West Bengal Small Industries Development Corporation Limited and Ors. v. Official Liquidator and Ors.

The judgment makes it explicit that audi alteram partem should be followed before depriving parties of any of their rights or discharging them of their liabilities. It is essential that a notice should be given to such occupants, an opportunity of hearing should be granted to the parties concerned and procedure must be followed according to law.
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Introduction

The relationship between the tenant and landlord is one area of law where a lot of legal dispute arises. Long term leases in cases where the lessee is a company add to the possibility of more disputes. The situation gets further complicated if the tenant mortgages a leased property to a third party. However, all of this is brought to the foreground when the lessee-company is liquidated. The responsibility of the official liquidator increases multifold in these circumstances.

The interests of lessor, lessee and mortgagee have to be determined judicially in accordance with the current legal regime. Section 535 of the Companies Act, 1956 provided for directions for dealing with such situations. The judgment of West Bengal Small Industries Development Corporation Limited and Ors. v. Official Liquidator and Ors.[1]discusses the importance of section 535 of Companies Act, 1956 and its impact on rights of the parties involved.

Facts

On 14th Feb, 1969 an indenture of lease was signed between the Governor of the State of West Bengal and the Wellman Incandescent Limited whereby a 99 years lease commenced from 1st Sept, 1968 with an option of renewal. Through another indenture of lease dated 19th Feb, 1991 the State of West Bengal demised to the company an area of 260 sq. ft at a monthly rental of Rs. 26.72 which would to be reduced to Rs. 8.63 per year after the expiry of 30 years.

After the winding-up order (dated 24th September 2002) was passed by a learned single judge in BJFR case no. 55 of 1998[2], the West Bengal Small Industries Development Corporation (hereinafter referred to as “WBSIDC”) filed an application under Section 535 of the Companies Act, 1956. It prayed for a direction upon the Official Liquidator to hand over vacant possessions of the leasehold interest and alternatively, direct the Official Liquidator to disclaim possession of the said leasehold interest. It also asked to direct the Official Liquidator to pay off the outstanding dues of Rs. 12.650. However, the learned company judge rejected the application. Aggrieved by this decision, WBSIDC appealed before the Division Bench of this Court. The Division Bench set aside the order passed by the learned Company Court.

Dissatisfied by the decision, the applicant named Stressed Assets Stabilization fund filed the application to review the order of the Division Bench of the Court. The applicant was a body constituted by the Government of India for administering and managing the Stressed Assets of IDBI with a view to recover the amount due thereunder. On 30th Sept, 2004 a deed of assignment was executed by IDBI wherein it unconditionally and irrevocably sold, assigned, transferred and released to the applicant all the loans granted by it. The IDBI had granted loans to the company in liquidation against the mortgage and hypothecation of all assets of company.[3]Thus, the applicant was the secured creditor.

The Calcutta HC allowed the review application and held that although Section 535 of the Companies Act 1956 wasn’t applicable in the present case, it was the correct position of law to hear both the parties. Therefore,it send the matter back to the learned Trial judge to determine whether there was any violation of lease and the validity of the mortgage. The High court set aside the order  of learned single judge of Trial Court, recalled the order of Division Bench and ordered the matter to be open for fresh hearing.[4]

Contentions from both the sides

The applicant contends that in lease deed executed by the State of West Bengal in favor of the company, there was a specific provision granting the power to lessee to mortgage, charge and hypothecate or otherwise encumber the leasehold interest in the demised premises which included the land, sheds, fittings, fixtures and structures, etc., to any LIC and any Bank or Financial Corporation to secure any loan. In these circumstances, the IDBI granted a loan of Rs. 13 crores to the company. The total amount to be paid to the applicant on date of winding up was Rs. 42, 36, 68,780. Therefore, the applicant as secured creditor filed the application to review the order which had prejudicially affected its interest. It was also argued that the order should be recalled as the applicant had not been given any opportunity of presenting its case. [5]

The appellant, WBSIDC, questioned the authority of the applicant to file the application. According to the appellant, there was a breach of terms of lease committed by the company and hence it had right to immediate possession of the premises. Since there is no error apparent on the order to be reviewed hence no interference is possible.

Judgment of the court

WBSIDC filed an application under Section 535 of the Companies Act, 1956[6]. The learned Company Judge rejected the application and observed that the leasehold interest of the company was an asset of the company. Therefore, the same had to be taken into consideration by the Official Liquidator at the time of sale of assets of the company. Since the Court had already fixed the sale of assets of company, nothing can be done.

However, the Division Bench, hearing the appeal from WBSIDC, decided to set aside the order of the learned Company Court. It observed as follows- “There are two courses now open. The first course is the hardline course whereby we would be compelled to ask the Official Liquidator formally to disclaim the tenancy and summarily put the appellant back in possession of the land by removal of all sheds and machinery lying thereon. The other course, a milder one and we hope a reasonable one, which we propose to adopt, would give the parties a little more time to negotiate on a reasonable basis. As such, we allow the Official Liquidator may occupy the premises under the supervision of the Company Court until further orders, but for such occupation from the month of July, 2004 (sale being completed and money paid in or about mid-June, 2004) the Official Liquidator will go on paying out of the sale proceeds received by them a sum of Rs. 30,000/- per month to the appellant. This will be paid as expenses in liquidation, which take priority over everything else. This arrangement will continue until N.R.G: Trading order succeeds in obtaining negotiated terms with the appellant or the land is cleared and possession thereof is given back to the appellant fully.”[7] Thus, it disposed of the appeal accordingly.

Being aggrieved by the said decision, the applicant filed an application to review the order of Division Bench of the Court. The Calcutta High Court relied on the findings of division bench and held that the terms of the lease were not onerous as the appellant gave lease of the land to the company at a very nominal rate and it also had an automatic forfeited clause in case of non-payment of rent or for not running of the factory. Therefore, the court stated that since terms of lease were not onerous so the appellant could not get relief in terms of section 535 of the Companies Act, 1956. It pointed out that this was not considered by the Division Bench. [8]

However, according to the High Court it is settled position of law that even in case of application being filed under wrong statutory provision, if the Court has jurisdiction to grant that relief it can go ahead and do so. It acknowledge that the property was in possession of the Court through Official Liquidator so the appellant-lessor was entitled to approach the Court for release of the land provided it could show that it had the right to get back immediate possession for the wrong committed by the company before the order of winding up was passed. It observed that the Division Bench failed to acknowledge this point in its decision. The Division Bench also didn’t record its satisfaction in the order that tenancy was determined according to law after giving an opportunity to the company before liquidation. The Court also pointed out the fact that in the application before the Company Court it was not mentioned by the appellant that the non-functioning period was continuous before the order of winding up for more than six months thus giving rise to the claim of appellant-lessor to claim the possession of property.

Subsequently, the High Court also analyzed the cases cited by the Counsel of Appellant. For State of West Bengal and Anr. v. Banalata Investment Pvt. Ltd.[9] it observed that when a property is purchased by the Government, the tenancy would be guided by the West Bengal Government Premises (Tenancy Regulation) Act, 1976. The same law is applicable in the present case. After this, it relied on United Bank of India v. Official Liquidator and Ors.[10] where it was held that when property is in possession of the Court then it is the obligation of lessor to satisfy the Company Court that because of the wrongful conduct of the tenant a right to eject him/her had accrued and if the company Court is satisfied, the landlord can take recourse to appropriate proceedings thus permitting official liquidator to contest the proceedings. However, if the Company Court is satisfied that such determination is already made then lessor acquires the right immediately. But no question of suo motu surrender of tenancy can arise unless terms of lease are onerous. [11]

Through an unreported decision of Lal Mohan Nandy v. Executive Director, West Bengal Small Scale Industries Development Corporation Limited, the High Court held that West Bengal Government Premises(Tenancy Regulation) Act, 1976[12] could not take away the right so lessee created by the lessor as the deed was entered into before the operation of the Act. The Act could  only determine the tenancy and the mode of taking possession but only on violation of the terms of lease. It was all to be done after giving an opportunity to the lessee to present his side.

After observing all this, the Court recalled the order to be reviewed and send it back to the Trial  Judge for considering the questions- whether on the date of winding up, there was any breach of terms of lease by lessee and whether the mortgage was created in name of the applicant, It directed that after determination of all these questions the Trial judge could adjudicate the matter keeping in mind the interest of the mortgage. Both the orders of learned Company Judge and Division Bench were recalled and matter was opened for fresh hearing.[13]

The application was allowed with no costs.

Analysis

Legislative Provisions- Section 535 dealt with disclaimer of onerous property in case of company which is being wound up. In the present judgment, the Section wasn’t applicable as the terms of lease deed were not onerous. The word onerous as defined by Merriam Webster means involving, imposing or constituting a burden.[14] The Act of 1960 substituted the “the company shall be deemed to have adopted it” for “he shall be deemed to have adopted it,” The Companies (Second Amendment) Act, 2002 substituted tribunal for Court in the Section 535.

Section 535 of the Companies Act, 1956 bestows a right on the official liquidator to disclaim property of the company in liquidation which has become a liability. Thus, it cannot be used for winding up of the company. The Court can also direct the Official Liquidator to disclaim a property at the request of some other interested parties.

Case-laws: In Ashoka Ghosh v. Official Liquidator[15] it was held that the leasehold interest being an asset of the company in liquidation, possession of the premises from actual occupants could be taken only in accordance of due process of law. The Court in case of Ravindra Ishwardas Sethna and Another v. Official Liquidator and Another[16] held that the Liquidator with the sanction of the Court can carry on the business only to the extent it is necessary for the beneficial winding up of the company. In United Bank of India v. Official Liquidator, the Court in para 10 observed that- “The intention of Section 535 is to protect the creditors of the company in liquidation and not mulct them by reason of onerous covenants. The power under section 535 is not to be lightly exercised. Due care and circumspection have to be bestowed. It must be remembered that an order permitting disclaimer, while it frees the company in liquidation of the obligation to comply with it, puts the party in whose favour the covenants are, to serious disadvantage.”[17]

Going through all these cases, it appears that the Court in the present case was correct in its approach. The Division Bench erred in recording its satisfaction if tenancy is determined in accordance with law. It is apparently clear that the opportunity of hearing should be provided to the company in liquidation-tenant before ordering for disclaimer.

Although Section 535 was not applicable in the present case, the principle of audi alteram partem has to be maintained strictly. The High Court by recalling the order and sending it back to the lower court took the appropriate step. This judgment is remarkable in the way that it prudently balances the rights of landlord-tenant with that of mortgagee in grave situation such as liquidation of the company.

Conclusion

Liquidation of a company is a huge event which not only affects the rights and liabilities of company but also that of secured creditors, landlords, mortgagees, etc. This judgment is a prime example of balancing these rights and liabilities equally. Section 333 of the Companies Act, 2013[18] corresponds with the Section 535 of the Companies Act, 1956[19]. The judgment was followed in Phatu Rochiram Mulchandani v. Karnataka Industrial Areas Development Board[20], Bangur Brothers Ltd. v. Official Liquidator and Ors.[21], Renu Aggarwal v. Income Tax Officer[22]wherein the courts adopted the same approach in regard to balancing the rights of parties involved during liquidation of a company. These decisions also emphasized that the courts should be very careful while deciding the rights and liabilities of concerned parties. The courts should ensure that reasonable opportunity of hearing has been provided to each party involved. It maintains the validity of the decision in long run.

The judgment makes it explicit that audi alteram partem should be followed before depriving parties of any of their rights or discharging them of their liabilities. It is essential that a notice should be given to such occupants, an opportunity of hearing should be granted to the parties concerned and procedure must be followed according to law. In future, the courts will have to comply with this approach to ensure the validity of their decisions. It also ensures transparency in the system. In light of these factors, the judgment stands correct in law.

Also read Group Of Companies Doctrine and Indian laws


[1] [2006]133CompCas717(Cal).

[2]Id, para 2.

[3]Id, paras 3 and 4.

[4]Id, para 20 and 21.

[5][2006]133CompCas717(Cal).

[6] Companies Act 1956, Section 535.

[7][2006]133CompCas717(Cal).

[8][2006]133CompCas717(Cal).

[9]State of West Bengal and Anr.v. Banalata Investment Pvt. Ltd, [2001] 3 SCR 241.

[10]United Bank of India v. Official Liquidator and Ors.,(1994) 1 SCC 575,

[11] (1994) 1 SCC 575,

[12] West Bengal Government Premises (Tenancy Regulation) Act, 1976.

[13][2006]133CompCas717(Cal).

[14]The Merriam Webster Dictionary (Revised Edition, Merriam Webster, 2009).

[15]AshokaGhosh v. Official Liquidator,(2003) 3 Cal LT, 608.

[16]RavindraIshwardasSethna and Another v. Official Liquidator and Another, (1983) 4 SCC 269.

[17]United Bank of India v. Official Liquidator,(1994) 1 SCC 575.

[18] Companies Act 2013, Section 333.

[19] Companies Act 1956, Section 535.

[20] (2015) 5 SCC 244.

[21] 2018 (2) CHN 730.

[22] (2014) 266 CTR (All) 80.

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