IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MRS. JUSTICE M.C.HARI RANI WEDNESDAY, THE 19TH OCTOBER 2011 / 27TH ASWINA 1933 Co.Appeal.No. 39 of 2010(A) ------------------------------------- (AGAINST THE ORDER DATED 17.5.2010 OF THE LEARNED COMPANY JUDGE OF THIS COURT IN C.A.No.539/2005 IN REPORT No.88 IN C.P No.18/1999) .................... APPELLANT (S): PETITIONER: -------------------------------------------- A.U.MOHMMED ASHRAF S/O.LATE UMMER, AZHIVELIKAKATHA HOUSE, SYED MOHAMMED ROAD, EDAVANAKKAD P.O., ERNAKULAM. BY ADV. SRI.SEBASTIAN PAUL SRI.LAL K.JOSEPH SRI.A.A.ZIYAD RAHMAN SRI.V.R.REKESH RESPONDENT(S): RESPONDENTS: ------------------------------------------------ 1. THE OFFICIAL LIQUIDATOR, HIGH COURT OF KERALA, ERNAKULAM. 2. BOBBY VARGHESE, (EX-MANAGING DIRECTOR ST. MARY'S FINANCE LTD.) RESIDING AT MARIYA HOUSE, PIPILINE ROAD, PADIVATOOM ,KOCHI-24 3. M/S.KANOOS BUSINESS INDIA PVT LTD., RUKIYAS BAGH,RAVIPURAM ROAD, KOCHI, REP.BY ITS MANAGING DIRECTOR. R1 BY ADV.SRI.C.KHALID (B/O) SRI.K.MONI R2 BY ADV. SRI.K.K.JOHN R3 BY ADV. SRI.VAKKOM N.VIJAYAN SRI.MAATAYIL R.S.NAIR SMT.V.RENJU SRI.P.ANIYAN THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 14/12/2010, ALONG WITH COA NO. 59 OF 2010 COA NO. 60 OF 2010 THE COURT ON 19/10/2011 DELIVERED THE FOLLOWING: K.M.JOSEPH & M.C.HARI RANI, JJ. ------------------------------------------------------ Company Appeal No.39 of 2010-A Company Appeal No.59 of 2010-E & Company Appeal No.60 of 2010-E ---------------------------------------------- Dated, this the 19th day of October, 2011 J U D G M E N T K.M.Joseph, J. Being connected we dispose of these appeals by this common judgment. 2. The appellant in all these cases is one and the same. He calls in question the order passed by the learned Company Judge in Co.A.No. 539 of 2005 in Report No.88 in C.P.No. 18 of 1999. He also challenges the order passed in M.C.A.No.112 of 2008 in Report No.88 in CP 18 of 1999. Lastly, he also calls in question the order passed in Co.Appl No.620 of 2008 in Report No.88 in C.P.No.18 of 1999. C.P.No.18 of 1999 was filed to wind up St. Mary's Finance Ltd. (hereinafter referred to as the 'Company'). 3. Briefly put, the case of the appellant is as follows: The appellant entered into an agreement dated 31.3.2002 with Sri.Bobby Varghese (2nd respondent) for purchase of property having an extent of 6.792 cents in COA 39,50, 60/2010 -2- Ernakulam village. The 2nd respondent is none other than the Ex-Managing Director of the company. It is the case of the appellant that the property in the agreement originally belonged to Sri. M.U.Varkey who is the father of the 2nd respondent. The appellant paid a sum of R.10.25 lakhs to the 2nd respondent in all and after issuing lawyer notice he instituted O.S.No.197/2005 before the Ist Additional Sub Court, Ernakulam seeking specific performance of the agreement. The suit was decreed allowing specific performance of the contract directing the appellant to deposit the balance sale consideration of Rs. 1,52,575/- within one month and the 2nd respondent was to execute the sale deed on such deposit being made in favour of the appellant. It is the further case of the appellant that he remitted the balance sale consideration within the stipulated time. It is his case that the 2nd respondent expressed his inability to execute the sale deed and informed him as to the proceedings initiated by the Official Liquidator which was concealed by him at the time of advancing the sale consideration. It is his case that the 2nd respondent also informed him that the property has been attached and sold in auction in the Company Petition as part of liquidation. It is further contended that on further enquiry it was revealed that in compliance with the order of Court on COA 39,50, 60/2010 -3- 30.5.2005, proceedings were to be initiated against the properties of Directors of the company including the properties of the 2nd respondent, and, accordingly, the Official Liquidator conducted sale of the property in which the 3rd respondent was the highest bidder. The 3rd respondent has offered Rs.70,00,584/-. On the said basis the appellant filed C.A No.539/2005 to set aside the sale by the Official Liquidator in favour of the 3rd respondent. Pending the same, Liquidator filed M.C.A No.112/2008 to review the judgment in O.S.No.197/2005. The 3rd respondent filed C.A.620/2008 for a direction to the Liquidator to confirm the sale conducted in his favour. By the judgment under challenge the learned Company Judge dismissed C.A.No.539/2005, while he allowed the prayers in M.C.A.No.112/2008 and C.A.No.620/2008. It is accordingly that the appellant has filed Co.A.No.39/2010 against the order passed in C.A.No.539/2005, Co.A.No.59/2010 against the order in M.C.A.No.112/2008 and Co.A.No.60/2010 against the order in C.A.No.620/2008 as aforesaid. 4. A learned Single Judge of this Court had withdrawn the decree in the suit and other proceedings to this Court in exercise of the powers under Article 227 and it was directed that in exercise of the authority under the Companies COA 39,50, 60/2010 -4- Act that the suit itself shall stand tagged along with the Company Applications for further consideration. The Official Liquidator had been directed to take appropriate steps . It is thereafter that the Official Liquidator apparently filed petition to review MCA No.112/2008. 5. We heard the learned counsel for the parties. We also heard Sri.Jacob Mathew Manalil who purported to appear for the Depositors' Association which is the prime player in the proceedings as on all hands admitted. 6. The findings of the learned Company Judge are as follows: O.S.No.197/2005 filed by the appellant is not incompetent for want of leave of the Court under Section 446 of the Companies Act or for non-joinder of the Official Liquidator. The property in question is not the property belonging to the company in liquidation admittedly. It cannot also be said that the property was acquired utilizing the funds of the company in liquidation as it 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 under a will. The Official Liquidator at best would be a proper party, but, it does not make the suit incompetent. But, the decree would be subject to the rights of the Official Liquidator on the basis of COA 39,50, 60/2010 -5- attachment and sale as the suit was filed long after the order of the Court directing attachment and sale. It is further found as follows. It is not open to the appellant and 2nd respondent relying on the observations of the judgment in M.F.A.No.629/2002 to contend that only those properties of the 2nd respondent found to have been acquired utilizing the funds of the company could be proceeded against in the winding up proceedings. The Company Petition was filed as a creditor's winding up petition in 1999. From the beginning of the proceedings it is noted that the directors especially the Managing Director was acting without bonafides. Reliance is placed on the order dated 28.9.1999 and the winding up order to show that directors are guilty of misfeasance and malfeasance in respect of the affairs of the company and it is a clear indictment of the directors. 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. Crores of rupees were unauthorizedly paid off by the Managing Director to various persons of his choice while proceedings were going on alleging the same to be debts due to the payees. It is in the said circumstance the personal property of the directors were directed to be attached. The learned Judge expressed his COA 39,50, 60/2010 -6- opinion that the agreement between the appellant and the 2nd respondent was a pre-emptive transaction to create the 3rd party rights in the property and defeat the creditors of the company and to pre-empt the Court from proceeding against that property which agreement was entered into two months prior to the winding up order. Learned company Judge expressed his disinclination to believe that the appellant was unaware of those proceedings. The 2nd respondent did not even choose to contest the case and allowed the suit to be decreed exparte. For the prime property near Banerji Road at Ernakulam the consideration was Rs.11,77,575/-. The 3rd respondent has offered more than Rs.70 lakhs in a distress sale. The Court distrusted the Managing Director and Directors of the company. The public was aware of the position. In 1999 the learned Judge found it hard to believe that the appellant was not aware of the situation the 2nd respondent was in. The Official Liquidator took possession of the attached property on 10.2.2003 and put a notice board in the premises of the property declaring his possession which is the property agreed to be purchased by the appellant. The appellant would have been aware of these happenings. He allegedly paid further consideration without any legal compulsion. There is no evidence except the endorsement in COA 39,50, 60/2010 -7- the sale agreement. The amounts should have been paid under law only by cheque. Even going by the payments endorsed in the agreement on 10.6.2004 the total payment was only Rs.7 lakhs. However, the appellant acknowledged receipt of Rs.8 lakhs which casts serious doubt regarding the truth of the payments themselves. The learned Judge was not inclined to believe that any consideration passed from the appellant to the 2nd respondent. By endorsement dated 20.12.2004 the period of validity of the agreement was extended upto 30.4.2005. One month prior to the expiry of the extended period suit notice was issued alleging non- compliance and the suit was filed by the appellant 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 5.4.2005. There was no reason for the appellant to file on 31.3.2005 when there was time till 30.4.2005. There is collusion. It is only a reasonable conclusion that the 2nd respondent was expecting some adverse orders from the Court for proceeding against his personal properties and thereby entered into the sale agreement barely two months prior to the order of attachment by this Court in an attempt to pre-empt the Court from proceeding against the property. From the conduct of COA 39,50, 60/2010 -8- the appellant it is clear that he was a willing accomplice to the 2nd respondent in his illegal designs to defeat the creditors. The appellant was not found a transferee in good faith for consideration. The suit was found to be collusive to defraud the Court and creditors. Since the Court had chosen to make the 2nd respondent personally responsible for the debts of the company even if sale deed had been executed pursuant to the decree there was justification to declare the same as fraudulent transfer by virtue of Sec.64 of the Transfer of Property Act. It is further found that since the sale agreement has not yet fructified into a sale and the title in the property has not yet passed to the appellant from the 2nd respondent before attachment, the property is still available for disposition of the Court in accordance with the attachment and sale as ordered in the winding up proceedings. The sale agreement is not a registered one under Sec.64(2) of the Code of Civil Procedure and therefore the attachment and sale is unaffected by the sale agreement and decree. Learned company Judge on these findings inter alia declared that the sale agreement and decree are vitiated by fraud and collusion and accordingly the decree in O.S.197/2005 was declared as null and void. Finding the price offered by the 3rd respondent as reasonable the Liquidator was permitted to confirm the sale COA 39,50, 60/2010 -9- and to execute the sale deed after receiving the balance sale consideration. To pay the balance sale consideration one month's time was given. 7. Learned counsel for the appellant would contend as follows: Learned Judge went wrong in relying on the price mentioned in the agreement between the appellant and the 2nd respondent. He would point out that the agreement was in the year 2002. He relies on the report of the Official Liquidator to show that in the year 2004 it was estimated at about Rs.32 lakhs. The fact that it is sold in 2008 for about Rs.70 lakhs should therefore be viewed in the circumstance as not militating against the genuineness of the agreement in 2002. It is also pointed out that in the auction at which the 3rd respondent quoted at Rs.70 lakhs the rest of the bidders had quoted far lower amounts. It is further contended that the learned Judge has erred in finding that even adding all the sums mentioned the amount would be only Rs.7 lakhs. It is pointed out that one payment has been omitted to be considered. It is further contended that the reliance placed on the newly added provision to Se.64 of the Code of Civil Procedure was misplaced. He would submit that the amendment came into effect on 1.7.2002 while the agreement is dated 31.3.2002 and the amendment which speaks about COA 39,50, 60/2010 -10- registration of the agreement cannot be applied. His next contention is that while the agreement is dated 31.3.2002, the attachment is effected only in 2003. In such circumstances, the decision of the Apex Court in Vannarakkal Kallalathil Sreedharan v. Chandramaath Balakrishnan and another (1990 (3) SCC 291) and the Division Bench decision of this Court in Abdul Jalal v. Mariya Financiers & Anr. (2002 (1) KLJ 482) would show that the right of the earlier agreement holder will prevail over the later attaching creditor. He would submit that on this short point the appeals are to be allowed. It is further contended that the property in question is the personal property of the 2nd respondent. He derives his title under a will executed by his father. It is not the property of the company. He refers to the judgment in M.F.A. 629/2002 in an attempt to contend that what really the Court was concerned with was the properties which were acquired using the funds of the company and sister concern and by no means it could be contended that the property in question was acquired by the 2nd respondent using the funds of the company or benami as admittedly, this property belonged to his father and a conveyance was executed in the year 1982 in favour of his father. COA 39,50, 60/2010 -11- 8. Per contra, learned counsel for the 3rd respondent/auction purchaser would support the order. She would point out various circumstances establishing collusion between the appellant and the 2nd respondent. It is her case that actually the agreement was created upon knowing of the attachment in the year 2003. In this connection, she points out that all the payments are allegedly made in cash and there is no payment by way of cheque. She would point out that the 2nd respondents embarrassed circumstances was well-known and if there was a genuine agreement when the property was attached by the Official Liquidator as directed by this Court there would have been a claim raised against the attachment. This is not done. It is further contended that the recitals in the agreement to the effect that the 2nd respondent must take steps to lift the attachment and to make the property free from encumbrance would also show that the appellant was aware that there were attachments and property had to be rendered free from encumbrance by the 2nd respondent. This shows that the appellant was fully aware of the facts and he was privy to the collusion and fraud as rightly found by the Company Judge. Another important circumstance which is pointed out is the institution of the suit at the time when there was about a month under the alleged agreement COA 39,50, 60/2010 -12- for the 2nd respondent to execute sale deed. In other words, the suit was premature. In this context, it is further pointed out that the suit is for specific relief and not for injunction. This is to counter the allegation of the appellant that the suit could not be termed as premature as there were attempts by 2nd respondent to transfer the property. If that was true, learned counsel for the 3rd respondent submits, that the suit would have been one for injunction. Then it is next pointed out that the conduct of the 2nd respondent in not contesting the suit and remaining exparte spoke volumes for the collusion between the parties. That the price is very low for the prime property is reiterated as another circumstance establishing collusion and fraud between the parties. Learned counsel also read out the recital in Annexure A1 document of title by which the predecessor in interest of the 2nd respondent acquired title to contend that actually the 2nd respondent's father had acquired on behalf of the firm of which he was the managing partner. She also relied on the recital in the agreement that the 2nd respondent will remove the notice board to contend that it was the attachment which is referred to and it shows lack of bonafides in the claim of the appellant. 9. Learned counsel on behalf of Depositors Association Sri. Sri.Jacob Mathew Manalil whom we are told COA 39,50, 60/2010 -13- copies of all applications have been served right from the beginning would submit as follows: It is a case where Sec.53 of the Transfer of Property Act is applicable and the appellant was not a bonafide transferee for consideration. In this regard he would point out that actually the deposits were taken by the firm. The company was floated somewhere in the year 1986. Several suits were filed by the unpaid depositors. Decrees were obtained against the 2nd respondent, his wife and the company. In fact, it is pointed out that the attachment was obtained in respect of one suit in regard to the very property in question. Therefore, there can be no doubt that the 2nd respondent was in an embarrassed position and the only question was whether the appellant was aware of and party to it. In this regard it is pointed out that the appellant and the 2nd respondent belong to Ernakulam district. Both of them are dealing in real estate. Therefore it is most probable that the appellant was fully aware of the condition. It is submitted that the matter was reported in news papers including the arrest of the 2nd respondent. He would also submit that even if any payments were made by the appellant it cannot be treated as bonafide. He does not admit that payments were made. He relied on the decision in AIR 1963 SC 1150 to contend that the appellant was fully aware and is COA 39,50, 60/2010 -14- a party to the efforts of the 2nd respondent to delay and defeat his creditors by allegedly entering into the agreement. 10. Learned counsel for the appellant in reply would submit that the appellant is not afforded an opportunity by the learned Company Judge to adduce evidence to establish his case. He contends that the appellant had obtained a decree from the civil Court. There was an application to review the said judgment. It stands allowed. It is only when the decree was reviewed and set aside that the appellant need have adduced evidence in support of his contentions, he submits. No doubt, he does not have a case that he made request to the learned Company Judge to adduce evidence. He would further contend that the property in question was the personal property of the 2nd respondent and the appellant may have been aware of the financial position which the company was in. Being engaged in real estate the appellant was prepared to take risk in the matter, he contends. But, he would never have thought that the personal property of the 2nd respondent would be proceeded against by the Company Court. He dubs the order of the Company Court by which the personal property is directed to be proceeded as unusual. Even if there may have been justification for the Court to order so, when the agreement COA 39,50, 60/2010 -15- was entered into the appellant was not to be blamed for entering into the agreement. He would also submit that fraud and collusion has not been established. It is further contended that the only beneficiary of the impugned order is the 2nd respondent. 11. As already noted the appeals arise from the common order passed in three proceedings. Firstly, the appellant filed C.A.No.539/2005 to set aside the proceedings by the Official Liquidator. Let us examine whether there is any merit in the complaint of the appellant against the order of the Company Judge rejecting the said application. The appellant inter alia refers to the sale agreement, payments made, proceedings in the suit, the decree obtained, the order passed by the Company Judge winding up the company, the order passed by the Division Bench in MFA 629/2002 and he further states that he was not aware of the proceedings initiated against the property by the Official Liquidator. He alleges that the 2nd respondent was well aware of the proceedings and deliberately concealed the facts from him with ulterior motive and that he managed to receive more than 90% of the sale consideration. 12. A counter affidavit is filed in the matter by the Official Liquidator. COA 39,50, 60/2010 -16- 13. CP 18/1999 was a creditor's petition to wind up the company. The company had filed application under Section 391 (1) of the Act for sanction of a scheme of compromise. A creditor filed CP 18/99 for winding up of the company. Both these petitions were disposed of by order dated 28.9.99 rejecting the scheme of compromise proposed by the company, but the Court did not allow the winding up either and instead the Court proposed a scheme for the running of the business of the company without winding up of the company. The court gave various directions for the working of the scheme. Official Liquidator was appointed as the provisional liquidator of the company under Section 450 of the Act. It appears that the scheme did not work and the petitioner in the CP filed C.A.320/2000 seeking various reliefs. The Court proceeded to pass order dated 30.5.2002 winding up the company. It was further ordered (direction No.3) that the properties of the directors of the company as well as certain others mentioned therein shall be attached and those properties shall also be brought for sale in accordance with law. In the said order this Court had referred to order dated 28.9.1999 and to the fact that this Court had found in the said order that the company had admitted that a huge amount of Rs.7.67 crores had been diverted to another COA 39,50, 60/2010 -17- company St.Mary's Properties Limited in violation of law. It is further found that in violation of the order Rs. 2.9 crores had been paid off to certain creditors of the choice of the directors of the company though there is a direction to retain the amount. The Court also in the order dated 30.5.2002 took note of the repeated directions to produce the records. Further, the Court took note that in a statement submitted on 23.6.1999 the Company admitted gold security of more than 2 crores in the possession of the company. After adjusting the amount received and release of gold for Rs.1,29,20,039/-, the Court found that still there would be gold worth nearly Rs.1 crore. The company had not surrendered the above gold security to the Official Liquidator even after repeated directions. The Court noted that it appears that the gold had been misappropriated by the company or the amount had been collected and misappropriated. 14. Sri.C.K.Moni, learned counsel for the Official Liquidator would point out that it is on this basis that the personal property of the Directors have been directed to be proceeded against and the reason the property in question was also attached and brought to sale. 15. Learned counsel for the appellant