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2023 DIGILAW 5 (KER)

Annam Steels (P) Ltd. v. Canara Bank Ltd.

2023-01-04

BECHU KURIAN THOMAS

body2023
JUDGMENT : Can the earnest money deposited by the promoter of a company prior to its incorporation, be treated as an earnest money deposit made on behalf of a bidding company at an auction? The aforesaid question primarily arises for consideration in this writ petition under Article 226 of the Constitution of India. The challenge is against an auction sale held under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, 'the Act'). 2. Initially, the writ petition was filed, challenging the auction notice issued under the Act. During the pendency of the writ petition, since the auction took place, an amendment was effected assailing the auction sale itself. 3. The facts, in a nutshell, are as follows : An amount of Rs.190 Crores was borrowed by the petitioners from a consortium of two banks comprising the first and second respondents. When repayment was defaulted, proceedings for recovery were initiated apart from filing an application under the Recovery of Debts and Bankruptcy Act, 1993, as O.A. No.147/2016. In the meantime, proceedings were initiated under the Act, which was challenged in S.A. No. 111/2017 before the DRT, Ernakulam. Later, when possession of the secured asset was proposed to be taken, W.P.(C) No.21892 of 2021 was filed by the petitioners, which was dismissed by judgment dated 03.01.2022. Thereafter, petitioners submitted a proposal for a one-time settlement, and since the initial proposal was not acceptable to the consortium of banks, a revised proposal was submitted, all of which ended in rejection. While so on 14.06.2022, the impugned sale notice was published, notifying the sale of one of the secured assets to be held on 30.07.2022 at 11.30 am. 4. A day before the date of sale, this writ petition was preferred challenging the sale notice. By an interim order dated 29.07.2022, a learned Single Judge of this Court directed the petitioners to deposit Rs.1 Crore on the date of sale (i.e. on 30.07.2022) and a further amount of Rs. 6.9 Crores to be deposited on or before 10.08.2022, and directed the confirmation of sale scheduled on 30.07.2022 to be deferred. Since the learned Single Judge had not stayed the auction, though petitioners complied with the condition of deposit of Rs. 1 Crore, the auction of the property took place on 30.07.2022 as notified. In the meantime, petitioners deposited Rs.6.9 Crores also within the time stipulated. 5. Since the learned Single Judge had not stayed the auction, though petitioners complied with the condition of deposit of Rs. 1 Crore, the auction of the property took place on 30.07.2022 as notified. In the meantime, petitioners deposited Rs.6.9 Crores also within the time stipulated. 5. Later, on 01.09.2022, the interim order staying the confirmation of sale was vacated by this Court, after noticing the amendment brought into section 13(8) of the Act. The decision of the Supreme Court in Bank of Baroda v. Karwa Trading Company and Another [ (2022) 5 SCC 168 ] and that of this Court in Sree Gokulam Chit and Finance Co. Pvt. Ltd. v. Emil and Eric Hospitality Services ( 2021 (6) KLT 673 ) were relied upon. While vacating the stay against the confirmation of sale, it was observed that the amount of Rs. 7.9 Crores deposited by the petitioners will be kept in a non-lien account and shall be subject to final orders in the writ petition. It was also clarified that petitioners will have the liberty to approach the appropriate forum if they are aggrieved by the auction sale. 6. A writ appeal was preferred by the writ petitioners against the said interim order as W.A. No.1355 of 2022. The Division Bench of this Court by judgment dated 06.10.2022, while affirming the order, observed that the direction to approach the Debts Recovery Tribunal is in effect, a final relief, and since the same could not have been granted as an interim measure, that portion of the order directing the writ petitioners to pursue their alternative remedies was interfered with. A further direction was issued to the learned single Judge to dispose of the writ petition itself on merits. It was pointed out that though petitioners had challenged the judgment of the Division Bench before the Supreme Court, by order dated 18.11.2022, the SLP was dismissed after observing that the learned single Judge would not be influenced by the observations of the Division Bench. 7. As mentioned earlier, the sale took place on 30.08.2022 and the bidder had deposited the entire purchase money. The writ petitioners impleaded the auction purchaser as the third respondent on 24.08.2022 and also amended the writ petition incorporating the challenge against the auction held on 30.07.2022. 7. As mentioned earlier, the sale took place on 30.08.2022 and the bidder had deposited the entire purchase money. The writ petitioners impleaded the auction purchaser as the third respondent on 24.08.2022 and also amended the writ petition incorporating the challenge against the auction held on 30.07.2022. According to the petitioners, as per the auction notice, the intending purchaser was bound to deposit the Earnest Money Deposit (EMD) at 10% of the reserve price followed by the balance equivalent to 25% of the bid amount and the balance within 15 days from the date of confirmation of sale. Petitioners pleaded that the EMD was deposited by an individual while the balance of bid amount was deposited by the Company that became the purchaser and therefore the said bid cannot be treated as a valid bid in the eye of law. It was also averred that the sale notice and the sale itself are malafide since petitioners had deposited the amounts directed by this Court and therefore the sale should not have taken place. 8. In the counter affidavit filed by the consortium of banks, the maintainability was questioned and also pointed out that the one-time settlement proposals submitted by the petitioners did not reflect any concrete proposal as such and that the preparedness to make the payment was not reflected in any of the proposals, and since respondents had rejected the earlier proposals, there were no pending settlement proposals. Respondents also pleaded that one Yousuf Pangat, who was the promoter of the third respondent, had remitted the EMD of Rs.79 lakhs, being 10% of the reserve price, on 02.07.2022 and thereafter on 01.08.2022, the balance equivalent to 25% of the bid amount was deposited, as per rule 9(3) of the Security Interest (Enforcement) Rules, 2002 (for short ‘the Rules’) and on 20.09.2022, the balance sale price of Rs.585.09 lakhs was also remitted, which clearly reveals that the third respondent had purchased the property in compliance with the provisions of the Act and the Rules. It was again pleaded that the incorporation of the third respondent company subsequent to the date of payment of EMD cannot be a reason to interfere with the sale and also that the third respondent was competent to bid the property even if the incorporation was subsequent to payment of EMD. It was again pleaded that the incorporation of the third respondent company subsequent to the date of payment of EMD cannot be a reason to interfere with the sale and also that the third respondent was competent to bid the property even if the incorporation was subsequent to payment of EMD. It was also pointed out that the auction has been confirmed in favour of the third respondent and that as per the provisions of the Act, the petitioners had lost their right of redemption and therefore they cannot stall the auction. 9. Another counter affidavit was filed on behalf of the third respondent/auction purchaser, reiterating the pleadings of the other respondents. It was further pointed out that the EMD was paid from the account of the promoter, who later became the Director of the Company after incorporation, and that there was absolutely no illegality since the person who submitted the bid was the company itself and the sale was in favour of the said entity. It was pleaded that the circumstances of the case indicate that the bid cannot be said to be unaccompanied by an EMD and the allegations to the contrary are baseless. Reliance was placed upon the decision of this Court in Sree Gokulam Chit & Finance Co. Pvt. Ltd. v. Emil and Eric Hospitality Services ( 2021 (6) KLT 673 ) and sought dismissal of the writ petition. 10. A reply affidavit was filed by the petitioners pleading that there is no legal sale in the eye of law and that the first respondent had acted without jurisdiction in conducting the auction and therefore, the question of maintainability of the writ petition cannot be raised. 11. On the basis of the above pleadings, I have heard Sri.S.Easwaran, learned counsel for the petitioners, Sri.A.V.Thomas, learned Senior Counsel duly instructed by Adv.C.Ajithkumar on behalf of respondents 1 and 2 as well as Sri.Praveen Hariharan, learned counsel for the third respondent. 12. Sri.S.Easwaran, learned counsel for the petitioners vehemently contended that the third respondent was incorporated only on 24.07.2022 and therefore, the EMD paid on 02.07.2022 could not have been made at the behest of the bidder and in such a view of the matter, there was no EMD that accompanied the bid. 12. Sri.S.Easwaran, learned counsel for the petitioners vehemently contended that the third respondent was incorporated only on 24.07.2022 and therefore, the EMD paid on 02.07.2022 could not have been made at the behest of the bidder and in such a view of the matter, there was no EMD that accompanied the bid. It was further argued that as per the provisions of the Companies Act, 2013 the company could not have commenced its business before incorporation and the receipt of incorporation and the corresponding forms were uploaded only on 01.08.2022 and since there was a legal interdiction in commencing business prior to 01.08.2022, the bid submitted by the third respondent was not valid and therefore the sale itself is void. Relying upon Rules 9(2) and 9(3) of the Rules, it was contended that the respondents could not have confirmed the sale in view of the direction of this Court. Learned counsel further urged that the third respondent Company had only a paid-up capital of Rs.1 lakh and that no amount had gone from the Company's account towards the bid and the said payment was made by Yousuf Pangat or by the bank itself and therefore the sale is malafide and liable to be interfered with. In support of the contentions, learned counsel relied upon the decisions in Commissioner of Income Tax and Others v. Chhabil Dass Agarwal [ (2014) 1 SCC 603 ], Authorised Officer, State Bank of Travancore and Another v. Mathew K.C [ (2018) 3 SCC 85 ] and Global Energy Ltd. and Another v. Adani Exports Ltd. and Others [ (2005) 4 SCC 435 ]. 13. Sri.A.V.Thomas, learned Senior Counsel on the other hand submitted that the EMD was paid on 02.07.2022 by the promoter of the Company who later caused the incorporation of the Company on 24.07.2022 which bid at the auction. According to the learned Senior Counsel, there is no legal embargo for bidding the property by the Company, even though the EMD was deposited by the promoter. It was also submitted that the property was notified for sale on 14.06.2022 and despite being aware about the proposed sale, this writ petition was filed on the eve of the auction. Though this Court directed the petitioners to deposit Rs. It was also submitted that the property was notified for sale on 14.06.2022 and despite being aware about the proposed sale, this writ petition was filed on the eve of the auction. Though this Court directed the petitioners to deposit Rs. 1 Crore by 30.07.2022 and a further Rs.6.9 Crores by 10.08.2022, there was no embargo in the conduct of the auction, and hence it was proceeded with. Learned Senior Counsel also asserted that in the absence of any legal invalidity of the auction, this Court ought not to interfere, as that would prejudice the attempts of the bank to enforce the security interest. 14. Sri.Praveen Hariharan, learned counsel appearing on behalf of the auction purchaser submitted that the writ petition itself is not maintainable as the remedy of the petitioners is before the Debts Recovery Tribunal. He further contended that the Company was incorporated on 22.07.2022 and that there was no legal hindrance in bidding at the auction. According to the learned counsel, as a private limited Company, no provision of the Companies Act, 2013 restricts the promoter from depositing the EMD on behalf of the Company and as long as there are no disputes between the Company and the promoter, it is not open for a third party to raise disputes, which are purely within the realm of internal arrangement. On the above basis, the third respondent sought for dismissal of the writ petition. 15. On a consideration of the rival contentions, the following questions arise for a solution : (i) Whether the remedy under Article 226 of the Constitution of India is available to the petitioners to set aside the sale? (ii) Whether the EMD paid by the promoter of the Company can be treated as a valid payment when the bid was subsequently made by the Company incorporated after the date of payment of EMD? (iii) Whether the sale held on 30-07-2022 is liable to be set aside? (iv) What is the effect of payment made by the petitioners pursuant to the direction of this Court on 28.07.2022? 16. The questions are discussed and answered as below. Q.No.(i) Whether the remedy under Article 226 of the Constitution of India is available to the petitioners to set aside the sale? 17. The Debts Recovery Tribunal has been constituted as a forum for challenging the steps initiated under the Act. 16. The questions are discussed and answered as below. Q.No.(i) Whether the remedy under Article 226 of the Constitution of India is available to the petitioners to set aside the sale? 17. The Debts Recovery Tribunal has been constituted as a forum for challenging the steps initiated under the Act. There is an alternative remedy available to a person aggrieved to challenge the steps initiated for recovery, including the auction. It is trite that the principle of exhaustion of alternative remedy is a rule of discretion and not of compulsion. However, there must be compelling reasons for the High Court to entertain a petition filed under Article 226 of the Constitution and pass interim orders ignoring the existence of effective alternative remedies. 18. In the decision in Authorised Officer, State Bank of Travancore and Another v. Mathew K.C. [ (2018) 3 SCC 85 ] the Supreme Court held that when the alternative forum in the form of the Debts Recovery Tribunal is in existence, recourse to the remedy under Article 226 or 227 of the Constitution of India cannot be resorted to. Similarly in a recent decision in Phoenix ARC Private Limited v. Vishwa Bharati Vidya Mandir and Others [ (2022) 5 SCC 345 ] also the Supreme Court had categorically observed that the High Court ought not to interfere under Article 226 of the Constitution of India when there is an alternative remedy available. 19. Petitioners are challenging Ext.P11 auction notice, which notified the auction on 30.07.2022. Ext.P11 notice is dated 14.06.2022. This writ petition was filed only on 28.07.2022, which was the last date for receipt of tender documents. Petitioners had ample time from the date of notice, i.e., 14.06.2022 till 28.07.2022, to move the statutory forum. However, they waited till the penultimate day of the auction to raise a challenge against the sale notice. There is no justification for invoking the jurisdiction of this Court under Article 226 of the Constitution of India, at the eleventh hour. Taking into reckoning the aforesaid circumstance, I am of the view that this writ petition itself is not maintainable and is liable to be dismissed on the said ground itself. 20. There is no justification for invoking the jurisdiction of this Court under Article 226 of the Constitution of India, at the eleventh hour. Taking into reckoning the aforesaid circumstance, I am of the view that this writ petition itself is not maintainable and is liable to be dismissed on the said ground itself. 20. Despite the above finding on the maintainability of the writ petition, I propose to consider the contentions raised by the parties on merits also, since the learned Senior Counsel for respondents 1 and 2 contended that in order to put the lis to rest, they have no objection in this Court considering the matter on merits also. Q. No.(ii) Whether the EMD paid by the promoter of the Company can be treated as a valid payment when the bid was subsequently made by the Company incorporated after the date of payment of EMD? 21. As per Ext.P11 sale notice dated 14.06.2022, issued under section 13(4) of the Act read with Rule 8(6) of the Rules, the property scheduled therein was proposed to be sold on 30.07.2022 by the online mode of auction for recovery of Rs. 2,51,15,17,883.81 plus interest. The property was specified as 13.53 cents (5.47 ares) at Kasaba Village, Calicut District. The terms of the auction provided that the reserve price was fixed at Rs. 790 lakhs and the EMD of Rs.79 lakhs must be deposited by 5.00 pm on or before 28.07.2022. 22. The following clauses (g) and (h) of the notice of auction are extracted as below: “(g) EMD amount of 10% of the Reserve Price is to be deposited by way of Demand draft in favour of Authorised Officer, Canara Bank, ARM Branch, Ernakulam OR shall be deposited through RTGS/NEFT/Fund transfer to credit of account of Canara Bank, ARM Branch, Ernakulam, A/c No. 209272434 IFSC code: CNRB0002875 on or before 28.07.2022 upto 5.00 pm (h) After payment of the EMD amount, the intending bidder should submit a copy of the following documents/details on or before 28.07.2022 up to 5.00 pm to Canara Bank, ARM Branch, Ernakulam, by hand or by email a. Demand Draft/Pay Order towards EMD amount. If paid through RTGS/NEFT, acknowledgement receipt thereof with UTR No. b. Photocopies of PAN Card, ID Proof and Address proof. If paid through RTGS/NEFT, acknowledgement receipt thereof with UTR No. b. Photocopies of PAN Card, ID Proof and Address proof. However, successful bidder would have to produce these documents in original to the Bank at the time of making payment of balance amount of 25% of bid amount. c. Bidders Name. Contact No. Address, E Mail Id. d. Bidder's A/c details for online refund of EMD.” 23. The EMD in the instant case was paid by Yousuf Pangat on 02.07.2022. He is one of the two Directors of the third respondent Company. The third respondent was incorporated only on 22.07.2022, and 25% of the bid amount, which totalled to Rs. 119 lakhs including the EMD, was paid on 01.08.2022 (the date of auction was a Sunday). Strictly speaking, a reading of clause (g) will reveal that the terms do not specify that the intending bidder alone can deposit the EMD. Clause (g) extracted above does not specify that the EMD must be deposited by the intending bidder itself. Assuming that such an intention or interpretation can be gathered from the other clauses, the question arises is whether the EMD deposited by a promoter can be termed to be by the Company incorporated later. 24. A promoter of a Company is defined in section 2(69) of the Companies Act, 2013 as follows: “S.2.(69) “Promoter” means a person— (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.” 25. The definition evinces that a promoter of a Company cannot be said to be wholly disassociated with the company. In general parlance, a promoter is a person who takes up the initiative to form, develop and organise an entity in the form of a Company. The promoter of a Company can be considered as the originator or the inventor of the corporate entity. A promoter is a person who employs himself in the preliminary work essential to form a Company. He is regarded as an imaginative entrepreneur. The promoter of a Company can be considered as the originator or the inventor of the corporate entity. A promoter is a person who employs himself in the preliminary work essential to form a Company. He is regarded as an imaginative entrepreneur. If the business of the Company becomes successful, the promoter is regarded as a visionary and a creative person. 26. In Palmers Company Law 24th Edition, it is observed that “the promoters of a Company stand undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the Company. They have the power of defining how, and when and in what shape, and under what supervision, it shall start into existence and begin to act…” Thus the acts done by a promoter, for the benefit of the Company, even prior to its incorporation, cannot be excluded from consideration. In fact, in India, sections 15(h) and 19(e) of the Specific Relief Act, 1963 even recognises contracts entered into by promoters of a Company prior to its incorporation, provided the Company has accepted the contract and has communicated such acceptance to the other party to the contract. 27. The Supreme Court had in the decision in Jai Narain Parasrampuria (Dead) and Others v. Pushpa Devi Saraf and Others [ (2006) 7 SCC 756 ] considered the question of whether the property purchased in the name of the promoters could be said to be the property of the Company. In the said case, the promoters had purchased a property in their name four months prior to the incorporation of the Company. After incorporation, the cost of purchase was paid by the Company to the promoters. After referring to the provisions of section 15(h) and 19(e) of the Specific Relief Act, 1963, it was observed that the promoters of a Company before its incorporation could enter into a contract for the benefit of the Company and such contract may be warranted by the terms of incorporation of the Company. The following observations are also relevant : “The Company upon incorporation has accepted the contract and communicated such acceptance to the other party. Besides that, purchase of the property was for the purpose of the Company. The following observations are also relevant : “The Company upon incorporation has accepted the contract and communicated such acceptance to the other party. Besides that, purchase of the property was for the purpose of the Company. …….What is meant by acceptance of the contract by the Company which is to be warranted by its incorporation is that it is not ultra vires the purpose for which the Company had been incorporated. …. An express ratification of the contract, therefore is no longer warranted.” 28. As mentioned earlier, the promoter of the auction purchaser had deposited the EMD even before the company was formed. The Company was incorporated on 22.07.2022, and the certificate of incorporation was received on 24.07.2022. At the time of the auction on 30.07.2022, the property was bid by the Company itself and not by the promoter. The Company does not dispute the payment of EMD by the promoter on 02.07.2022 and on the other hand has indirectly ratified the payment of EMD by bidding at the auction and depositing the balance bid amount. The promoter had no objection in treating the payment of EMD as made on behalf of the Company too. The bank has treated the payment of EMD as valid. The objects of the Company include acting as builders, and developers, carrying on real estate business and letting out buildings, as is evident from Ext.P17. Yousuf Pangat is one of the two subscribers to the shares of the Company, holding the majority of shares too. 29. The contention of the petitioners, based on section 10A of the Companies Act, 2013 is without any merit. Section 10A of the Companies Act provides that a company shall not commence any business or exercise any borrowing powers unless a declaration is filed within a period of one hundred and eighty days of the date of incorporation in the prescribed form and a verification of the address is filed with the Registrar. However, for any default committed, only a penalty of Rs. 50,000/-is stipulated as per section 10A(2). It is also provided in section 10A(3) that the name of the Company can be removed if the declaration is not filed within 180 days. The section therefore only indicates an irregularity until 180 days of incorporation of the company, if the declarations are not filed. In the instant case, the declarations were uploaded, even according to the petitioners on 01.08.2022. The section therefore only indicates an irregularity until 180 days of incorporation of the company, if the declarations are not filed. In the instant case, the declarations were uploaded, even according to the petitioners on 01.08.2022. Therefore, the uploading of declarations and other documents on 01.08.2022 cannot render the bid of the third respondent, legally incompetent. 30. In such circumstances, the EMD deposited by the promoter of the third respondent can be termed to be made on behalf of the Company incorporated later. Hence, it is held that the bid of the third respondent was supported by the EMD. Q.No. (iii) Whether the sale held on 30-07-2022 is liable to be set aside? 31. Petitioners had deposited an amount of 7.90 Crores pursuant to the direction of this Court while the auction purchaser had bid the property at Rs. 7.91 Crores, just one lakh more than the reserve price fixed. The amount was deposited by the petitioners pursuant to the direction of this Court and the confirmation was stayed on condition of deposit. 32. The payment made pursuant to the direction of this Court cannot be a reason to set aside the auction sale. The sanctity of an auction sale cannot be interfered with lightly. Though the action notice was issued on 14.06.2022, the writ petition was filed only on the eve of the auction. Even then, this Court had not interdicted the auction. The secured creditor proceeded with the auction and the third respondent bid at the auction and it is already held as answer to question No. (ii) above, that there is no merit in the challenge against the auction sale or against the notice of auction. 33. Merely because petitioners had deposited the amount fixed as the reserve price as directed by this Court, that by itself is not a reason to set aside the auction, especially when the secured creditor had not agreed to defer the auction based on the deposit. Depositing the amount as directed by this Court was a chance that the petitioners took to persuade the secured creditor from avoiding the auction. The secured creditor or the auction purchaser cannot be bound by the direction of this Court to deposit the reserve price and nor can the auction be set aside on that count. 34. The observation of this Court in Sree Gokulam Chit and Finance Co. The secured creditor or the auction purchaser cannot be bound by the direction of this Court to deposit the reserve price and nor can the auction be set aside on that count. 34. The observation of this Court in Sree Gokulam Chit and Finance Co. Pvt. Ltd. v. Emil and Eric Hospitality Services ( 2021 (6) KLT 673 ) are relevant. After noticing the amendment brought into section 13(8) of the Act it was held that “If the amount due to the secured creditor is offered after the date of publication of the notice for public auction, the secured creditor is not bound by such offer or tendering and instead shall be entitled to proceed with the sale or with such mode of transfer intended by the secured creditor………….. The statute has given a free hand to a secured creditor to enforce any security interest without the intervention of the Court or Tribunal. If the enforcement is by the methods and manner provided under the Act, the Court or Tribunal cannot interfere with the measures adopted……… It is vital to the scheme and intent of the Act that the sanctity of auction sales are maintained, lest the intending bidders would think twice before coming forward with bids. If the intending bidders are ensured the required confidence of auction sales under the Act, the price fetched at such auctions will be higher. Such higher prices at the auctions auger better in the interests of all and at the same time achieves the purpose of the Act also”. 35. In view of the above, the auction sale held on 30.07.2022 is not liable to be set aside. Q No. (iv) What is the effect of payment made by the petitioners pursuant to the direction of this Court on 28.07.2022? 36. By interim order dated 28.07.2022, this Court had directed the petitioners to deposit the amount of Rs. 7.90 Crores. The auction was, however, not stayed. The amount deposited by the petitioners was later directed to be kept in a non-lien account. The amount is allegedly stated to have been borrowed from other persons and was raised only on the basis of the directions of this Court. 7.90 Crores. The auction was, however, not stayed. The amount deposited by the petitioners was later directed to be kept in a non-lien account. The amount is allegedly stated to have been borrowed from other persons and was raised only on the basis of the directions of this Court. Since an act of Court shall not prejudice a person and as the amount is kept in a non-lien account, I am of the view that interest of justice demands that the said amount be returned back to the petitioners with nominal interest. 37. In view of the above discussions, the writ petition fails and is dismissed. However, respondents 1 and 2 shall return the amount of 790 lakhs deposited by the petitioners along with the bank interest accrued on it from the date of deposit, within fifteen days from the date of receipt of a copy of this judgment.