Revenue Divisional Officer vs Brunton and Co. (Engineers) Ltd.

Shamsuddin, J.—This MFA is filed challenging the order of a learned single judge in Company Application No. 306 of 1986 in Company Petition No. 11 of 1983.

The Revenue Divisional Officer, Fort Cochin, who is the appellant herein filed the above application under Rule 7 of the Companies (Court) Rules, 1959, praying for cancellation of the sale effected pursuant to a notice of sale dated October 15, 1985, published by the official liquidator, High Court of Kerala, in respect of 1.35 acres of land specified in the agreement executed between the Government and Brunton and Company (Engineers) Ltd. (now in liquidation) and to direct the official liquidator to confine the sale only to the structures standing on the land and to surrender vacant site to the Government after declaring that the lease is terminated.

The material averments contained in the affidavit filed in support of the above application are as follows :

A lease agreement was executed between the director of Brunton and Company (Engineers) Ltd. (in liquidation) and the Government, covering 1.35 acres of land in Sy. No. 8/9/2 and 1173 in Fort Cochin for a period of 50 years from May 1, 1954. This lease deed was only in continuation of an earlier lease deed executed in 1864 by the then District Collector of Malabar and Brunton and Company (Engineers) Ltd. for a period of 99 years. One of the conditions in the lease deed was that the lessee will not, within the period of lease, sublet or otherwise part with the land demised or any part thereof without the permission in writing of the District Collector within whose jurisdiction the land is situated. The lessee agreed to surrender the land on termination of lease peacefully. The lessee-company is now defunct and liquidation proceedings are pending before this court The administration of the lessee-company is carried on by the liquidator appointed by this court. The official liquidator has been making regular payments of rent to the Government. Since the company is defunct, the purpose of the lease deed no more exists, and, therefore, the lease agreement has to be terminated. On October 15, 1986, the official liquidator published an advertisement inviting tenders for disposing of the property mentioned in the lease deed. On examination of the booklet published by the official liquidator, it was revealed that the sale related to the properties covered by the lease agreement as well as construction made thereon. The action of the official liquidator is illegal and without jurisdiction. It will also violate Sub-clause (3) of Clause 2 of the lease. In the circumstances, the lease agreement would be terminated and vacant land would be handed over to the applicant. The Government is badly in need of offices in important parts of the city, especially in the heart of Fort Cochin where some of the important Government offices are located in rented buildings. In the circumstances, it is necessary to cancel the proposed sale in respect of 1.35 acres of land specified in the agreement and direct the liquidator to confine the sale only to the structures standing on the land and to surrender the vacant land after declaring that the lease is terminated.

Exhibit A-3, dated February 1, 1867, the original lease, was in favour of James Oughterson, but it is not disputed that the leasehold right executed under exhibit A-3 devolved on Brunton and Company (Engineers) Ltd., and that the lease was renewed as per exhibit A-2 agreement dated March 31, 1962, with retrospective effect from the date of the expiry of the term of original lease and under exhibit A-2, the terms of the lease were extended up to 2003 A. D. There is also no dispute that the third additional respondent was the highest bidder.

The official liquidator, the Canara Bank which is the principal creditor and the highest bidder who was impleaded as an additional respondent resisted the application. The official liquidator contended that the company still exists and the fact that the company is ordered to be wound up by itself is not a sufficient or valid ground to rescind the lease. He also denied the allegation that the sale is illegal and beyond the powers of the liquidator. On the date of winding up order, the company had the leasehold interest in the land for the period up to 2003 A. D. and the unexpired portion of the lease is a very valuable right possessed by the company and as an asset of the company, the official liquidator is entitled to sell and realise the money. He also contended that Clause 2(3) of the lease agreement prohibits only voluntary sale by the company and will not apply to a sale under orders of this court in the course of the winding up in his capacity as the representative of the general body of creditors including a large number of workers in whose favour a statutory charge is created by Section 529A of the Companies Act. He also drew the attention of the court to Clause 3 (3) of the agreement which provides that when the lessees shall be required to surrender any portion of the land leased to form a public road or for some other public purpose of the Government under Clause 2(6), they shall be entitled to compensation for the land surrendered to be settled by mutual agreement between them and the Collector or by an award of the arbitrators mentioned therein.

In the counter-affidavit filed on behalf of the Canara Bank, it was contended that in view of the fact that substantial rights of the body of creditors are involved, the Collector cannot arbitrarily or unreasonably refuse to grant permission even if this court is inclined to take the view that such permission is necessary. After the terms are settled, the official liquidator can very well move for sanction and if such sanction is unreasonably withheld, it is within the competence of this court to deal with the matter. It was also contended that the restrictive covenant referred to above can have no application to a case where properties came to vest in the official liquidator by operation of law on the company being ordered to be wound up.

The learned single judge held that what exhibit A-2 prohibits is only a voluntary assignment or sub-letting and not an involuntary sale by operation of law or assignment authorised by statute. The learned single judge further held that all the assets of the company including the leasehold right in question came into the control of the liquidator on the winding up order of the company and the creditors of the company acquired the right to have the assets realised and distributed among them and, thereafter, no new rights can be created nor incomplete rights completed. In this view of the matter, the application was dismissed.

In this appeal also, the main contention raised by the learned Government Pleader is that Sub-clause (3) of Clause 2 of exhibit A-2 agreement prohibits assignment or sub-letting without the written consent of the District Collector and, therefore, the sale conducted without the written sanction of the Collector is illegal and beyond the competence of the official liquidator. It is also contended that since the official liquidator violated the terms of the agreement, the Government is empowered to terminate the lease and to get back vacant possession of the land. It is also stated that the Government is badly in need of the property to construct office buildings for the Government.

Sub-rule (2) of Rule 15 of the Land Assignment Rules, framed in exercise of the powers conferred by Section 7 of the Kerala Land Assignment Act, 1960, is also pressed into service in support of the contention that the right under exhibit A-2 agreement cannot be alienated.

We shall first deal with the objection raised to the sale on the ground of statutory provision contained in Sub-rule (2) of Rule 15 of the Kerala Land Assignment Rules. Rule 15(2) reads as follows :

"Lease or licence granted under these rules shall be heritable, but not alienable."

On the strength of the above rule, the learned Government Pleader argued that the lease created under exhibit A-2 is not alienable but only heritable and that Rule 15(2) being a statutory rule, should prevail over all agreements regarding assignment of land.

Sri Govinda Warrier, learned counsel for the Canara Bank, countered his argument by inviting our attention to Rule 1A of the Kerala Land Assignment, Rules. Rule 1A deals with exemptions and Sub-rule (i) of Rule 1A provides, that nothing contained in the rules shall apply to or affect lands situated within the limits of a corporation, municipality or cantonment, or within such other areas as the Government may, by order, specify. So also Sub-rule (5) of Rule 1A provides that the rules shall not apply to Government lands held under any special agreement with the Government In view of the above provisions, it is clear that the provisions of the Kerala Land Assignment Rules are not applicable to exhibit A-2 lease agreement and for this reason, we hold that the contentions raised by the learned Government Pleader on the basis of Sub-rule (2) of Rule 15 of the Land Assignment Rules cannot be accepted.

We will now examine whether the sale is bad, illegal, or beyond the competence of the official liquidator, for want of sanction in writing of the District Collector permitting the sale or assignment of the interest or the right under exhibit A-2 agreement. Sub-clause (3) of Clause 2 of exhibit A-2 agreement reads as follows :

"The lessees will not within the period of the lease assign or sub-let or otherwise part with the land hereby demised or any constructions . erected thereon or any part thereof without the permission in writing of the Collector of the District (hereinafter called "the Collector") within whose jurisdiction the land is situated."

Sub-clause (2) of clause 3 of exhibit A-2 which deals with the consequence of a breach of a covenant or condition reads as follows :

"(2) That whenever there shall be a breach of any of the covenants or conditions to be observed by the lessees herein contained, the lessor may re-enter the land and determine this lease and to proceed against the lessees under the Land Conservancy Act of 1958."

Counsel for the respondents argued that the restrictive covenant contained in Sub-clause (3) of Clause 2 of exhibit A-2 agreement will be applicable only to voluntary sale and not to any involuntary sale by operation of law or execution of a decree and that a sale by the official liquidator is hot a voluntary sale, and, therefore, the restrictive covenant contained in Sub-clause (3) of Clause 2 and the right of re-entry and termination of lease provided in Sub-clause (2) of clause 3 of exhibit A-2 is not applicable to the present case. In support of their contention, learned counsel for the respondents have placed before us some decisions which took this view.

In the decisions in Tamaya Bin Annaya v. Timapa Ganpaya ilr [1881] 7 Bom 262, Nil Madhab Sikdar v. Narattam Sikdar ILR [1890] Cal 826, Golak Nath Roy Chowdhry v. Mathura Nath Roy Chowdhry ILR[1891] Cal 273, Satish Chandra De v. Gagan Chandra Rudre [1924] 78 IC 802, and Kasturi Mt. v. Baliram and Deokisan [1924] 79 IC 117, it was held that the restrictive covenants will not operate against an involuntary sale, such as an assignment by operation of law or a sale under an execution. However, none of these decisions related to a sale by an official liquidator, but it is clear from the above decisions that the restrictive covenants and the consequences provided for breach thereof are not applicble to involuntary sales.

Learned counsel for the Canara Bank has brought to our notice a recent decision of the Calcutta High Court in Kailash Financiers (Calcutta) Pvt. Ltd. (In Liquidation), In re [1982] Tax LR 2439, and also another decision of the Allahabad High Court in West Hopetown Tea Co. Ltd., In re ILR [1890] All 192. Both these cases related to assignments in breach of covenants in winding up proceedings. In the latter case, West Hopetown Tea Co. Ltd., In re, the Allahabad High Court observed as follows (at page 197) :

"This was an application on behalf of the liquidator of the West Hopetown Tea Company Limited, for sanction u/s 144 of the Indian Companies Act to sell the movable and immovable property of the company by private contract with power to transfer the same to any person or company either as a whole or in separate lots. The application is objected to by Mr. Alston, who appears on behalf of the trustees of a deed of trust of the 11th September, 1885, and by Mr. Mullaly on behalf of Mr. Hay, one of the shareholders of the late company. Mr. Alston''s objection is that the lease contained a covenant against assignment without the previous consent of the lessors, and he relies on Sections 10 and 12 of the Transfer of Property Act. The covenant is not a covenant against assignments by operation of law, or against assignments authorised by statute. The group of sections among which Sections 10 and 12 come relate to transfers of property by act of parties. That group of sections is headed by a portion of the Act which indicates that the sections relate to transfers by act of parties. u/s 144(c) of the Indian Companies Act, the court has power to give sanction to a liquidator to sell, and that power overrides a private contract against assignment by the parties. Mr. Alston''s objection, in my opinion, consequently fails."

In Kailash Financiers'' case [1982] Tax LR 2439, the Calcutta High Court, after quoting the passage from the Supreme Court''s decision in Ramesh Himmatlal Shah Vs. Harsukh Jadhavji Joshi, to the effect that in the absence of clear and unambiguous legal provisions to the contrary, it will not be in public interest nor in the interest of commerce to impose a bar on sale of flats by a tortuous process of reasoning, made the following observations (at page 2452) :

"In my view, the same observation also appears to be applicable to the facts of the present case. On the other hand, the Companies Act, 1956, and the rules made thereunder if it is read as a whole and the aim, object and intention is gathered from the relevant sections and rules which I have referred to above and it will be quite clear that although not. in so many terms the property of the company (in liquidation) has vested in the court or the liquidator, but the properties are in the custody of the court and the liquidator is the custodian and for the interest of the creditors and contributories and now it is also for the public interest, the court must be deemed to have been vested with the rights to deal with such a valuable asset like monthly tenancy and leasehold right of a company (in liquidation) and the sale is by an order of the court and amounts to sale by operation of law and is an involuntary sale. The court can impose any term so as to safeguard the interest of the landlords and the lessors. There cannot be any dispute as to the legal position that the corporate existence of the company continues till dissolution and the liquidator steps into the shoes of the company but he is under the control and supervision of the court and whatever he does particularly in respect of sale of the assets of the company is pursuant to the order and sanction of the court. Therefore, the court has the supreme control and say in the matter to deal with the assets and there is no prohibition in the Companies Act, 1956, and the rules made thereunder in India to interpret the provisions as to deprive the court of the power of sale of the monthly tenancy and the leasehold right which are undoubtedly and undisputedly very valuable assets in the present day, if not in some cases, it is the only asset available out of the sale proceeds of which the creditors or the contributories can be paid to some extent. Therefore, if the sale of the same cannot be effected by the court through the liquidator, it will be against public interest and thereby dishonest persons who have misappropriated the assets of the company and deprived the creditors of their legitimate dues will be benefited as in some cases the ex-directors or their nominees or their wives and relations are the landlords or the lessors. It is also sometimes that on the property of the lessor, the company has built a very valuable asset being the factory building and installed plants, machinery, etc., and, therefore, the assets will be of scrap value only, which is detrimental to public interest and against the interest of the creditors and contributories of the company (in liquidation).

The provisions of the Companies Act, 1956, particularly Sections 447, 451, 456, 457, 458, 467(1), 468, 531, 531A, 535, 536 and 537 clearly show that it is the court which controls and supervises the liquidation proceedings and directs by orders search and directs the liquidator to realise the assets of the company and pay the liabilities according to the provisions of the Companies Act, 1956, and rules made thereunder."

19 In this view of the matter, the Calcutta High Court held that the sale by the official liquidator is an involuntary sale.

The Supreme Court had occasion to consider the nature of sale in liquidation proceedings in Parasram Harnand Rao Vs. Shanti Parsad Narinder Kumar Jain and Another, In that case, the landlord executed a lease in respect of the disputed premises in favour of respondent No. 2. A suit was brought by the appellant for eviction of the tenant for conversion of the user of the premises. The prayer for possession was disallowed but a decree for arrears of rent was passed and it was held that Laxmi Bank was the real tenant. Subsequently, the Bombay High Court ordered the bank to be wound up and in the winding up proceedings, the High Court appointed an official liquidator who sold the tenancy right to respondent No. 1. The landlord filed an application under the Delhi Rent Control Act for eviction of Laxmi Bank and a decree for eviction was passed. Respondent No. 1 filed a suit for a declaration that he was the tenant of the landlord. The suit was dismissed for non-prosecution and an application to set aside the ex parte decree was dismissed and the appeal against the order also failed. Thereafter, respondent No. 1 filed an application u/s 25 of the Delhi Rent Control Act, for recalling the warrant of possession issued by the court in pursuance of the decree. The Rent Controller allowed the application, but on appeal by the landlord, the Rent Control Tribunal reversed the order and dismissed the tenant''s application. The High Court reversed the order of the Tribunal and restored the order of the Rent Controller. An appeal was preferred to the Supreme Court by special leave. Relying on Section 14(b) of the Delhi Rent Control Act which provided sub-letting or assigning as a ground for eviction, it was argued that the transfer to the appellant by the official liquidator of the tenancy rights to the first respondent came within the mischief of Section 14(b) of the Act. Dealing with the question, the Supreme Court made the following observation (at page 1656) :

"As regards point No. 3, the High Court relying on a decision of the Calcutta High Court in Krishna Das Nandy Vs. Bidhan Chandra Roy, , has found that as the transfer in favour of respondent No. 1 by the official liquidator was confirmed by the court, the status of the tenant by respondent No. 1 was acquired by operation of law and, therefore, the transfer was an involuntary transfer and the provisions of the Rent Control Act would not be attracted. After a careful perusal of the Calcutta case, in the first place it appears that the section concerned has not been extracted and we are not in a position to know what was the actual language of the section of the Bengal Act. Secondly, in our opinion, the official liquidator had merely stepped into the shoes of Laxmi Bank which was the original tenant and even if the official liquidator had transferred the tenancy interest to respondent No. 1 under the orders of the court it was on behalf of the original tenant. It was undoubtedly a voluntary sale which clearly fell within the mischief of Section 14(1)(b) of the Delhi Rent Control Act. Assuming that the sale by the official liquidator was an involuntary sale, then it undoubtedly became an assignment as provided for by Section 14(b) of the Delhi Rent Control Act. Section 14(b) runs thus :

''14(b). --That the tenant has, on or after the 9th day of June, 1952, sub-let, assigned or otherwise parted with the possession of the whole or any part of the premises without obtaining the consent in writing of the landlord.''

The language of Section 14(b) is wide enough not only to include any sub-lease but even an assignment or any other mode by which possession of the tenanted premises is parted with. In view of the wide amplitude of Section 14(b), we are clearly of the opinion that it does not exclude even an involuntary sale. For these reasons, therefore, we are unable to agree with the view taken by the High Court."

In view of the above ruling of the Supreme Court, the decisions of the Allahabad High Court in West Hopetown Tea Co. Ltd., In re ILR [1890] All 192 and of the Calcutta High Court in Kailash Financiers (Calcutta) Pvt. Ltd.''s case [1982] Tax LR 2439 to the effect that the sale by the official liquidator is an involuntary sale, cannot be considered to have . laid down the correct law. It is true that the decision of the Supreme Court in Parasram Harnand Rao Vs. Shanti Parsad Narinder Kumar Jain and Another, , was noticed by the Calcutta High Court in the decision in Kailash Financiers (Calcutta) Pvt. Ltd. [1982] TLR 2439 but it was distinguished saying that the Supreme Court did not declare that even if the sale was within the mischief of Section 14(1)(b) of the Delhi Rent Control Act, it was void or the court had no power to direct the sale. We are unable to find any such distinction. The Supreme Court held that the official liquidator has only stepped into the shoes of the company under liquidation and if he transfers the interest under the order of court it is on behalf of the original tenant and it is undoubtedly a voluntary sale. In these circumstances, we are unable to hold that the proposed sale in this case is an involuntary sale and, therefore, is not in any way affected by the restrictive covenant contained in exhibit A-2 agreement and the consequence provided therein for breach thereof. In this case, unfortunately, the decision of the Supreme Court was not brought to the notice of the learned company judge and the learned judge did not have the benefit of the observations contained in the judgment. The view taken by the learned company judge that the sale by the official liquidator is an involuntary sale cannot be upheld in view of the above ruling of the Supreme Court.

However, the above finding does not lead us to a situation in which we are required to allow the prayers in the application and cancel the proposed sale by the official liquidator and direct the liquidator to confine the sale only to the structures standing on the land and to surrender the vacant site to the Government after declaring that the lease is terminated, No sale of the land is effected and it is still open to the official liquidator to apply for necessary sanction to the District Collector. The District Collector will consider the application on merits, and dispose of the same after considering all relevant factors. We have no doubt that the District Collector will consider also the interest of the Canara Bank which is a nationalised bank as well as the interest of the other creditors and shareholders of the company in disposing of the application for sanction. What is provided in Sub-clause (2) of Clause 3 of exhibit A-2 agreement in case of breach of covenants or conditions, is the right of the lessor to re-enter and determine the lease and proceed against the lessees under the Land Conservancy Act.

In the circumstances, the present application is premature. The official liquidator is directed to file the necessary application before the District Collector for sanction to effect the sale immediately. The applicant or the District Collector who is competent to represent the Government will be at liberty to approach the company court again for appropriate orders at a later stage after the disposal of the application for sanction for sale by the District Collector, if necessary.

The MFA is disposed of as above. There will be no order as to costs.