Gujarat High Court
Kanubhai H. Prajapati And Ors. vs Official Liquidator And Ors. on 3 August, 1998
Equivalent citations: (1999)1GLR429
JUDGMENT R. Balia, J.
1. This application was moved seeking direction in the case of Navjivan Mills Co. Ltd. (in liquidation) that the official liquidator hand over possession of land bearing revenue Survey No. 375 of village Kalol, Taluka Kalol, Distt. Mehsana, to the applicants and that the official liquidator be restrained from accepting any offer for the purchase of the land in question in pursuance of the advertisement given in a local daily Sandesh for the sale of properties on as in where is basis.
2. According to the applicant, the land in question was given on lease by the predecessor in title of the applicant on 30.3.1993 at annual rent of Rs. 155 per annum. Lease was for an indefinite period. Accordingly, it is contended that the period of lease is from year to year. The company has been ordered to be wound up. The premises are no more required for the company's business and therefore the applicant landlords have become entitled to the possession of the land. In these circumstances, prayer has been made for delivery of possession to the applicants.
3. It is urged by Mr. Thakore, the learned counsel appearing for the applicants, that the land in question is property to which Rend Act applies and under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 ('the rent Act') a tenant is prohibited to sublet whole or part or any of the premises let to him or to assign or transfer in any manner his interest therein unless there is a contract to the contrary. Notwithstanding order of winding up until company is dissolved a company continues to exist and the official liquidator as a tenant. The company in liquidation administered by liquidator is inhibited by the provisions of section 15 of the Rent Act. He pointed out that notification issued under proviso to sub-section (1) of section 15 of the Rent Act will not govern the present case unless the proposed transfer of assets of the company do not fall within either of exception carved out in notification dated 28.4.1969, issued under the said proviso. He, therefore, contends that for the present, the official liquidator as a tenant be prohibited from transferring the property leased to him.
4. Coming to the prayer about delivery of possession, Mr. Thakore stated that in view of the aforesaid legal position, as the other assets of the company may be occupying the land in question, and it may be required by the company, in liquidation for that purpose, he does not press for the recovery of possession immediately at present reserving his right to ask for possession at a future date when the occasion for making such prayer arise, He restricted his prayer for restraining the official liquidator from transferring the land independent of company's business as a going concern.
5. Mr. Mehta, the learned counsel appearing for respondent No. 2, a secured creditor of the company in liquidation, opposes the application on two-fold grounds. Firstly, that as the property in question is governed by the Rent Act, no civil suit would lie for recovery of possession except in accordance with the Rent Act. In view of section 28 of the Rent Act, exclusive jurisdiction to entertain the prayer for recovery of possession rests with the, Tribunal specified therein and not with the civil court of ordinary jurisdiction, therefore, this court cannot entertain this application. He also urges that sale by the official liquidator of the assets of the company under the directions of the court does not guarantee the title of the company in assets put to sale. A buyer purchases the property at its own risk. If the company has no title, the purchaser may not get any title, without any right to get any diminution in consideration or return of his money. Therefore, the court ought not to stay the sale of the company's assets whether it has any interest in it or not. Otherwise, it would result in depleting the realisation if the court were to determine this question. He placed reliance in this connection on a decision of the Supreme Court in United Bank of India v. Official Liquidator (1993) 3 Comp LJ 414 (SC) : (1994) 1 SCC 577. Mr. Vasavada appearing for respondent No. 3, a union of workmen, adopts the contention raised by Mr. Mehta.
6. First, coming to the preliminary objection raised by Mr. Mehta about the maintainability of the application, it is true that on the admitted facts, the jurisdiction to entertain a claim for recovery of the possession of the leased out premises will be governed by section 28 of the Rent Act. However, section 446 of the Companies Act, 1956 ('the Act') which comes into operation as soon as an order for winding up is made in respect thereof provides under sub-section (2) that the court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, shall have jurisdiction is entertain or dispose of any suit or proceedings by or against the company. This jurisdiction is conferred not only in respect of fresh proceedings but also in respect of pending proceedings. It may also be noticed that under sub-section (1) of section 446 of the Act, all suits and proceedings pending against the company are stayed by operation of law as soon as order for winding up of a company is made by the court or official liquidator is appointed as provisional liquidator and cannot be proceeded with except with the leave of the court and subject to such terms as the court may impose. The other legal proceedings in section 446(2) are expression of wide amplitude and includes proceedings under Rent Act as well against or by the company. The special provision relating to dealing with litigation by or against the company has been made under section 446 manifesting that all litigation by or against the company, once it is ordered to be wound up, must be within the knowledge and supervision of the court winding up the company conferring upon it also jurisdiction to entertain and dispose of such litigation as referred to in section 446 by itself. Thus, it cannot be said that the Company Court has no jurisdiction to entertain proceedings relating to recovery of possession by the land-lord of the leased premises from a company which has been ordered to be wound up. In comparison, while section 28 of the Rent Act operates generally in the field of providing jurisdiction for entertaining claims for recovery of rent possession of premises by a landlord against a tenant, section 446 operates in the specified field of proceedings by or against a company in winding up. It would be trite to say where two different statutes with non obstinate clauses operate, as a rule of harmonious construction, the provision operating in a general field would give way to the provision operating in specified field on the principle generalia specialibus non derogant, I, therefore, do not find any substance in the preliminary objection raised by Mr. Mehta in this regard.
7. Coming to the merit of the case, it is not an issue between the parties that the land in question is governed by the Rent Act. Applicability of section 15 is not in dispute. Without going into the validity of broad and general proposition propounded by Mr. Mehta that as there is no guarantee of title, the assets of the company should be put to sale without any enquiry as to the question of company having any title over the asset in question, prima facie which is a doubtful proposition, it is suffice to state that no court would countenance any action or sanction an act to be committed by the official liquidator which is prohibited by law. To say otherwise, will be to stir very foundations of soul and spirit of an organised society governed by rule of law for whose preservance, institutions for administration of justice through independent tribunals exist.
8. The parties have accepted the position that the relationship of landlord and tenant continues between owner land the company in liquidation until company is dissolved. The Rent Act applies to such properties. The conclusion is irresistible that all provisions of the Rent Act which grant protection or imposes restrictions and obligations on any of the parties continue to operate. If under section 15, there is a prohibition against transfer of leased premises by way of subletting, assigning or transferring in any other manner, it would be impossible to accept the contention of Mr. Mehta that notwithstanding this prohibition operating, the court should direct the official liquidator to act in breach of law by transferring the leased premises, contrary to the said provision. This is apart from the question whether landlord becomes entitled to recover possession on such breach or not. The courts always act in furtherance of implementation of laws and not in furtherance of committing breaches, on the jejune ground of realising more money by committing breach of statutory provision in that regard as suggested by the learned counsel for the respondent Nos. 2 and 3. It will be sacrificing rule of law at the altar of expediency. In fact, Mr. Thakore has been candid enough to point out that vigour of section 15 has been mitigated by issuing notice dated 28.4.1969 which envisages transfer or assignment or gift or sale without possession in certain circumstances and transfer or assignment of the lease property incidental in sale of business as going concern provided that the transfer or assignment is of interest of assignee in goodwill together with the business and stock-in-trade.
9. Thus if the entire business of lessee is to be transferred in any manner, the embargo of section 15 would not apply and the transfer of business would take within its sweep transfer of lease and the interest of the proprietor of the business is extinguished as a whole. I am not examining the contention of Mr. Thakore that unless the transfer of business is coupled with stock-in-trade and goodwill, clause (2) of notification would not apply and because, in the present case, Mr. Thakore submits, as the company is ordered to be wound up on the ground of its inability to pay the debts, it has no goodwill which is to be transferred and without transfer of goodwill, sub-section (2) does not apply. The allusion to sub-clause (Z) is only for the purpose to emphasise that the exceptions have been carved out in which assignment and transfer is permitted. However, the advertisement which has been put for the sale of the assets of the company is not as per the exception to the rule enacted in sub-section (1) of section 15.
10. Attention has also been invited to the two decisions of the Supreme Court in the case of Ravindra Ishwardas Sethna and another v. Official Liquidator, High Court, Bombay, and another (1983) 3 Comp LJ 23 (SC) : AIR 1983 SC 1061 and Smt. Nirmala R. Bafna/Kershi Shivax Cambatta and others v. Khandesh Spg. & Wvg Mills Co. Ltd. /Official Liquidator and others (1992) 2 Comp LJ 9 (SC) : AIR 1993 SC 1380.
11. In Ravindra Ishwardas Sethna's case, supra, the sanction of the High Court was sought that liquidator should hand over the possession of the leased property to the owner and the caretakers' agreement entered by the official liquidator delivering the possession of the premise used by the company for compensation be quashed, as the same were contrary to the Rent Act. In the High Court, both before the learned single Judge as well as the Division Bench, the applicant was unsuccessful. The Division Bench held that the appellant has no present right to possession because he had now filed a suit for eviction in the Small Causes Court, and the agreement entered by the official liquidator was not contrary to the Rent Act. The court came to the conclusion that the official liquidator was not carrying out the business of the company. The court concluded that (at page 28 of Comp LJ) :
"....... The statutory tenancy confers the right to be in possession; but if the tenant does not any more require use of the premises, the provisions of the Rent Act and especially, sections 13 and 15 completely prohibited giving the possession of the premises on licence or on sub-lease ... The Rent Act is no doubt enacted for protecting the tenants, and indisputably, its provisions must receive such interpretation as to advance the protection and thwart the action of the landlord in rendering tenants distributes. But this does not imply that the court should lend its aid to flout the provisions of the Rent Act so as to earn money by unfair and impermissible use of the premises. And that is what the liquidator sought to do and the Court extended its help to the liquidator. This, on our opinion, is wholly impermissible ....."
Thus the conclusion which I have reached above that the liquidator cannot be permitted to part with possession of the leased property in contravention of the provisions of the Rent Act accords with the ratio of aforesaid decision. The aforesaid decision arose with reference to Bombay Rent Act.
12. The issue again arose before the Supreme Court in Khandesh Spg. & Wvg Mills Co. Ltd.'s case [(1992) 2 Comp LJ 9 (SC)], supra, in slightly different circumstances. Three separate appeals were filed before the Supreme Court in respect of three separate proceedings connected with the premises, let out to the company which was ordered to be wound up, consisting of a flat, portion of which was sublet to appellant before Supreme Court, allegedly with the permission of landlord. One appeal had arisen out of suit filed by appellant for a declaration that she is a lawful tenant and protected sub-tenant having acquired sub-tenancy with the consent of landlord, sought injunction restraining defendant from interfering with her possession and enjoyment. In the application for proceeding with the suit under section 446(1), the court and official liquidator had moved an application for transfer of the suit to the High Court to be tried by the company under section 443. Dismissing the application of the official liquidator, the High Court has observed that the suit instituted by the applicant after winding up order is collusive and the claim is dishonest. In appeal against that order, the court observed that the two issues which prima facie arise for consideration, namely, (a) the tenancy rights, the company had, in the said flat may not be an asset for the purpose of liquidation proceedings; and (b) merely because a company goes in liquidation and a liquidator/official liquidator is appointed, the rights of the company vis-a-vis its landlord and/or its tenants do not undergo any change. As the suit was pending, the court issued certain directions by way of interim arrangement pending the suit, with which we are presently not concerned. In another application which was subject matter of SLP(C) No. 15678 of 1990, the landlord required the company to surrender possession of the said property including symbolic possession of the portion in possession of sub-tenant. That application was rejected by the High Court. Considering that the liquidator requires the said portion, that is, the flat in his possession for storing the company records at Bombay and the additional reason given by the Division Bench was that the proposal has been received from Rashtriya Girni Kamgar Sangh for reviving of the company which was under consideration. A suggestion was made that the requirement of storing the company's records may be fulfilled by storing the same in the office or elsewhere and for that purpose, the premises in question were not required by him. Repelling the contention, the court said (para 25 at page 14 (1992) 2 Comp LJ) :
"That the official liquidator requires the portion of the flat (now in his actual possession) for storing the company books, is certainly a relevant consideration. Mr. Sanghi, learned counsel for the appellant, argued that the official liquidator does not require the said premises for storing the books and that he can store the books in his office or anywhere else. May be, the liquidator can do so, but we cannot force him to do so, so long as the reason given by him for continuing in possession is a relevant one .... Suffice it to say that the reasons for which the application filed by the appellant landlord have been dismissed cannot said to be irrelevant."
13. In the aforesaid decision, though it has not decided, but prima facie it was opined that merely because a company goes in liquidation and liquidator/official liquidator is appointed, the right of company vis-a-vis the landlord do not undergo any change and, secondly, that if the official liquidator requires the portion of leased property for the purpose of winding up whether for storing company's records or for company's other assets is a relevant consideration for allowing the official liquidator to remain in possession and he cannot be compelled to deliver the possession to landlord on the ground that the company has ceased to require the premises for running the business which has come to standstill. It is on this principle that Mr. Thakore has confined his present application at this stage only to restrain the official liquidator from transferring the possession and company's interest in the leased property to third parties independently. The decision support the relief claimed by the applicant.
14. On the other hand, Mr. Mehta placed reliance on Union Bank of India's case [(1993) 3 Comp LJ 414 (SC)], supra, to suggest that a discordant note has been struck by the apex court in this later decision. However, on going through the said decision, I am unable to agree. It was a case in which the landlord of the property in question required the official liquidator to disclaim the said land and surrender its possession to him because it was burdened with onerous covenant. The landlord also took judges summons asking the Company Court to direct the official liquidator under section 535 of the Act to disclaim the said land because it was burdened with onerous covenants. The onerous covenant was stated to be burden of paying rent in respect of the property which was not required by the company, as it had ceased to carry on business. Prior to that, Union Bank of India, one of the secured creditors, has filed the suit against that company in liquidation and a decree in the sum of Rs. 1,00,00,000 and odd amount had been passed in favour of the creditor. In winding up proceedings, the court had directed to sale of the assets of the company in liquidation. The sale was objected to by the landlords. During the course of hearing before the court all the assets of the company were transferred as a whole by accepting the offer of one purchaser, to purchase the same as a going concern. The directions made in this regard were that the consideration price will be Rs. 2,60,00,000 out of which the purchase were to pay Rs. 30,00,000 within two weeks from the date of confirmation to the bank in the name of official liquidator and balance amounts were to be paid in 24 equal monthly instalments. More importantly, all the dues of the workers present and past will be settled by Shyam Sundar Agarwal that the workers who are represented by various unions and workers were to run the mill in adjustment with the purchaser as a going concern.
15. Thus, fixing the consideration for the transfer of the company's assets as a going concern, modalities for its payment and directions to run the company's business as a going concern by the purchaser and erstwhile workmen, the court observed that (para 15 at page 420 of (1993) 3 Comp LJ) :
"The High Court ought to have appreciated that it was rather unlikely that the party who had the benefit of onerous covenants would apply for disclaimer and ought to have viewed the official liquidator's application to disclaim made pursuant to the trust's letter to him in that behalf, in that light. We find it difficult to see how such a large area of land leased to the company in liquidation for 99 years with the option of renewal for a further 99 years for the meager rent of Rs. 1,200 per annum can be said to be land burdened with onerous covenants. The High court was not justified in debating and holding in proceedings under section 535 that the lease of the said land had been validly terminated so that the official liquidator became liable to pay mesne profits to the trust, and that this coupled with arrears of rent, in five figures made the lease onerous. [We are also of the view that] the bank's offer to pay the arrears of rent to the trust should have been accepted by the High Court. The bank to protect and keep alive its security, had put official liquidator in funds in regard to other matters and was eager to meet this liability. Had this been done valuable property of the company in liquidation could have been retained so that its undertaking, which stood on the said land, could have been sold as a running concern, as has been done upon intervention of the court, for benefit of the creditor."
16. It is while interfering with the High Court's order in allowing the official liquidator's application for disclaim the property in question as burdened with onerous convenants to the disadvantage of the company in liquidation, the court observed :
"When the official liquidator sells the property and assets of a company in liquidation under the orders of the court, he cannot and does not hold out any guarantee or warranty in respect thereof."
Obviously, this observation has come in the context of application for diminishing the consideration fixed while issuing directions about modalities of payment and running the mill as a going concern by the purchaser. The court declined that prayer on the ground that a purchaser at the court sale cannot require diminution in the price on the ground of defect in title or there being a cloud on the title of the seller diminishing the value of the property. These considerations are alien for the purpose of reduction in price.
17. These observations cannot be pressed into service for the purpose of arguing that the property of the company whether it is alienable or not must be put to auction and the price be recovered from the purchasers, and appropriated towards payment of creditors' dues following the principle that 'buyer beware' that risk is purely of the purchaser of any defect in title. The principle which was clearly held to be untenable and deprecated to be pressed into service merely because of results in cash inflow with the official liquidator in the case of Ravindra Ishwardas [(1983) 3 Comp LJ 23 (SC)], referred to above, which directly deals with the issue of dealing with applications for transfer of the possession of the leased properties by the company in liquidation which are subject to rent laws.
18. Principles emerging as a result of above discussion can broadly be summarised thus :
1. The rights and obligations arising under rent laws as landlord and tenant subsist between the owner and the company in liquidation after the order of winding up is made until the company is dissolved.
2. The leased property cannot be transferred or alienated contrary to the provisions of the Rent laws.
3. Even where the company has closed its business and the premises are not required for the purposes of carrying on the business, still the official liquidator is entitled to retain possession if it is required by him during the course of winding up for the purpose of company's affairs, for example, keeping records, storing the stock-in-trade and other movables or if the same are occupied by plant and machinery. Such requirement is relevant consideration for refusing the permission to return possession to the landlord; and
4. The leasehold tenancy rights under a lease are the assets of the company which may be dealt with and transferred if official liquidator is required to transfer the assets of the company as a going concern subject of course, to law permitting the same. The transferability of the assets is a relevant consideration while deciding the question whether the property is burdened with onerous convenants.
19. With the aforesaid conclusions, I am of the opinion that application deserves to be allowed to the extent it seeks restraint against the transfer of land in question independently and not as a part of a going concern. The official liquidator is so restrained. As noticed above, the applicant himself has not pressed, and in my opinion, rightly so keeping in view the ratio laid down in Nirmala R. Bafna's case [(1992) 2 Comp LJ 9 (SC)], supra, the prayer for immediate return of possession as the premises are occupied for company's purposes by the official liquidator. This will not preclude the applicant to take recourse to such remedies as are available to him including moving a fresh application in this regard for recovering the possession of the property in question from the official liquidator, when the occasion arises in future. However, the official liquidator shall continue to pay the annual rent as per agreement, as and when it becomes due and shall pay such of balance of arrears, if any, with effect from the date of winding up to date. Any amount, if it is due for period prior to date of winding up will be subject to be proved as debt before the official liquidator in accordance with Company Court Rules.
20. Application accordingly stands disposed of.