may set aside or refuse to enforce a

Decree. That was a case in which a Decree had been obtained confirming an

unregistered charge which was void as against Official Liquidator on

account of Section 125 of the Companies Act 1956. The Decree holder had

applied for and obtained leave under Section 446 of the Companies Act

1956 to put the Decree in execution. This leave was sought to be revoked by

three contributories of the Company on the ground that the charge on the

25. (1986) 59 Company Cases 147

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basis of which the Decree had been rendered was void on account of Section

125. In agreeing with the contributories, the Court observed :

"42.The decree fixed a date for redemption of the "mortgage or charge"
so declared. It ordered the mortgagees to deliver up all deeds relating to
the mortgage property to the mortgagors (the company) should the
mortgagors make payment on or before the date of redemption of the
amount declared by the decree to be due under the mortgage. From these
provisions of the decree declaring the equitable mortgage and the charge
created thereby and permitting redemption thereof within the stated
period, we find that the unregistered charge created by the company in
favour of the mortgagees is kept alive. The order of sale of the mortgage
property under the decree is to operate only if by the stated period
redemption has not been effected. Upon such sale the charge could be
extinguished. The provisions of s. 125, therefore, apply to the
unregistered charge created by the equitable mortgage and declared by
the decree and it is void as against the Official Liquidator. The
unregistered charge has no effect upon the property of the company in
liquidation. The mortgagees cannot sell the mortgage property
notwithstanding the decree obtained prior to the order winding-up the
company.

44. It was contended by Shri Tulzapurkar that Official Liquidator could
not go behind the decree unless there be fraud or collusion. In view of the
provisions of s. 125 Official Liquidator is entitled, if not obliged, to place
before the executing court his objection based thereon."

(g) The present case bears a striking resemblance to the facts

considered by the Division Bench, save for the added feature that the

Consent Decree that applicant seeks to enforce was procured by fraud. This

would, of course, make the Decree more vulnerable rather than less.

25 Attachment not a charge :

(a) The application proceeds on the basis that the attachment of

the Satara property constitutes a charge in favour of applicant. In the course

of the hearing, however, applicant has sought to abandon its stand that the

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attachment would constitute a charge. If it did, it would in any event fall

foul of both Sections 531 and 536 of the Companies Act 1956. However,

applicant has continued to maintain that by virtue of the attachment,

applicant was a secured lender and was entitled to priority of payment out

of the sale proceeds from the Satara property.

(b) There is nothing in law to support this proposition. In fact,

the authorities are quite clear that an attachment does no more than prevent

a debtor from dealing with an asset, thus ensuring that it would be available

to satisfy any legitimate debt. Official Liquidator has relied in this behalf on

the judgment of the Hon'ble Supreme Court in Kerala State Financial

Enterprises Ltd. V/s. Official Liquidator, High Court of Kerala 26 where the

Court, inter alia, observed that "an attachment itself does not create any

charge in the property". Official Liquidator also relied on the judgment of the

Hon'ble Calcutta High Court in Mahadeo Saran Sahu (Supra) where the

Court following the Full Bench ruling in Frederick Peacock V/s. Madan

Gopal27 and the dictum of the Judicial Committee in Motilal V/s.

Karrabuldani28 held that it was impossible to contend that plaintiff in that

case "acquired any title or charge upon the property by reason of the

attachment in question".

26. (2006) 10 SCC 709
27. I.L.R. 29 Cal 428
28. I.L.R. 25 Cal 179 (1897)

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(c) In the light of the aforesaid, apart from the fact that the

Consent Decree itself is liable to be set aside, applicant also acquired no title

or interest in the Satara Property merely by virtue of the attachment.

Applicant is no more than an unsecured creditor who has no prior right in

law over any other lender for payment out of the sale proceeds of the Satara

property. The interest of all stakeholders would therefore be far better

served if leave as sought for by applicant is refused and the property is sold

by the Official Liquidator.

26 Plea of Limitation :

(a) Applicant has contended that the directions sought by

Official Liquidator for setting aside the Consent Decree are time barred.

Shri Godbole for applicant relied on the judgment of the Andhra Pradesh

High Court in Official Liquidator, High Court V/s. Andhra Pradesh State

Financial Corporation29 in support of the proposition that the law of

limitation would apply as much to Official Liquidator as to any other litigant

and that an application of the nature brought by Official Liquidator was

required to be brought within three years from when the cause of action

accrued. The Consent Decree having been passed on 9th July 2009, applicant

contends that the reliefs sought in the Official Liquidator's Report were

clearly barred by time.

29. 2001 (3) ALT 334

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(b) The argument of applicant is misconceived. While the

Limitation Act would undoubtedly apply to Official Liquidator subject to the

qualification introduced in Section 458A30 of the Companies Act 1956 the

reliefs sought in the Official Liquidator's Report are not time barred for two

reasons, viz. applicant's argument loses sight of the fact that the Consent

Decree impugned in the Official Liquidator's Report was procured by fraud.

Any act of Court, which is the result of fraud ought be undone, regardless of

the stage at which it is impugned and or before which forum and secondly,

Official Liquidator became aware of the fraud only on coming into

possession of the papers and proceedings in Suit No.164 of 2009 pursuant

to the Order dated 4th January 2017 in the present company application.

(c) Shortly thereafter, Official Liquidator filed a reply in the

company application and an Official Liquidator's Report, in both of which he

impugned the Consent Decree as constituting a fraudulent preference. Thus,

in any view of the matter, the cause of action in favour of Official Liquidator

can be held to be complete only on his becoming aware, from the suit

proceedings, of the nature of the fraud perpetrated by applicant in collusion

with the Company. As such the directions sought by Official Liquidator are

clearly within time.

30. Section 458A : Exclusion of certain time in computing periods of limitation. Notwithstanding anything in the Indian
Limitation Act, 1908 (9 of 1908) or in any other law for the time being in force, in computing the period of limitation
prescribed for any suit or application in the name and on behalf of a company which is being wound up by the [Tribunal],
the period from the date of commencement of the winding up of the company to the date on which the winding up order is
made (both inclusive) and a period of one year immediately following the date of the winding up order shall be excluded.

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27 Refund of amounts withdrawn :

(a) It is applicant's case that Official Liquidator is, in any event,

not entitled to apply for refund by applicant of the amounts withdrawn by

it. Applicant so contends on the ground that the distribution was permitted

by DRT and that Official Liquidator, despite being heard, did not object to

such distribution and certainly not on the basis that the consent decree was

fraudulent.

(b) The formulation of this argument is problematic. The

distribution was effected not under orders passed by DRT. While applicant

and Kotak Mahindra Bank did place before the DRT consent terms defining

the proportion in which the sale proceeds of the Ambattur property would

be distributed as between them, no order was passed in terms of the said

consent terms by DRT. Directions in this behalf were eventually sought by

Kotak Mahindra Bank from this Court.

(c) The order dated 21st April 2016 of this Court permitting

such distribution was careful to qualify the order by the observation that it

would be an interim arrangement subject to final outcome of the issue on

status of the creditors of the Company (in liquidation) and that the order

was being passed at the instance of Kotak Mahindra Bank and applicant and

"without prejudice to the rights and contentions of the Official Liquidator".

As such, this order merely permitted an ad-hoc distribution of the sale

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proceeds and did not conclude any rights between the parties.

(d) Indeed, this issue regarding the illegality of the Consent

Decree sought to be enforced by applicant was neither considered nor

determined by either the DRT or this Court. This was on account of the fact

that the papers and proceedings in Suit No.164 of 2009, which induced

Official Liquidator to form the view that the Consent Decree is a fraudulent

preference, was not then in his possession. His omission in these

circumstances to raise a specific plea that the Consent Decree was

fraudulently procured cannot preclude Official Liquidator, being more fully

informed, from raising that plea now.

28 In these circumstances,

(a) the leave sought by applicant under Section 446 of the

Companies Act 1956 to enforce the Consent Decree dated 9 th July 2009 is

refused;

(b) the Consent Decree dated 9th July 2009 is declared illegal

and void as a fraudulent preference; and

(c) applicant is directed to refund with interest at 12% p.a. the

amount of Rs.10,17,03,493/- withdrawn by it from the sale proceeds of the

Ambattur property.

29 Company application no.341 of 2016 and Official Liquidator's

Report accordingly disposed.

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30 In view of the above, company application (lodging) no.85 of

2018 also disposed.

(K.R. SHRIRAM, J.)

Digitally
signed by
Gauri Gauri Amit
Gaekwad
Amit Date:
Gaekwad 2018.07.18
11:12:56
+0530

Gauri Gaekwad

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