K.M. Mehta, J.
1. Report of the Official Liquidator : The official liquidator as liquidator of Piramal Financial Services Ltd. (hereinafter referred to as 'the company in liquidation or PFSL'), has filed this report with a prayer for directions of this court on the following question.
'(a) Whether this court may permit the official liquidator to deseal the flats in question as requested by the flat owners ?'
2. The facts giving rise to this petition as contained in the report of the official liquidator are as under :
Piramal Financial Services Ltd. (the company in liquidation or PFSL), was a company incorporated on October 8, 1992. The Reserve Bank of India (hereinafter referred to as 'RBI') had issued a certificate under Section 45-I(f) of the Reserve Bank of India Act, 1934, that it was a non-banking financial company and it was bound by the directions issued by the RBI as amended from time to time.
3. The RBI, a body corporate, established by the Reserve Bank of India Act, 1934 (hereinafter referred to as the 'RBI Act'), had filed a winding up petition under the provisions of the RBI Act before this court for winding up of PFSL. On May 10, 2000, this court passed an order to the effect that the official liquidator attached to this court be appointed as provisional liquidator of the company in liquidation.
4. This court by the judgment and order dated October 20, 2000 (since reported in RBI v. Piramal Financial Services Ltd. [2000] 41(4) GLR 3476), admitted the said petition and appointed a provisional liquidator to the said company.
5. Thereafter, this court by its order dated March 20, 2001, passed an order winding up PFSL and the official liquidator who was appointed as provisional liquidator earlier by the order dated October 20, 2000, was directed to be appointed as liquidator of the company with usual powers under the Companies Act, 1956. Thereafter, this court by its order dated July 20, 2001, passed in Company Application No. 44 of 2001 directed the official liquidator to take possession of the properties and assets as mentioned in Schedule A to the report of the official liquidator dated July 12, 2001, in the aforesaid company application.
6. Pursuant to the aforesaid orders the official liquidator had deputed his representative on August 8, 2001, for taking possession of flats Nos. 8, 16, 17 situated at Haridwar Apartment, Panchvati, Near Gulbai Tekra, Ahmedabad, after giving due notice to the persons concerned. A copy of the notice is annexed at annexure A to the report.
7. The representative of the official liquidator, in the presence of the representative of the company, representative of Bank of India and representative of Nutan Nagrik Sahakari Bank Ltd., took possession of flats Nos. 8, 16 and 17 on August 8, 2001. A copy of the minutes recorded at the time of taking possession of flats is annexed to the said report at annexure B.
8. The official liquidator in his report has stated that he has received three applications from the owners, Rajiv Enterprises Pvt. Ltd. of the flats requesting him to deseal the flats immediately otherwise he has to pay charges of rent and compensation to the owners of the flats. In support of the contentions, Rajiv Enterprises Pvt. Ltd. has filed certain documents.
9. The official liquidator, thereafter, in his report dated October 25, 2001, stated that while examining the said papers/documents it is seen from the certificate issued by the Housing Development Finance Corporation Ltd., (HDFC for short) that Piramal Finance Services Ltd., had availed of corporate loan of Rs. 50 lakhs from the HDFC and title deeds of the flats were mortgaged with HDFC as security by the company (in liquidation) and title deeds were returned to the company (in liquidation) by the HDFC. A copy of the said certificate dated March 10, 1999, is annexed at annexure C to the said report.
10. The official liquidator in his report has stated that it is seen from the sale deeds that the aforesaid flats were sold by the company (in liquidation) to A.R. Mehta, Rajiv Vastupal and Rajiv Vastupal Mehta on May 7, 1999, in full consideration as per the sale agreements which are registered with the Sub-Registrar. A copy of the said document is annexed at annexure D to the report.
11. After examining the same, the official liquidator in his report stated that his representative visited the premises and the flats were found to be locked and the owners were not present at that moment. Then all such properties and flats were sealed by the official liquidator by taking symbolic possession. The official liquidator is not having keys of these flats.
12. In view of the above, the official liquidator stated that from the records produced before the official liquidator it appears that all the formalities for sale have been duly complied with by owners of flats and it is clear from above that the flats do not belong to the company in (in liquidation), i.e., PFSL.
13. In view of the aforesaid report of the official liquidator, the question which has been set out earlier hereinbefore, has been posed before the official liquidator. The said report was filed on October 25, 2001.
14. As the matter pertains to a large number of immovable properties of the company (in liquidation), it may be noted that the official liquidator has also filed further reports dated January 30, 2002, and September 30, 2002. It may be noted that in view of the importance of the matter, this court requested the official liquidator that if he desires to have assistance of an advocate, this court may appoint any advocate of this court. Accordingly, Mr. Roshan Desai, who has appeared on behalf of the official liquidator, has been requested to appear and he has readily agreed to appear in this behalf and he has rendered very valuable assistance to this court in this important matter.
15. It may be noted that in view of the same, the court initially issued notice to the RBI who was the respondent in the said report in this behalf. Learned counsel for the RBI, Sri Amar Bhatt, has filed affidavits dated January 9, 2002, February 7, 2002, of the general manager, Sri A.K. Khound, Department of Non-Banking Supervision of the RBI, respondent herein, and affidavit dated August 28, 2002, of the Deputy General Manager, P. Radhakrishnan, Department of Non-banking Supervision of the RBI.
16. Looking to the importance of the matter, Sri Rajesh C. Shah, chartered accountant, who was also appearing in Company Application No. 44 of 2001 has also filed affidavit. Sri Rajiv Vastupal Mehta, has also filed affidavit dated September 14, 2002, and further affidavit dated September 27, 2002. It may be noted that Sri Rajiv Vastupal Mehta has been represented by Sri S.N. Soparkar, learned senior advocate. Sri Rajesh C. Shah, chartered accountant, was represented by Sri D.S. Vasavada, learned advocate and in the original winding up petition for one of the creditors Sri Ashwin L. Shah was appearing who was also permitted to appear as intervener.
17. It may be noted that total four flats have been sold namely, flats Nos. 8, 16, 17 and 18 but as flat No. 18 has been sold subsequently to other person and he has taken out separate judges' summons, I am not dealing with the contention of flat No. 18 but only flats Nos. 8, 16 and 17. I will consider the case of flat No. 18 separately. So far as flat No. 18 is concerned, Sri Nigam P. Maniar claiming to be its purchaser (of flat No. 18) has preferred Company Application No. 220 of 2002 intimated that the said flat No. 18 is in his possession and his family is occupying the said flat and his possession may not be disturbed. It may be noted that flat No. 18 is purchased by Sri Nigam P. Maniar from Sri Rajiv V. Mehta. Sri Nigam P. Maniar has filed separate petition before this court and this court by order dated August 24, 2001, permitted Sri Nigam P. Maniar and his family members to reside in the said flat No. 18. That is how I am not dealing with flat No. 18 in the present judgment.
18. Looking to the importance of the matter, I also requested learned counsel to file written submissions and accordingly written submissions were filed by learned counsel for respective parties.
19. It may be noted that over and above the RBI, other creditors have also filed winding up petition under the provisions of the Companies Act and in Company Petition No. 296 of 1999 this court also passed winding up order dated August 23, 2002.
Submissions on behalf of the official liquidator :
Learned counsel for the official liquidator submitted all these facts in his report which I have stated earlier in this behalf. It may be noted that this petition relates to flats Nos. 8, 16, 17 and 18 situated at Haridwar Apartment, Panchvati, Near Gulbai Tekra, Ahmedabad.
Regarding flat No. 8 :
It appears that flat No. 8 was purchased by Rajiv Petrochemicals Pvt. Ltd., vide deed of sale dated May 7, 1999, from Piramal Financial Services Ltd. (hereinafter referred to 'the company in liquidation'). The said sale deed was lodged for registration with the Sub-Registrar of Assurances under serial No. 1261, From the correspondence which has been produced in this case it appears that consideration of flat No. 8 as per the sale deed is Rs. 13,00,000. The said flat was acquired by the company in liquidation at the cost of Rs. 16,50,000 as evident from the application for certificate under Section 230A(1) of the Income-tax Act, 1961, produced at pages 91 to 96 of the paper book. From the letter dated January 11, 1999, it appears that the company in liquidation had addressed a letter to Rajiv Petrochemicals Pvt. Ltd. It appears that intercorporate loan of Rs. 10 lakhs for a period of six months carrying interest payable quarterly was received by the company in liquidation and fixed deposit receipt dated January 9, 1999, was issued in which maturity period is stated as July 8, 1999, It may be noted that the loan agreement was also entered into between the company in liquidation and Rajiv Petrochemicals Pvt. Ltd. Interest at the rate of 27 per cent, from January 9, 1999, to April 8, 1999, after deducting TDS is Rs. 54,000. A copy of Banakhat and sale deed and other documents have also been produced at pages 64 to 115 of the paper book. When this flat was purchased by Rajiv Petrochemicals Pvt. Ltd., at Rs. 13 lakhs, the said sum of Rs. 10 lakhs was adjusted. In this transaction the company has suffered loss of Rs. 3,50,000. Over and above this, the company in liquidation vide letter dated May 6, 1999, which is produced at page 97 of the paper book intimated Sashya Association to transfer maintenance deposit of Rs. 50,000 to Rajiv Petrochemicals Pvt. Ltd. Thus the company in liquidation has suffered further loss of Rs. 50,000. It is not clear who has paid the transfer fee for transfer of flat No. 8 from the company in liquidation to Rajiv Petrochemicals Pvt. Ltd., which is required to be paid as per the rules and regulations of the non-trading association and/or co-operative society.
20. As regards flat No. 16, the said flat was sold for a sum of Rs. 12,28,000 while the cost of acquisition of the said property is Rs. 16,50,000. In this transaction the company in liquidation has suffered a loss of Rs. 4,22,000. Over and above the same, the company in liquidation has intimated to Sashya Association vide its letter dated May 6, 1999, produced at page 46 of the paper book to transfer Rs. 50,000 being the amount of maintenance deposit in the name of Smt. Aarti Rajiv Mehta. It was therefore submitted that the company in liquidation has suffered in all loss of Rs. 4,72,000. It is not clear who has paid the transfer fees for transfer of flat No. 16 from the company in liquidation to Aarti Rajiv Mehta. It may be noted that Smt. Aarti Rajiv Mehta has given deposit of Rs. 15 lakhs to the company and the said sum of Rs. 15 lakhs has been adjusted against the purchase of the said flat.
21. As regards flat No. 17, it appears that Rajiv Enterprise, sole proprietor Sri Rajiv Vastupal Mehta had granted bill discounting facility to the tune of Rs. 15 lakhs to the company in liquidation. The said facility was granted for a period of six months from November 25, 1998, to May 24, 1999. The said facts have been gathered from letter dated November 26, 1998, which is produced at page 116 of the paper book. Against the said loan the company in liquidation has issued cheque dated May 24, 1999, in favour of Rajiv Enterprise for Rs. 15,00,000 which is at page 117 of the paper book. The sale deed has been lodged for registration with the Sub-Registrar of Assurances under serial No. 1260. The company in liquidation sold the said flat No. 17 to Sri Rajiv Vastupal Mehta, sole proprietor of Rajiv Enterprise for consideration of Rs. 14,43,000. A copy of the agreement for sale, deed of sale and other relevant documents are produced at pages 119 to 151 of the paper book. The sale deed dated May 7, 1999, executed between Rajiv Vastupal Mehta on the one hand and the company in liquidation on the other particularly Clause 18 at page 138 of the paper book. This shows that out of the sum of Rs. 15 lakhs, the price of the flat being Rs. 14,43,000 is adjusted and the balance amount of Rs. 57,000 has been paid by the company in liquidation. It may be noted that Rs. 14,000 has been paid on May 6, 1999, and Rs. 43,000 was already adjusted earlier. Thereby, total amount of Rs. 57,000 has been paid to Rajiv Enterprise, sole proprietor Sri Rajiv Vastupal Mehta. It may be noted that the cost of acquisition of the said flat as is evident from the application for a certificate under Section 230A(1) of the Income-tax Act, 1961, is Rs. 17,38,750. In view of the same, the company has suffered a loss of Rs. 4,95,750. Over and above this, the company in liquidation vide letter dated May 6, 1999, which is produced at page 147 of the paper book intimated to Sashya Association to transfer Rs. 58,750 being the amount of maintenance deposit placed by the company in liquidation in the name of Sri Rajiv Vastupal Mehta. It is not clear who has paid the transfer fee for transfer of flat No. 17 from the company in liquidation to Sri Rajiv Vastupal Mehta which is required to be paid as per the rules and regulations of the non-trading association and/or co-operative society.
22. On possession being taken by liquidator and sealing flats Nos. 8, 16 and 17, purchasers Rajiv petrochemicals Pvt. Ltd., Smt. Aarti Rajiv Mehta and Sri Rajiv Vastupal Mehta forwarded an application to the liquidator to deseal the flats, otherwise, the liquidator has to pay the charges and rent and compensation to the owners of the flats. The documents mentioned in para. 6 on page 3 of the official liquidator's report were submitted by the purchasers to the liquidator.
23. Learned counsel for the liquidator has submitted that Forms Nos. 13 and 17 were filed with the Registrar of Companies for satisfying the charge created by PFSL in favour of Housing Development Finance Corporation. One of the Forms, namely, Form No. 17 filed with the Registrar of Companies, is produced at page 103 of the paper book. In the said form it is stated that the charge created in favour of HDFC, the particulars of which were registered with the Registrar of Companies on January 30, 1997, is satisfied in full on May 7, 1999.
24. Learned counsel for the official liquidator therefore submitted that in view of the aforesaid facts, transfer of flats Nos. 8, 16 and 17 is fraudulent preference in favour of Rajiv Petrochemicals Pvt. Ltd., Smt. Aarti Rajiv Mehta and Sri Rajiv Vastupal Mehta and covered by Sections 531 and 531A of the Companies Act.
25. To substantiate the aforesaid contention, learned counsel for the official liquidator relied on Sections 441, 531 and 531A of the Companies Act which, read as under :
Section 441 of the Companies Act reads as under :
'Section 441. Commencement of winding up by court.--(1) Where, before the presentation of a petition for the winding up of a company by the court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of passing of the resolution, and unless the court, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up.'
Section 531 of the Companies Act reads as under :
'531. Fraudulent preference.--(1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly :
Provided that in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with substitution, for the reference to six months, of a reference to three months.
(2) For the purposes of Sub-section (1), the presentation of a petition for winding up in the case of a winding up by or subject to the supervision of the court, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual.'
Section 531A of the Companies Act reads as under :'Avoidance of voluntary transfer.--Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery, made in the ordinary course of its business or in favour of a purchaser or encumbrance in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by or subject to the supervision of the court or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator.'
26. After relying on the aforesaid provisions of the Act, learned counsel for the official liquidator submitted the following facts to show the transfer by the company in liquidation as fraudulent preference as under :
The first petition against the company in liquidation is filed by Unnati Enterprise on October 18, 1999, being Company Petition No. 296 of 1999. The transaction of sale has taken place on May 7, 1999, i.e., within a period of one year before presentation of Company Petition No. 296 of 1999. Learned counsel for the official liquidator further relied on Section 441(2) of the Companies Act which provides that winding up of the company shall be deemed to commence at the time of presentation of the petition for winding up.
27. The flats are transferred against deposit/bill discounting facilities given to the company. The date of maturity of the said deposit/bills was July 8, 1999/ May 24, 1999. The company in liquidation had transferred flats in favour of Rajiv Mehta and others in discharge of their deposits/bills rediscounting facilities much prior to the maturity dates.
28. He submitted that according to the depositors against whose deposits the flats in question are transferred (hereinafter referred to as Rajiv Mehta and others), they had placed intercorporate deposits with the company and had given bills discounting facilities to the company. The details emerging from the documents produced may be summarised as under :
Deposits/bills discounting facility
Date
Due date
Date of transfer of flats in lieu of amount duefrom the company to Rajiv Mehta and others
1.
Rs. 10 lakhs (deposit)
08-01-99
08-7-99
7-5-1999
2.
Rs. 15 lakhs (deposit)
08-01-99
08-7-99
7-5-1999
3.
Rs. 15 lakhs(bills redis-counting)
25-11-98
24-5-99
7-5-1999
4.
Rs. 15 lakhs (bills redis-counting)
25-11-98
24-5-99
7-5-1999
29. The official liquidator further submitted that several depositors preferred petitions before the Company Law Board, Bombay. One of the petitions was filed by Sri Pranjivandas C. Parikh and others. The depositors by filing the petition before the Company Law Board prayed that PFSL be directed to pay the amounts of deposit with interest. In the said petitions PFSL filed reply vide letter dated May 4, 1999, produced at pages 271 to 291. In the said reply in Clauses 2.2 and 3 at page 274 it is stated that the reason for failure on the part of Piramal Financial Services Ltd., to meet its obligation was financial crunch and due to delay in recovery of its dues. It was also submitted that it was a temporary financial problem and its assets are in excess of its liabilities and most of the assets are blocked up in real estate markets where the recovery is very slow. It was also stated that PFSL is making all efforts to meet its obligations within a reasonable time. In Clause 9 of the said reply it stated that in order to ensure that all the depositors receive back the amount of deposits placed by them over a period of time as may be prescribed by the Board. It was prayed that it is necessary to issue directions/guidelines. The said guidelines may be on the lines as suggested in annexure IV to the said letter which is produced at page 285 of the paper book. In the said letter it is specifically admitted by the company that the company had no funds. The proposal given in annexure IV which is produced at page 285 is that the amount will be paid within a period of five years from the date of maturity. Clause 8 of the said annexure provides that all the deposits of Rs. 10 lakhs to Rs. 25 lakhs will be paid within five years from the date of maturity. From the aforesaid facts, it is clear that the company had no funds and it proposed to pay all the deposit holders including Rajiv Enterprise Pvt. Ltd., and Rajiv Petrochemical Pvt. Ltd., the amount of deposit as per clause 8 of annexure IV, i.e., within a period of five years from the date of maturity meaning thereby that from July 8, 1999, the amount will be paid within a period of five years.
30. It appears that even before the said reply was filed, agreement for sale was entered into on April 8, 1999. It is submitted that the said agreement for sale is not genuine for the reason that there was no confirming party in the agreement for sale which is produced at page 18 of the paper book. The said agreement only referred to two parties. However, Clause 18 of the deed of sale at page 37 refers to confirming parties. It is clear that Clause 18 in the deed of sale dated May 7, 1999, at page 37 is similar to Clause 11 of the agreement for sale. The date of agreement is in handwriting as April 8, 1999, and notary has certified the agreement for sale and deed of sale on May 7, 1999. It is submitted that the notary has certified the deed of sale as true copy before it is lodged for registration with the Sub-Registrar of Assurances. The learned advocate for the liquidator has made this submission on the basis that the Sub-Registrar after document is lodged for registration will return the document only after registering the same. It appears that the notary has certified the deed of sale as true copy without comparing the same with the original deed of sale. These facts leads to the belief that the agreement for sale is not genuine and is not executed on April 8, 1999, when particularly in the reply filed before the Company Law Board no reference with regard to agreement for sale has been made. On the contrary it is stated that the deposit will be repaid within five years from the date of maturity.
31. Mr. Roshan Desai, learned advocate for the liquidator, has relied on certain affidavit of the RBI which is also referred to in the arguments of Sri Amar Bhatt. He has also relied on the report dated September 13, 2002, which is produced at pages 299-306 of the paper book. From the said report it was submitted that when the original report was filed the winding up order on March 20, 2001, was passed by this court in the company petition filed by the RBI under the provisions of the RBI Act. In the said report it was also submitted, that another event has also taken place which has changed the complete picture since the court has passed the winding up order on August 23, 2002, in Company Petition No. 296 of 1999 filed on October 18, 1999, with other company petitions ordering that the company be wound up. Company Petition No. 296 of 1999 and other company petitions are filed under the provisions of the Companies Act, 1956, and on winding up order being passed, the provisions of the Companies Act are applicable and the said fact has been submitted by the liquidator in his report dated September 13, 2002, at pages 303 to 310 of the paper book. On these facts, the liquidator has submitted that the transactions of sale of flat No. 8 in favour of Rajiv Petrochemicals Pvt. Ltd., flat No. 16 in favour of Smt. Aarti Rajiv Mehta and flat No. 17 in favour of Sri Rajiv Vastupal Mehta are void transactions in view of the provisions of the Companies Act, 1956. It has been further stated that the RBI vide its letter dated July 19, 2002, submitted copy of the last scrutiny report dated August 30, 1999. Para. 2(iii) of the said report which has been mentioned on pages 305-306 of the paper book that outstanding under the bills discounting facility was brought to nil as on March 31, 1999, as per the trial balance-sheet as on that date. The relevant bills were not made available for scrutiny as it was reported that the same has been returned to concerned parties.
32. He further submitted that from the facts which have emerged from the records, it is clear that the transfer is a voluntary transfer and is not transfer under compulsion, i.e., in the circumstances which exist and which require the company to sell the said flats to save its own skin. Since it is a voluntary transfer and in selling the said flats Nos. 8, 16, 17 and 18 preference is shown to the purchasers namely Rajiv Petrochemicals Pvt. Ltd., Rajiv Enterprise Pvt. Ltd. (Smt. Aarti Rajiv Mehta) and Rajiv Vastupal Mehta as sole proprietor and as karta of the Hindu undivided family, the transaction is void and not binding on the liquidator.
33. In view of the same, it clearly shows that there is fraudulent preference shown to the said three depositors amongst other depositors and these flats are sold without adequate consideration. In view of the same, the transaction is void under Section 531A of the Companies Act, 1956.
34. Learned counsel for the official liquidator further submitted that the aforesaid facts clearly establish beyond doubt that the transaction in question is not done in good faith and not for valuable consideration and as such is void against the liquidator.
35. In support of the aforesaid contention, learned counsel for the RBI has relied on the decision of this court (Coram : D.A. Desai J. (as he then was) in Maneckchowk and Ahmedabad ., In re [1970] 40 Comp Cas 819 in which on pages 846-848, the court has observed as under :
'It was next contended that the deed of mortgage executed by the company in favour of the Central Board of Trustees for the provident fund on May 21, 1968, would be a fraudulent preference given to the said trustees. It appears that Rs. 15,05,418.37 were due and payable by the company in respect of the provident fund contribution and Rs. 47,693.80 for administration charges to the Regional Provident Fund Commissioner. It appears that the company had committed default in payment of this amount and the properties of the company were attached. Subsequently, on May 21, 1968, the company executed a mortgage deed in favour of the Central Board of Trustees. It was urged that a petition for winding up the company was pending when this mortgage deed was executed by the company and that, in the absence of the mortgage, the Central Board of Trustees for the provident fund would be unsecured creditors and they are given fraudulent preference by executing the mortgage deed in their favour and that would be a fraudulent preference. It is undoubtedly true that the mortgage deed in favour of the Central Board of Trustees was executed on May 21, 1968, when the petition for winding up the company was pending in the court. It is, at any rate, executed within six months prior to the institution of the petition which is now pending and in which prayer for winding up the company is made. If that petition succeeds, investigation will have to be made whether the mortgage in favour of the Central Board of Trustees would amount to a fraudulent preference within the meaning of Section 531 of the Companies Act. Mr. R.M. Gandhi, learned advocate who appeared for the Regional Provident Fund Commissioner, urged that the properties of the company were already attached by the revenue authorities at the instance of the Central Board of Trustees right from the year 1961-62 and the Central Board of Trustees gave further time to pay up the amount on the company executing the mortgage deed in favour of the Central Board of Trustees. Accordingly, the company executed the mortgage deed. Mr. Gandhi, however, urged that, even apart from this, the circumstances in which the mortgage deed came to be executed would themselves indicate that it would not be avoided as a fraudulent preference. Mr. R.M. Gandhi referred to the arguments of Mr. D.C. Gandhi in which he has stated that the directors of the company were threatened with prosecution and under the threat of prosecution they executed the mortgage deed. Mr. R.M. Gandhi, however, urged that, assuming that this submission is factually correct, yet, execution of the mortgage in favour of the Central Board of Trustees would not be a fraudulent preference . . .
In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could not in such circumstances be fraudulent preference. This decision has been followed in M.I.G. Trust Ltd., In re [1933] 3 Comp Cas 345 (CA). Reference may also be made to F.L.E. Holdings Ltd., In re [1968] 38 Comp Cas 214 (Ch D). In that case a passage from Buckley on the Companies Acts, 13th edition (1957), is quoted which shows that as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment. Viewed from this angle the transfer by way of mortgage by directors in favour of the Central Board of Trustees would not prima facie appear to be fraudulent preference as it appears that it was done under the threat of imminent prosecution.'
36. He has also further relied on the decision in the case of Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom) in which on pages 108-109 the court has observed thus :
'The prospect of further legal proceedings by Monark Enterprises against the company to recover the decretal dues was too obvious. Reasonable inferences can be easily drawn if required. The court must endeavour to take a view consistent with common sense and the ordinary course of human conduct. It is obvious to me that the impugned transaction dated February 18, 1987, was entered into by and between the company with Monark Enterprises after hard bargaining not with a view to preferring one creditor to another creditor but in view of the lawful pressure exercised by Monark Enterprises on the company. Learned counsel for Monark Enterprises filed a compilation of judgments and passages from various text books on the subject. I do not propose to deal with all the cases included in the compilation though I have considered all the cases cited by learned counsel for all the parties. I propose to refer to only one case to justify the approach of the court to the problem under consideration. In Maneckchoivk and Ahmedabad ., In re [1970] 40 Comp Cas 819, 847, D.A. Desai J. (as his Lordship then was) of the High Court of Gujarat summed up the legal principle in such a situation in his own inimitable style, after referring to the judgment of the House of Lords in Sharp, Official Receiver v. Jackson [1899] AC 419. The High Court of Gujarat observed that, if the transaction was done not with a view to prefer one of the creditors but to save one's own skin, the transfer could not, in such circumstances, be treated as a fraudulent preference. After referring to a passage from Buckley on the Companies Acts, 13th edition (1957), the learned judge observed that the expression 'preference' implied selection and selection implied freedom of choice. The learned judge observed that a payment, in order to constitute a preference, must be voluntarily made, and that a payment made under pressure, e.g. in the context of proceedings, actual or threatened, by the creditor concerned, or fear of such proceedings, could not be considered as a fraudulent preference under the company law. In the instant case, the facts are quite eloquent. Learned counsel for the official liquidator and the petitioners have submitted that Monark Enterprises had not issued any notice to the company to the effect that it would execute the decree in view of the default committed. No such notice need be actually issued. Since Monark Enterprises were receiving threatening letters from the Bank of Maharashtra, Monark Enterprises must have threatened the company to pay its dues as the primary liability in respect of unpaid hundis executed by the company for the price of goods sold and delivered by Monark Enterprises to the company was of the company and Monark Enterprises were facing threats from the Bank of Maharashtra mainly because of the company having defaulted in respect of its obligation to discharge its liability to pay the amount in question.'
37. He has also referred to Halsbury, 4th edition, volume 3, Bankruptcy and Insolvency, particularly Clause (iv) Avoidance of Fraudulent Preference on page 496. Paragraph 908 provides object of avoidance and paragraph 909 provides meaning of 'fraudulent preference'. Paragraph 909 'fraudulent preference' reads as under :
'Every conveyance or transfer of property or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding affecting his property taken or suffered, by any person unable to pay his debts as they become due from his own money, in favour of any creditor or of any person in trust for any creditor, is deemed to be fraudulent and void as against his trustee in bankruptcy, provided four conditions be fulfilled.
These conditions are : (1) the debtor must, at the date of the transaction, be unable to pay from his own money his debts as they fall due ; (2) the transaction must be in favour of a creditor, or of some person in trust for a creditor ; (3) the debtor must have acted with the view of giving that creditor, or a surety or guarantor for the debt due to that creditor, a preference over his other creditors, (4) the debtor must be adjudged bankrupt on a bankruptcy petition presented within six calendar months after the date of the transaction sought to be impeached. The first and fourth of these conditions have an important connection with one another, for their combined effect is to render it unnecessary to inquire whether the debtor acted in contemplation of bankruptcy ; this question is now irrelevant, at any rate so far as its determination in the affirmative would be a condition precedent to the avoidance of a transaction as a fraudulent preference ; the test which these two conditions create is sufficient.
Although the term 'fraudulent' preference is currently used, the term 'fraudulent' is used in the section, fraud in the strict common law sense need never be proved, although it may often be present.'
38. He has also referred to paragraph No. 910 of the above volume 3 which provides debtor, creditor and surety. In order to avoid a transaction as a fraudulent preference, it is, as a general rule, essential that the relation of debtor and creditor should exist between the parties to the transaction. Paragraph 911 provides act done must be in favour of creditor or surety. Paragraph No. 913 provides transaction with view of preferring creditor.
39. Learned counsel for the official liquidator has submitted that unless transaction of company property amounts to a fraudulent preference under the insolvency law and it is entered into within a period of six months prior to the commencement of winding up, the transaction cannot be treated as void under Section 531 of the Companies Act, 1956. It is held that the law does not presume that the transaction was fraudulent transaction. The question is as to whether the company entered into the transaction to save its own skin for its own benefit in the circumstances prevailing or whether the dominant motive of the company in effecting the transaction was to favour one creditor to another. After relying on the said judgment he submitted that the facts of the present case clearly establish that though the creditors and the depositors have initiated action and some depositors have filed petitions before the Company Law Board, instead of making payment to creditors, the amount is paid to the purchasers by selling the flats that too at the price much lower than cost of acquisition and also before the date of maturity of the deposits. In two cases no consideration has been received. The said fact clearly establishes the situation that the transaction amounts to fraudulent preference and it should be declared as invalid void and not binding on the liquidator and creditors of the company. He has further relied on the decisions of the Kerala High Court in the cases of K.N. Narayana Iyer v. CIT [1993] 78 Comp Cas 156 and Bank of Maharashtra v. Official Liquidator, Navjivan Trading Finance Pvt. Ltd. [1999] 96 Comp Cas 234, 236 (Guj).
40. It was further submitted that the liquidator has proved beyond reasonable doubt that the transaction is a voluntary transaction and in effecting the transaction fraudulent preference has been given to the purchasers against all other creditors. Therefore, the transaction is void.
Contentions of Mr. Amar Bhatt on behalf of the Reserve Bank of India :
For properly appreciating the aforesaid contention we will have to consider the contentions of the Reserve Bank of India who has been shown as respondent in the report of the official liquidator and who has originally filed winding up petition before this court. As indicated earlier, the RBI had also filed detailed affidavit. From the contentions which were raised by the RBI, the following facts emerge :
(i) The Reserve Bank of India filed Company Petition No. 147 of 2000 (since reported in Piramal Financial Services Ltd. v. RBI [2001] 104 Comp Cas 299 (Guj)) against PFSL for its winding up under Section 45MC of the Reserve Bank of India Act, 1934. The said petition was filed on May 10, 2000.
(ii) Orders in connection with winding up have been passed on October 20, 2000, March 20, 2001, and July 20, 2001, which I have already narrated earlier and therefore I do not repeat the same facts at this stage.
41. Learned counsel Mr. Amar Bhatt appearing on behalf of the RBI on the basis of the aforesaid facts has submitted that over and above the RBI, other creditors had also filed winding up petitions under the provisions of the Companies Act against the company (PFSL). The first winding up petition was filed on October 21, 1999, being Company Petition No. 296 of 1999 filed by one Unnati Investments Pvt. Ltd. The details of winding up petitions have been given in the affidavit dated February 7, 2002, of A.K. Khound, General Manager of Non-Banking Supervision of the RBI which is on page 180 of the paper book.
42. Learned counsel further submitted that transfer of flats in this case by PFSL to Rajiv Petrochemicals Pvt. Ltd., Aarti Rajiv Mehta and Rajiv Vastupal of flats Nos. 8, 16 and 17 amounts to fraudulent preference in favour of Rajiv Mehta and others and hence covered by Section 531 of the Companies Act which will be clear from the following facts :
(i) The first petition against PFSL is filed on October 21, 1999, being Company Petition No. 296 of 1999. The transactions have taken place on May 7, 1999, i.e., within the period of six months from the date of presentation of the first petition. He has also relied on Section 441(2) of the Companies Act which provides that winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for winding up.
(ii) The flats are transferred by the company against the deposits/bills discounting facility given by Rajiv Mehta and others to the company. The due dates/maturity dates for the said deposits/bills rediscounting facilities were July 8, 1999, and May 24, 1999. Thus the transfer of flats on May 7, 1999, against the deposits/bills rediscounting facilities is made prior to the due date(s)/maturity dates.
43. The above details have been given in the affidavit of one P. Radhakrishnan, Deputy General Manager of Department of Non-Banking Supervision of the RBI which is on page No. 265.
44. Learned counsel for the RBI therefore submitted that it is clear that the transfers of flats in discharge of debt have taken place prior to the due date(s)/ maturity dates. He submitted that it is an admitted fact that the company was facing financial difficulty. As per the reply dated May 4, 1999, to the Company Law Board, the company proposed a scheme of repayment of dues of various depositors. In the said reply it was admitted by the company that it is unable to pay the depositors. However, on May 7, 1999, the company transferred flats in favour of Rajiv Mehta and others in discharge of their deposits/bills rediscounting facilities much prior to the maturity dates. This conduct of the company is nothing but a fraudulent preference shown in favour of a few selected depositors. The company did not make payments to the several depositors whose payment become due on or about May 7, 1999. However, the company went out of the way and transferred the flats in discharge of the debts of only four depositors namely Rajiv Mehta and others even though their debts had not become due. He submitted that in the affidavit of Rajiv V. Mehta, it is clearly admitted that the due dates of the deposits were July 8, 1999, and May 24, 1999, and that the parties renegotiated the deal and the company agreed to transfer its properties on May 7, 1999, meaning thereby that the transfer of flats from the company on May 7, 1999, was a voluntary transfer. Thus the company showed fraudulent preference in repaying the deposits of Rajiv Mehta and others by transferring flats. The transactions are, therefore, hit by the provisions of Section 531 of the Companies Act.
45. In support of the aforesaid contention, learned counsel for the RBI relied on the following statutory provisions, namely, Sections 441, 531 and 531A of the Companies Act. After relying on the provisions of the Companies Act, learned counsel for the RBI has relied on the following decisions :
In Gandabhai Gulabchand v. Balkrishna Vaman AIR 1930 Bom 217, in which on page 218 the court held as under :'The words 'with a view of giving a creditor a preference over other creditors' have formed the subject of numerous decisions, the corresponding sections in most of the Bankruptcy Acts in different parts of the empire being identical. It suffices to refer to the decision of the House of Lords in Sharp (Official Receiver) v. Jackson [1899] AC 419 in appeal from the case in New, Prance and Canard's Trustee v. Hunting [1897] 2 QB 19 (CA) referred to above, and the decision of their Lordships of the Privy Council in Sime, Darby and Co. Ltd. v. Official Assignee of the Estate of Lee Pang Seng AIR 1928 PC 77, followed in Sholapur Spinning and Weaving Co. Ltd. v. Pandharinath Martand Sulakhe AIR 1928 Bom 341. It was observed in the last case (page 291) (of 30 BLR): 'The question to be determined is one of fact ; was the dominant motive actuating the debtor in making the transfer, a desire to prefer the particular creditor or was it of a different character As the solution to this question involves an inquiry into the state of a man's mind, and as it must very seldom be the case that there is direct evidence on the point, the decision generally depends on the inference properly to be drawn from the circumstances attending the transfer as established by the evidence'.'
46. The court on page 219 of the said judgment has further held as under :
'It is true that because the ultimate result of a payment made was preference, it does not follow that the view in the sense of dominant motive at the time of payment was preference. As the cases referred to above show the view on the part of the insolvent implies that the payment is firstly voluntary, and secondly, that it is deliberate preference of one creditor over the others. In order that the payment may be voluntary on the part of the insolvent, it is necessary that there should be neither outside pressure nor even inward mental apprehension of such pressure.'
47. Gopal Rao v. Hiralal AIR 1925 Nagpur 225 wherein on page 226 it is held thus :
'Both the courts below hold that the inclusion of the amount of lease money not due was indicative of the mala fides of the transaction. Not only this but I would add that the repayment of the debt not yet due by a person in insolvent circumstances amounts to undue preference. Official Receiver Ex parte, Jukes, In re [1902] 2 KB 58 quoted with approval by Mittra A.J.C, in Daolat v. Pandurang--M.A. No. 5-B of 1919, decided on January 30,1920, where Wright J., says 'I cannot help thinking that if a creditor of a debtor takes the whole, or substantially the whole, of the property of his debtor in payment of a past debt, and knowing that there are other creditors, he cannot be said to be acting in good faith,' is an authority for this view. In view of this proof of the transaction of lease which gave rise to the liability for rent, the position of the appellant as a creditor was not disputed before the appellate court. The Court of Appeal therefore treating the case even from that stand-point, took the view that it was also a case of fraudulent preference under Section 37 of the Act and that the transfer was rightly annulled by the first court.'
Appana Veeraraghavamma v. Chandalada Padmaraju : AIR1954Mad93 .
48. On the basis of the aforesaid authorities learned counsel for the RBI submitted that for fraudulent preference the dominant motive of the company must be to prefer a creditor which is clearly established on facts. The transfer of property or payment to that creditor should be voluntary transfer and not under some pressure or threat. That is also clear from the affidavit of Rajiv Vastupal Mehta at page 187 of the paper book.
49. From the documents and the conduct of Rajiv Mehta and the company, it is clear that the case is also covered by Section 531A and the transfer is not a bona fide transfer. In support of the same, learned counsel for the RBI has referred to the affidavit of P. Radhakrishnan, Deputy General Manager, RBI, dated August 28, 2002, produced at page 263 particularly pages 267-270, the details of which have been referred to earlier. He further submitted that there are several discrepancies in the documents produced with the OLR (official liquidator's report) as well as with the affidavit of Rajiv V. Mehta. He submitted that the letter from the company to Rajiv Enterprises Pvt. Ltd., dated January 11, 1999, and the letter from the company to Rajiv Petrochemicals Ltd., dated January 11, 1999, refer to intercorporate loan whereas in the affidavit of Rajiv V. Mehta it is described as deposit although the document produced with the OLR shows that the printed words fixed deposit receipt have been cancelled and the words loan receipt are typed. In the banakhat between Rajiv Enterprises Pvt. Ltd., and the company alleged to have been executed on April 8, 1999, there is a reference to the payment of Rs. 15 lakhs as deposit by 'confirming party'. However, there is no confirming party in the banakhat dated April 8, 1999. He has further stated that Rajiv Enterprises Pvt. Ltd., was the confirming party only in the sale deed dated May 7, 1999, between Aarti Mehta and the company. Again the witnesses in the banakhat and the witnesses in the sale deed are the same and the banakhat and the sale deed are notarised on the same day, i.e., on May 7, 1999. Clause 14 of the sale deed in question mentions that the sale is between the member and the member of the association which does not appear to be correct statement. Similar discrepancies are also there in the other banakhats and sale deeds which are in question. Along with the OLR a certificate from the HDFC dated March 10, 1999, is produced stating, inter alia, that the HDFC is releasing the flats in question from mortgage and that the company has repaid the dues of the HDFC in full. However, the register of charges and Form No. 17 under the Companies Act, 1956, produced with the OLR shows that the charge of the HDFC was satisfied in full on May 7, 1999. The depositors/purchasers have claimed to have purchased the flats after obtaining the title clearance certificate. The so-called title certificate dated April 17, 1999, given by Sri B.R. Patel, advocate, is produced with the OLR. (see : page 57 of the paper book) (search report on title : page 59)
50. Apart from the fact that the said title certificate is addressed to the president/secretary, Sashya Association it does not show that the titles of the company in respect of flats were clear on April 17, 1999. In any case as per Form No. 17 referred to above the charge of the HDFC appears to have been satisfied only on May 7, 1999. Therefore, it cannot be said that on April 17, 1999, the title of the company to the said flats was clear and without any charges.
51. In view of the aforesaid submissions learned counsel for the RBI stated that the contention of Rajiv Mehta and others that they obtained title clearance certificate before purchasing the flats in question is not factually correct.
52. Taking the aforesaid grounds into consideration, the transfer of flats by the company in favour of Rajiv Mehta and others are required to be declared as covered by Sections 531 and 531A of the Companies Act, 1956, and hence null and void.
53. Learned counsel for the RBI has further submitted that along with the affidavit of Rajiv V. Mehta valuation reports have been produced to show that the consideration involved in the transactions was adequate. However, the said valuation reports are dated February 16, 2002, i.e., after filing of the OLR. Again the person giving the valuation reports has not given any comparative sale instances and therefore the said valuation reports cannot be relied upon. At any rate from the totality of the documents produced in this OLR it is clear that the transactions cannot be called good faith transactions nor can they be called bona fide transactions. In fact, in these transactions the seller has paid the amounts to Rajiv Mehta and others over and above selling the flats which is not usual in the transactions of the transfer of properties. Apart from the difference being paid by the company to the purchasers/depositors for adjusting them towards the dues of the depositors the company has also transferred maintenance deposit of Rs. 50,000 for each flat (total Rs. 2 lakhs) by requesting Sashya Association, a non-trading corporation who developed the said flats to transfer the said deposits in the name of the purchasers. Thus, Rajiv Mehta and others not only got back the principal amount of their dues in preference to the other depositors but they also got additional amount by way of maintenance deposit towards interest. The transactions, thus, are covered by Section 531A of the Companies Act.
Submissions of learned senior advocate Mr. S.N. Soparkar :
Sri S.N. Soparkar, learned senior advocate along with Mrs. Swati S. Soparkar, appearing on behalf of purchasers Rajiv Mehta and others has initially relied on the report of the official liquidator. He has also filed an affidavit of Rajiv Vastupal Mehta dated February 14, 2002, and September 27, 2002. He has also filed written submissions. He has also referred to documents which I have referred to earlier and from the documents, he has made the following submissions :He has submitted that Rajiv Petrochemicals Pvt. Ltd., (RPPL for short) and Rajiv Enterprise Pvt. Ltd., (REPL for short) had placed intercorporate deposits (ICD) with the company (in liquidation) for amounts of Rs. 10 lakhs on January 8, 1999, and Rs. 15 lakhs on January 8, 1999, respectively and Rajiv Enterprise had deposited the amount of Rs. 15 lakhs for bill rediscounting on November 25, 1998, for a period of six months. The due date of the above-said deposits was July 8, 1999, July 8, 2999, and May 24, 1999. However, the parties renegotiated the deal and it was agreed by the company (in liquidation) to sell its properties and therefore sold three flats to three group companies for a consideration agreed between them and sale deeds were executed on May 7, 1999.
54. Learned counsel has submitted that the company had sold flat No. 8 to RPPL for Rs. 13 lakhs against its due of Rs. 10 lakhs. It is stated that RPPL had issued a further cheque of Rs. 3 lakhs on May 6, 1999, against the final consideration of flat No. 8 which is clear from the sale deed which is annexed at annexure A to the affidavit dated February 14, 2002.
55. Learned counsel further submitted that the company had sold flat No. 16 for Rs. 12.28 lakhs to REPL against its dues of Rs. 15 lakhs and the difference of Rs. 2.72 lakhs was received by cheque from the company in liquidation. However, the said agreement was arrived at between the company in liquidation and Mrs. Aarti R. Mehta, the director of REPL, where REPL stood as a confirming party. It is submitted that the said amount of Rs. 12.28 lakhs which was due from Mrs. Aarti R. Mehta had been given to REPL vide cheque No. 551865 dated May 7, 1999. It is therefore submitted that Mrs. Aarti R. Mehta has purchased the said flat for full consideration and is the owner of the said flat.
56. Learned counsel submitted that the company (in liquidation) had sold flat No. 17 of Rs. 15 lakhs to Rajiv Enterprise. Against its dues of Rs. 15 lakhs, Rs. 14.43 lakhs payable under fixed deposit was adjusted and for the difference of Rs. 57,000 the company (in liquidation) issued a cheque of Rs. 14,000 on May 6, 1999, and balance of Rs. 43,000 was adjusted against interest.
57. Learned counsel has further submitted that all the three flats were sold at the market value and the purchasers have paid full consideration.
58. Learned counsel appearing for the purchasers has submitted that the said properties were transferred vide sale deed dated May 7, 1999, and the first winding up petition of the company (in liquidation) was presented on October 21, 1999. The only fact that the transfer was made within one year before the presentation of the winding up petition is not the only criterion for proving the violation of Section 531A of the Companies Act. The other conditions to be seen are whether the transfer was made in ordinary course of its business and whether the consideration is valuable. It is submitted that the properties were transferred to the purchasers in ordinary course of business and the consideration arrived at is based on the market value of the properties and hence is reasonable. It is further submitted that the transaction is not covered by Section 531 and/or Section 531A of the Companies Act and hence there is no violation of Sections 531 and/or 531A of the Companies Act and the transfer is not void.
59. It is submitted that the liquidator has stated in his report dated October 25, 2001, that all formalities for sale have been duly complied with by the owners of the flats and it is clear that the flats do not belong to the company (in liquidation). It is further submitted that the liquidator has by his statement meant that the sale is genuine and bona fide. It is submitted that it is not open to the liquidator to take up completely contrary position at this stage.
60. Section 531 of the Companies Act states that any transfer of property done by or against the company within six months before the commencement of its winding up be deemed to be a fraudulent preference and be invalid accordingly. In the present case sale deed is executed on May 7, 1999. Six months prior to that will be November 7, 1998. It is respectfully submitted that there was no petition pending on November 7, 1998. Hence the transaction is not hit by Section 531.
61. It is submitted that no other creditors came forward to take the flats of the company (in liquidation). It is stated that therefore the flats were offered to the purchasers against the dues of the purchasers. The purchasers were only interested in purchasing the flats amongst all the creditors and hence have entered into the transaction. It is, therefore, stated that there is no fraudulent preference and violation of Section 531 of the Act.
62. Learned counsel for the purchasers has relied on the judgment of the hon'ble Supreme Court in the case of N. Subramania Iyer v. Official Receiver : [1958]1SCR257 . In the said case the hon'ble Supreme Court has observed in para. 4 on page 4 thus :
'A number of points were raised on behalf of the appellant and at the threshold of the arguments it was contended, and in our opinion rightly, that the courts below had erred in throwing the burden on the transferee of proving affirmatively that the transaction impeached namely, the usufructuary mortgage bond dated August 18, 1924, was supported by good faith and valuable consideration,'
63. At para. 7 on page 6 the hon'ble Supreme Court further observed as under:
'The contrary proposition has not been pressed upon us and we need not therefore pronounce upon that. If the burden lay on the receiver, in our opinion, his application for annulment can be allowed on proof either that there was no consideration for the transaction or that the consideration was so inadequate as to raise the presumption of want of good faith.'
64. Learned counsel for the purchasers after relying on the decision of the hon'ble Supreme Court in the case of N. Subramania Iyer v. Official Receiver : [1958]1SCR257 , has submitted that the burden to prove that the transaction is mala fide lies on the persons who impeaches the transaction. The initial burden of proving that the transaction impeached had not been made in good faith and for valuable consideration lies on the party seeking to set aside the transaction. If the transaction impeached was a real and not a fictitious one, the receiver could not be said to have brought the case within the section unless he proved that the transferee knew that the transferor was insolvent at the time the transfer was made, even though the transfer was of the entire assets of the transferor. The receiver may also succeed on showing that though there was a valuable consideration for the transaction impeached, there was want of good faith in the sense that the transferee knowing all the circumstances of the transferor who had since been adjudged as insolvent entered into the transaction with a view to screening the assets of the insolvent from the receiver in whom the insolvent's property vests for the benefit of the creditors. However, in the present case it is nobody's case that there is want of good faith.
65. Learned counsel has relied on the above-referred Maneckchowk and Ahmedabad ., In re [1970] 40 Comp Cas 819 (Guj). It is submitted that in the said case it is held that in order to avoid a transfer of property in favour of a creditor on the ground of its being a fraudulent preference, it must be shown that the debtor, with intent to prefer the creditor, has transferred the property, and it must be a free and volitional act of the party. It refers to the state of mind of the debtor and it must be shown that the debtor intended to prefer the creditor or acted in a manner solely with a view to prefer the creditor to the exclusion of the others. Therefore, if it could be shown that the debtor acted under an apprehension that he would be prosecuted or under a threat of prosecution, the transfer of property by him could not be said to be a free volitional act of the debtor disclosing an intention to prefer the creditor. In order to find out whether a transfer of property would amount to fraudulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could not in such circumstances be fraudulent preference. It is held that the intention of the company in entering into the said transaction was to salvage the situation as far as possible and not to prefer one creditor over another. Therefore, the transaction was not vitiated by Section 531 of the Companies Act.
66. He has further relied on the above-referred decision in the case of Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom) and submitted that if the court comes to the conclusion that such transfer, though made within a period of one year before presentation of the petition, was made either in the ordinary course of business or in good faith and for valuable consideration, such transfer would not be annulled. The burden of proving that the impugned transaction was not entered into in the ordinary course of business or in good faith and for valuable consideration would be on the official liquidator or the creditors impugning the transaction.
67. He has further referred to the decision in the case of Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1986] 60 Comp Cas 77 (P & H) and submitted that in a case where there was valuable consideration, the liquidator may show want of good faith in the sense that the transferee, knowing all the circumstances of the transferor-company which is since wound up, entered into the transaction with a view to shield the asset against the claim of the creditors. Unless it is found that the transferee was wanting in bona fides in respect of the transaction in question, he cannot be affected by the dishonest course of conduct of the transferor-company.
68. It was further observed that it was not necessary for upholding the transaction that the transferor who had been subsequently adjudged as an insolvent should have been honest and straightforward in the matter of transaction impeached. Both the transferor and transferee must have common intention to defraud the creditors. The test is that the purchasers have acted honestly. A thing shall be done in good faith where it is in fact done honestly, whether it is done negligently or not.
69. He has further submitted that a winding up petition is proceeding in rem and not in personam. Once the winding up order is passed in one matter, it operates against the world at large. It is submitted that on October 20, 2001, the winding up order was passed in Company Petition No. 147 of 2000 preferred by the RBI. Hence there is no need to pass a winding up order once again in any other company petition. A winding up order passed again in any other company petition is a nullity and void in eyes of law. Therefore, the second winding up order dated August 23, 2002, passed in Company Petition No. 296 of 1999 is required to be ignored and for the purpose of Section 441 only the first order is required to be taken into consideration,
Contentions of Mr. Ashwin Lalbhai Shah on behalf of the intervener :
Mr. Ashwin Lalbhai Shah, learned advocate, appearing for some of the interveners has stated that he is supporting Mr. Roshan Desai, learned advocate for the official liquidator and Mr. Amar Bhatt, learned advocate for the RBI. However, for additional submissions, from the Companies Act he has made the following submissions ;
He has submitted that the preferred creditor has relied upon the following documents for the purpose of showing that the transactions in question were not hit by the provisions of Section 531 or 531A of the Companies Act, 1956.
(a) Banakhats for the sale of various properties to the above parties ;
(b) Sale deeds of the above properties ;
(c) Income-tax clearance certificate ;
(d) No due certificate issued by HDFC ;
(e) Form filed with the Registrar of Companies regarding the satisfaction of charge created in favour of HDFC ;
(f) title clearance certificate issued by the advocate ;
(g) valuation reports of the above properties ;
(h) letters issued to the company for the transfer of maintenance deposits in favour of the preferred creditor.
70. Learned counsel has submitted that the above documents do not support the preferred creditor but on the contrary, go against him as stated hereinafter.
71. As regards banakhats, no party is shown to be confirming party as shown in the sale deeds. All the said banakhats are dated April 8, 1999, and the total consideration in all the said banakhats is Rs. 40 lakhs and that too in favour of the same party.
72. As regards sale deeds, the said sale deeds are dated May 1, 1999. The sale deed of flat No. 16 has been in favour of Mrs. Aarti Rajiv Mehta, the wife of Sri Rajiv V. Mehta. The sale deed has been also executed by Rajiv Enterprises Pvt. Ltd., as the confirming party. Similarly, the said deed of flat No. 17 has been in favour of Sri Rajiv V. Mehta, the sole proprietor of Rajiv Enterprises. The said sale deed has been executed by the said Rajiv Enterprises through its said sole proprietor as the confirming party. The sale deed of flat No. 8 has been executed in favour of Rajiv Petrochemicals Pvt. Ltd., belonging to the preferred creditor. Thus, all the said flats have been sold to the same preferred creditor.
73. No monetary consideration has passed from the purchasing parties to the company but only the adjustment of the amounts alleged to be due by the company to the various parties is made and on the contrary, the balance has been actually paid by the company to the concerned parties as is stated in the respect sale deeds.
74. The company has been paid much less consideration of about Rs. 59 lakhs for the total of four flats being flats Nos. 8, 16, 17 and 18 against the total value of about Rs. 84 lakhs, thus Rajiv Mehta and others gaining a benefit of about Rs. 25 lakhs as will be evident from what is stated hereinunder :
(a) In the application for the income-tax clearance certificate for flat No. 8, the cost of acquisition of flat No. 8 is shown to be Rs. 16.50 lakhs while the said flat is sold for Rs. 13 lakhs. The said application is dated April 22, 1999, and the date of acquisition is shown to be August 1, 1997. The banakhat has been dated April 8, 1999. Thus, within 1 years of the date of acquisition, the said flat has been agreed to be sold at a price of Rs. 13 lakhs being less than its acquisition price by Rs. 3.5 lakhs. The argument of the preferred creditor that the sale price is less than the acquisition price because of the alleged recession in the real estate market is not tenable firstly because there is nothing to show that there was recession in the said market and no judicial notice of any such alleged fact can be taken by the court and secondly because there could not be recession of this extent of almost 25 per cent, within a period of 1 years. Moreover, there is nothing to show the recession to that extent.
(b) Similarly, in the application for income-tax clearance certificate for flat No. 16, the cost of acquisition is shown to be Rs. 16,50,000 while the same is agreed to be sold for Rs. 12,28,000 in the concerned banakhat, the same being less by Rs. 4,22,000 within 1 years of the date of acquisition. Thus, there is a loss of more than 30 per cent. Learned counsel submitted that what is stated above in connection with flat No. 8, also applies here.
(c) Similarly, in the application for income-tax clearance certificate for flat No. 17, the cost of acquisition is shown to be Rs. 19,38,750, while the same is agreed to be sold for Rs, 14,43,000 in the concerned banakhat the same being less by Rs. 4,95,750 within 1 years of the date of acquisition. Thus, there is a loss of more than 25 per cent. Learned counsel submitted that what is stated above in connection with flat No. 8, also applies here.
(d) Thus, there is a total loss of Rs. 14.22 lakhs being the amount realised less than the total amount of cost of acquisition of the said three flats only in a period of 1 years. In addition to this, the amount of Rs. 50,000 in the case of each of the said three flats deposited by the company with Sashya Association by way of maintenance deposits is transferred to the purchasers. The company has thus, in effect, paid the total sum of Rs. 1,50,000 to the preferred creditor. The said amount of Rs. 50,000 has to be deducted from the amount received by the company from the preferred creditor in each of the said three cases.
(e) In addition to the above, there is nothing to show as to who has paid the stamp duty and registration charges for the said sale deeds. Normally, the said charges are required to be paid by the purchasers and since the same has not been paid by the purchasers, they have benefited in the said transactions to that extent. The stamp duty payable is about 12 per cent, of the sale consideration in each of the said cases and since the purchasers have not paid the same, the preferred creditor has benefited to a considerable extent even on that count. The same is the case with respect to the registration charges of the said sale deeds. The preferred creditor has not produced anything to show that the purchasers have paid anything towards the said stamp duty in spite of the arguments to the above effect at the time of the hearing of the above application. As such, an adverse inference has to be drawn against the purchasers in this connection.
(f) Moreover, certain amount has to be paid to the said association for the transfer of the said flats to the purchasers. This also must have been paid by the company though the purchasers are liable to pay. Thus they have benefited in this respect also to a considerable extent. The company has been out of pocket to that extent. This point was also argued at the time of the said hearing. However, the preferred creditor has thought it fit not to controvert the same by producing anything in his support.
(g) In addition to the above, it is pertinent to note that in Form No. 13 filed by the company with the Registrar of Companies registering the creation and satisfaction of the charge created in favour of HDFC, a loan of Rs. 50 lakhs from HDFC is shown to have been obtained from HDFC which is secured by a mortgage of the said four flats in favour of HDFC. It can safely be assumed that when giving the said loan, HDFC must have kept a margin of at least 40 per cent, of the value of the said flats. This will mean that the value of the said four flats must have been at least Rs. 84 lakhs. Even otherwise, the cost of acquisition of the said four flats disclosed in the applications for income-tax clearance certificate comes to about Rs. 82 lakhs. Against this, the total amount realised is about Rs. 59 lakhs only, assuming that flat No. 18 has been sold at Rs. 14,43,000 being the price of flat No. 17 since the area of both the flats are the same, namely 235 sq. yards. In addition to this, the total amount of the transfer of the maintenance deposit Rs. 50,000 in each case as also the payment of the stamp duty, registration charges and transfer fees in each case mentioned above has to be deducted. All this can lead one to an irresistible conclusion that the said flats are not sold for valuable consideration and the preferred creditor has acquired the same at much less consideration in collusion with the company.
75. Learned counsel has referred to Section 441(2) of the Companies Act and submitted that under Section 441(2) of the Companies Act, 1956, the winding up of a company by the court is to be deemed to have commenced at the time of the presentation of the petition for the winding up. This provision is to be given effect to in the case of every petition when an order of winding up is passed in the case of a company irrespective of whether or not any order of winding up is passed with respect to the same company earlier. Section 441(2) is to be read to the effect that winding up is deemed to have commenced from the respective dates of the filing of the petitions when there are more than one orders passed for winding up of a company.
76. Learned counsel has submitted that the valuation reports relied upon by the preferred creditor have no value and the same cannot be relied upon on account of the following :
(a) The said valuation reports are made on May 5, 1999, while the valuer has stated that he had inspected the properties on February 15, 2002, i.e., about three years after making the reports. In addition to this, he has signed the reports on February 16, 2002, i.e., before the alleged inspection.
(b) In the column 'owner' in the said reports, the names of the respective purchasers are shown, while, as a matter of fact, on the date of the making of the said valuation namely, on May 5, 1999, no sale deed was executed and the concerned parties were not at all the owners of the respective flats.
(c) No sale instances have been taken into consideration by the valuer which is much necessary for making such valuation. No reason for the same is stated in the said reports.
(d) An absolutely general valuation has been made and general observations have been made without any basis whatsoever.
(e) The value stated in the reports is much less in view of the above-referred loan of Rs. 50 lakhs granted by HDFC.
77. Learned counsel has submitted that in view of the above, the said valuation reports do not lend any credence and have to be ignored.
78. As regards search report, learned counsel has submitted that search reports relied upon by the preferred creditor are useless in view of the following :
(a) The search reports and the title clearance certificates are dated April 17, 1999, stating that the title of Sashya Association is clear. However, in the above-referred Form No. 17, the company has stated that the charge in favour of HDFC has been satisfied on May 7, 1999, that means that till then the charge of HDFC was subsisting and the title to the said properties was not clear. Admittedly, on the date of the said report, the said flats were under mortgage with HDFC.
Moreover, at the relevant time, the company was the owner of the said flats. There is no title certificate of the ownership of the company to the said flats. The said title certificate refers to the title of Sashya Association which was admittedly not an owner of the said flats.
(b) The said reports state that a search of the record of the sub-registry and revenue authority was taken. Nothing in support is produced. Moreover, no search of the office of the Registrar of Companies has been taken which if taken, would have disclosed the above charge.
79. Learned counsel has referred to various authorities. He has also referred to the judgment of the Court of Appeal in Gray's Inn Construction Co. Ltd., In re [1982] 1 Comp LJ 255, 256 in which it is held thus :
'The concept of English law is clear on this point, that is to say, the free assets or the Insolvent's estate shall be distributed rateably among the unsecured creditors. The court has power under Section 227 to validate transactions such as sale of the company as a going concern at best price available.'
80. He has also referred to Companies Act, 1948 (Part V, page 745)--Buckley 7th edition in the heading 'Motive and Deeds of Arrangement' (pages 745 and 746)--
'On the question of fraudulent preference the court looks at the dominant or oral intention and not the result . . .
Where the intention is to discharge a legal obligation, or what is thought to be a legal obligation, or voluntarily to repair a wrong done, or to protect the paying party from penal consequences or from exposure, the payment is not a fraudulent preference . . .
To prove the motive or intention to prefer evidence of other acts of preference in favour of other creditors committed at or about the same time is admissible.
Burden of proof--The onus is on those who claim to avoid the transaction to establish what the debtor really intended and that the real intention was to prefer. The onus is only discharged when the court, upon a review of all the circumstances, is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but when there is not direct evidence and there is room for more than one explanation it is not enough to say, there being no direct evidence, the intent to prefer must be inferred. But this does not mean that unless there is no other possible explanation the intent to prefer will not be inferred; the ordinary principles adopted by the court in drawing inferences of fact apply.'
81. Learned counsel has also referred to the judgment of the Kerala High Court in the case of Smt. Jayanthi Bai v. Popular Bank Ltd. : AIR1966Ker296 the court has observed and held as follows (page 860 of 36 Comp Cas) :
'The bank cannot with a dominant intent prefer one creditor over the others in the guise of making an adjustment or payment. The existence of a legal right is not conclusive that what was done was in the exercise of such right, though in normal circumstances the action would be referable to it. In many instances, except perhaps in the case of a naked or patent fraud, there might be some antecedent right to serve as the ostensible basis of a fraudulent preference. But once it is seen that what was achieved was the preferring of one creditor over the others with a dominant intent so to do, the vice of Section 531 of the Companies Act is attracted, and the transaction is in fact a fraudulent preference. Direct evidence of such preference is not often forthcoming and is not necessary either. In Cohen, In re Trustee, Ex parte [1924] 2 Ch. 515 (CA), a voluntary payment, made on the eve of the bankruptcy, with knowledge of insolvency, was held, in the absence of proof of some other dominant motive, to be sufficient to establish a fraudulent preference. As held in M. Kushler Ltd., In re [1943] 13 Comp Cas 219 ; [1943] 2 All ER 22 (CA), the dominant intent to prefer may be proved by circumstantial evidence leading to a necessary inference, like any other fact. The rule is stated thus in Halsbury's Laws of England, 3rd edition, volume 2, page 556, paragraph 1103.
'In order that a transaction may be set aside as a fraudulent preference, it is necessary to prove that it was carried out with the substantial or dominant view of giving the creditor, or surety or guarantor for the debt, a preference over the other creditors. This need not be the primary result aimed at ; it is sufficient that it should be the object aimed at in bringing about the primary result. If the transaction can properly be referred to some other motive than that of giving a particular creditor or surety a preference over the other creditors, the payment is not fraudulent and void, for it is from the intention of the debtor to act in fraud of the law (i.e., to prevent the distribution of the bankrupt's property rateably among all his creditors) that the invalidity of the transaction arises.' and at page 557, paragraph 1104 :
'On the other hand, in the absence of direct evidence, the existence of some other possible explanation for the transaction will not of itself exclude the drawing of an inference that there was an intention to prefer.'It is not necessary to discuss decided cases cited at the Bar, in which the debtor was found to have acted not with a dominant intent, but, say, with a belief that he was under a legal obligation to do the act whether such belief was well-founded or not, or with an intent to keep his business going or to set right his financial position, or even to take an advantage for himself if the law would permit such a course. If, on the facts and circumstances there is room for more than one explanation, an intent to prefer is not of necessity to be drawn. The onus of proof is of course on the liquidator. We may examine the circumstances, having regard to these considerations.'
82. Learned counsel has also referred to the decision in the case of Eric Holmes (Property) Ltd. (In liquidation), In re [1965] 35 Comp Cas 811 ; [1966] 1 Comp LJ 19 (Ch D) in which on page 25 it is observed thus (page 821) :
'I was referred to a number of authorities on the effect of Section 44 of the Bankruptcy Act, 1914, in particular Peat v. Gresham Trust Ltd. [1934] AC 252 (HL), M. Kushler Ltd., In re [1943] 13 Comp Cas 219 ; [1943] 2 All ER 22 (CA) and Cutts (T. W.), In re, Ex parte Bognor Mutual Building Society v. Trustee in Bankruptcy [1956] 2 All ER 537 (CA). I do not propose to quote from these authorities at length. It will be sufficient at this stage to say that it is well established that for the purpose of Section 44 'view' means 'intention' ; that the relevant intention is that of the debtor ; that the burden of establishing the relevant intention lies on the party seeking to avoid the transaction ; that the debtor's intention is a matter of fact ; and that in reaching its conclusion of fact the court is bound to draw all proper inferences from the evidence and circumstances.'
83. Learned counsel for the interveners has submitted that the say of the preferred creditor is that the transfers in question were made in the ordinary course of business. He has submitted that admittedly when the transfers were made, the company was not carrying on any business and as such the argument that the same have been made in the ordinary course of business is baseless. Moreover, the sale of flats was not the business of the company. The business of the company was to give finance for the various purposes and not to purchase and sell immovable properties. No instance of any such activity is produced so as to suggest that the company was as a matter of fact carrying on such activity as business. He has further submitted that the transfer should be within six months before the commencement of winding up. As such, if the winding up commenced within six months of the date of transfer, such transfer will be covered by Section 531. One has to go forward from the date of transfer and not backward from that date which is exactly the thing argued in the said paragraph. A winding up petition was pending within six months after the date of transfers in question and as such the said transfers are clearly covered by Section 531 of the Act.
84. Learned counsel has submitted that there is a distinction between the point of time when an order of winding up is made and the point of time when an order of dissolution is made. The company continues to exist between the two terminii.
85. In view of the above, learned counsel submitted that the sale transactions are not bona fide, for valuable consideration and entered into in the ordinary course of business of the company and as such, are void.
Contentions of Mr. D.S. Vasavada, learned advocate, appearing on behalf of Rajesh Chimanlal Shah, chartered accountant :
Mr. Vasavada, learned counsel appearing on behalf of Rajesh Chimanlal Shah, chartered accountant, has submitted that the transfer of flats in question is a voluntary transfer and the company showed preference in repaying the dues of only a few select depositors, Even the documents produced before the court do not inspire confidence and the same are fraudulent transfers and in view of the same, OLR No. 81 of 2001 is required to be dismissed. The said affidavit of Sri Rajesh Chimanlal Shah is produced at pages Nos. 293 to 298 of the paper book. Over and above the said affidavit of Mr. Rajesh C. Shah, Mr. Vasavada has supported the contentions of Mr. Roshan Desai, Mr. Amar Bhatt and Mr. Ashwin L. Shah, learned advocates for the other parties.
Conclusion :
86. As regards flat No. 8, as per the deed of sale it is sold at Rs. 13 lakhs while the cost of acquisition of the said flat is Rs. 16,50,000 as is evident from the figures stated in the application for income-tax clearance certificate under Section 230A(1) of the Income-tax Act, 1961, produced at page 94 of the paper book. In this transaction the company in liquidation has suffered a loss of Rs. 3,50,000, Over and above the same, as per the letter dated May 6, 1999, produced at page No. 97 of the paper book of the company in liquidation/ PFSL intimated to Sashya Association to transfer Rs. 50,000 being the amount of maintenance deposit placed by PFSL in the name of Rajiv Petro Chemical Pvt. Ltd. In view of the same, this is a further loss of Rs. 50,000 to the company in liquidation. It is also not clear who has paid the transfer fee for transfer of flat No. 8 from the company in liquidation/PFSL to Rajiv Petrochemicals Pvt. Ltd., which is required to be paid as per the rules and regulations of the non-trading association and/or co-operative society. In view of the same, the transaction of sale is below the cost of acquisition and loan of Rs. 10 lakhs has been adjusted against the price of Rs. 13 lakhs. The transaction of sale has also taken place before the due date of loan and therefore the transaction of sale regarding flat No. 8 being below the cost of acquisition, the company in liquidation suffered loss of Rs. 3,50,000 plus Rs. 50,000 maintenance charges and amount of transfer fees.
87. It may be noted that the company had taken a loan of Rs. 10,00,000 from Rajiv Petrochemicals Pvt. Ltd., in January, 1999, and the said loan was repayable to RPPL on July 8, 1999. Against the said loan of Rs. 10 lakhs on May 7, 1999, the company had entered into a sale agreement in connection with flat No. 8. Rs. 10 lakhs was adjusted by the company against purchase of the flat and Rs. 3 lakhs was paid by the purchaser to the company on May 6, 1999. That is how consideration of Rs. 13 lakhs was paid. It has not been shown as to how the company was compelled to sell the flat at a lesser price of Rs. 3.50 lakhs. Even it is not clear who has paid the transfer fees. Thus the sale of flat No. 8 by the company to RPPL is not bona fide being before the due date and not under compulsion and not for valuable consideration. Therefore, the transaction amounts to fraudulent preference by the company in liquidation.
88. As regards flat No. 16, the same was sold at Rs. 12,28,000. The said flat was sold against loan of Rs. 15 lakhs which the company obtained from Rajiv Mehta. The agreement to sell clearly shows that Rs. 12,28,000 has been adjusted by the company against the said loan and the company had paid Rs. 2,72,000 to Rajiv Enterprise Pvt. Ltd., on that day. This clearly shows that the company has given preference not only by adjusting the flat value of Rs. 12,28,000 but it has also paid Rs. 2,72,000 to Rajiv Enterprise Pvt. Ltd., in cash, though in fact the company had no capacity to make the payment to the other creditors. This fact is corroborated by the sale deed dated August 17, 1999. Income-tax clearance certificate which has been produced on record clearly shows that cost of acquisition of the said flat is Rs. 16,50,000 but admittedly the flat has been sold much below the cost of acquisition. It may be noted that the learned advocate for the purchaser has only stated that values of the property have gone down and therefore the company had no alternative but to sell the flat at below the cost of acquisition. In support of the same, he has relied on the valuation report but it does not inspite any confidence because the valuation as on May 7, 1999, has been done only on February 16, 2002, and the valuation report also does not show how the value is arrived at. In view of this, the valuation report does not inspire any confidence and the same cannot be relied on. It may be noted that when the company had decided to sell the property on May 7, 1999, there was no legal threat or compelling reason for the company to sell the flat. When the company knew that the cost of acquisition was Rs. 16,50,000 the company could have waited for some more time to get a better price instead of Rs. 12,28,000 and should also have invited offers for its sale. Now the company has not shown as to whether the company has published any advertisement in the public newspaper about the sale of the property and whether it has received any other offer and the offer of Rs. 12,28,000 is the highest offer. The purchaser has also not shown any document about the same. In view of the same, in my view the transaction is not in good faith and the company has also not acted bona fide particularly when sale of the property is far below the cost of acquisition.
89. Over and above the said value of the property, the amount of Rs. 50,000 deposited by the company with Sashya Association by way of maintenance deposit is transferred to the purchaser. So as regards flat No. 16, the company has suffered a loss of Rs. 3,72,000 + Rs. 50,000. In view of the same, this transaction does not inspire confidence and the same is not bona fide and not in good faith. The company has clearly tried to prefer the creditor Rajiv Mehta not only by adjustment of money but even paid cash amount though admittedly the company has no capacity to make payment in this behalf.
90. As regards flat No. 17, it may be noted that the company had entered into rediscounting bill of Rs. 15,00,000 with Rajiv Enterprise. In this behalf the said amount was due and payable by the company to Rajiv Enterprise on May 24, 1999. The said discounting facility was adjusted against flat No. 17. The cost of the flat was Rs. 14,43,000 against the bill rediscounting of Rs. 15 lakhs. The said amount was adjusted against Rs. 14,43,000 and out of the remaining amount of Rs. 57,000, Rs. 14,000 was paid by the company to the purchaser on May 6, 1999, whereas Rs. 43,000 the company had earlier paid the said amount to the purchaser of the said flat, namely Rajiv V. Mehta. This also shows that the company has not only adjusted Rs. 14,43,000 against bills rediscounting facility but paid Rs. 57,000 in cash on May 6, 1999. The transaction of sale took place on May 7, 1999. This fact clearly shows that the company has tried to prefer this creditor to other creditors in this behalf. Even on that day there was no compulsion to sell the flat.
91. It may be noted that income-tax clearance certificate which has been produced shows the cost of acquisition of the flat at Rs. 19,37,750. Thus the company has sold the flat below the cost of acquisition and suffered loss of Rs. 4,95,750 and Rs. 50,000 towards transfer of maintenance deposit. In view of the same, for the reasons stated above, the company has tried to prefer this creditor to other creditors and the transaction is not in good faith and not bona fide. I also do not give any importance to the valuation report for the reasons which I have stated in connection with flat No. 16.
92. The facts emerging from the record of the present case are that the company in liquidation has transferred three flats, i.e., flats Nos. 8, 16 and 17 situate at Haridwar Apartments, Panchvati, Gulbai Tekra, Ahmedabad, in favour of Rajiv V. Mehta and others on May 7, 1999. It may be noted that one company, namely, Unnati Investment Ltd., filed winding up petition against the company on October 21, 1999, for which winding up order has been passed by this court on August 23, 2002. In the present case the transaction has taken place on May 7, 1999, i.e., within a period of six months previous to the date of presentation of the first petition, namely, on October 21, 1999. In view of the Section 441(2) of the Companies Act, winding up of the company shall be deemed to commence at the time of the presentation of the petition for the winding up. So in the present case, date of commencement of winding up petition is October 21, 1999. Therefore, the transfer date May 7, 1999, of flats clearly falls within six months from the date of presentation of winding up petition.
93. I have seen the reply of the company filed before the Company Law Board dated May 4, 1999, which is on pages 271-283 of the paper book. In the said reply it was submitted by the company that it is unable to pay the depositors. In fact, the company in its reply has made various schemes for payment to various creditors particularly one has to refer to the entire report and particularly annexure IV which provides for scheme of repayment. Clause 8 of the said annexure (on page 286) clearly provides that all deposits of Rs. 10,00,001 to Rs. 25,00,000 will be paid within five years from the date of maturity at 10 per cent, within 30 months, 20 per cent, within 42 months, 35 per cent, within 54 months and 35 per cent, within 60 months together with interest both for pre and post-maturity period. Here clearly the amount is more than Rs. 10,00,000. So ordinarily, the company would have paid the amount within five years from the date of maturity. On the other hand, in this case the company has paid the entire amount before the maturity period and there was no legal proceeding initiated by Rajiv V. Mehta against the company. So there was no legal threat or compulsion against the company for making the payment in this behalf. The payment was merely at the volition of the company in this behalf. Though admittedly the company was facing financial difficulty and was not able to pay to any other creditors. This shows that the company has clearly preferred Rajiv Mehta and others to other creditors in this behalf whose claim the company expresses its inability to pay before the Company Law Board. This clearly shows that the company has given fraudulent preference to Rajiv Mehta and others which clearly falls within the provisions of Section 531 of the Companies Act. In fact the decisions in the cases of N. Sub-ramania Iyer v. Official Receiver : [1958]1SCR257 and Gandabhai Gulabchand v. Balkrishna Vaman AIR 1930 Bom 217, which have been referred to by learned counsel for the RBI clearly apply to the facts of the present case. The facts gathered from the record clearly establish that the company has incurred considerable loss in the transaction. Even Rajiv Mehta in his affidavit has stated that the parties have renegotiated the deal before the date of maturity. In view of the same, company in liquidation has transferred three flats even before the due date and therefore also the transaction in question is not under compulsion or not under threat or duress. The transaction was at the volition of the parties and therefore the company in liquidation cannot raise any defence that they were compelled to sell the flats to save their skin.
What is meant by fraudulent transfer :
'Section 76 of the joint Stock Companies Act, 1856, first introduced the bankruptcy principles as to fraudulent preferences into the liquidation of insolvent companies. The last such provision was contained in Section 615 of the Act of 1985.
Under this provision, any act relating to property made or done by or against a company within six months before the commencement of winding up is invalid as a fraudulent preference if it qualified as such in the bankruptcy of an individual. Hereunder fall, in particular, conveyances of property, the grant of mortgages, and the delivery of, or the payment for, goods (Section 615(1)).
For a transaction to constitute a fraudulent preference, it must appear that the transaction took place within six months of the commencement of winding up, and that the substantial or effectual or dominant view in the mind of the company, acting by its directors, was to prefer the creditor at a time when the company was unable to pay its debts as they became due. It need not, however, be the sole motive. If these requirements are satisfied, the transaction is deemed to be fraudulent ; it is not necessary to prove that any moral blame attaches to the company.'
(See : Palmer's Company Law--24th edition, 1987, paras. 88-79, page 1456).
94. In England a payment will be a fraudulent preference if it is--
(a) made with the dominant intention of giving the creditor a preference over the other creditors, and
(b) the voluntary act of the company. A payment made under pressure is not a fraudulent preference.
95. M and his wife were the sole directors and shareholders of a company. The company's overdraft was guaranteed by them. The company's overdraft was cleared without pressure from the bank. The company went into liquidation. M believed at the time of payment that all the debts would be paid in due course even though they could not be paid as they became due. The Court of Appeal held that this was not sufficient to prevent the payment to the bank being a fraudulent preference : F.P. and C.H. Matthews Ltd., In re [1982] 1 All ER 338, 342 (CA) :
'Where the debtor company is unable to pay its debts as they arise, that circumstance seems to us to fall clearly within the words 'a preference over the other creditors'. The receiving creditor gets its money in full and the rest of the creditors are left with the risk that they may not be paid in full.--Per Lawton L. J at page 342.'
(See : Charlesworth and Cain--Company Law--12th edition, 1983, page 638).
96. The law relating to fraudulent preference in the case of individuals is contained in Section 56 of the Presidency Towns Insolvency Act and Section 54 of the Provincial Insolvency Act. In the place of words 'every obligation incurred and every judicial proceeding taken or suffered' occurring in those Acts, the words 'any other act relating the property' are found here. As under the General Clauses Act, 'act' includes 'illegal omissions', the wording of the present section (i.e., Section 531) is capable of covering all possible cases of fraudulent preference in respect of property.
97. If the transaction of transfer amounts to a fraudulent preference under the insolvency law and if it is entered into within a period of six months prior to the commencement of winding up, then alone the transaction in question can be treated as void under Section 531(1) of the Act or otherwise.
98. To constitute fraudulent preference, there need not be a transfer of property, nor is any cash payment necessary. The words 'other act relating to the property' are very comprehensive, and roundabout transaction may come within its scope. Nattukottai Bank Ltd., In re [1957] 27 Comp Cas 404 (Mad) and Smt. Jayanthi Bai v. Popular Bank Ltd. : AIR1966Ker296 . According to the above-mentioned cases the section will apply even if the fraudulent preference is not direct but the intention is fraudulent preference. (See also Taylor ex parte, Goldsmid, In re [1887] 18 QB 295).
99. To establish fraudulent preference under Section 531, it is not enough to show that preference was shown to a particular creditor ; it must also be shown that it was done 'with a view' to give him favoured treatment. The dominant motive attending the transaction has to be ascertained and if it is tainted with an element of dishonesty, questions of fraud arise. A probe into the debtors' mind, an assessment of the various motives that animate human conduct, is thus involved.
100. The proper test is to see whether there was an overriding intention to prefer one particular creditor or creditors. Lloyd J. in considering whether a creditor of an insolvent company has received a preference the court has to consider the state of mind of the directors at the time the alleged preference was given and to see whether the company was influenced by a desire to give a preference. (Re : para. 9.10 to 9.14--A Ramaiya, 15th edition, 2001, pages 3706-3707).
'Without anything more a fraudulent preference means discharge of an existing liability or an act on the part of the insolvent which may result in a discharge of one liability over others to give the former a favourable treatment, which tinder the provisions of insolvency law is considered a fraudulent preference. A fraudulent preference has a definite connotation. Section 531 clearly envisages that what shall be treated as fraudulent preference in the case of an individual adjudged as insolvent under the insolvency law applicable to him shall be treated as a fraudulent preference of its creditors under the Companies Act also. Section 54 of the Act of 1920, provides what is to be considered fraudulent preference.
Law has been well settled that to establish fraudulent preference under Section 531 it is not enough to show that preference was shown to a particular creditor. It must also be shown that it was done with a view to give him preferential treatment. For the purpose of assuming a transaction as a fraudulent preference, the discharge of a debt within the stipulated period, namely six months before the presentation of the petition for winding up is to be considered and what is to be considered is not the incurring of debt, but the payments made to discharge that debt.'
(para. 9.15 and 9.15A--Re : Division Bench judgment of this court in the case of Bank of Maharashtra v. Official Liquidator, Navjivan Trading Finance Pvt. Ltd. [1999] 96 Comp Cas 234, relevant pages 255 and 256).
101. Whether the transfer is voluntary transfer :
As held by this court in the case of Maneckchowk and Ahmedabad ., In re [1970] 40 Comp Cas 819, the use of the word 'preference' implies an act of free will and that would by itself make it necessary to consider whether pressure was or had not been used. A payment made under the impression that unless a particular creditor was paid, the company would go into liquidation is not done out of free will and volition. If the object was to save the company, it may not amount to fraudulent preference. In this case the transaction was not entered into to save the company from threat or liability and therefore it amounts to fraudulent preference.
Good faith :
102. Good faith is defined in the General Clauses Act as follows : 'A thing shall be deemed to be done in 'good faith' where it is in fact done honestly whether it is done negligently or not'. In the absence of a separate definition under the Companies Act, this definition must be applied. I have relied upon the judgments of the hon'ble Supreme Court in the cases of N. Subramania Iyer v. Official Receiver : [1958]1SCR257 and Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom) which are applicable to present case.
103. In view of the same, I have to examine as to whether the transaction is done bona fide by the company. For examining this aspect, it may be noted that as per the income-tax clearance certificate which has been referred to by me in the earlier part of the judgment during the course of discussion, the company had taken loan of Rs. 15 lakhs from Rajiv Enterprise and executed promissory note for the same. The said loan was payable on or after July 8, 1999. The company has also taken loan of Rs. 15 lakhs from Rajiv Enterprise Pvt. Ltd.
104. It may be noted that in the official liquidator's report, the official liquidator has tried to produce documents like banakhat, sale deed and other documents to show as to whether the transaction is bona fide or not. However, all these documents do not inspire any confidence. As regards banakhat, there is no party shown to be confirming party as shown in the sale deed. The total consideration of the said banakhats is Rs. 40 lakhs and that too in favour of the same party.
105. As regards sale deeds, the company has been paid much less consideration as against cost of acquisition. As I have stated earlier, the company and the purchaser have not been able to show how the value of the flats has decreased as against cost of acquisition and that too to the extent of about 25 per cent, within a period of one and half year. No independent evidence has been produced to show how the value of the flat has declined. No advertisement was published in the newspaper and no offer has been invited by the company in this behalf. Moreover, who has paid the transfer fees is not clear and to that extent the company has suffered a further loss. In the absence of any specific contention that the purchaser has paid transfer fees (Rs. 50,000), I have to presume that the company has paid the same. Moreover, a total sum of Rs. 1,50,000 being the amount of maintenance deposits has been transferred to the name of purchasers from the name of the company.
106. As regards search report which has been produced by the creditors, the same cannot be relied on because the search reports and the title clearance certificates are dated April 17, 1999, stating that the title of Sashya Association is clear. However, in Form No. 17, the company has stated that the charge in favour of HDFC has been satisfied on May 7, 1999, that till then the charge of HDFC was subsisting and the title to the said properties was not clear. Admittedly, on the date of the said report, the said flats were under mortgage with HDFC.
107. So far as the valuation report is concerned, the transaction in question was entered in 1999 whereas the valuation has been done in 2001/2002. The valuation report does not give any comparable figure and therefore the valuation report does not inspire any confidence.
108. As the flats in question have been sold below the price at which they have been acquired, the transaction entered into by the company in liquidation with the purchaser is not in good faith or the transaction is not bona fide.
109. In view of the above, documents like banakhat, sale deed, search report and valuation report on which the creditors place reliance, do not inspire any confidence. The intention on the part of the company was to prefer the preferred creditor to the prejudice of the other unsecured creditors and as such the same amounts to fraudulent preference liable to be hit by Sections 531 and 531A of the Companies Act.
110. It may be noted that there is no provision under the Act to the effect that no order of winding up can be passed when an earlier order is already passed. In the decision of this court in the case of Y.S. Spinners Ltd. v. Official Liquidator, Ambica Mills Ltd. [2000] 100 Comp Cas 547, the order of winding up passed by this court in Company Petition No. 121 of 1995 on January 17, 1997, was referred to which stated that it is an order in Company Petition No. 66 of 1988 (and other petitions including Company Petition No. 121 of 1995) which was filed on April 12, 1988, which was the earliest petition. That means the court had already passed similar orders in the other petitions in spite of the fact that it had already passed an order in the later petition. The only difference in the present case is that instead of the above order, the court had passed specific separate orders of winding up. However, this does not make any difference since in the said decision, the court should be taken to have passed separate orders in other petitions but the language used is somewhat different which has no significance to the question whether winding up orders can be passed for the same company which is ordered to be wound up in another petition. In both the cases the legal effect is the same namely that winding up is deemed to have commenced from the dates of the respective petitions in each case. The said decision also supports the legal position that orders for winding up a company can be passed in more than one petition. As far as the question involved in the present case is concerned, the fact that winding up orders are passed on different dates in the instant case has no relevance.
111. Winding up is a process which ultimately may result into the dissolution of a company. It is not true to say that when a winding up order is passed, the company dies and there cannot be a death of a person who has already died. The argument to the contrary is misconceived since it proceeds on the assumption that on the winding up, a company dies and ceases to exist.
112. In Sub-section (2) of Section 441 of the Companies Act, the words are 'shall be deemed to commence' instead of 'shall commence' indicate that although the winding up of a company does not in fact commence at the time of the presentation of the petition, it nevertheless shall be taken to commence from that stage if and when the winding up order is made (see : A.C. Goel v. First National Bank Ltd. [1960] 30 Comp Cas 317 ; AIR 1960 Punj 476). Winding up is a process which begins after the court passes the order for winding up. Till such order is passed, there cannot be any winding up in fact. (U. O. No. 21182/ 71/Adv(f), dated March 31, 1971, on Department's File No. 5/1/69-CL-III) (see : Guide to the Companies Act, A. Ramaiya, fifteenth edition 2001, page 3392).
113. Thus a company continues to exist even after the winding up order. An order of winding up can be passed in the case of a company which is already ordered to be wound up in another case and in each case of a winding up petition, the order takes effect and the winding up commences from the date of the winding up petition. Once an order of winding up is made, the provision of Section 441 automatically comes into operation and the winding up commences from the date of the concerned petition. There cannot be any exception to the said legal effect and the law has to be given effect to. In case winding up order is passed in more than one petition, the winding up will commence from the date of the earliest petition and any transfer within six months previous to such commencement will be hit by Section 531.
114. In view of the same, order of winding up was passed in Company Petition No. 147 of 2000, winding up commenced from May 9, 2000. After that when the order was passed in Company Petition No. 296 of 1999, it commenced from October 18, 1999. The impugned transfers have been effected on May 7, 1999, which date is within six months previous to October 18, 1999, and as such, the same are covered by Section 531 of the Act.
115. I have considered Sections 441 and 531 of the Companies Act. I have also considered judgment in the case of J.K. (Bombay) P. Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. [1970] 40 Comp Cas 689 (SC) particularly on pages 713-714 and also the Division Bench judgment of this court in the case of Bank of Maharashtra v. Official Liquidator, Navjivan Trading Finance Pvt. Ltd. [1999] 96 Comp Cas 234 and other decisions cited at the Bar. I have also considered the judgments of the hon'ble Supreme Court. I have also considered the submissions regarding flats Nos. 8, 16 and 17. It is an admitted fact that transactions have been entered into in May, 1999, when the amount was not due and payable by the company in liquidation to the purchaser. In spite of the fact that there was no legal threat or compulsion, the company in liquidation has voluntarily transferred the flats in question, namely, flats Nos. 8, 16 and 17 to the purchasers. The company in liquidation has not acted bona fide or in good faith and the transactions entered into by the company in liquidation with the purchasers amount to fraudulent preference as set out under Section 531 of the Companies Act and interpreted by various judgments in this behalf. In view of the same, the flats in question are not transferred in favour of the purchasers as the transactions between the company in liquidation and the purchasers amount to fraudulent preference in the eye of law. Therefore, the property in question, namely flats Nos. 8, 16 and 17, vests in the official liquidator and the transactions entered into by the company in liquidation regarding the property in question with the respective purchasers are contrary to Section 531 of the Companies Act. The said transactions are illegal, bad and liable to be quashed. Ultimately, the property in question, namely flats Nos. 8, 16 and 17, vests in the official liquidator. The official liquidator is directed to seal the property in question and I do not accept the request of the official liquidator to de seal the flats in question for the reasons stated in the judgment.
116. In this matter very complicated facts and law were involved and learned counsel Mr. Roshan Desai on behalf of the official liquidator, Mr. Amar Bhatt on behalf of the Reserve Bank of India, Mr. Vasavada on behalf of Textile Labour Association, Mr. Ashwin Lalbhai Shah on behalf of the interveners, and learned senior counsel Mr. S.N. Soparkar, with learned advocate Ms. Swati Soparkar, have assisted this court in resolving the complicated facts and law. This court puts on record its sense of appreciation of their able assistance.
Before parting, I would like to quote the following :
Fraud and collusion vitiate even most solemn proceedings in any civilised system of jurisprudence (Re : William Deny v. Sir Henry Willaim Peek [1889] 14 AC 337).
117. Mr. Roshan Desai, learned advocate appearing for the official liquidator points out to this court that through oversight after the conclusion of the judgment it is not mentioned that the official liquidator's report is disposed of and the Department has also shown that the report is pending. In view of the same, it is ordered that O.L.R. No. 81 of 2001 stands disposed of with no order as to costs.