Bombay High Court
Bakul M. Kapadia vs Bank Of India And Others on 8 March, 1993
Equivalent citations: [1997]88COMPCAS515(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT
Smt. Sujata Manohar J.
1. This is an appeal from the order of the learned single judge dated February 8, 1993, in Notice of Motion No. 2781 of 1992, taken out in Suit No. 2218 of 1983. By this order, the learned single judge has extended the proposed date of sale by the Court receiver by further four weeks when the fifth defendant applied for an interim order. In view of this order, as nothing further survived, the notice of motion was disposed of with no order as to costs. Being aggrieved by this order of learned single judge, the original fifth defendant has preferred the present appeal.
2. The notice of motion which is taken out on December 15, 1992, by the appellant, is for the following prayers :
"(a) this court do direct the Court Receiver, High Court, Bombay, not to put up for sale, the immovable properties of the first defendant company till -
(i) the investigation into the quantum of and responsibility for the damage done to the immovable properties of first defendant company ascertained and the quantum of and responsibility for loss of properties of the first defendant company is ascertained as also the cause and quantum of responsibility for the loss due to the sale of movable properties of the first defendant company at a gross undervalue is ascertained; and
(ii) determination of liability of the first defendant company to the plaintiff in view of the written statement of defendant No. 5;
(b) in the alternative, this court do appoint an approved valuer to assess the present market value of the immovable properties of the first defendant company and consequently revise upwards the minimum bid of Rs. 4 crores as this Hon'ble court may deem fit."
3. In order to appreciate the contentions of the appellant, it is necessary to state the facts. On November 2, 1983, the Bank of India, respondent No. 1 to this appeal, field a suit to recover from the second respondent, Jasmine Mills Pvt. Ltd., a sum of Rs. 1,76,89,829.08 and to realise the securities by way of a mortgage of the immovable properties of the second respondent and its various movables which were hypothecated to the bank. The appellant is a guarantor of the debts of the company to the bank and is defendant No. 5 in the suit. On November 24, 1983, an ad interim receiver was appointed in respect of movables and immovable properties of the second respondent under Order 40, rule 1 of the Civil Procedure Code, 1908, but without the power of sale. Pursuant to this order, court receiver took possession of all these properties on November 28, 1983.
4. On January 18, 1984, an order was passed by this court for winding up the second respondent Jasmine Mills Pvt. Ltd. The official liquidator, therefore, came on the scene. Thereafter, the suit of the first respondent was continued after obtaining leave section 446 of the Companies Act.
5. By an order dated August 13, 1984, another judge of this court confirmed the appointment of the court receiver under Order 40, rule 1 of the Civil Procedure Code, in respect of all properties of the second respondent company. This order also gives the court receiver a power of sale of the properties. This order was passed after giving notices to all the parties including the present appellant who is a guarantor in respect of the amounts advanced by the first respondent bank to Jasmine Mills Pvt. Ltd. No appeal was filed from this order challenging the power of sale conferred on the court receiver.
6. From the years 1984 to 1987, various applications were made by the ex-directors of the second respondent company regarding a proposed scheme of compromise with the creditors and at their request the bank did not proceed with the sale. Ultimately from the year 1988 onwards the court receiver prepared particulars and conditions of sale which were finalised at various meetings which were held before the court receiver.
7. At the meetings held before the court receiver on April 12, 1990, and August 8, 1990, the appellant appeared in person before the court receiver and proposed that the immovable property of the company in winding up should be sold by private treaty and not by public auction. The official liquidator who was also present at the meeting convened by the court receiver, however, did not agree to the properties being sold by private treaty and submitted that the properties should be sold by public auction. From April, 1990, to April, 1991, several meetings were held before the court receiver in respect of the proposed sale, inter alia, of immovable properties at which the official liquidator as well as the appellant were also present. Nobody opposed the sale of the immovable properties in question.
8. Thereafter, four infructuous sales took place between October, 1990, and July, 1992. The appellant took out a Notice of Motion No. 1416 of 1992 some time prior to July, 1992, praying that pending the hearing and final disposal of this suit, the court receiver and the plaintiffs be restrained from advertising the auction sale or proceeding with the auction sale of the immovable property known as Jasmine Mills premises situated at Mahim which was to be sold by auction on July 7, 1992. There was a further prayer that the court receiver should be directed to invite offers for giving the premises or any part thereof on leave and licence basis. This notice of motion was dismissed by a learned single judge of this court by his order dated July 6, 1992. The learned single judge in the order has observed that prima facie the fifth defendant had taken out this notice of motion at a belated stage with a view to delay and/or defeat the claim of the plaintiffs and the workers of the company which was in liquidation. In the order, the learned judge has noted that the receiver was initially appointed on November 24, 1983, without the power of sale. The power of sale was conferred on him on August 13, 1984. In exercise of this power of sale the sale of movables had been effected on February 9, 1990, and the sale of the immovable property was fixed for July 7, 1992. The learned judge has also pointed out that the present appellant being one of the directors of the company prior to its going into liquidation, was aware of all the proceedings in the suit as well as the notice of motion. He was also present before the receiver at the meeting held on August 8, 1990, when the appellant as well as the advocate for defendants Nos. 2, 3 and 4 requested the receiver to sell the property by private treaty and requested the receiver that an opportunity be given to the parties to bring private offers. He has noted that on account of the objection of the official liquidator to a sale by private treaty, the sale by public auction was proposed. The learned judge also referred to the report submitted by the court receiver dated February 21, 1991, of which notice was given to the fifth defendant. On the report, the court has directed the receiver to hold a fresh auction sale and to consider fresh offers. This order was also passed in the presence of the present appellant. In view of this conduct of the present appellant, the learned judge also observed that the contention of the present appellant that the sale be not effected, was not bona fide. He, therefore, dismissed the notice of motion. We have referred to this notice of motion and the order passed thereon at some length because very similar arguments are also advanced before us and that too on the notice of motion which contains somewhat different prayers. We also note that none of the contentions raised before us in this connection by learned counsel for the appellant for preventing sale of the immovable property by the court receiver, were urged before the learned single judge. We will come to this point a little later.
9. After the dismissal of the Notice of Motion No. 1416 of 1992, the court receiver submitted a report dated July 13, 1992, in connection with a sale which was held with a reserved bid of Rs. 4 crores as fixed by this court. The court receiver had received only one offer of Rs. 4,05,00,000. The offerer also deposited Rs. 10 lakhs. The court receiver had submitted the report and sought directions whether he should accept this offer. When this report came up for consideration before the learned single judge of this court on August 5, 1992, the present appellant appeared and asked for a month's time to produce a substantially higher offer. Ultimately, the learned judge observed that he was inclined to postpone the confirmation of sale on the following undertaking given by the present appellant :
He would agree to pay the difference between the interest, given on a fixed deposit for a term of 45 days by a nationalised bank, and 18 per cent. per annum on the amount of Rs. 10 lakhs deposited by the offered and on his undertaking to pay security charges for a period of 45 days at the rate of Rs. 21,000 per month. This was in view of the statement made before the learned judge by the present appellant that if he were given six weeks' time, he would obtain a valuation of the property in accordance with the amended Development Control Rules and produce an offer substantially higher than the offer of Rs. 4,05,00,000. At this stage, the advocate for the offerer said that if the court was not inclined to accept the offer, his client may be permitted to withdraw the offer and the deposit may be refunded to him.
10. Accordingly, the learned judge permitted the offerer to withdraw the offer, and directed the court receiver to refund the deposit of Rs. 10 lakhs. The learned judge thereupon directed the property to be put up for sale by public auction on the same reserve bid. He also said that since the sale held had been virtually cancelled at the instance of the present appellant, he should pay the costs of advertisement for a fresh sale. We are informed that the appellant has paid the costs of advertisement. However, the appellant has not produced any offer at all for the purchase of the said immovable property whether substantially higher than Rs. 4 crores or otherwise, although considerable time has elapsed since the above order of the learned singe judge.
11. He has now taken out the present notice of motion on December 15, 1992. In the meanwhile the court receiver held a meeting on February 6, 1993, at which, inter alia, he fixed a fresh schedule of advertisement and auction sale of the immovable property. Thereafter, the appellant made an ad interim application on February 8, 1993, in his pending notice of motion asking for stay of the sale. This application has been disposed of by the impugned order under which the learned judge has extended the proposed date of sale fixed by the court receiver by four weeks, and has not granted any other relief and has disposed of the notice of the motion for the postponement of the sale.
12. It is necessary to note that the notice of motion which is take out by the appellant is only for a direction that the court receiver should not put up the immovable property of the first defendant-company for sale until the investigation into the damage done to the immovable properties of the company is ascertained and the responsibility for the loss caused on account of sale of movable properties is ascertained. The prayer further states that the court receiver should not put up the immovable properties for sale until the court determines the liability of the first defendant-company to the bank in view of the written statement of the appellant. Since the learned judge was not inclined to postpone the sale beyond four weeks, he has disposed of the notice of motion.
13. In view of the grievance of the appellant that he was not heard on the motion, we have now heard him at length. There is no prayer in the notice of motion for setting aside the order of August 13, 1984, granting to the court receiver a power to sell the mortgaged property. At the hearing of the appeal, however, learned counsel for the appellant has only challenged the validity of the order of August 13, 1984. No arguments were advanced at all in connection with either of the two prayers in the motion. As is set out earlier, although the appellant agreed before the learned single judge at the time of the order of August 5, 1992, that within six weeks he would obtain a fresh valuation, he has not done so. Nor has he procured any offer higher than Rs. 4,05,00,000. The arguments advanced before us were only in connection with the original order of August 13, 1984, under which the court receiver was given power to sell, inter alia, the immovable property in question.
14. It is submitted by Mr. M.S. Singhvi, learned counsel for the appellant, that this order is a nullity and hence the court receiver has no power to sell the immovable property of the second respondent company which is in liquidation. In the place, the order which is so sought to be challenged in the notice of motion, although there is no prayer to that effect, is an order passed as far back as on August 13, 1984. Nine years have elapsed since the order was passed. The appellant was party to the proceedings in which this order was passed. He has throughout been fully aware of this order and has in fact appeared before the court receiver in several meetings to determine the mode of selling of the said property pursuant to the said order of August 13, 1984. No explanation is forthcoming from the appellant for the delay of nine years in challenging this order. On this ground alone, the entire submission of the appellant deserves to be rejected.
15. In any event, we have examined various contentions of the appellant in this connection and we find them to be avoid of any merit. The first question which the appellant has to satisfy is the question of has locus standi to challenge the order of August 13, 1984. The appellant is a guarantor in respect of various credit facilities obtained by the second respondent company from the first respondent bank. The order for sale has been obtained in the proceeding taken out in the mortgage suit. Neither the mortgagor nor the mortgagee has any grievance regarding the order. According to the appellant, he is a shareholder of the second respondent company although he may also have been its director and a guarantor. As a shareholder/contributory he is entitled to share in any surplus fund of the second respondent company, if available, in the course of winding up. Under section 511 of the Companies Act, such a contributory has a share in the surplus. We fail to see how this entitles the appellant to challenge the order of sale in a mortgage suit. The mortgagor in the present case is a private limited company registered under the Companies Act, 1956. Such a company has a separate legal existence. It is the company which has created a mortgage in respect of its property in favour of the first respondent bank. Therefore, it is the company as such mortgagor which is entitled either to redeem the mortgage or to contents the mortgage suit of the first respondent bank or to arrive at such arrangements as it may be considered appropriate in connection with this with the first respondent bank. An individual shareholder cannot be considered as a mortgagor at all; nor is an individual shareholder entitled to redeem a mortgage created by the private limited company in favour of a third party. He has no claim to the equity of redemption of such mortgage. As a shareholder, therefore, the appellant cannot be heard in a mortgage suit.
16. It is next contended by the appellant that he is also a guarantor of the debt incurred by the second respondent company. As cash guarantor, the appellant is undoubtedly entitled to be subrogated to the rights of the mortgagee if he discharges the mortgage debt. In the present case, the question of subrogation does not arise because the guarantor has not discharged the mortgage debt of the principal debtor, not has he even offered to do so. In fact it is started very frankly by learned counsel for the appellant that he is not in a position to do so. The question, therefore, of the appellant being entitled to the security created in favour of the mortgagee by stepping into the shoes of the mortgagee does not arise.
17. In connection with the locus standi of the appellant, Mr. Sanghavi, learned counsel for the appellant, relied upon a decision of the Division Bench of this court (to which one of us was a party), in the case of H.S. Kamlani v. Mazgaon Docks Ltd. [1983] Tax LR 2472; [1985] 57 Comp Cas 742. He relied on paragraphs 18 and 19 of this judgment. We have carefully gone through this part which deals with the right of a secured creditor in the winding up proceedings and the rights and obligations of the official liquidator qua the sale of any property of the company so secured. We fail to see that this decision has any bearing on the question before us. The appellant, therefore, either as a guarantor or as a shareholder has no right to challenge the order of sale at the instance of the mortgagee in a mortgage suit.
18. Even otherwise, on the merits, we do not see any reason for setting aside the order of August 13, 1984. It has been strongly urged by Mr. Singhvi, learned counsel for the appellant that the equity of redemption can be extinguished only by act of parties or a decree of the court. He relied upon section 60 of the Transfer of Property Act and Order 34 of the Code of civil Procedure. He has submitted that in the present case, there is no decree passed in the mortgage suit which would extinguish the equity of redemption and, therefore, no order could have been passed directing the court receiver to see the property. He, therefore, submits that the order dated August 13, 1984, is a nullity and must be ignored.
19. This argument is fallacious. We may assume for the sake of argument that the order directing the court receiver to sell the property was wrongly passed or that this order is contrary to law. Even so, such an order cannot be considered as a nullity. It is only when the court has no inherent jurisdiction to pass an order that the order becomes a nullity. In the case of Hira Lal Patni v. Kali Nath, , it has been held that "the validity of a decree can be challenged in execution proceedings only on the ground that the court which passed the decree was lacking in inherent jurisdiction in the sense that it could not have seizin of the case because the subject matter was wholly foreign to its jurisdiction or that the defendant was dead at the time the suit had been instituted or decree passed, or some such other ground which could have the effect of rendering the court entirely lacking in jurisdiction in respect of the subject matter of the suit or over the parties to it." These observations of the Supreme Court have been cited with approval by the Patna High Court in the case of Rabindra Narain v. Nirmala, . In that case, the Patna High Court considered a case where, in a mortgage suit, a preliminary decree had been passed in terms of a compromise. The mortgagor failed to pay the instalments as per the terms of the compromise. A final decree was passed in this mortgage suit without a fresh preliminary decree. The court said that the consent decree was not covered by Order 34, rule 4 and it was not necessary to have a fresh preliminary decree. It held that the final decree could not be considered as a nullity. A Division Bench of our High Court (P.D. Desai C.J. and S.H. Kapadia J.) in Appeal No. 622 of 1992 decided on October 20, 1992, has also relied upon the judgment of the Supreme Court in the case of Hira Lal Patni v. Kali Nath, . It has also said, "it is a settled principle of law that the validity of a decree can be challenged in execution proceedings only on the ground that the court which passed the decree was lacking in inherent jurisdiction in the sense that it could not have seizin of the case because the subject was wholly foreign to its jurisdiction." In the present case, the mortgage suit is filed in the court which had jurisdiction to decide the suit. The order of sale was also passed by the court which clearly had jurisdiction in the matter. At the highest, the order may be considered as wrong in law. But this does not render such an order a nullity. It is binding on all parties unless it is set aside. The remedy in such a case for the aggrieved party is to file an appeal. But in this case, nothing has been done and the order has been allowed to stand for nine years and has been acted upon by all parties including the appellant. We do not see any reason why such an order should be treated as a nullity or should be ignored. This contention has, therefore, no merit.
20. We also fail to see why the order should be considered as wrong in law looking to the circumstances of the present case although we are not sitting in appeal over that order. The mortgage suit when it was originally filed, was against the second respondent company which was the mortgagor. The guarantors including the appellant were also parties to its. The interim order appointing the court receiver did not grant him any power of sale. The situation, however, changed thereafter because the second respondent company was wound up. The official liquidator was and is in no position to redeem the mortgage. On the contrary, under section 457 of the Companies Act, the liquidator is required, inter alia, to sell the movable and immovable property and actionable claims of the company by public auction or private treaty as set out in that section and generally to do all such things as may be necessary for winding up the affairs of the company and distribute its assets. The official liquidator, therefore, did not oppose the mortgagee's notice of motion for sale of the movable and immovable properties of the company. A speedy sale of such assets would assist the official liquidator in winding up proceedings because he would be able to utilise any surplus found remaining after the secured creditors had been paid, for the purpose of distribution amongst various parties entitled to it under the Companies Act. The official liquidator would also save expenses in connection with the maintenance of such property. It is in these circumstances that the official liquidator did not contest the notice of motion of the mortgagee for appointment of a court receiver with power of sale. In fact all the advocates for the respondents were absent at the time when the order of August 13, 1984, was passed. Even thereafter, the official liquidator at no stage, has raised any objection to the property being sold by the court receiver. The mortgagor has, therefore, clearly acquiesced in the sale of the said property. This cannot be considered in any manner as contrary to the provisions of section 60 of the Transfer of Property Act or Order 34 of the Civil Procedure Code, 1908. Neither of these provisions prevent any of the parties including the mortgagor from giving up his right to redeem the property. In the case of Keshavrao v. Nanabhai, AIR 1929 PC 61, in a mortgage suit a foreclosure decree in the English form was passed to the effect that if the mortgagor failed to pay within six months the mortgage amount, he will stand absolutely debarred and foreclosed from exercising his equity of redemption. Not being in a position to find the necessary funds the mortgagor gave up possession to the mortgagee some years thereafter. The mortgagee and those claiming through him remained in unchallenged possession. Thereafter, a suit for redemption was brought in by the mortgagor. The Privy Council held that the mortgagor acquiesced in the position that the mortgagee was entitled to hold the property as his own and that it was no longer necessary for the mortgagee to execute the foreclosure decree. The Privy Council, therefore, clearly considered the conduct of the party in deciding whether the case between the parties has remained alive.
21. The courts have also held that Order 34 of the Code of Civil Procedure, 1908, is not exhaustive and it is open to the parties even in a suit for sale brought on account of a simple mortgage to settle by compromise the form of a decree, e.g., it is open to the court by consent of parties to pass the first decree as an executable decree and thus do away with the necessity of passing a preliminary decree and then a final decree as provided in Order 34, rule 4. In the present case the mortgagor has acquiesced in security being sold by the mortgagee at the interim stage. There are no directions given as yet by the court in connection with the distribution of sale proceeds, nor has the court determined the amount which the court receiver is entitled to appropriate towards the mortgagee's claim. In the present case both the mortgagor and mortgagee have agreed that the securities should be sold so that the net sale proceeds can be realised and thereafter appropriately distributed under the direction of the court after ascertaining the claim of the mortgagee in view of the fact that the mortgagor company has been would up and the official liquidator who is in charge of the assets of the mortgagor company is required to realise the assets and distribute them in accordance with law.
22. We may also add that Mr. S.S. Phadnis, advocate appeared on behalf of the workers of the second respondent mill. Dues of the workers exceed according to him, Rs. 2 crores. He has also submitted that the mortgaged property should be speedily sold because the workers have a pari passu charge and a preferential claim in view of sections 529 and 529A of the Companies Act.
23. There is, therefore, no merit in the contention of the appellant that the order of August 13, 1984, is a nullity and no sale can take place pursuant to that order. The Division Bench under its order dated 16, 1993, while admitting the present appeal has observed that it was admitting the appeal, not because it was satisfied about the contentions of the appellant, but only because a complaint was made that the trial judge disposed of the motion at an ad interim stage, in spite of the objection of the appellant. The only ground that we find in the memo of appeal in this connection is ground (b) which is to the effect that the learned judge ought not to have disposed of the notice of motion without granting the reliefs as prayed for in the notice of motion. In any case even otherwise we do not find any merit in the various contentions which are raised by the appellant before us. We have heard the appellant at length because of the grievance that they have not been heard in the notice of motion. In view of the above, there is no merit in the notice of motion particularly when the appellant has not pressed any of the reliefs asked for in the motion, but has only addressed us on the validity of the order passed on August 13, 1984. The appeal is, therefore, dismissed with costs.
24. The appellant applies that the advertisement should not be issued for a period of eight weeks. We do not see any reason for granting this application. It will, however, be open to the court receiver to fix such schedule as he may consider appropriate for the sale of the properties after notice to all the parties in view of the fact that the schedule earlier fixed is now obsolete.
25. In view of the circumstances of the case, the conduct of the appellant and the lengthy arguments advanced before us on prayers not applied for in the notice of motion and on points not urged before the learned single judge, as also the claims involved, it is a fit case where we should grant higher costs under rule 606(2)(a) of the High Court O.S. Rules than those fixed. Costs are accordingly quantified at Rs. 5,000.