Madras High Court
Pyramid Saimira Theatre Ltd vs S.Murugan on 31 October, 2008
Author: P.K. Misra
Bench: P.K.Misra, K.Kannan
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 31-10-2008
CORAM:
THE HON'BLE MR.JUSTICE P.K.MISRA
AND
THE HON'BLE MR.JUSTICE K.KANNAN
OSA.NOs. 44, 45, 46,47, 101, 102, 103, 104,
105, 106, 107, 108, 109, 110 and 188 of 2008
and connected Miscellaneous Petitions
O.S.A.No.44 of 2008
Pyramid Saimira Theatre Ltd.,
Having Office at No.672, 2nd Floor
Temple Towers Anna Salai, Nandanam
Chennai 600 035.
.. Appellant
vs
1.S.Murugan
2.Karur Vysya Bank Ltd.,
rep. by its Deputy General Manager
Mr.J.Hariharan,
Divisional Office
KVB Towers (I floor)
No.568, Anna Salai
Teynampet, Chennai 600 018.
3.S.Paramasivam Pillai
4.Ashoka Associates
Partnership Firm rep. by its Partner
V.Manthiram having Office at
No.9, Davidson Street
Chennai 600 001.
5.M/s Lavanya and Co.
Proprietorship Firm
rep. by Mr.N.Narayanan
Having office at
245/6, R.K.Mutt Road
Mylapore, Chennai 600 004.
6.The Hon'ble Receiver
Justice K.Swamidurai
M/s Aruna Theatres and Enterprises Pvt. Ltd.,
No.6, Davidson Street
Chennai 600 001.
7.M/s Aruna Theatres and Enterprises Pvt. Ltd.
Rep. by its Board of Directors
Having regd. Office at
No.3, Pillar Road
Ashok Nagar, Chennai 600 083.
8.M/s Annai Mookambigai Roller Flour Mills Ltd.
No.6 Davidson Street
Chennai 600 001.
9.K.Muthusamy
10.N.Sankaranarayanan
11.N.Arunachalathammal
rep. by her Power of Attorney
N.Sankaranarayanan
12.P.Muthu Rajeswari
13.M.Shanmuga Sundari
14.G.Vasugi
15.R.Lakshmi
16.S.Gomathy Ammal
The Original Side Appeal No.44 of 2008 is filed against the order dated 4.1.2008 in the Original Civil Jurisdiction in Application O.A.No.1171 of 2007 in C.S.No.937 of 2007.
For Appellant : Mr.P.S.Raman, Sr.Counsel
for R.Sagadevan -O.S.A.44 & 45 of 2008
Mr.A.R.L.Sundaresan, Sr.Counsel
for M/s G.Pavithra
-O.S.A.Nos.46 & 47 of 2008
Mr.N.V.Srinivasan
for M/s N.V.S.Associates
-O.S.A.Nos.101 to 110 of 2008
Mr.A.L.Somayaji, Sr.Counsell
for M/s A.V.Dadhakrishnan
-O.S.A.No.188 of 2008
Mr.T.R.Mani O.S.A.No.289 of 2008
For Respondents: Mr.P.H.Arvind Pandian
- R1 in O.S.A.NoS.44, 47, 105 TO 108 &
188 of 2008.
:Mr.A.L.Somayaji, Sr.Counsel
for M/s A.V.Dadhakrishnan
-R2 in O.S.A.No.44, 45, 46, 101 to 110 of 2008
:Mr.K.S.Natarajan -
R6 in O.S.A.No.44, 45, 46, 47, 101 to 104, 105 to 108, 110 and 188 of 2008.
:Mr.T.V.Ramanujam, Senior Counsel
for M/s C.Umasankar
-R7 in O.S.A.Nos.44, 47, 105 to 108
and 188 of 2008
-R1 in O.S.A.Nos.45, 46, 101 to 104, 109 and 110 of 2008
:Mr.K.Sridhar
-R8 in O.S.A.No.44, 47, 105 TO 108 AND 188 of 2008
-R7 in O.S.A.No.45 & 46, 101 TO 104, 109, 110 OF 2008
:Mr.Muthusamy, Sr.Counsel
for V.Ramakrishnan
- R9 in O.S.A.NoS.44 & 47 OF 2008
:Mr.T.R.Mani, Sr.Counsel
for M/s A.Raghavalu
-R10, 11 in O.S.A.NoS.44 & 188 OF 2008
:Mr.A.R.L.Sundaresan, Sr.Counsel
for M/s G.Pavithra
-R4 in O.S.A.NoS.101 to 104, 109, 110
OF 2008,
-R5 in O.S.A.Nos.44, 105 to 108 and
188 of 2008
:Mr.P.S.Raman, Sr.Counsel
for R.Sagadevan
- R4 in O.S.A.No.105, 106, 107, 108 and
188 of 2008
- R5 in O.S.A.Nos.46, 101 to 104,109 and
110 of 2008
:Mr.N.V.Srinivasan
for M/s N.V.S.Associates
-R3 in O.S.A.No.44, 45, 46 and 47 of 2008
- - -
J U D G M E N T
P.K. MISRA, J I have gone through the judgment so meticulously prepared by my learned Brother Kannan, J and I agree with the same. However, I would like to supplement (not supplant) by observing as follows :-
There is no dispute about the right of the Bank to recover the amount borrowed from such Bank along with interest as per the transaction. There is also no dispute that the Bank has right to sell the property concerned, namely, the Theatre complex. The Company and its shareholders, who have been impleaded as interveners, unanimously agree that one time settlement with the Bank is beneficial for the Company and its shareholders. However, either individually or collectively they are not in a position to arrange for the huge fund required to complete the one time settlement. In other words, even though all of them are impugning the transactions with fourth and fifth defendants by the second defendant, they have unanimously submitted that one time settlement should not be allowed to fall-through. They are also not in a position to repay the amount received from fourth and fifth defendants. Senior Counsel appearing for the Bank has unequivocally stated that if the Bank is forced to wait indefinitely, it will not be in a position to honour the one time settlement and it will be forced to pursue its statutory remedy by completing the proceedings under the SARFAESI Act and realize the amount due to it along with the normal rate of interest by selling the property in question. Senior counsels appearing for fourth and fifth defendants have also submitted that in case they are not able to enjoy the benefit of the transactions for which they had advanced huge amount, they would be forced to pursue their right by availing legal remedy for refund of the amount paid by them with interest.
In such a scenario, not only the benefit of the one time settlement would not be available to the Company and its shareholders, but also the Company would be embroiled in further litigations and the ultimate result would either be same or even more disastrous. In order to avoid such disastrous consequence, the Board of Directors of the Company, which is the plaintiff in one of the cases, has passed a resolution subject, of course, to the approval of the appropriate authorities so that the Theatre complex can be sold off and the amount payable either to the bank or the fourth and the fifth defendants, as the case may be, can be repaid. The overwhelming majority of the shareholders through their Counsels have also submitted that the best possible solution would be to sell-off the property so that the surplus amount can be distributed among all the shareholders after meeting all the liabilities. The only objection has emanated from some of the shareholders, who represent comparatively much less shares. As a matter of fact, the Senior Counsels, representing such shareholders who are far less in number, have only suggested that any alternative property should be sold and not the Theatre complex. Of course, Defendant No.2 has raised vehement objection to such proposals and suggestions by raising various technical objections.
Even though prima facie conclusion of the learned single Judge raises doubt regarding the bona fide of the conduct of Defendant No.2, the fact remains that the amount received from Defendant No.4 and Defendant No.5 have been utilized to make the one time settlement possible. In other words, the company and all the shareholders are the beneficiaries. The Defendant Nos.4 and 5, instead of pursuing their appeals, are prepared to take return of the amount with reasonable interest. The Company and the overwhelming majority of shareholders have suggested that the Theatre complex can be auctioned so that the Defendant Nos.4 and 5 can be repaid and the surplus amount can be distributed. In such a scenario, instead of wading through the maze of legal hurdles and technicalities, the best possible and equitable solution would be to auction the property.
In order to protect the ultimate interest of the Company as well as the overwhelming majority of its shareholders and keeping in view the equitable principles, it is felt just and proper in the peculiar facts and circumstances of the case to adopt a novel method of finalising the dispute by permitting sale of the property.
(P.K.M.,J) 31.10.2008 K.KANNAN,J I. Disposition by Court of first instance:
1. All the appeals have arisen out of the common order passed on 4.1.2008 in O.A.No.1169 to 1172 of 2007 and Application Nos.6926 to 6930,6935, 6936 of 2007 in C.S.No.937 of 2007 and O.A.NO.1040 and 1041 OF 2007 in C.S.No.980 of 2007. The array of parties are as described in the first suit C.S.No.937 of 2007. C.S.No.937 of 2007 has been filed by an individual shareholder of 7th defendant company impugning certain transactions relating to the indebtedness of the 7th defendant and the 8th defendant company through the creation of mortgages, assignment of mortgages, lease and sub-mortgage. C.S.No.980 of 2007 has been subsequently instituted containing similar prayers as found in C.S.No.937 of 2007 by the 7th defendant company. A common order was passed on 4.1.2008 which found that the plaintiff had established a prima facie case by showing that all the four impugned transactions were not free from doubt in its opinion and that there were serious questions of allegations of fraud to be tried in the suit. The learned Single Judge took notice of the fact that the Receiver was able to generate income of Rs.29 to 30 lakhs per month and being assured by counsel representing the Receiver that the income could be further increased by proper management and refixing the rates of tickets, the Court found that the balance of convenience lay in favour of the plaintiffs and other shareholders, who, if the interim orders were not issued would be subject to great hardship and inconvenience. Consequently, the Court passed the restraint orders against the respective defendants from acting on the four impugned documents dated 9.10.2007 In the application for removal of the Receiver, the Court found that the Receiver should continue in possession. Consequently, O.A.Nos.1169,1170,1171,1172 for grant of injunction were allowed. Applications 6926,6927, 6028,6929,6930 ,6935 and 6936 for vacating the orders of injunction at the instance of the various defendants were dismissed. Applications for impleadment of the parties filed in the injunction applications were allowed. Curiously, applications for impleadment do not appear to have been filed in the suit, but only in the applications in 7660 to 7678 in C.S.No.937 of 2007 . They were allowed. O.A.No.1240 and 1241 of 2007 filed in C.S.No.980 of 2007 were allowed granting injunction as prayed for. It is this common order passed in the above applications that is assailed in the appeals filed by affected the parties.
2. M/s Pyramid Saimeera has filed OSA.NO.44 to 47 of 2008 against O.A.NO.1169,1172 OF 2007 IN C.S.No.937 OF 2007, OSA.NoS.101 TO 110 have been filed by the second defendant Paramasiva Pillai in so far as the orders were against him in various applications OSA.188 of 2008 has been filed by the Bank in so far as there are certain observations against the bonafides of the transactions involving the bank and the assignments in favour of the second defendant.
II. The nature of business and the genesis of disputes: 3. The genesis of the problem that has given rise to this spate of applications and respective appeals was the act of the 8th defendant viz., Annai Mookambigai Roller Flour Mills Private Limited, called the Mills Company, availed of a loan of Rs.759.68 lakhs from the first defendant Karyur Vysya Bank, hereinafter referred as the Bank on 12.10.1988. The loan was secured by creation of equitable mortgage of properties belonging to it . The 7th defendant, M/s Aruna Theatre and Enterprises Private Limited, hereinafter called the Theatre Company, stood corporate guarantee for the loan facility and created equitable mortgage of various assets and particularly Theatre and the premises situate in an extent of 23 grounds 1930 sq ft. There were also personal guarantees by several Directors of the Theatre Company . The Mills Company committed default in repayment of the loan that resulted in bank initiating proceedings before the Debt Recovery Tribunal, Chennai in O.A.No.18 of 2007 for Rs.12.53 Crores and odd with interest at 19.5% per annum. The bank had itself filed an original application for appointment of Receiver pending disposal of the original application and a retired Judge of this Court Hon'ble Mr.Justice Swamidurai was appointed as Receiver.
4. Some of the Directors of the Mills Company are the Directors of the Theatre Company. Both the companies are private and the shareholders and the Directors are all members of a Hindu family, whose common ancestor was Sankara Narayana Pillai. Two of the brothers had originally spanned out of Udaiyathur village of Tirunelveli District and shifted to Chennai first by establishing the business of trade in grams and grains; later a business relating to flour mill operations and still later relating to Theatre business. As the family grew in its size, with several branches removed in the order of descent from the common ancestor Sankara Narayanan Pillai, dissensions arose and inevitably the business began to flounder and so too, its income. The waning wealth gave rise to increased acrimony. Some of the shareholders of the company filed a company petition before the Company Law Board alleging act of oppression and mismanagement. Some of the Directors were removed and some of the decisions taken in the extraordinary General meeting came to be questioned before the Company Law Board. Interim orders passed by the Company Law Board were subject of appeal before this Court in CMA.NO.1900 of 2007 at the instance of Theatre Company and two others, when this Court directed the main petition might be taken up with specific direction that
(a) no major policy or important decisions could be taken by the Board of Directors without the consent of the Company Law Board;
(b) No alienation, transfer or encumbrance of the company assets could be made without the consent of the Company Law Board ; and
(c) The Board of Directors should take only decisions to manage the day to day affairs of the company till the Company Law Board passes final order.
5. The second defendant, Paramasivsm Pillai, one of the founder Directors had a strong sentiment to preserve the Theatre premises which was the principal asset of the Theatre Company from the prospect of distress sale. The sale seemed imminent, especially after the Bank had issued notice under Section 13(2) of SARFAESI ACT on 29.1.2003 and issued a further notice for taking over the symbolic possession under Section 13(4) on 24.3.2003. The transition of the cinema theatre business from out of the hands of the theatre company materialised by the action of the Debt Recovery Tribunal in appointing the Receiver on 17.2.2005. Upon a further resolution of the Board of Directors of the Cinema theatre company, the cinema theatre building complex was physically taken over possession by the Receiver on 19.6.2006. After the appointment of Receiver by Debt Recovery Tribunal, the family members knew that holding back benefited no one, especially when the persons who were in management did not properly account for the incomes and the Receiver's possession guaranteed staving off immediate sale and further ensured prevention of pocketing the sizeable income from the cinema theatre business only by the persons in actual management to the exclusion of others.
III. Immediate cause for further litigations:
6. The second major phase that came about from the acts of ingenuity of Paramasivam Pillai, the second defendant,who wanted to ensure that by the action of the Bank in its resort to SARFAESI Act did not result in distress sale of the cinema theatre complex. The plan of action that materialised took the shape of first satisfying the claim of the bank so that the imminent threat of sale was warded off. He did not have the money himself. He could not have therefore discharged the mortgage. He therefore came upon the idea of entering into a memorandum of understanding through a partnership firm M/s Ashoka Associates hereinafter called as partnership firm in which he was himself a partner with the 4th defendant (in C.S.980/2007) M/s Lavanya and Company on 3.10.2007. Another agreement was made on 4.10.2007 with M/s Pyramid Saimeera Theatre Limited that gave expression to the intention of the second defendant secured through MOU dated 3.10.2007. The second defendant through the firm assured to himself a short term loan of Rs.12.6 crores carrying interest at 14% with an undertaking to repay the same within ten months on the security of the theatre premises . The MUO dated 4.10.2007 was to generate a facility of obtaining Rs.3.50 crores to be deposited with the bank for its appropriation towards the loan granted to the company on the understanding that the firm would offer the Theatre premises on lease on a monthly rental of Rs.29 lakhs for a term of 15 years extendable for further term of 10 years on mutual consent. These two memoranda gave place to two further agreements executed on 5.10.2007, one in the shape of loan agreement by M/s Lavanya to pay the firm Rs.12.60 crores with interest at 14% p.a. on the security of the theatre complex. The contemporaneous document dated 5.10.2007 took the shape of tripartite agreements between the bank, the second defendant and the partnership firm by which the bank undertook to receive Rs.13.50 crores in full settlement of all claims by the bank and that on being paid the said sum, it offered to assign the security in favour of the second defendant. Pursuant to these two agreements, four more documents came to be executed ;one was a deed of assignment by Karur Vysya Bank to the second defendant and on the same day, an assignment by the second defendant to the partnership firm;the third document was a simple mortgage by the partnership firm to M/s Lavanya in respect of Theatre Premises; the fourth document was a lease in favour of M/s Pyramid Saimeera. By all these transactions, the second defendant received Rs.12.6 crores from M/s Lavanya and Rs.3.5 crores from M/s Pyramid Saimeera. By the amount of Rs.16.1 crores so realised, the second defendant had made arrangement to pay Rs.13.5 crores to the bank as one time settlement to the bank with a surplus of Rs.2.6 crores. This financial manoeuvre made possible averting the immediate prospect of the sale, but since the second defendant did not himself have any money, he could not obviously discharge the mortgage, but substituted one mortgagee by another and the prospect of loss of the property out of the hands of the family to a lessee for a period of 15 years with a liberty for further extension of 10 years. The scheme does not set out anywhere as to how the second defendant would pay back M/s Lavanya Rs.12.6 crores with interest within ten months period. In fact, the ten months has come and gone at the time of hearing before us, without paying up the sub-mortgagee. If the sub-mortgagee would have his way, the threat of sale again hovers above one's head at his instance.
IV.Imputations against the conduct of the second defendant:
7. One of the shareholders of the company who was the plaintiff in C.S.No.937 of 2008 and the company itself had reasons to complain. According to them, the entire manoeuvre of the second defendant betrayed lack of bona fides. One secured creditor was supplanted by another creditor. The reason for further consternation was how in the process, the second defendant himself was able to take kickbacks when no benefits accrued either to the company or to the shareholders/ members of the family. It was further possible for the second defendant and his cohorts who were partners in the firm to take over the affairs of the theatre business from the company. They smelt rat and two consecutive suits were filed seeking for the prayer that the assignment deeds dated 9.10.2007 and the mortgage and the lease deed dated 9.10.2007 were null and void through C.S.No.937 of 2007. The subsequent suit in C.S.No.980 of 2007 was more comprehensive in detailing instances of what according to the plaintiff therein as constituting a fraud and seeking for similar declaration that the assignment deeds, mortgage and the lease were also illegal and non-est in the eye of law and not binding upon the company. The plaintiff in C.S.No.937 of 2007 has himself verified as one of the Directors as Theatre Company in C.S.NO.980 OF 2007 along with another person K.Muthu Kumar as a Co Director.
8. The first suit appears to have been instituted on 11.10.2007 even before the ink dried, as it where, on the deeds of assignment, the sub-mortgage and lease deeds. The bank had received Rs.13.5 crores through various transactions referred to above and the receipt was filed before the Debt Recovery Tribunal for recording full satisfaction of its claims, but the institution of suits and the interim orders in the meantime stopped the process. The Receiver was continued and every one of the applications seeking for injunction at the instance of the respective plaintiff in C.S.No.937 and 980 of 2007 was countered with corresponding application for vacating the orders of injunction. M/s Saimeera and M/s Lavanya had also come up with applications for vacating the orders therein. All the applications therefore revolved on the prima facie nature of the claim of the plaintiffs, characterising the agreements, assignments, sub-mortgage and lease deeds as fraudulent transactions. Apart from that, there were also applications for discharging the Receiver appointed by the Debt Recovery Tribunal on the ground that the loan in favour of the bank had been discharged on payment on Rs.13.5crores and the bank at whose instance the Receiver was appointed by Debt Recovery Tribunal could no longer be required. It was contended that the properties should thenceforth stand delivered to the second defendant to enable him to hand over the lessee M/s Pyramid Saimeera.
V. The initial parleys before this court to end disputes and responses:
9. At the time when the case was taken up for arguments, senior counsel Mr.T.V.Ramanujam, appearing for the plaintiffs, Mr.P.S.Raman, learned Additional Advocate General appearing for the lessee, Mr.AR.L.Sundaresan, learned Senior counsel appearing for sub-mortgagee, Mr.Arvind Pandiyan, learned counsel appearing for the plaintiff in C.S.937/2007, Mr.K.Sridhar learned counsel appearing for the 8th defendant expressed that even without adverting to the merits of the respective claims, Theatre company could be directed to be sold under the supervision of the Court and the proceeds realised after discharge of loans could be distributed.
10. Mr.N.V,Subramanian, learned counsel appearing for the second defendant had strong objections to the same and urged that in the absence of unanimous decision relating to sale, the Court would not be within its powers to pronounce on a direction for sale of the property. To him, the more important concern was to save the property from being sold and recover the property from the hands of the Receiver and to put him in joint possession with the lessee.
11. Mr.T.R.Mani, learned Senior counsel appearing for the third party applicant Mr.Sakthivel and Arunachalathammal, also shareholders, resisted the proposal for sale of the property and according to him, if the properties were to be continued to be in the hands of the Receiver, for another period of two years, the entire loan could be discharged. According to him, the properties of the 8th defendant could itself be sold and that the 2nd defendant was thwarting it because he was interested in retaining control over the flour mill company and its assets. Mr.K.Sridhar, learned counsel appearing for the 8th defendant responded by saying that the property of the 8th defendant was already heavily encumbered and a sale would not garner enough resources to discharge the principal debt. Mr.Ramakrishnan learned counsel appearing for some intervenors also objects to sale and has filed a memo to take on record that a Kalyana Mandap, which is a portion of the building complex is in the possession of one Kalayanasundaram as a lessee (That the lease of the kalyana mandapam is disputed in another proceeding is a different matter). The several proposals and counter proposals flowing from the counsel appearing for the parties did not head for any consensus and we therefore directed the learned counsel to argue on merits on their respective claims. After hearing the learned counsel, we are of the opinion that following points for determination would address the problems that this welter of litigations grapple with.
VI Points for determination:
12.(i)Whether the documents dated 9.10.2007 are prima facie not valid and susceptible to be challenged as fraudulent?
(ii) If the documents are valid what are the respective powers of the sub-mortgagee and lessee for obtaining possession and management?
(iii) What is the right of the assignee of the bank vis-a-vis the scope of applicability of SARFAESI Act to benefit such an assignee?
(iv) Is it feasible to prevent the further management of the Receiver and discharge him or continue his possession till the loan is completely discharged?
(v) Whether the suits before Civil Court are not maintainable by the exclusion of jurisdiction under SRFAESI & RDB Act?
(vi)Does the Court have the power to order sale of the property of the company at the stage of disposal of the Interlocutory applications, especially when simultaneous applications are pending before the Company Law Board complaining of oppression and mis-management and when there exists already an order of the High Court that no major decisions in relation to the company could be taken?
(i) In re: The nature and effect of impugned transactions: 13. The bonafides of the transactions involving assignment of mortgage and lease executed by the second defendant or at his instance assumes significance, for, that will leave us with scope for considering whether the civil court can assume jurisdiction. The basis of the suits and the strength of the respective plaintiffs' contentions shall be the starting point. The arsenal stands sharpened against the actions of the 2nd defendant as they point out to the fact that no one benefits by the actions, except the 2nd defendant himself and his immediate family.
14. The second defendant's contention is that as a founder Director of the company he has an overwhelming interest to ensure utmost protection of the property of the family and see that it is not lost completely. He makes reference to the scheme of action by referring to the affidavit that he has filed before the Company Law Board and his own affidavit in support of his petition. The decision to thwart any attempt of the sale of the Theatre premises it seems to us, begins and ends there as merely a wish. The so called scheme that he has envisaged has no viable formulation as to how he could generate money to pay immediately the creditors who are thirsting for the moneys that they have advanced. If the second defendant had money and as a guarantor, if he had discharged the debt originally contracted by the 8th defendant from the bank, taking personal responsibility without further encumbering the property, one could understand his desire to prevent any sale. The mechanism which he has adopted is questionable only because in the scheme that he has executed, he has not redeemed the mortgage, he has only obtained an assignment of the security with no immediate prospect from disentangling the claims on the cinema theatre complex.
15. There are several distinctions between redemption of mortgage and obtaining assignment of the mortgage.
(1) The redemption discharges the mortgage; assignment keeps alive the original debt and transfers the right of the mortgagee to the assignee;
(2) The redemption of mortgage is contemplated under Section 91 of Transfer of Property Act to obtain only in favour of certain classes of persons set out of under Section 91 viz. any person who has interest or charge upon the property, any surety, a creditor of the mortgagor; the assignee could be any person including even a stranger.
(3) The right of subrogation under Section 92 contemplates only for a person who redeems mortgage and it is really a recognition of equitable right of all mortgagee's interest to a person redeeming the property subject to the mortagage; an assignment, on the other hand, gets a complete transfer of the interest of the property and the definition of the mortgagee itself under Section 59A of Transfer of Property Act states that a reference in Chapter IV of the Transfer of Property Act, to mortgagors and mortgagees shall be deemed to include references to persons deriving title from them respectively.
(4) The surety that discharges the mortgage shall enforce all the rights of the creditor/mortgagee by virtue of Section 140 of the Indian Contract Act; the assignee gets the rights of the mortgagee under the assignment itself even without recourse to Section 140 of the said Act.
16. As far as the theatre company is concerned, no benefit has obtained. The threat of sale has not been averted. The possession of the property has moved out of the company. Income is completely lost to the company. The bank which had filed the case for recovery before the Debt Recovery Tribunal has subsequently invoked Section 19(18)of RDB Act for appointment of Receiver. If the second defendant had taken steps to discharge the debt to the bank and got back the property to be enjoyed by the company itself, it would have been different. However, he has brought about the transactions of assignment in his favour on 9.10.2007 and before the ink dried he has caused the assignment to the partnership firm in which he himself is a partner and on the same day, he has executed two more documents one of simple mortgage and another a deed of lease. By such process, he has only ensured that the property in the hands of the Receiver could go to the hands of a lessee for a longer period. He has undertaken to discharge the loan within a period of ten months, but his own scheme does not disclose as to how he was going to generate the money for repayment to the sub-mortgagee. Indeed the said period has come and gone at the time, when we were hearing the appeal and when asked whether he could discharge the mortgage, he conceded that he has no resources to do so. Even the lease amount Rs.29 lakhs per month, could not have been sufficient to discharge the mortgage within the time which he had undertaken to discharge. The effect of the impugned transactions as far as the company was concerned, from the bank being the creditor, the assignee, the partnership firm, itself has now become a creditor. The want of bonafides is explicit also by the fact that transactions of assignment, sub-mortgage and the lease have resulted in personal benefit to the second defendant himself. He has secured Rs.3.5 crores from M/s Pyramid Saimeera and Rs.12.6 crores under the sub-mortgage. He has paid a sum of Rs.13.5.Crores to the bank and the second defendant has been able to secure in his hand an excess of Rs.2.6 crores. This chain of action which he has brought about, puts him at an advantage by making possible to take over possession of the only asset of Cinema Theatre Company.
17.If he had attempted to stave off the threat of sale and he was making it possible by paying up the bank, another person who was funding the transaction must be a person who should have been a person willing to bide by time, so that the lease from the theatre would pay the subsequent mortgagee viz., the sub-mortgage over a period of time. As pointed out already, the breather that he secured was a short period of ten months which would have enabled him to secure no more than Rs.2 crores by receiving the lease rentals, has opened up only fresh vistas for the sub-mortgagee to enforce the security by sale. Again, if the intentions had been genuine, the second defendant need not have secured Rs.3.5 crores as a refundable deposit from the lessee. He could have instead secured a higher rental to compensate for giving up the advance amount which he was receiving from the lessee and the returns from the lease could have ensured a shorter gestation for repayment of the loan. All these transactions have also caused unnecessary huge expenses as registration charges, all of which would only be taxed ultimately on the estate when the sub-mortgagee or the lessee would include as costs for recovery of their debts. While we see that there is a transparent decision to stop the sale of Theatre Premises, the scheme that the second defendant has evolved, is only a crafty machination and he has secured himself a personal benefit of Rs.2.6 crores and found a device for taking over the control of the Theatre Premises from the company managed by the family members to himself.
18. The learned Single Judge who was dealing with these applications, while allowing the Receiver appointed by the Debt Recovery Tribunal to continue has referred to all the above instances as creating suspicion in the bona fide transaction.
19. We were referring to the lack of bona fides of the second defendant only to apprise ourselves about the situation about how and where all his transactions have led the company into and how more vulnerable he has exposed the company to lose out any income from the property to reach any member of the family and at the same time, obtain the benefit only to himself and other members of his immediate family.
20. Mr.T.R.Mani, learned Senior counsel appearing for the some of the shareholders has his own view to dispute the bona fides of the second defendant. According to him, the second defendant's attempt is to ensure that the property of the 8th defendant in which he is a shareholder, is protected and if the second defendant had been truly intending to safeguard the Theatre Property, instead of the several manoeuvres he has undertaken through several transactions which are impugned, he ought to have made some provision for sale of the Mills property and attempted to discharge the loan. According to him, after all, the principal debtor was the 8th defendant itself and therefore, the 8th defendant's properties ought to have been offered for sale. We are afraid, we cannot enter into such controversy because the action for sale of the property did not originate from the second defendant, but from the bank. The bank as a creditor is always competent to make its own choice of property for sale for realisation of money. But one thing is clear that the second defendant by his manoeuvre is able to keep at bay any possible threat to the property of the 8th defendant and at the same time he could gain control over the theatre premises itself as a lessor to the exclusion of the 7th defendant whose principal asset is the cinema Theatre complex.
(ii) The rights of sub-mortgagee and lessee:
21. The admitted case is that after the assignment of the mortgage, the assignee has created a sub-mortgage in favour of M/s Lavanya. The mortgagee/assignee has no need to give notice of sub-mortgage to the mortgagor.(See PAPPALA CHAKRAPANI VS. LACHIMI ACHI (DB) AIR 1919 Madras 1082)
22. The period stipulated in the sub-mortgage executed in favour of the M/s Lavanya, the 5th defendant has expired and if the transaction were to be upheld, the sub-mortgagee himself is entitled to bring to sale the property secured towards the realisation of the amount against the original mortgagor or the mortgagee, though it may be limited to the amount due by the sub-mortgagor. (See K.AMBALAVANAN Vs.BANK OF MADURAI LIMITED BY ITS Agent SATTAPPA SUBRAMANIAN AND OTHERS(1974) 87 LW 89). This is stated only to bring home the fact that the so called attempt of the second defendant to stop any attempt to bring the sale of the property stands exposed that if his transactions were to be upheld, it makes the very same premises vulnerable for being brought for sale at the instance of the sub-mortgagee whose debt has not been discharged within the time stipulated. Perhaps he might contend that the pendency of the suit itself has brought about the difficulty of discharging the sub-mortgage within the time limit. We have already pointed out that the scheme which he professed did not envisage any particular income generating sources other than the theatre business itself. It could well be that the assignee of the mortgagee could also execute a lease of the property where the property was held in possession by the mortgagee. The Transfer of Property Act itself makes provision under Section 65 recognising the mortgagor's power to lease. But, there is no power for the mortgagee who is not put in possession of the property to lease. The counsel for the 2nd defendant points out to the clause in the corporate guarantee that the power is granted to the bank to grant a lease. But, if at all the power could be exercised, it could be only under the term of the mortgage deed, after taking possession from the mortgagor. The mortgage in favour of the bank was only a mortgage by deposit of title deeds and the possession had not passed to the mortgagee.
(iii) Rights of assignee vis a vis SARFAESI Act:
23. What, however, enables the bank to do under the SARFAESI ACT could be limited to be available only to secured creditor as defined under the said Act. It is seen from the records that the bank has issued notice under Section 13(2) on 29.1.2003 and issued notice of possession on 24.3.2003. It has been held in M/s TRANSCORE v UNION OF INDIA AND ANOTHER reported in 2006(5) (CTC) 753 that under the Act, there is no difference between symbolic possession and actual possession and a secured creditor who could obtain symbolic possession would also have a right to make a lease of the property under Section 13(4)(a) of the said Act. The said provision makes possible an assignment and the assignee has been granted the same power as that of the original owner.
Sections 13(6) and 7 of SARFAESI ACT reads as follows:
"13......
(6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset.
(7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment o such costs,charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests."
The said provision does not say that the assignee shall have a same right as that of the assignor, though it would normally be the case. Section 13(6) states that the transferee will be vested with all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such asset. The Act is very specific about certain classes of persons alone as being beneficiaries of the provision for enforcement of its security on a fast track, as it were. The secured creditor has been defined under Section 2(Zd) as follows:
Secured creditor means any bank or financial institution or any consortium or group of banks or financial institutions and includes-
(i) debenture trustee appointed by any bank or financial institution; or
(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction as the case may be; or
(iii) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created for due repayment by any borrower of any financial assistance;
24. This definition takes in its wings only banks or financial institutions or any consortium or group of banks and excludes for its operation any private individual. The second defendant who was the original assignee and the partnership firm to which the mortgage is subsequently assigned cannot treat itself as a "secured creditor" to exercise all the power under the SARFAESI ACT . Consequently, possession can never fall to the second defendant or its successors in order that it could lawfully create a lease in favour of Pyramid Saimeera. It is only because of these difficulties that the second defendant has sought for the discharge of the Receiver who was appointed by the Debt Recovery Tribunal at the instance of an application filed by the bank. If the mortgagee himself could have taken possession by virtue of special provision under Section 13(4) and handed over possession to his assignee, such assignee may be able to lease the property and also put the lessee in possession. Without any of these acts, it will be impermissible for a private assignee such as the second defendant or the partnership firm to execute the valid lease and put the lessee in possession. Giving effect to such a lease or obtaining the lease for discharge of the loan contracted by the 8th defendant, becomes therefore a distant possibility mired in several legal obstructions.
iv)Feasibility of continuing the Receiver:
25. KERR on The Law of Receivers, The Law and Practice to Receive (15th Edition, Sweet & Maxwell, 1978) sets out the circumstances under which the Receiver can be an agent of the mortgagor or mortgagee or the Court. (pp. 279 to 282.) Where the Receiver is appointed without resorting to Courts, he should be a agent of the person at whose instance he was appointed. At Page 288 of the above Edition, KERR observes "A Receiver appointed under the statutory power is deemed to be the agent of the mortgagor who is liable for his acts of defaults, unless the mortgage deed otherwise expressly provides which it seldom, if ever, does.(Page 289) But, where the mortgagor is in occupation, a Receiver appointed under the statute has no power to recover possession against him by force of his own title: he has only a right to recover the rents: though if he could recover possession, he could let, if the power to do so has been delegated to him". Under the English law, the agency of the receiver for the mortgagor is a statutory recognition under the Law of Property Act of 1925. However, neither under the SARFAESI ACT, nor under the RDB Act, 1993, there is any mention of the agency status of the Receiver. The RDB Act provides specifically for his appointment, for properly securing the security and its income under Section 19(18) for just and convenient reasons. It could probably be stated that the receiver holds his possession only under the supervision of the Debt Recovery Tribunal, for the benefit of both the mortgagor and the mortgagee. Even before the suit was instituted, the bank had initiated action before the Debt Recovery Tribunal. The bank has sought for appointment of Receiver by an application before the Debt Recovery Tribunal and the Receiver has been appointed by the order of DRT on 17.5.2005. The Receiver has also taken physical possession of the Theatre Premises from 19.6.2006 when the bank itself had passed a resolution offering to hand over the possession of the property to the Receiver peacefully.
26. Mr.N.V.Subramanian learned counsel for the second defendant contended that full satisfaction shall be directed to be recorded by the DRT and having regard to the fact that the indebtedness to the bank has been discharged, the mandate of the Receiver shall be terminated and the property shall be put in joint possession of the second defendant and M/s Pyramid Saimira Limited. While the termination of the receiver's mandate by the discharge the loan in favour of the bank would have normally been the result, such a course cannot ensue in a situation like this, where further complications have resulted by the conduct of the second defendant himself. Learned Single Judge has directed by her order that the Receiver shall continue in office till the conclusion of the suit and subject to the direction of the Court. The Receiver has subjected himself to jurisdiction of this Court and has filed reports in the months of June 2008 and July 2008 when the proceedings have been pending before us. The reports disclose that balance of income after deduction of tax and all other expenses is Rs.12,56,855/- for the period between 1.6.2008 and 30.6.2008 and an amount of Rs.27,97,760/- has been the income after incurring all the expenditures and tax for the period between 1.7.2008 and 31.7.2008. It is reported that the Receiver has so far generated an income of over Rs. 2 crores by way of rentals and in the light of gnawing dissension amongst the persons in the management of the Theatre Company, generation of income which could ultimately go to discharging the loans would be most just and convenient. The lessee himself does not want to take possession if the money which he has paid is repaid to him with reasonable interest. The sub-mortgage has not been paid nor is there a scope for immediate discharge of its loan and we do not think it appropriate to give the benefit of possession to the second defendant, especially in view of what we have found through our discussion about his conduct as not above board. Under the circumstances, we think that the Receiver must be continued in possession of the property until further directions and he should continue to render account in the manner in which it is being done. We have given directions for audit of the accounts from the day when the Receiver has taken charge till the end of the financial year 2008-2009 and for further periods also by separate order.
V. Jurisdiction of Civil Court and maintainability of present suits:
27. At the forefront of the contention on behalf of the second defendant was the plea that the suits were not maintainable. As regards the suit instituted by an individual shareholder, it was his contention, as well by Mr.P.S.Raman, learned Senior counsel for the lessee that an individual shareholder has no interest in the assets of the company and he has no locus standi to institute the suit. (MRS BACHA GAIZDAR VS. COMMISSIONER, INCOME TAX, AIR 1955(SC) 74. Now that another suit has been filed at the instance of shareholder this objection does not obtain much weight. It is also their contention that the SARFAESI Act is a complete code in itself for enforcement of securities by securing creditors. The counsel relies on the decision in TRANSCORE VS. UNION OF INDIA AND ANOTHER (2006 (5) CTC 757), THE BANK OF INDIA VS. N.NATARAJAN AND ANOTHER (2007 (4) CTC 360, STATE OF BIKANER AND JAIPUR VS. M/S VALLAB DAS AND OTHERS JT 1999 (7) SCC 102, UNION BANK OF INDIA VS. DEBT RECOVRY TRIBUNAL AND OTHERS (2001) B.C.662, KRISHNA FILAMENT (118) CC 35 and BANK OF INDIA VS. MANIKAM (2006)4 MLJ 914.STATE OF BIKANER AND JAIUR VS. VALLAB DAS JT (1998) 7 SC 102 deals with the power of the Court to transfer a case pending before a civil Court when the SARFAESI Act was introduced. The issue was whether the civil Court should adjudicate on the subsistence of the debt in the case or whether the debt was discharged, as contended and that only when the Court records the finding that the debt is subsisting, the case could be transferred. The Supreme Court held that all pending matters before the Civil Court which was filed on the basis of debt as subsisting was enough ground for a transfer and it would be only a Tribunal which could adjudicate on the contentious issues.
28. UNION OF INDIA VS. DEBT RECOVERY TRIBUNAL AND OTHERS reported in 2001 (BC) 662 was a case where the Court decided on the expression 'debt' referred to under SARFAESI Act and dealt with similar issue where the Supreme Court held that the expression 'debt' has to be given its wide amplitude if the averment in the plaint indicated that the suit was essentially for recovery of debt due to it and it shall be the Tribunal which would have exclusive jurisdiction to decide the dispute and not the ordinary Civil Court.
29. KRISHNA FILAMENTS LIMITED VS. INDUSTRIAL DEVELOPEMNT BANK OF INDIA reported in 118(CC) 35 was a decision of the Bombay High Court which while deciding on the effect of Section 18 of the SARFAESI Act which laid down that even if the particular bank is not a banking company within the meaning of Banking Regulation Act or if it answers the description of "financial institution' as defined in Section 2(G)(i) under the Recovery of Debt due to Banks & Financial Institutions Act 1993 (RDB Act), such a bank would have recourse only to the debt Recovery Tribunal and not Civil Court.
30. THE BANK OF INDIA VS. NATESAN AND ANOTHER reported in 2007(4) CTC 360 was a case where the bank issued a notice under Section 13(2) when a third party filed a suit claiming himself to be a lessee in possession and that he would not be bound by the action taken by the bank and that his possession should not be therefore disturbed.
31. None of the cases referred to above has a bearing to the claim of a third party impeaching principally the transactions of a person who is not a 'financial institution', though the 'financial Institution' is also one of the parties. We have already seen that the right to enforce the lease or sub-mortgagee's right to enforce its claim could be done without reference to the right of the bank to claim its own due. The validity or otherwise of these transactions will not in any way prevent the bank from enforcing its own right, if its debts shall still subsist under the procedure established in the SARFAESI Act.
32. These decisions refer to the exclusion of jurisdiction of the civil court in respect of action initiated by the financial Institutions defined under that Act. Of them, the decisions of the Madras High Court in 2006 (4) MLJ 914 and (2007) 4 CTC 360 dealt with cases where averments had been expressly made attacking the transactions that were put through at the instance of bank on the ground of fraud. The counsel for the second defendant refers the decision particularly to show that only by assailing the transactions as vitiated by fraud it will not take away the jurisdiction of the Debt Recovery Tribunal and SARFAESI ACT. According to him, if the plaintiff has challenged the assignment made by the bank which is protected under Section 13(4) the proper remedy of persons affected by such a decision would be only to prefer an appeal provided under Section 17 of the Act. According to him, the decision of the Supreme Court in M/s Transcore Vs. Union of India and another (2006 (5) CTC 757) puts beyond the pale of any controversy that even in respect of matters where proceedings have been taken either before the civil Court or before the Debt Recovery Tribunal, it shall be possible for the secured creditor under SARFAESI Act and that the remedy of an aggrieved party would be only by means of appeal under Section 17 of SARFAESI Act before the Debt Recovery Tribunal only. The reliance on this judgment is to lend support to the primacy in the jurisdiction that vests with the Debt Recovery Tribunal excluding the jurisdiction of the civil court in respect of matters covered under the Act. If the suit had been merely an action challenging the assignment by the bank in favour of the second defendant or firm, it could well be urged that the party affected by the such an act ought to challenge the same only under Section 17 of the Act by way of appeal.
33. The present suit does not merely assail the transactions by the bank but a whole series of actions to which the bank is not party including the assignment by the second defendant to the partnership firms, the execution of sub-mortgage by the firm and the execution of lease. The transactions assailed does not terminate with the first transaction of assignment by the bank to the second defendant. The subsequent transactions cannot be a subject of any adjudication by the Debt Recovery Tribunal. If the transaction had stopped with the discharge of loan to the bank, neither the bank nor any of the shareholders could have had any grievance and it could have been perceived as the most beneficial act. On the other hand, the bone of contention has been only the action of the second defendant that has resulted in not merely displacing possession of the theatre premises from the 7th defendant company but also makes possible the assumption of control by the second defendant in anafarious manner. It is veritably a plausible perception that the second defendant could not have lawfully assumed the prospect of control over the asset of the company viz. Cinema Theatre without shedding a single paise by playing with the money of other parties and continuing the indebtedness of the company. The right which a "private transferee" obtains from the bank by virtue of assignment under Section 13(4) Clause (a), cannot extend to have a relief under the SARFAESTI Act, unless he himself is a secured creditor in the manner defined under Section 2(zd) of the said Act. We have already seen neither the second defendant nor the partnership firm could describe itself as such nor indeed M/s Lavanya could have any relief pursued under the SARFAESI Act in its assumed right of subrogation or sub-mortgage respectively.
34. A sub-mortgagee himself cannot redeem the mortgage for he has only derive title from the mortgagee and not from the mortgagor. (1966 2 MLJ 308: 1966 (79) LW 400). It has been held that sub-mortgagee has no priority of estate or contract with the original mortgagor. (RAMANADHA CHETTIAR VS. SETHU MADIGARAO SAHIB AND ANOTHER AIR 1928 Madras 382) It will be therefore not possible for M/s Lavanya to come to the succour of the 8th defendant and redeem itself out of the financial stringency that these transactions have involved the principal debtor or the cinema theatre complex.
35. Above all, when the action of the second defendant is questioned by means of suits and there exists ample prima facie proof that the transactions are a fraudulent ploy to wrest control of the business of the 7th defendant and persisting the indebtedness of the company, it is not possible to accept the contention that the civil Court's jurisdiction is ousted. The Courts have held that exclusion of jurisdiction of civil Court is not to be readily inferred, unless the statue excludes the jurisdiction giving the finality to the issues raised before it. The validity of the transactions and alleged fraud have relevance to the series of documents that have been generated by the second defendant to route to the partnership firm through assignment and through instruments of debts by sub-mortgage and lease, all of which, cannot be considered by the Debt Recovery Tribunal. It is therefore not possible to give in to the proposition canvassed by the counsel for the second defendant. It is not merely a plea of fraud or the alleged non-est nature of transactions canvassed by the plaintiff that ousts the jurisdiction of the Debt Recovery Tribunal and vests the jurisdiction of the Civil Court . It is the series of actions that the second defendant had indulged in where he could not have any relief before the Tribunal that gives the civil Court its jurisdiction.
36. A conjoint reading of several decisions could be paraphrased to set down the following propositions of law with regard to the exclusion civil Court jurisdiction in respect of matters covered by the SARFAESI Act and the Reovery Debts due to Banks and Financial Institutions Act, 1993 (RDB Act).
37. The approach shall be first to ascertain the particular action that is complained of. If the impugned action is at the instance of financial institution, the next question is whether the remedy for the act complained of, is available under the SARFAESI Act itself. If fraud is complained against the financial institution, it will not immediately take the issues of adjudication outside the purview of the SARFAESI Act or RDB Act. However, if the act is illegal and fraud has been practised on the Tribunal itself, the remedy will be always available through the civil courts. Ouster clause in any statue shall be strictly construed. Section 34 of SRFAESI Act and Section 18 of RDB Act shall be so construed to invest in the Tribunal jurisdiction in every matter which is directly connected with indebtedness to the financial institutions itself. If the relief does not pertain to the indebtedness and the mode of enforcement of debt by a "secured creditor" defined under the SRFAESI Act or a "financial institution" defined under RDB Act, there could be no exclusion of jurisdiction.
38. As a matter of fact, after the payment of amount of Rs.13.5 crores to the bank, which it has received as one time settlement, no further remains to be done by the bank. Although, we are aware that the Debt Recovery Tribunal proceedings are not terminated formally by withdrawal of the petition or recording full satisfaction before the Tribunal, for all practical purposes, the bank's remedy before the Debt Recovery Tribunal has come to an end. It could be only a matter of time to formalize full satisfaction by the bank. The assignment that the bank has made in favour of the second defendant cannot by itself offer to the second defendant to have any relief under the Act and consequently, it does not lie in the mouth of the second defendant to deflect the proceedings taken before the Civil Court to the Debt Recovery Tribunal again. In the arguments before us, all the parties including the counsel appearing for the plaintiffs, sound in unison that they do not desire to put the clock back so as to revive the loan in favour of the bank. Though the plaintiffs have attacked the assignment of the bank to the second defendant, among other transactions, they will not go so far as to say that the banks loan shall stand revived. It is perhaps uncharitable to characterise the assignment of the debt by the bank to the 2nd defendant as fraudulent and we do not associate ourselves with the branding that the learned single Judge had made against the bank, especially when it has offered OTS by way of concession to the outstanding liability. Mr.A.L.Somajji, learned counsel appearing on behalf of the bank requests the remarks made against the bank in paras 86, 87 and 107 of the judgment to be expunged. We are convinced that it is a justified request and accordingly they are expunged. The contention against the bank should be seen in the context that it has given a chain of actions which according to the respective plaintiffs is a part of larger scheme of the second defendant to reach the assets of the 7th defendant company and gain its control. The suits as framed are maintainable and amenable to Civil Court's jurisdiction.
VI. The power of Court to order sale in Interlocutory Application:
39.All our discussions affirm the decision of the learned single Judge that there is a prima facie case in favour of the plaintiff. The transactions viz., assignment by 2nd defendant, the lease and mortgage brought about by him are tainted and we have no hesitation in affirming the judgment of the learned Single Judge that the documents shall not be given effect to. After the passing of the order by the learned Single Judge, there have been subsequent developments as well. Simultaneous proceedings before the Company Law Board and Civil Miscellaneous Appeal to this Court from the order in Interlocutory Application from the Company Law Board have given rise to the situation where the activities of the Cinema theatre company have come to a stand still. It has been pointed out that the Cinema Theatre Complex is the only asset of the company and the predominant object of the company is running the Theatre business. The business is admittedly not with them and like the saying that goes, "an idle mind is devil's workshop", the company that has no business, has left the Directors of the Company and the shareholders, who are all members of the same family, with further acrimony and in-fights. This Court has already given a direction in CMA.NO.1900 OF 2007 not to take any major policy decision. In the meanwhile, the company has itself passed a resolution in its General Body Meeting that the property could be sold in public auction.
40. Mr. Aravind Pandian, learned counsel Counsel appearing for the plaintiff in C.S.930/2007 and Mr.T.V.Ramanujam appearing for the company also affirm that they have decided to sell the Cinema Theatre Complex, having regard to the present circumstances where there has been no income for them and many of the shareholders have been complaining that they have not received any dividends. We put it across to the parties to deliberate the proposal to sell the property to pay up the loans that have accrued and distribute the surplus proceeds.
41.Mr.P.S.Raman, learned Senior Counsel appearing for M/s Pyramid Saimeera, Mr.AR.L.Sundaresan learned Senior Counsel appearing for M/s Lavanya have no objection to the property being sold, if only the respective amounts which they have advanced are repaid with reasonable interest. Their clients have paid the money and it is their money that has obviated the sale at the instance of the bank. If at all, there was a justification for the appointment of a Receiver, either one of them should have been put in possession with direction to account as a Receiver. But in all fairness to them, they stake no right to possession and express willingness for sale. The proposal for sale is objected to only by the counsel for the second defendant, Mr.N.V.Subramanian and Mr.T.R.Mani counsel appearing for intervenors who have but a miniscule percentage of shareholding of the company.
42.Both Mr.N.V.Subramanian and Mr.T.R.Mani contended that the direction for sale of the property is really outside the scope of the Interlocutory Application and unless there is unanimity for the sale proposals, the Court shall not order the same. Mr.N.V.Subramanian would anchor his contentions only to general objection oft repeated that the Court itself does not have jurisdiction to entertain the suits and the desire of the second defendant to hold back the Theatre premises for the benefit of the family itself will lose its meaning ,if the sale shall take place. While the desire to retain the property could be lofty, he has no viable scheme to suggest for liquidation of the debt itself. If we are to contend with the position that the debt should be paid by the accruals of lease or the amount earned through the Receiver, it cannot happen immediately and there is no means of preventing the creditor from exercising his right, if according to him the lease and the mortgage are true.
43.Mr.T.R.Mani's objection is that principal debtor is the 8th defendant and it would be only appropriate if the 8th defendant's property is sold. Learned counsel appearing for 8th defendant , Mr.K.Sridhar states that there are large liabilities in the properties including the tax dues to the Government and the sale of the property cannot fetch the amount that is presently due by them. Mr.T.R.Mani, while contending that the sale of property would fetch more than Rs.100 crores, it need not be done for paying off the debt of only Rs.16 crores and odd. He had himself no more proposals than contending that the property of the 8th defendant itself should be sold. He has also contended that another item of property viz., petrol bunk, is equally valuable and the market price that the sale of the property of the 8th defendant and the petrol bunk would be sufficient to discharge the loans. Neither the property of 8th defendant nor the petrol bunk are the subject matter of any of the suits. There is no unanimity in the contentions of all the parties for sale of these properties and that the sales could garner sufficient resources to discharge the loans. In the circumstances, we are left with examining the decision whether the sale of Theatre premises could be a viable proposition.
44. Two scenarios emerge: If the plaintiff's suit were to be decreed which would result in the annulment of transactions commencing from the assignment of mortgage deed by the bank to the second defendant, the assignment by the second defendant to the third defendant, the grant of lease to the fourth defendant and the mortgage in favour of 5th defendant would stand nullified which would revive the deed in favour of the bank in which case, the amount of Rs.13.5 crores which the bank had accepted as one time settlement would no longer be available and it would be possible for the bank to scale up its demand on the contract rate of 19.5% from the initial date of loan. The banks' right to enforce its debts under the SARFAESI Act or before the Debt Recovery Tribunal would revive and when no party has come with any proposal to discharge the loan with any other source of income, it will bring back the same situation as it all started, when the bank took action for enforcement of its debts. The counsel for the Bank also argued that if the document of assignment to the 2nd defendant could not be enforced by any interim order, it would result in its liability to return Rs.13.5 Crores to the 2nd defendant, treat the OTS as cancelled and the Bank would be compelled to invoke the SARFAESI ACT for sale. This process would be obviously grossly unjust to all parties. The bank's right to enforce its debt stands deferred only by the pendency of the actions before the Court. The liability of the principal debtor and the guarantor would be escalated, with further interest loaded on the amount borrowed and the benefit of OTS by interest waiver being made available to be completely forfeited. The 4th defendant and 5th defendant could sue the 2nd defendant and 3rd defendant for return of Rs.16.1 crore with interest on the ground of quantum meruit and under the equitable principles statutorily recognised through Section 31 of the Specific Relief Act.
45. The other scenario is that the suits are dismissed after the trial and the transactions entered into by the second defendant are all held valid. If the transactions are valid, it could validate the lease and the mortgage apart from the assignments made by the bank and other parties. The bank's claim would have been settled. But the indebtedness of the company would continue. At the same time, the lessee could not have been put in possession which he had a right to and the sub-mortgage could be enforced by bringing the property to sale for non-payment of the debt by a far too longer period than what was contracted. Again, the pendency of the suits will be put out against the interest of the creditors, which would benefit no one. The length of litigations would accumulate. The interest payable on the debts will further mount. The debtors cannot take their own time to repay its debts. The creditors may not be willing to to fetter themselves of the right of enforcement of the mortgage and the lease.
46. We have given our anxious consideration to the various situations that may develop and if there is a process that could terminate proceedings and leave all of them with a modicum of satisfaction, we adopt the course which our judicial conscience dictates to us. We will have come to no harm to anyone in the process. The bank debt will be taken as discharged right away by directing the full satisfaction to be recorded before the Debt Recovery Tribunal. The property of the company will be sold as per the decision taken by the majority of shareholders and exhibited through the resolution of the Board. It will only be in tune with the corporate democracy that the will of the majority prevails and at the same time not harming the minority shareholders.
47. Mr.Aravind Pandian relied on the decision in (MAXWELL AND CHEMICALS PVT. LTD., VS. KOTHARI INDUSTRIAL CORPORATION LIMITED reported in 85 Company Cases 111, rendered by a Division Bench of this Court, which, while exercising its company jurisdiction, recognised the primacy of resolution passed by the shareholders in a overwhelming majority and the Court's keep-the-hands-off approach, if it was ultimately for the benefit of the company. The Division Bench also held that the proceedings pending under Section 397 and 398 of the Act would not itself be a ground to stay the implementation of the resolution. The second defendant's objection to the sale would be easily seen as an obstruction by a person, who has a personal axe to grind. Even the 2nd defendant later conceded that if sale was the ultimate result, his clients shall have priority of a right of purchase. The objections of some of the shareholders that form a miniscule percentage of holding (766 shares that belonged to the estate of S.Narayana Pillai and 500 shares held by Arunachalathammal out of the total subscribed capital of 7596 shares)and represented through Mr.T.R.Mani, learned Senior Counsel, could be again seen only as the desire of persons who want to have the cake and eat it too. The Senior counsel, in his arguments,is not averse to the idea of sale as a concept in an Interlocutory Application. His objection is that instead of the Theatre Premises, the property of 8th defendant could be sold. We have no concession on behalf of the 8th defendant to endorse such a course. However, the property of the 8th defendant is not the subject matter of suit. The sale of the Theatre Premises cannot mean forcing a winding up and attachment of the property, even without reference to appropriate proceedings under the relevant provisions of the Companies Act. We do not close the affairs of the Company. The company will continue to exist. It is not as if the company is directed to be sold. The decision for sale has not emanated from us; such a decision bears the seal of approval of the majority of shareholders, but, for whose decision, we would not have ventured upon this proposal and simply stopped with affirming the decision of the learned Single Judge and directed the disposal of the suit affirming the interim orders already passed. The latter course could not have been for the benefit of any party. The lessee and the sub-mortgagee who have paid the moneys which as gone to pay off the bank cannot be made to indefinitely wait to get what they are entitled.
48. In directing the sale of the property, we are indeed exercising the equitable jurisdiction of the High Court. It has been held in KHANDESH SPINNING AND WEAVING MILLS COMPANY LIMITED VS. MOOIJI JAITHA AND CO reported in (1948)50 Bom.LR 49 that jurisdiction conferred upon the High Courts by Clause 12 of the Letters Patent, is similar to the equity jurisdiction exercised by the English Courts. M.C.Chagla, Acting C.J. (as he then was) wrote a separate judgment in the Division Bench,where the Bench were dealing with acts of misconduct with fraudulent intentions to gain control over the affairs of the defendant company whose assets were outside its territorial jurisdiction. The Court still exercised the jurisdiction by raising the question that the dominant purpose of the suit was to challenge the fraudulent conduct of the defendant and the relief being personal, the suit should be regarded as not for land and hence it had jurisdiction. The Court exercising the equitable jurisdiction does not supplant the statutory law, it compliments it, as in England. Consequent on the passing of the Supreme Court of Judicature Act 1875, the High Court of Justice had amongst its divisions the chancery division. The following matters were assigned by the Judicature at Chancery division.
(i) The administration of the estates of deceased persons.
(ii) The dissolution of partnerships or the taking of partnership or other accounts.
(iii) The redemption or foreclosure of mortgages.(emphasis supplied)
(iv) The raising of portions or other charges on land
(v) The sale and distribution of the proceeds of property subject to any lien or charge.(emphasis supplied)
(vi) The execution of trusts, charitable or private.
vii) The rectification or setting aside, or cancellation of deeds or other written instruments.
(viii)The specific performance of contracts between vendors and purchasers of real estates, including contracts for leases.
(ix)The partition or sale of real estates.
In directing the sale, we are trying to balance the equitable claims of several parties. The bank loan has to be discharged. The OTS shall be affirmed. The parties who have advanced moneys to the second defendant and third defendant which have gone to discharge the bank loan shall have to be paid back their moneys. The indebtedness of the company has to be relieved. The shareholders have to be satisfied. We are reaffirming the principle laid down that "Equity does not relieve against contracts which, owing to circumstances which might have been provided against, prove unexpectedly burdensome to one of the parties. In those cases, equity follows the law, and acts on the legal effect of the contract" (Halsbury's Laws of England (Fourth Edition Para 1242)).
VII. Conclusion
49. Under the circumstances, we affirm the decision of the learned Single Judge, as far as the merits of the claim of the plaintiffs are concerned. We however direct the expunction of the observations of the learned Judge regarding the 1st defendant bank in para 86, 87 and 107 that doubts the integrity of the bank. In view of the decision taken by us to endorse the proposal of the company for sale of the property, we shall direct the sale of the Cinema Theatre building complex by inviting global tenders by e-auction.
a. The property mentioned in the schedule to the plaint viz. the cinema theatre building complex situate in Door No.--Ashok Nagar shall be sold through 'e' auction conducted by invitation of global tenders.
b. All the known encumbrances shall be appropriately notified in the tender notice. The property shall be sold in 'as is where is' condition with all claims as they exist.
c. This direction for sale shall be treated as modification of the direction already given by the learned single Judge of this Court in CMA.NO.1900 of 1998 d. The whole process shall be executed by a retired judge of this Court. We have the consent of Justice Mr. K.P.Sivasubramaniam (Retd.)to be named as the commissioner for this delicate but onerous exercise. A separate warrant of commission will be issued setting out the terms of commission.
e. The bank shall be at liberty to act on the payment received through the 2nd defendant. It shall also initiate steps for withdrawal of proceedings before the DRT in the manner known to law.
f. The Receiver appointed by the DRT will continue in possession as Receiver of this Court. He shall continue in possession till the property is sold and made ready for delivery of possession to the purchasers.
g. The parties shall be at liberty to circulate their respective suggestions for successful conduct of the sale through global tender process within two weeks before the Commissioner appointed by the Court. The commissioner will give appropriate directions to the auctioneers that he may choose from out of persons that may be suggested by the parties for the conduct of the sale within a period of 2 months and for discharge of loans of parties. The Receiver shall hand over the property to the successful purchasers subject to the direction of the learned Single Judge.
h. The amounts paid by the 4th and 5th defendants, which have gone to discharge the loan of the 1st defendant Bank, will carry simple interest at 14% p.a. from the respective dates of loan and the amounts shall be paid from out of the sale proceeds of the theatre premises.
i. The report of the learned Commissioner will be presented before the learned single Judge exercising the original jurisdiction.
j. The amount of Rs.2.6 crores received by the 2nd defendant under the impugned transactions shall be paid back to the 7th defendant (the theatre company). The amount will carry interest at 12% p.a. from from the date of receipt of the amount from M/s Pyramid Saimira till the date of payment.
k. If the amount is not voluntarily paid, the plaintiff company will move an appropriate application for amendment of the plaint and upon payment of court fee for the relief, a decree will be drawn up in favour of the company viz., the plaintiff in C.S.No.980 of 2007 on payment of appropriate court fee and the costs of the suit will be taxed on the 2nd defendant.
l. The parties will seek appropriate direction to the court of first instance for working at the modalities of concluding the suits after the disbursals of all claims.
50. We have made the observations on the basis of the prima facie materials available through documents and believe that they shall serve the best interests of all parties. Subject to the above, the appeals are disposed of. No costs.
(KKJ) 31-10-2008 Index:Yes Website:Yes VJY/dpk P.K.MISRA,J and K.KANNAN,J Pre-Delivery Judgment made in OSA.NOs. 44, 45, 46,47, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110 and 188 of 2008 31-10-2008