COMA/337/2005 1/33 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 337 of 2005 IN COMPANY PETITION No. 264 of 2000 WITH COMPANY APPLICATION No. 279 of 2006 IN COMPANY APPLICATION No. 337 of 2005 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- ========================================= 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge? NO ========================================= BHAGUDEO FLOUR MILLS PVT.LTD. - Applicant Versus O.L. OF DISHA AGRO INDUSTRIES LIMITED. & 4 - Respondents ========================================= Appearance : MR AS VAKIL for Applicant. MR JS YADAV FOR OFFICIAL LIQUIDATOR. MR PRANAV G DESAI for Respondent No. 2. MR RD DAVE for Respondent No. 3. MR AR GUPTA for Respondent No. 4. MR SHIRISH JOSHI for Respondent No. 5. ========================================= COMA/337/2005 2/33 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.A.PUJ Date : 29/04/2008 COMMON ORAL JUDGMENT 1. Since the subject matter of both these applications is somewhat similar and both these applications deal with the same property, they are heard together and the same are being disposed of by this common judgment and order. 2. In Company Application No. 337 of 2005, the applicant has taken out the Judges Summons praying for permanent injunction against the Official Liquidator from taking possession of the factory, land and building of the applicant at survey No. 427, Maha Gujarat Industrial Nagar, Village Moraiya, National Highway No.8 , Sarkhej Bavla Highway-Taluka Sanand, Ahmedabad, 3. In Company Application No. 279 of 2006 the applicant has taken out the Judges Summons praying for a direction to the Official Liquidator to execute the sale deed in favour of the applicant in respect of the above referred property. COMA/337/2005 3/33 JUDGMENT 4. In both these applications, affidavits are filed by Shri Dharmin Patel Director of the applicant company in support of the respective Judges Summons. 5. It is the case of the applicant Company that Disha Agro Industries Limited (in liquidation) had obtained some financial assistance from Gujarat Steel Financial Corporation. The said Disha Agro Industries had also obtained various financial assistance/ facilities from State Bank of India and failed to repay the financial assistance. The GSFC, in exercise of powers conferred upon it under section 29 of the State Financial Corporation Act took over the possession of Disha Agro Industries' land and building. 6. Being aggrieved by the said action of GSFC, Disha Agro Industries filed Special Civil application No. 750 of 2000 before this Court on or around 1.2.2000 praying for a direction to quash and set aside the action of GSFC in taking over the possession of its properties. This Court had initially issued notice to GSFC and did not grant any ex-parte ad interim order in favour of Disha Agro Industries. Thereafter, the GSFC appeared in the said COMA/337/2005 4/33 JUDGMENT petition and filed its affidavit in reply on 3rd May 2000. During the pendency of the said petition, GSFC issued the public advertisement dated 21st June 2000 inviting offers for sale of the property. The applicant company had submitted its offer before GSFC. Meanwhile, Disha Agro Industries had preferred Civil Application No. 5262 of 2007 before this Court praying to quash and set aside the letter dated 22nd June 2000 whereby the GSFC intimated Disha Agro Industries that auction of the property of Disha Agro Industries would be considered on 6th July 2000. This Court passed order on 5th July 2000 observing that any action which GSFC may take shall be subject to further order which may be passed by this Court in the said proceedings. Since this Court had not granted any stay/ injunction against the sale of the property of Disha Agro Industries the property came to be sold by GSFC and purchased by the applicant company. The applicant company had initially submitted their offer of Rs 72 lakhs. GSFC in its meeting held on 6th July 2000 followed by the Board meeting on 20th July 2000 considered the offer of the applicant company, including revised offer of Rs.1,11,11,111/- and accepted the same subject to certain terms and conditions. The COMA/337/2005 5/33 JUDGMENT applicant company thereafter paid to GSFC sum of Rs.36,71,111/- and furnished bank guarantee for the remaining amount and possession of the properties of Disha Agro Industries was handed over to the applicant company. 7. Since the properties of Disha Agro Industries were sold to the applicant, Disha Agro Industries filed Civil Application No.7945 of 2000 before this Court praying for impleadment of the applicant as party respondent in Special Civil application No.750 of 2000, and also praying for appointment of Court Commissioner to take inventory of the premises of Disha Agro Industries and to submit his report as regards the possession of the machineries, materials and the books of account lying in the premises, and further praying for injunction restraining GSFC and the present applicant from taking any action as regards the finished goods, raw materials, machineries as well as books of accounts lying in the premises and further restraining them from alienating, selling, transferring or in any way using or disposing of the said property. This Court had passed order on 6th September 2000 in Civil Application No.7945 of 2000 COMA/337/2005 6/33 JUDGMENT and granted prayer only with regard to the impleadment of the applicant as respondent No.2 in Special Civil Application No.750 of 2000. 8. The applicant had also filed Civil Application No. 8419 of 2000 in Special Civil Application 750 of 2000 seeking leave to be joined as respondent in Special Civil Application No. 750 of 2000 and to make amendment in the said petition accordingly. The said prayer was granted by this Court vide order dated 18th September 2000. 9. During the pendency of the above proceedings before this Court, in or around September / October 2000, one Grasim Industries Limited filed Company Petition No.264 of 2000 against Disha Agro Industries under section 433, and 434 of the Companies Act, 1956 for winding up the said company on the ground that the said company had failed and neglected to pay an amount of Rs 3,40,276.96 ps along with interest drawn at 24% per annum as on 31st August 2000. The said petition came to be admitted vide order dated 8th August 2001. However, the order of advertisement was not passed and the same was COMA/337/2005 7/33 JUDGMENT thereafter passed on 18th November 2002 and the petitioner was directed to publish/ advertise in Indian Express and Sandesh, both of Ahmedabad editions. An affidavit of publication of the advertisement came to be filed on or around 11th July 2005, but none appeared on behalf of Disha Agro in the said petition. 10.Disha Agro Industries filed Civil Application No. 215 of 2005 on or around 12th January 2005 seeking an amendment in Special Civil Application No. 750 of 2000 and thereby challenging the sale of property of Disha Agro Industries in favour of the applicant company. For the first time , after more than four years in the said Civil Application, the applicant company has filed its affidavit in reply dated 6th March 2005. GSFC has also filed its affidavit in reply. 11.During the pendency of Special Civil Application No. 750 of 2000 and Civil Application No. 215 of 2005 this Court, on 20.07.2005 passed winding up order in the case Disha Agro Industries and appointed the Official Liquidator as the liquidator of Disha Agro Industries. The liquidator was directed to take charge of the assets of Disha Agro COMA/337/2005 8/33 JUDGMENT Industries in exercise of powers conferred upon him under the provisions of the Companies Act 1956. Pursuant to the winding up order dated 20th July 2005, the officers of the Official Liquidator visited the property on 5th October 2005 to take charge of the assets of Disha Agro Industries. The applicant company informed the officers of the Official Liquidator that they are in possession of the premises/ property since September 2000, in view of having purchased the same from GSFC. The possession was not taken on that day. However, the applicant company was apprehending that the possession might be taken from them filed Company Application No. 337 of 2005 before this Court. This Court has issued notice dated 14th October 2005 and since, the possession was not taken by the Official Liquidator the direction regarding interim relief was not considered. On 22nd November 2005, this Court directed the Official Liquidator to examine the matter and submit its detailed reply within four weeks. By way of interim measure it was directed that in relation to the possession of the property in dispute the parties shall maintain status quo. The applicant was also directed not to create any charge or encumbrance over the property or alienate the COMA/337/2005 9/33 JUDGMENT same without any further order. 12.The Official Liquidator has filed his report on 19th December 2005 wherein an issue was raised by the Official Liquidator that the sale was conducted by GSFC one month prior to the presentation of the petition and hence, in view of the provisions contained in Section 531 of the Companies Act, 1956, the sale transaction entered into by GSFC with the applicant company is fraudulent. The Official Liquidator therefore requested the Court to direct the applicant to hand over the possession of the assets of the company to the Official Liquidator. The Official Liquidator has also requested this Court to direct GSFC to transfer the sale proceeds so realized by GSFC. The Official Liquidator has also sought for direction with regard to the advertisement for the purpose of inviting claims of all classes of creditors and workers of the company. The Court thereafter passed order on 20th December 2005 for impleadment of respondent No. 2, 3 and 4. 13.During the pendency of Company Application NO. 337 of 2005, Disha Agro Industries preferred Misc. Civil COMA/337/2005 10/33 JUDGMENT Application No. 123 of 2005 to recall the judgment and order /winding up order dated 20th July 2005 passed in Company Petition No. 264 of 2000 and to revive the said Company Petition. This court has however, rejected the said application. In Company Application No. 337 of 2005 this Court has passed order on 12th April, 2006 observing therein that as the Company under liquidation has challenged the action of GSFC in taking the possession of the property and put the same to auction, it would be prudent to await the final judgment in Special Civil Application No. 750 of 2000. The Court however, passed further order directing the applicant not to change the nature of property nor to raise any new construction nor to demolish any part of the property. The Court has also directed the Official Liquidator to appoint someone to make inspection of the property and to submit his report since this order has adversely affected the interest of the applicant, and Special Civil Application No. 750 of 2000 with Civil Application No. 5262 of 2000 was ordered to be notified. The order passed by this Court on 28th April 2006 directing to delete the name of learned advocate who appeared for Disha Agro Industries and to show the COMA/337/2005 11/33 JUDGMENT name of Official Liquidator and the Court has made it very clear that if the Official Liquidator would not take any action, the matter would be disposed of on merits. Since the Official Liquidator did not take any action nor anyone appeared, the Court has not extended the interim relief and Civil Application was accordingly disposed of. By the order passed by this Court on 27th April 2006, the interim order dated 5th July 2000 by which this Court observed that the action of GSFC would abide by further order, stood vacated. The applicant therefore, filed Company Application No. 279 of 2006 praying for a direction to the Official Liquidator to execute the sale deed in their favour. 14.In Company Application 279 of 2006, Gujarat State Financial Corporation has filed affidavit on 22nd November 2006 stating therein that the amount of Rs 74,62,262/- is outstanding against the applicant as on 30th June 2006. This Court thereafter passed an order dated 12th July 2007 disposing of Special Civil Application No. 750 of 2000 filed by the company. While passing the said order, the Court has observed that since the sale deed was not executed by the GSFC in COMA/337/2005 12/33 JUDGMENT favour of the purchaser and at this stage the company was ordered to be wound up and the company Court is to look after the action of the Official Liquidator who is in charge of the company and functions under the supervision of this Court, the Company Court can examine the legality and validity of the transaction of sale by taking care of interest of everybody including secured creditors, dues of workmen, other creditors etc. The Court therefore did not record any conclusion and observed that the sale in question was subject to scrutiny and finalization by this court in its jurisdiction under the Companies Act. The Company Court has also passed an order on the same day i.e 12th July 2007 directing the applicant to deposit the amount of Rs 72,00,000/- together with interest accrued thereon and remained un-paid, at the rate of 18 % per annum with the Official Liquidator within a period of four weeks from the date of the said order and on that condition interim injunction granted earlier was ordered to be continued. The Court has made it very clear that on failure of the applicant to deposit the said amount with the Official Liquidator, the Official Liquidator would be entitled to take possession of the premises after drawing panchnama of the COMA/337/2005 13/33 JUDGMENT properties. The rights and contentions of all secured creditors including GSFC were ordered to be finalised at the later stage when the matter would be finally considered. 15.Pursuant to the aforesaid order the amount of Rs 72 lacs with interest at the rate of of 18% was deposited with the Official Liquidator. The applicant has thus paid the total amount of Rs 1,96,62,190.10 ps. by way of sale consideration. The Court has recorded this fact in its order dated 19th September 2007 and further directed GSFC as well as the Official Liquidator to furnish certain details. GSFC was directed to file Valuation Report if any, taken by GSFC before the offer of the applicant was accepted. The Official Liquidator was directed to invite claims of the creditors and workers by issuing advertisements and he was further directed to file report with regard to the value of the property on the date of filing such report. State Bank of India was also directed to submit details of the amount, if any, realised out of the disposal of the movable property. Pursuant to the order dated 19th September 2007, advertisements were published in the newspaper. However, no claims COMA/337/2005 14/33 JUDGMENT were received by the Official Liquidator. GSFC has filed affidavit on 9th October 2007 along with which valuation report dated 29th April 2000 was placed on record. On 23rd October 2007 the Official Liquidator has placed on record the valuation report of Amrut Gajjar and Associates determining the market value of land with factory premises at Rs 42,20,000/- and building at Rs 1,00,24,000/-. An affidavit is filed by Mr Falgun Patel, Power of Attorney holder of Ms Nita U Choksi, ex- Director of the company in liquidation raising certain objections of the valuation report submitted by GSFC and Official Liquidator and reiterating the submissions that the property of the company was disposed of by GSFC for an amount of Rs 1,11,11,111/- as against the total value of plant and machinery of Rs 3.08 crores. One more affidavit is filed by the said Mr. Phalgun Patel dated 5th December 2007 along with certificate dated 1st December 2007 issued by Shri Paresh V. Shah, architect Engineer. On behalf of State Bank of India an affidavit is filed on 4th December 2007 stating therein that the counter claim filed by the company was dismissed for want of prosecution. COMA/337/2005 15/33 JUDGMENT 16.It is in the above background and in light of the above factual scenario, both these applications are taken up for hearing. 17.Mr. A. S. Vakil, learned advocate appearing for the applicant in both these applications has submitted that the applicant has purchased the property in question through auction held by the Gujarat State Financial Corporation in exercise of its power under Section 29 of the State Financial Act. The auction was held after following due process of law and the applicant being the highest bidder, the sale was effected in favour of the applicant. The applicant has paid the entire sale consideration along with interest @ 18% p.a. and hence, the sale deed is required to be executed in favour of the applicant. He has further submitted that since the sale was effected prior to the date of winding up order and also in exercise of powers under Section 29 of the State Financial Corporation Act, the provisions of Section 531 & 531-A of the Companies Act, 1956 are not applicable as it is not a transfer by the Company in liquidation nor it is a transfer to the Creditor of the Company. It is further submitted that Section 531-A applies only when the COMA/337/2005 16/33 JUDGMENT transfer of the assets is made voluntarily and by the Company and the burden lies on the Official Liquidator to show that the transfer is not in good faith and not for valuable consideration. It is further submitted that when the transfer is made by the State Financial Corporation in exercise of its power under Section 29 of the Act, either within six months and/or one year, immediately preceding the date of presentation of winding up petition, Section 531 & 531-A of the Companies Act, 1956 are not attracted. 18.Reliance is placed on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh State Financial Corporation V/s. Electrothermic (P) Limited and another, (1997) 5 COMPANY LAW JOURNAL 418 (AP), Sporolac Laboratories (P) Limited V/s. A.P. State Financial Corporation and others, (2000) 4 COMPANY LAW JOURNAL 372 (AP), A.P. State Financial Corporation V/s. T.G.L. Quick Foods Limited, (2000) 3 COMPANY LAW JOURNAL 61 (AP), Shivalik Agro Poly Products Ltd. V/s. Disco Electronics Ltd. (In Liquidation) and another, 114 Company Cases 398, Rajasthan State COMA/337/2005 17/33 JUDGMENT Financial Corporation V/s. Official Liquidator, (2005) 128 Company Cases 387. On the basis of this settled legal position and considering the entire facts and circumstances of the case, he strongly urged that the prayers made by the applicant in both these applications are required to be granted. 19.Mr. J. S. Yadav, learned advocate appearing for the Official Liquidator has submitted that winding up petition was presented by the petitioner on 16.09.2000 and the winding up order was passed by this Court on 20.07.2005. The sale was conducted by GSFC within one year prior to the presentation of the winding up petition. He has, therefore, submitted that considering the provisions contained in Section 531 of the Companies Act, 1956, the transaction entered into by GSFC and the applicant is fraudulent against the Official Liquidator. He has, therefore, submitted that the applicant may be directed to hand over the possession to the Official Liquidator and sale deed may not be executed in favour of the applicant. He has also submitted that the sale proceeds realized by GSFC are directed to be handed over to the Official Liquidator in view of the decision of COMA/337/2005 18/33 JUDGMENT the Apex Court in the case of Rajasthan State Financial Corporation and others V/s. Official Liquidator and others. 20.Mr. Pranav G. Desai, learned advocate appearing for the respondent No.2 i.e. State Bank of India has on the basis of the affidavit filed on behalf of the Bank submitted that State Bank of India has assigned its debts to Kotak Mahindra Bank Limited on 23.03.2006 by Deed of Assignment and hence, from that date onwards, the said Kotak Mahindra Bank Limited is entitled to receive its share on distribution of the sale proceeds amongst the Secured Creditors. It is further submitted that Original Application No.376 of 1998 was pending before the Debts Recovery Tribunal at Ahmedabad at the relevant point of time and the Debts Recovery Tribunal has appointed Manager of State Bank of India as Receiver on 10.11.2000, with a direction to keep the movables which were hypothecated with the Bank and to take steps to sell the same by giving advertisements in the newspaper and to place the offers before the Tribunal. Pursuant to the said order, the Valuer was engaged and copy of the list of assets and inventory was prepared on 21.10.2000. COMA/337/2005 19/33 JUDGMENT GSFC was having first charge over the land, building and fixed assets of the Company in liquidation and the applicant addressed a letter dated 16.03.2001 informing that Item Nos. 1 to 8 in the list belonging to the Company in liquidation and the other items in the list belonging to them. The Valuer had visited the site and found that item Nos. 1 to 8 of the inventory were lying in the open ground in damaged condition. The Valuer, therefore, valued the same and submitted report dated 17.03.2001. The Receiver found that the Valuer could not value the goods as the goods were in very bad shape and the expenses to be incurred are in excess of realisable value of goods. Original Application No. 376 of 1998 was finally heard by the DRT and after hearing both the parties, the DRT passed an order on 30.04.2005. No further appeal was preferred by the Company in liquidation against the said order of the DRT. The Company in liquidation has filed Civil Suit by way of counter claim. However, DRT vide its order dated 21.09.2006 disposed of the said Civil Suit No. 07 of 1999 which was numbered as Transfer Application No. 1211 of 2006 and the same was disposed of by default. No further appeal was filed against the dismissal of the said COMA/337/2005 20/33 JUDGMENT counter claim. 21.Mr. R. D. Dave, learned advocate appearing for the respondent No.4 i.e. GSFC has submitted that there is no substance in any of the allegations made by the respondent No.5 in his pleadings before this Court. The Company in liquidation is a chronic defaulter and was not in a position to repay the loan taken by the Company from GSFC as well as other financial institutions and Banks. GSFC has sold the assets of the Company after following due process of law and the respondent No.5 being the defaulter has no right to challenge the said action of GSFC. He has further submitted that the action of GSFC cannot be challenged in the present proceedings as the sale was effected prior to the winding up order passed by this Court and even otherwise, there is settled position in law that the sale is effected by GSFC in exercise of its power under Section 29 of the State Financial Corporation Act and the same cannot be challenged before the Company Court on the ground that such sale is hit by the provisions contained in Section 530 & 531 of the Companies Act, 1956. The factory was closed since 1998 and necessary notices were issued COMA/337/2005 21/33 JUDGMENT under Section 29. Thereafter, possession was taken and after due advertisement in newspaper, the sale was effected. Since no higher offer was received by GSFC, the sale was effected in favour of the applicant and hence, no fault can be found with GSFC if the sale is effected below the value determined by the Valuer in his valuation report. Even otherwise, the challenge was