United Bank of India v. Official Liquidator.

The author in this article discusses the role of an Official Liquidator and the fact that Judgments on liquidation and the role of the liquidator are instrumental in company law
Estimated Reading Time: 8 minutes

Introduction

A liquidator is an individual who conducts the entire process of liquidation of a company. When a company is about to wind up, it is required to realize its assets and distribute it among the debenture holders, creditors, shareholders and other stakeholders. For fulfilling these obligations, the liquidator is appointed to complete the procedures before the company ceases to exist. The process of winding up is of two kinds: Compulsory winding up and voluntary winding up. Hence this case of the United Bank.

An Official Liquidator is appointed at the time of compulsory winding up. Asan officer of High Court who is appointed when the order of the winding up is passed, the official liquidator has certain duties bestowed upon him to perform under the Companies Act and he has the obligation to fulfill these requirements in respect of compulsory winding up of a company as directed by theHigh Court. In this case, the Naskarpara Jute Mills Co. Ltd. was wound up under the orders of the High Court at Calcutta on 28th July, 1981 and the Official Liquidator was appointed its liquidator.

Factual Background

On 2nd July, 1931, the company had taken on lease from Bharat Abhyudaya Cotton Mills Ltd.7 bighas of land under a deed. The lease was for 99 years with renewal permitted on the same terms for another 99 years. The rent under the lease was Rs. 1200 per annum. On 25thSeptember, 1935 the interest in the land was purchased by Brij Mohan Saraogi which was settled upon the Brij Mohan Saraogi Charitable Trust. At the time of the winding-up petition, the company had been in default of rent and consent terms had been decided stating that the company had undertaken to pay the arrears.

A suit was filed by the United Bank of India, on 13thAugust, 1981, against the company in liquidation for a decree in the sum of Rs. 1,81,07,623.64 with interest up to 31stJuly, 1981.[1]The High Court, as a part of the winding-up process, directed the sale of the property and assets of the company. The sale was to be executed by the Official Liquidator as directed by the Court. Sealed offers were received by 3rd December, 1982. However, the Trust opposed the sale, thereby leading the deferment of the consideration for the offers. Subsequently, on 25th January, 1982, the Trust requested the Official Liquidatorto disclaim the land and surrender its possession to the Trust as it was burdened with onerous covenants.[2]

Procedural history

A Judge’s summons was taken out by the Trust on 31st January, 1983 to direct the Official Liquidator under Section 535[3] of the Companies Act to disclaim the land because it was burdened with onerous covenants. The Bank opposed the Judge’s Summons and argued that the land was a security for the loans it had advanced to the company in liquidation and that it should be available to the creditors. It was stated that the covenants of the lease were not onerous and there was a saleable interest in the land. On 4thFebruary, the Company Judge directed the Official Liquidator to return the offers to the parties who had made them and later the Judge’s Summons was made absolute and the Official Liquidator was directed to disclaim the land and hand over possession to the Trust.[4]

Against this order, the Bank appealed in front of a Division Bench which held that the lease of the land stood terminated by the Trust’s notice. The Bench held that the Official Liquidator was not in a position to apply for any relief against forfeiture by tendering arrears of rent and interest. The land ceased to be a part of the assets of the company in liquidation and it had no right or interestin it. He was liable to pay mesne profits for such wrongful possession or occupation in addition to the arrears of rent. Therefore, the land was held to be onerous.[5]

Subsequently, aspecial leave petition to appeal against the judgment and order of the Division Bench was filed. On 28thJanuary, 1987the workers’ unions of the company in liquidation wanted to discuss the possibility of taking over the interest of the Trust for running the mills of the company. The clients intended to buy the interest of the Trust for Rs. 30,00,000. It was directed that the land and assets of Naskarpara Jute Mills Co. Ltd.andthe leasehold land were to be sold by the Liquidator by 31stAugust, 1987. The Liquidator was to pay a sum of Rs 7,50,000 to Brij Mohan Saraogi Charitable Trust.[6]

The offer of Shyam S. Agarwal to purchase the assets as well as the properties of the companywas accepted on 9th May, 1988. The Court decided that the consideration price would be Rs. 2,60,00,000 out of which he was to pay Rs. 30,00,000 within two weeks with the United Bank of India in the name of the Official Liquidator. The remaining amount was to be paid in 24 equal monthly instalments. Additionally, he was to furnish a bank guarantee for Rs. 2,30,00,000 within six weeks. All the dues of the workers were to be settled as well. However, Agarwal did not make the payments and as a result, contempt proceedings were initiated against him. It had transpired that he had been acting on behalf of Triputi Jute Industries.[7]

On 22ndOctober, 1992, the Court discussed whether he was entitled to claim the price of the land which had been sold to Triputi. The Court decided that the rights of the Trust and its creditorshad to be determined either by the Court or by any other authority under its directions. On 8thSeptember, 1993, the Court observed that Rs. 1.98 crores had been deposited in the Court by Triputi, thereby raising various other contentions for final adjudication.

Issues

  1. Whether the previous appeal is infructuous?[8]
  2. What should be paid by the Official Liquidator out of the funds of the company in liquidation to the Trust by way of compensation for its rights in the land?[9]
  3. Whether the land was burdened with onerous covenants?[10]
  4. Whether Triputi should be made liable to pay interest at the rate of 15% per annum?[11]

Summary of the decision and judgement

The Court’s order of 30th April, 1987 made the appeal infructuous as it directed the Official Liquidator to sell the assets and properties of the company in liquidationand to pay to the Trust Rs. 7,50,000, after the adjudication of all the rights of the partiesin respect of Trust’s rights over the land. The land was to be sold free of the lease. Consequently, the Court had to assess the amount to be paid by the Official Liquidator from the funds of the company in liquidation to the Trust as compensation for its rights in the land. Since the Trust received the amount of Rs. 7,50,000as per the order dated 30th April, 1987, it directed the Official Liquidator to pay the balance amount within 12 weeks.[12]

The Court was not satisfied with the interpretation of Section 535[13] by the Division Bench. The Court held that the High Court may give leave to the Official Liquidator to disclaim the landwhich forms a part of the property of the company in liquidation if burdened with onerous covenants. As to Triputi’s liability, it was decided that the payment was to be made with interest upon the amount of Rs 1,98,00,000 at the rate of 15% per annum from 1stJanuary, 1989 till payment.[14]

The previous judgment,as well as the order under appeal,was set aside. The Official Liquidator was directed to pay the Brij Mohan Saraogi Charitable Trust the remaining Rs. 2,50,000 out of the funds of the company in liquidation in full and final settlement of its claims

Analysis

The Official Liquidator plays an important role in the time of winding up of a company. He is appointed starting from the date of the order of the winding up and is given the custody of the company’s property and assets. The Court,in this case,held that when the Official Liquidator sells any property of the company, he cannot and does not hold out any guarantee or warranty and in particular he offers no warranty of title. Therefore, the property remains the property of the company.Under normal circumstances, the owner goes after some property in order to purchase it and take ownership. However, the property falls into the custody of the Official Liquidator without actually seeking it.

Creditor’s welfare is the main objective behind the appointment of an Official Liquidator. The intention of Section 535,[15] according to the Court, was to protect the creditors of the company in liquidation and not swindle them using onerous covenants. Indeed, the power under this Section is to be exercised with due care and circumspection.

Conclusion

Judgements on liquidation and the role of the liquidator are instrumental in company law. Subsequent cases have upheld the findings of the Court in this case. In V.Sambandan v. The Punjab National Bank,[16] the auction purchaser sought for diminution of the price. It was held that having purchased the property on such terms, a claim for diminution in the price on the ground of defect in title or description of the propertyis invalid. 

The High Court of Madras threw some light on the role of an Official Liquidator. In TCI Distribution Centers v. Official Liquidator,[17]the Official Liquidator had sold certain properties through an auction-sale. The auction-purchaser found out that the properties were not the same as described in the sale advertisement. The Court stated that under Section 456[18] of the Companies Act, the Official Liquidator can take custody of all the properties of the company during winding up. However, unlike cases of insolvency where property vests in the assignee, the property of the company in liquidation does not vest in the Official Liquidator.

Winding up is a complex process that requires skill and diligence. Maximizing the return for creditors is the liquidator’s main responsibility. Additionally, they have the responsibility to act impartially and maintain confidentiality. The powers conferred upon the liquidator puts him in a fiduciary relationship with the company. Therefore, the exercise of his authority should be within the scope of the law.

Also read Section 316: Company Liquidator to Submit Report on Progress of Winding Up


[1]United Bank of India v. Official Liquidator, (1994) 79 CompCas 262, para. 3.

[2]Id. at para 4.

[3] The Companies Act, 1956, No. 1, Acts of Parliament, 1956, Section 535.

[4]United Bank of India v. Official Liquidator, (1994) 79 CompCas 262, para. 4.

[5]Id. at para 5.

[6]Id. at para 8.

[7]Id.

[8]Id. at para. 9.

[9]Id. at para. 10.

[10]United Bank of India v. Official Liquidator, (1994) 79 CompCas 262, para. 11.

[11]Id. at para 12.

[12]Id. at para 9.

[13] The Companies Act, 1956, Section 535.

[14]United Bank of India v. Official Liquidator, (1994) 79 CompCas 262, para. 17.

[15] The Companies Act, 1956, Section 535.

[16]V. Sambandan v. The Punjab National Bank, MANU/TN/3041/2009.

[17]TCI Distribution Centers v. Official Liquidator, (2010) 153 CompCas 437.

[18]The Companies Act, 1956, Section 456.

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