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2010 DIGILAW 352 (KER)

Mohammed Ashraf A. U. v. Official Liquidator

2010-05-17

S.SIRI JAGAN

body2010
ORDER : S. Siri Jagan, J. Report No. 88 dated 08/09/2005 is filed by the Official Liquidator, seeking orders for confirmation of the sale of 6.5 cents of land in Sy No. 403/5 in Ernakulam Village in Kanayannur Taluk, belonging to the former managing director of the Company in liquidation, which was directed to be attached and sold by this Court, conducted by the Official Liquidator, as per order dated 31/03/2005 passed by this Court in the winding up proceedings in the above Company Petition, as also for execution of sale deed in favour of the highest bidder after accepting the balance sale consideration. Company A. No. 539 of 2005 is filed by a person, who allegedly entered into an agreement for sale in respect of the same property with the former Managing Director of the company in liquidation and who has obtained a decree for specific performance of the sale agreement, in OS No. 197 of 2005 of the Additional Subordinate Judge's Court, Ernakulam, for an order setting aside the sale conducted by the Official Liquidator, in respect of the said property. CA No. 435 of 2006 is filed by the same person who filed OS No. 197/2005 for accepting a copy of the agreement of sale on record as evidence in Comp. A. No. 539/2005, in which this Court passed order dated 29/11/2006 withdrawing the decree in the suit and the entire proceedings before the Additional Sub Court, to this Court. MCA No. 112/2008 is filed by the Official Liquidator, to review/set aside the said decree passed by the Additional Sub Court, Ernakulam, in OS No. 197/2005 on the grounds that, the same has been obtained without impleading the Official Liquidator or without obtaining leave of this Court and that the same is vitiated by fraud, collusion and misrepresentation of the plaintiff in that suit and the former Managing Director of the company, the defendant in the said suit, who remained ex parte in the suit. Comp. A. No. 620/2008 is filed on behalf of M/s. Kanoos Business India (P) Ltd., the highest bidder for the property in the auction conducted by the Official Liquidator, seeking confirmation of the sale, acceptance of the balance purchase price and execution of the sale deed in his name. Comp. A. No. 620/2008 is filed on behalf of M/s. Kanoos Business India (P) Ltd., the highest bidder for the property in the auction conducted by the Official Liquidator, seeking confirmation of the sale, acceptance of the balance purchase price and execution of the sale deed in his name. Since these cases are closely interconnected and decision in one would dispose of the other also, they were heard together and are being disposed of together. 2. In his report, the Official Liquidator contends that as permitted by this Court in order dated 31/03/2005, in Report No. 82, he invited tenders for sale of the property, pursuant to which he received six sealed tenders details of which are given in Annexure A. The highest offer is by M/s. Kanoos Business India (P) Ltd. for a sum of Rs. 70,00,584/- and the second highest offer is Rs. 42,51,121/-. He further submits that the approved valuer, through whom he conducted a valuation, has valued the property at Rs. 68,25,000/-. He avers that the reasonability of the offer has been discussed with the President of the Depositors Association of the Company in liquidation and he opined that the highest offer now received is reasonable. He therefore prays that orders may be passed for confirmation of the sale in favour of M/s. Kanoos Business India (P) Ltd., Rukhiya Bagh, Ravipuram Road, Kochi-16 and for execution of the sale deed in favour of the purchaser or his nominee/nominees, after accepting the balance sale consideration. 3. The ex-managing director of the company in liquidation, Sri. Bobby Varghese, has filed objections to the report, claiming that the property does not belong to the company in liquidation and is his personal property, which cannot be sold in the winding up proceedings as an asset of the company in liquidation. According to him, the property originally belonged to his late father, M.U. Varkey as per sale deed No. 144 of 1982 and on his death, the same devolved by succession on Sri. Bobby Varghese, as per the terms of Will dated 05/03/1996 registered as No. 29/1996. He submits that the company in liquidation was incorporated in 1986 and the property was not acquired using money belonging to the company in liquidation. Therefore, the property cannot be sold as an asset belonging to the company in liquidation in proceedings of winding up of the Company, is his contention. He submits that the company in liquidation was incorporated in 1986 and the property was not acquired using money belonging to the company in liquidation. Therefore, the property cannot be sold as an asset belonging to the company in liquidation in proceedings of winding up of the Company, is his contention. He further submits that although by order in Report No. 76, he was directed to hand over the title deeds of the property, the order in report No. 82 was passed without notice to him and without hearing him. He submits that he had filed objections to Report No. 76, in which there was no order for sale and his objections were not also disposed of by passing an order on the same. According to him there is no order fixing personal liability, in respect of the company in liquidation, on him and therefore his personal property cannot be sold for paying off the creditors of the company in liquidation. 4. The Official Liquidator has filed a reply statement seeking to refute the averments of the ex-managing director. He contends that in CP No. 18 of 1999, this Court had passed an order dated 28/09/1999 holding that the directors are guilty of misappropriation of the fund of the company and of other acts of misfeasance and malfeasance and in the judgment dated 30/05/2002 ordering winding up, there was a direction to attach the properties of the directors of the company as well as properties of M/s. M.C. Jacob and Sri. Vinod P. Jacob and bring those properties for sale in accordance with law. Pursuant to the said orders, the subject property was also attached on 10/02/2003 and possession was also taken, which was detailed in Annexure A copy of Report No. 76, filed on 15/07/2004. He points out that in evidence of taking possession of the property, he had placed a notice board in the property and ever since then he had been in possession of the property. The former managing director had granted a licence in favour of M/s. Jose Electricals, Ernakulam to exhibit a hoarding in the property on receiving annual rent. After obtaining orders from this Court in Report No. 63, the licence was extended. The former managing director had granted a licence in favour of M/s. Jose Electricals, Ernakulam to exhibit a hoarding in the property on receiving annual rent. After obtaining orders from this Court in Report No. 63, the licence was extended. In MFA No. 629/2002, the former managing director had challenged the order of winding up containing the direction to attach and sell the properties of the directors, before a Division Bench of this Court, which was dismissed by Annexure B order dated 12/07/2002. Therefore, the ex-managing director cannot now take any contention against the attachment and sale of the property in question is the contention of the Official Liquidator. 5. In Comp. A. No. 539/2005, Sri. A.U. Muhammed Ashraf would contend that the property in question was obtained by Sri. Bobby Varghese as per Annexure B will executed by his father, who obtained the property as part of the properties purchased by him as per Annexure A, A1 and A2 sale deeds in 1982. He would submit that he has entered into Annexure C sale agreement dated 31/03/2002 with the said Sri. Bobby Varghese for purchase of 6.792 cents out of the said properties, 6.5 cents of which is now proposed to be sold by the Official Liquidator. At the time of execution of the agreement, he had paid an amount of Rs. 3 Lakhs as advance sale consideration. Subsequently also amounts were paid towards part sale consideration and altogether an amount of Rs. 10.25 Lakhs were paid by him to Sri. Bobby H. Varghese, out of the agreed consideration of Rs. 11 77,575/-, he submits. Since Sri. Bobby Varghese did not honour his part of the agreement, the applicant filed OS No. 197/2005 for specific performance of the sale agreement, which was decreed ex parte directing the applicant to deposit the balance sale consideration and directing the 2nd respondent to execute the® sale deed in favour of the applicant. In accordance with the said decree, the applicant had deposited the balance sale consideration in Court also, as evidenced by Annexure F deposit receipt, is his submission. He submits that subsequently the 2nd respondent informed the applicant that because of orders of this Court in CP No. 18/99, he is not in a position to execute the sale deed. In accordance with the said decree, the applicant had deposited the balance sale consideration in Court also, as evidenced by Annexure F deposit receipt, is his submission. He submits that subsequently the 2nd respondent informed the applicant that because of orders of this Court in CP No. 18/99, he is not in a position to execute the sale deed. According to him, he entered into the sale agreement prior to the winding up order containing the direction to attach and sell the properties and therefore his rights would prevail over the said order. He further submits that in view of the directions in the judgment in MFA No. 629/2002, against the winding up order, whereby it has been observed that "it is for the investigating officer to examine whether the directors had acquired any properties diverting the funds of St. Mary's Finance Ltd. and it's sister concern", only those properties acquired by diverting funds from the company and its sister concern are liable to be proceeded against as per the winding up order. Therefore the sale conducted by the Official Liquidator is liable to be set aside, is the contention of the applicant in Comp. A. No. 539/2005. 6. M/s. Kanoos Business India (P) Ltd., the highest bidder for the property in the sale conducted by the Official Liquidator, has filed a counter-affidavit to Comp. A. No. 539/2005 contending that the circumstances detailed therein, according to him, would lead to the irresistible conclusion that the agreement of sale and the subsequent suit, which culminated in the ex parte decree were collusive transactions between the two parties to the same. They point out that the fact that the alleged payments of advance sale consideration in instalments, all of which, except the initial advance of Rs. 3 Lakhs, were allegedly paid after the attachment of the property by the Official Liquidator as per orders of this Court, is not believable. They also point out very serious discrepancies in the stamp paper in which the agreement for sale is executed, which, according to them, reveals fraud in obtaining the stamp paper even. The stamp paper does not bear date of issue and serial number as required under Rule 43 of the Kerala Manufacture and sale of Stamp Rules, 1960, they point out. The stamp paper does not bear date of issue and serial number as required under Rule 43 of the Kerala Manufacture and sale of Stamp Rules, 1960, they point out. They would submit that the same is a fraudulent transaction to defeat the creditors of the company for which, this Court has made the Managing Director personally liable by ordering attachment and sale of his properties and, therefore, Sri. A.U. Muhammed Ashraf cannot claim any legal right on the basis of the said sale agreement. 7. The Official Liquidator has filed MCA No. 112 of 2008 seeking to review/set aside the decree passed by the Additional Sub Court, Ernakulam, in OS No. 197 of 2005 on the grounds that, the same has been obtained without impleading the Official Liquidator or without obtaining leave of this Court and that the same is vitiated by fraud, collusion and misrepresentation of the plaintiff in that suit and the former Managing Director of the company, in which also the contentions raised are the same as in the report filed by him. According to the Official Liquidator, in view of Section 446 of the Companies Act, 1956, the said suit could not have been filed without obtaining leave from this Court and without impleading the Official Liquidator. 8. The applicant in Company Appeal No. 539 of 2005 has filed a counter-affidavit taking the stand that since the suit is not one against the company or any property of the company, no leave of this Court is necessary under Section 446 of the Companies Act, 1956 and the Official Liquidator is not a necessary party to the suit also. 9. Sri. K.S. Kader Piliai, of M/s. Kanoos Group of Companies, the highest bidder in the sale conducted by the Official Liquidator, has filed Comp. A. No. 620/2008 seeking orders to confirm the sale conducted by the Official Liquidator, and to direct the Official Liquidator to execute the sale deed after accepting the balance consideration as per the tender conditions. None of the parties have filed any counter-affidavit to the same, presumably because the pleadings of the parties are already on record in the other cases. In any, event orders to be passed in the other cases would automatically dispose of this case also. 10. None of the parties have filed any counter-affidavit to the same, presumably because the pleadings of the parties are already on record in the other cases. In any, event orders to be passed in the other cases would automatically dispose of this case also. 10. Parties have not chosen to adduce any evidence, but only wanted to argue the matters on the basis of the documents already on record. I have heard arguments of counsel of all parties on the basis of the pleadings and documents. 11. I find that by order dated 29th November, 2006 in Company Appeal No. 435 of 2006, this Court had withdrawn the decree in OS No. 197/2005 and the entire proceedings of the First Additional Sub Court, Ernakulam in that suit, to this Court since the learned Judge who passed that order felt that in view of the fact that the consideration for the sale stated to be paid to the ex-managing director, receipt of which was acknowledged by him by endorsement in the reverse side of the sale agreement, was paid in cash and law prescribes that payments above a particular amount shall be made only by cheque and not by cash, without expressing anything on the merits of the case. 12. At the outset I do not think that OS No. 197/2005 before the First Additional Sub Court, Ernakulam, is incompetent for want of leave of this Court under Section 446 of the Companies Act or for non-joinder of the Official Liquidator. The property in question is not a property belonging to the company in liquidation, admittedly. Nor can it be said that the said property was acquired utilising funds of the company in liquidation, since the same was acquired by the father of the ex-managing director of the company in liquidation before the company in liquidation came into existence and the property devolved by testamentary succession on the ex-managing director. Section 446 applies only to suits against the company. The suit being not against the company and the subject matter of the suit not being a property belonging to the company, no leave under Section 446 was necessary nor is the Official Liquidator a necessary party to the suit. Section 446 applies only to suits against the company. The suit being not against the company and the subject matter of the suit not being a property belonging to the company, no leave under Section 446 was necessary nor is the Official Liquidator a necessary party to the suit. Perhaps, since the property has been attached by the Official Liquidator under orders from this Court, the Official Liquidator, at best, may have been a proper party to the suit, which does not make the suit incompetent on the ground of non-joinder of parties. But the decree obtained would be subject to the rights of the Official Liquidator on the basis of the attachment and sale as per orders of this Court, since the suit was filed long after the order of this Court directing attachment and sale of the property in question. 13. However, I do not think that Sri. Bobby Varghese and Sri. A.U. Muhammed Ashraf can, relying on the observation in the judgment in MFA No. 629/2002, contend that only those properties of Sri. Bobby Varghese, which were found to have been acquired using funds of the company, can be proceeded against in the winding up proceedings, in view of the fact that the Division Bench had confirmed the order in the CP, which contained a specific direction to attach and sell the personal properties of Sri. Bobby Varghese, which was not interfered with by this Court. 14. But certainly two other issues are necessarily to be considered, viz. whether the agreement for sale and the decree in the suit are unenforceable as a collusive and fraudulent action between the ex-managing director and the plaintiff in the suit to defeat the proceedings pursuant to the orders in the Company Petition for winding up and, even if not, whether the attachment and sale of the property would render the suit itself infructuous. 15. The Company Petition was filed as a creditor's winding up petition as early as in 1999. From the beginning of the proceedings itself, this Court noted that the directors of the company, especially the managing director was acting without bona fides, which is very evident from the winding up order. In fact, the order dated 28/09/1999 and the winding up order are clear indictment of the directors of the Company that they are guilty of misfeasance and malfeasance in respect of the affairs of the Company. In fact, the order dated 28/09/1999 and the winding up order are clear indictment of the directors of the Company that they are guilty of misfeasance and malfeasance in respect of the affairs of the Company. Before ordering winding up, while rejecting the application filed by the ex-managing director of the company for sanctioning of a scheme of compromise with the creditors, this Court formulated a scheme for working of the company and appointed a provisional liquidator for the implementation of the scheme, which did not work out only due to the non-co-operation of the ex-managing director Sri. Bobby Varghese, which has been specifically found in the order of winding up. It was found that the directors of the company, especially the Managing Director, were guilty of diversion of funds of the Company and serious misfeasance and malfeasance regarding the affairs and properties of the company. None of the records of the company were handed over by the managing director to the Official Liquidator, even after specific directions issued by this Court in that regard. While proceedings were going on, crores of rupees were unauthorisedly paid off by the managing director to various persons of his choice, alleging the same to be debts due to the payees, which act was found by this Court to be illegal and with ulterior motive. It is under the said circumstances this Court directed attachment of the personal properties of the directors of the company especially those of Sri. Bobby Varghese. Even before that order, it was quite clear from the various orders of this Court that this Court is likely to proceed against the directors, especially the Managing Director, Sri. Bobby Varghese personally. Sri. Bobby Varghese, the ex-managing director was more than aware of the same. Therefore I am of opinion that the agreement of sale between Sri. A.U. Muhammed Ashraf and Sri. Bobby Varghese was a pre-emptive transaction to create third party rights in the property, and defeat the creditors of the company and to pre-empt this Court from proceeding against the said property, which agreement was entered into barely two months prior to the winding up order, in which the personal properties of Sri. Bobby Varghese were directed to be attached and sold. I am not inclined to believe that Sri. A.U. Muhammed Ashraf was unaware of these happenings. It is to be noted that Sri. Bobby Varghese were directed to be attached and sold. I am not inclined to believe that Sri. A.U. Muhammed Ashraf was unaware of these happenings. It is to be noted that Sri. Bobby Varghese, despite the fact that very valuable property belonging to him was being proceeded against, did not even bother to contest the case, allowing the suit to be decreed ex parte. The consideration fixed by the so called agreement for sale, viz. Rs. 11,77,575/-was ridiculously low for a prime property near Banerji Road, at Ernakulam even in 2002, considering the fact that even in a distress sale, the present offer is more than Rs. 70 Lakhs. 16. The order dated 28/09/1999, passed by this Court in MCA No. 6 of 1999, filed by the company through its managing director for sanctioning a scheme of compromise with its creditors is really an indictment of the directors of the company, particularly the managing director Sri. Bobby Varghese. In the same this Court found him to have committed all sorts of acts of misfeasance and malfeasance and that only because of the said actions of the Managing Director the company has reached the situation leading to the winding up of the company. While rejecting the scheme of compromise put forward by the Managing Director, this Court found it necessary to frame a scheme by its own, appointing the provisional liquidator in charge of the company to implement the scheme. This Court, in that order, completely distrusted the Managing Director and the directors of the company. This Court has found that the company is aware of the present situation in which it is placed, which is not a secret but known to the public as well. When the public was aware of the same in 1999 itself, I find it hard to believe that Sri. A.U. Muhammed Ashraf was not aware of the situation Mr. Bobby Varghese was in. The Official Liquidator took possession of the attached property as early as on 10/02/2003 and put a notice board in the premises of the property declaring his possession, which is the property agreed to be purchased by Sri. A.U. Muhammed Ashraf as per the sale agreement, which property is situated in the heart of the city of Cochin. I am not inclined to believe that Sri. A.U. Muhammed Ashraf was not aware of all these happenings. A.U. Muhammed Ashraf as per the sale agreement, which property is situated in the heart of the city of Cochin. I am not inclined to believe that Sri. A.U. Muhammed Ashraf was not aware of all these happenings. In spite of the same, apart from the advance of Rs. 3 lakhs allegedly paid at the time of execution of the sale agreement, he had allegedly paid further advance sale consideration to Sri. Bobby Varghese, even without any legal compulsion for the same, as follows: 20/06/2002 - Rs.1,00,000/- 21/10/2002 - Rs.1,00,000/- 02/05/2003 - Rs.1,00,000/- 08/10/2003 - Rs.50,000/- 02/02/2004 - Rs.50,000/- 10/06/2004 - Rs.50,000/- 27/09/2004 - Rs.50,000/- 20/12/2004 - Rs.50,000/- 11/01/2005 - Rs.50,000/- 09/02/2005 - Rs.25,000/- All these payments were acknowledged as cash payments by endorsements in the sale agreement itself. No other evidence is produced regarding such payment which under law should have been paid only by cheque. Further, although, going by the payments endorsed in the agreement, as on 10/06/2004, the total payment was only Rs. 7 lakhs, Sri. A.U. Muhammed Ashraf acknowledged receipt of Rs. 8 Lakhs as on that date, which casts a serious doubt on the truth regarding the payments themselves. Therefore I am not inclined to believe that any consideration has passed from Sri. A.U. Muhammed Ashraf to Sri. Bobby Varghese in respect of the sale agreement as alleged by him. Further, by an endorsement dated 20/12/2004 in the agreement for sale, the period of validity of the agreement was extended upto 30/04/2005. But strangely, more than one month prior to the expiry of the extended period of the agreements 10/03/2005, a suit notice was issued alleging non-compliance with the sale agreement the suit was filed by Sri. A.U. Muhammed Ashraf for specific performance, without the plaintiff or the counsel signing the plaint and without paying Court fee, as if the same was the last date for filing the same. The defects were cured on 05/04/2005. After mutually agreeing to extend the time upto 30/04/2005, there was absolutely no reason why Sri. A.U. Muhammed Ashral should have filed the suit on 31/03/2005 for specific performance. In fact, the suit filed before the expiry of the extended period of agreement was incompetent. Despite getting notice in the suit, Sri. Bobby Varghese chose to remain ex parte, which, under the above circumstances, points only to collusion between the parties to the suit. A.U. Muhammed Ashral should have filed the suit on 31/03/2005 for specific performance. In fact, the suit filed before the expiry of the extended period of agreement was incompetent. Despite getting notice in the suit, Sri. Bobby Varghese chose to remain ex parte, which, under the above circumstances, points only to collusion between the parties to the suit. Therefore it is only a reasonable conclusion that Sri. Bobby Varghese was expecting some adverse orders by this Court for proceeding against his personal properties and therefore entered into the sale agreement with Sri. A.U. Muhammed Ashraf, barely two months prior to the order of attachment by this Court, in an attempt to pre-empt this Court from proceeding against the property. From the conduct of Sri. A.U. Muhammed Ashraf, it is clear that he was a willing accomplice to Sri. Bobby Varghese in his illegal designs to defeat the creditors, whom he had defrauded, in an attempt to overreach this Court. I am not inclined to accept that Sri. A.U. Muhammed Ashraf was a transferee in good faith for consideration. Therefore I am inclined to hold that the sale agreement and the suit between Sri. A.U. Muhammed Ashraf and Sri. Bobby Varghese are collusive actions to defraud this Court and the creditors of the company in liquidation and therefore illegal and liable to be set aside. Therefore they cannot raise any defence against the sale of the property in question by the Official Liquidator, on the basis of the sale agreement and II collusive decree obtained by them. In fact, since this Court has chosen to make Sri. Bobby Varghese personally responsible for the debts of the company, even if the sale deed had be executed pursuant to the decree, this Court would have been perfectly justified in declaring the same as a fraudulent transfer for the above reasons, by virtue of Section 54 of the Transfer of Property Act, at the instance of the Official Liquidator on behalf of all the creditors of the company, for which the Official Liquidator has filed MCA No. 112/2008. 17. Even otherwise, since the sale agreement has not yet fructified into a sale and title in the property has not yet passed from Sri. Bobby Varghese to Sri. 17. Even otherwise, since the sale agreement has not yet fructified into a sale and title in the property has not yet passed from Sri. Bobby Varghese to Sri. A.U. Muhammed Ashraf before the attachment as ordered by this Court, the property is still available for disposition by this Court in accordance with the attachment and sale as ordered in the winding up proceedings, especially since the sale agreement is not a registered one as required under section 64(2) of the Code of Civil Procedure, and therefore the attachment and sale is unaffected by the sale agreement and the decree. 18. Accordingly, it is declared that the sale agreement and the decree referred to above are vitiated by fraud and collusion and accordingly the decree in OS No. 197/2005 on the files of the 1st Additional Sub Court of Ernakulam is declared as null and void. 19. Since I am satisfied that the price now offered by the applicant in Comp. A. No. 620/ 2008 is a reasonable price for the same under the circumstances, I permit the Official Liquidator to confirm the sale and to execute the sale deed after receiving the balance sale consideration. The balance sale consideration shall be paid by M/s. Kanoos Business India (P) Ltd., within one month from today and the sale deed shall be executed within one month of receipt of the balance sale consideration, at the expense of the purchaser. 20. In the result, the prayers in Report No. 88 and Company Appeal Nos. 112 of 2008 and 620 of 2008 are allowed as above. Company Appeal No. 539 of 2005 is dismissed. Company Appeal No. 435 of 2006 filed for accepting documents on record has already been allowed on 09/08/2006. But, the same has been tagged along with these cases because of the order dated 29/11/2006, withdrawing the proceedings in OS No. 197/2005 before the 1st Additional Sub Court to this Court. In view of the above orders, no further orders are necessary in that Company Application and the proceedings in the same are closed.