# PHATU ROCHIRAM MULCl:IANDANI v. KARNATAKA INDUSTRIAL AREAS DEVELOPMENT BOARD & ORS

- **Citation:** [2014] 3 S.C.R. 710
- **Court:** Supreme Court of India
- **Decided:** 2014-03-12
- **Case number:** Civil Appeal No. 3803 of 2014
- **Bench:** S.S. Nijjar, A.K. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/phatu-rochiram-mulcl-iandani-v-karnataka-industrial-areas-development-board-ors-29641
- **Pages:** 34

## Headnote

KARNATAKA INDUSTRIAL AREA DEVELOPMENT
C ACT, 1966:
Lease-cum-sale agreement - Allotment of plots to
company for setting up factory/industry - Industry not set up -
Company in liquidation - Agreement terminated by Board -
0
Held: Right to purchase the plots m question after the expiry
of the lease period could accrue in favour of the Company
only on fulfilling the covenants stipulated in clause 2(P) - On
Company's failure to do so, Lease Agreement gave right to
the Board to determine lease and resume the land - It is, thus,
in the nature of Lease-cum-Sale Agreement, which started
E with lease- and could culminate into sale - Lease came to be
determined by Board because of the breach of covenants of
lease agreement - Therefore, it cannot be accepted that
Company had become the owner of the plots in question.
F
Validity of termination notice - Held: Company had
committed clear breach in not completing the project and
setting up the factory within the time given on the Lease
Agreement or the time as extended by the Board - In such
circumstances, the Lease Agreement gave a definite right to
G the Board to terminate the lease - Board was within its right
to terminate the lease as provided in Lease Agreement.
H
Requirement of prior permission of Company Court
before terminating the lease - Notice of cancellation of lease
710
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA
711
INDUSTRIAL AREAS DEVP. BOARD
given after the winding up order - Held: Serving of cancellation
A
notice simplicitor would not come within the mischief of s.537
of Companies Act, as that by itself does not amount to
attachment, distress or execution etc - No doubt, after the
commencement of the winding up, possession of the land
could not be taken without the leave of the Court - Therefore,
B
no prior permission was required by the Board for cancelling
the lease - Companies Act, 1956 - s.537.
COMPANIES ACT, 1956:
s.536 - Company in liquidation - Resumption of plots C
allotted to company, on its failure to set up Factory/industry -
Application for permission by Board - Held: Termination
notice by the Board is valid - Likewise, order of Company
Judge permitting the Board to take possession of land in
question is legal and justified.
D
LOCUS STAND/:
Company in liquidation - Cancellation of lease-cum-sale
agreement in respect of two plots allotted to Company, for its
failure to set up factory/industry - Order of Company Judge
E
to OL to hand over possession of plots to Board - Challenged
by one of the shareholder/Promoter of Company - Held:
Appellant is very much concerned IA(ith the outcome of the
proceedings in as much as, if the ownership of the land in
question vests with the Company, it may reduce his personal
F
liability, as he has given guarantees to the financial
institutions for the loan advances to the Company.
Respondent No.2-company was allotted an industrial
plot on lease-cum-sale basis for a period of 11 years
G
under a lease agreement dated 21.12.1984 on certain
terms and conditions. On 10.01.1989 the Board assigned
an additional plot to the company. However, no leasecum-sale agreement was executed for the latter allotment.
Possession was given to the company on 19-01-1989.
H
712
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A Meanwhile proceedings for winding up were initiated
against the company and by order dated 15-01-1996 the
company was wound up. Respondent no.1 Board
terminated the agreement in respect of the two industrial
plots allotted to the company. Subsequently, the Board
8 filed an application before the Company Judge seeking
resumption of the two plots. The Company Judge
directed the official Liquidator to handover possession
of the said tow plots to the Board. The appellant claiming
himself to be promoter/share holder of the company
c challenged the order in an appeal before the Division
Bench of the High Court. The appeal was dismissed.
D
E
F
G
H
In the instant appeal, the questions for consideration
before the Court were:
Q.1
Whether the Company had

## Text

_Characters 0–39,921 of 66,244. This is a partial read: ask again with offset=39921 for what follows._

A
B
[2014] 3 S.C.R. 710
PHATU ROCHIRAM MULCl:IANDANI
v.
KARNATAKA INDUSTRIAL AREAS DEVELOPMENT
BOARD & ORS.
(Civil Appeal No. 3803 of 2014)
MARCH 12, 2014
[S.S. NIJJAR AND A.K. SIKRI, JJ.]
KARNATAKA INDUSTRIAL AREA DEVELOPMENT
C ACT, 1966:
Lease-cum-sale agreement - Allotment of plots to
company for setting up factory/industry - Industry not set up -
Company in liquidation - Agreement terminated by Board -
0
Held: Right to purchase the plots m question after the expiry
of the lease period could accrue in favour of the Company
only on fulfilling the covenants stipulated in clause 2(P) - On
Company's failure to do so, Lease Agreement gave right to
the Board to determine lease and resume the land - It is, thus,
in the nature of Lease-cum-Sale Agreement, which started
E with lease- and could culminate into sale - Lease came to be
determined by Board because of the breach of covenants of
lease agreement - Therefore, it cannot be accepted that
Company had become the owner of the plots in question.
F
Validity of termination notice - Held: Company had
committed clear breach in not completing the project and
setting up the factory within the time given on the Lease
Agreement or the time as extended by the Board - In such
circumstances, the Lease Agreement gave a definite right to
G the Board to terminate the lease - Board was within its right
to terminate the lease as provided in Lease Agreement.
H
Requirement of prior permission of Company Court
before terminating the lease - Notice of cancellation of lease
710
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA
711
INDUSTRIAL AREAS DEVP. BOARD
given after the winding up order - Held: Serving of cancellation
A
notice simplicitor would not come within the mischief of s.537
of Companies Act, as that by itself does not amount to
attachment, distress or execution etc - No doubt, after the
commencement of the winding up, possession of the land
could not be taken without the leave of the Court - Therefore,
B
no prior permission was required by the Board for cancelling
the lease - Companies Act, 1956 - s.537.
COMPANIES ACT, 1956:
s.536 - Company in liquidation - Resumption of plots C
allotted to company, on its failure to set up Factory/industry -
Application for permission by Board - Held: Termination
notice by the Board is valid - Likewise, order of Company
Judge permitting the Board to take possession of land in
question is legal and justified.
D
LOCUS STAND/:
Company in liquidation - Cancellation of lease-cum-sale
agreement in respect of two plots allotted to Company, for its
failure to set up factory/industry - Order of Company Judge
E
to OL to hand over possession of plots to Board - Challenged
by one of the shareholder/Promoter of Company - Held:
Appellant is very much concerned IA(ith the outcome of the
proceedings in as much as, if the ownership of the land in
question vests with the Company, it may reduce his personal
F
liability, as he has given guarantees to the financial
institutions for the loan advances to the Company.
Respondent No.2-company was allotted an industrial
plot on lease-cum-sale basis for a period of 11 years
G
under a lease agreement dated 21.12.1984 on certain
terms and conditions. On 10.01.1989 the Board assigned
an additional plot to the company. However, no leasecum-sale agreement was executed for the latter allotment.
Possession was given to the company on 19-01-1989.
H
712
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A Meanwhile proceedings for winding up were initiated
against the company and by order dated 15-01-1996 the
company was wound up. Respondent no.1 Board
terminated the agreement in respect of the two industrial
plots allotted to the company. Subsequently, the Board
8 filed an application before the Company Judge seeking
resumption of the two plots. The Company Judge
directed the official Liquidator to handover possession
of the said tow plots to the Board. The appellant claiming
himself to be promoter/share holder of the company
c challenged the order in an appeal before the Division
Bench of the High Court. The appeal was dismissed.
D
E
F
G
H
In the instant appeal, the questions for consideration
before the Court were:
Q.1
Whether the Company had acquired the
ownership of the two plots in question and,
therefore, the Board was precluded from
terminating the lease and resuming the plots?
OR
Whether the property in question continued to
be leasehold property as per the Lease
Agreement dated 21.12.1984?
Q.2 In the event it is decided that the property was
on lease with the Company, whether the notice
terminating the Lease Agreement was legal
and justified?
Q.3 Whether prior permission of the Company
court was required to terminate the Lease
Agreement by the Board since the Company
was under liquidation?
Q.4 Whether the circumstances warranted the
Company court to allow the application of the
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 713
INDUSTRIAL AREAS DEVP. BOARD
Board to resume the said land and take
A
possession thereof?
Dismissing the appeals, the Court
HELD: 1. Prima facie, this Court is of the opinion that
the appeal by the promoter/shareholder before the High
8
Court was maintainable and should not have been
dismissed on the ground that the appellant did not have
locus standi to prefer the said appeal. The appellant is
very much concerned with the outcome of the
· proceedings in as much as, if the ownership of the land C
in question vests with the Company, it may reduce his
personal liability, as he has given guarantees to the
financial institutions for the loan advances to the
Company. [para 18] [728-A-C]
D
Q.1 Re: Status of the property in question:
2.1 Admittedly, the Lease Agreement dated
21.12.1984 was entered into between the Board and the
Company by which the Board had agreed to lease to the
Company the land in question upon certain terms and
E
conditions, non-fulfilment of which would result in
allotment being cancelled and agreement being
terminated under Clause 4. Clause 7 of the Lease
Agreement enabled the Company to purchase the
property in question at the end of 11 years lease period
F
or the extended period, if any. [para 21-22] [729-C-D; 731A-B]
2.2 It is not in doubt that while construing an
agreement, it is not the nomenclature but the substance
G
thereof needs to be looked into. Therefore, mainly
because the agreement in question is termed as "Lease
Agreement" that by itself will not be the sole
determinative factor. However, various clauses of the
agreement also clearly manifest that it was an agreement
H
714
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A by which lease for 11 years period was created in favour
of the Company. At the same time, it was also not a Lease
Agreement simplicitor. It did not provide that on expiry of
the lease period, the demised property is to be reverted
back to the Board. The specified purpose of the Lease
8 Agreement was to give the plots in question to the
Company for setting up of radio factory/ industry. The
Company was even allowed to construct the building for
this purpose at its own cost within 24 months from the
date of letter of allotment. On fulfilling these and other
C conditions, at the end of 11 years the Company could
become entitled to even purchase the land at the sale
price which was to be determined by the Board. So much
so at that time the rental paid for the period of lease was
to be adjusted against the sale consideration. However,
0 this right to purchase the plots in question after the
expiry of the lease period could accrue in favour of the
Company only on fulfilling the covenants stipulated in
clause 2(P). On the Company's failure to do so the Lease
Agreement gave right to the Board to determine the lease
and resume the land. In that event, the question of right
E to purchase the land could not arise. It is, thus, in the
nature of Lease-cum-Sale Agreement, which started with
lease and could culminate into sale. It is found as a matter
of record that the Company failed to complete the
construction and start factory on the demised land. In
F fact, no factory could be set up at all. [para 23-24) [731D-H; 732-A-D]
2.3 It is thus clear that right to purchase the land did
not fructify in favour of the Company. On the contrary,
G while the relationship between the Company and the
Board was still that of lessee and lessor, the lease came
to be determined by the Board because of the breach of
the covenants of lease agreement. Therefore, it cannot
accepted that the Company had become the owner of the
H plots in question. [para 25) [732-G-H; 733-A]
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 715
INDUSTRIAL AREAS DEVP. BOARD
Q.2 Re: Validity of termination notice
A
3.1 On the failure of the Company to complete the
project within the specified period, the Board served
resumption letter dated 6.5.1992 upon the Company
stating that the land would be resumed on 8.6.1992 for
8
failure to implement the project in time. On 19.1.2002, the
Board passed the orders terminating the lease in respect
of both the plots. In this termination order, it was stated
that the Company had failed to construct the factory
building and implement the industrial projects on the
C
main land within the extended period and to execute
lease agreement in respect of additional land. [para 26
and 29) [733-B; 734-H; 735-A-B]
3.2 The Company had committed clear breach in not
completing the project and setting up the factory within
D
the time given in the Lease Agreement or the time as
extended by the Board. In such circumstances, the Lease
Agreement gave a definite right to the Board to terminate
the lease. This Court is, therefore, of the opinion that the
Board was very well within its right to terminate the lease
E
as provided in the Lease Agreement. [para 30) [735-F-G]
Q.3 Re: Necessity of prior permission of the Company
Court before terminating the lease:
I
4.1 In the instant case, the Company had gone into
F
liquidation and there was an order of winding up when
the notice of cancelling the lease· was given. It is clear
from the provisions of s. 537 of the Companies Act, 1956
that prior permission of the Court is required in respect
of any attachment, distress or execution put in force or G
for sale of the properties or effects of the Company.
Serving of cancellation notice simplicitor woulq not come
within the mischief of this section as that by itself does
not amount to attachment, distress or execution etc. No
doubt, after the commencement of the winding up,
H
716
SUPREME COURT REPORTS
(2014] 3 S.C.R.
A possession of the land could not be taken without the
leave of the Court. Precisely for this reason the Board had
filed the application seeking permission. It would have
been premature on the part of the Board to approach the
Company Judge for permission to resume the land
B without cancelling the lease in the first instance. This
Court, thus, holds that no prior permission was required
by the Board for cancelling the lease. [para 31, 38 and
39] [735-H; 736-A]
Q.4. Re: Validity of the order of the Company Court
C granting the permission.
5.1 Once the application for permission to resume the
land is filed, it is permissible for the Company Judge to
go into the validity of the action of the applicant. Thus,
D in the instant case, the Company Judge could find out
as to whether cancellation of lease is proper or not. The
Company Judge could also go into the question as to
whether the Company had become the owner of the
property, or it was only a lessee. Company Judge could
E also go into the question as to whether the property in
question is required by the Company and parameters of
the provisions of s.535 of the Companies Act are satisfied
or not. [para 40] [741-E-G]
5.2 This Court does not find action of the Board to
F be illegal or blemished. The land was allotted to the
Company for specified project which the Company failed
to establish. In such an event, under the statute itself
powers are given to the Board to cancel the allotment and
G
resume such land. [para 41 and 43] [741-G-H; 743-B]
5.3 The Company is in liquidation. Till date there is
no validly propounded scheme of rehabilitation u/s 391
to 394 of the Companies Act. Some obscure proposals,
without concrete Scheme as required under the Act,
H cannot be made a sheet anchor to come in the way of the
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 717
INDUSTRIAL AREAS DEVP. BOARD
rights of the Board which still remains the owner of the
A
plots. The O.L. could claim rights over this land only if it
had become the property of the Company and the
ownership was vested in it. Even that is not so. [para 44]
[743-C-D]
5.4 This Court, therefore, holds that termination
notice dated 19.1.2002 of the Board is valid. Likewise the
order of the Company Judge permitting the board to take
possession of the land in question is legal and justified.
[para 45) [7 43-E-F]
Rajratna Naranbhai Mills Co. Ltd. v. New Quality Bobbin
11\lorks; 1973 (43) Company Cases 131; in United Bank of
India v. Official Liquidator and Ors.; 1993 (3) Suppl. SCR 1
B
c
= 1994 (1) SCC 575; Mis. Hanuman Silks & Anr. v. Kamataka
Industrial Areas Development Board and Ors.; AIR 1997 Kar
D
134 - cited.
Case Law Reference:
1993 (3) Suppl. SCR 1
cited
para 13
E
1973 (43) Company Cases 131
cited
para 14
AIR 1997 Kar 134
cited
para 16
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
3803 of 2014.
F
From the Judgment and Order dated 11.02.2010 of the
High Court of Karnataka at Bangalore in Original Side Appeal
No. 4 of 2010.
C.A. Nos. 3804-3807 of 2014.
T.R. Andhyarujina, C.A. Sundaram, Basava Prabhu S.
G
Patil, P.V. Shetty, M.K. Garg, Vijay Kumar Desai, Shakumbri
Singh, M.K. Verma, Soumik Ghosal, Anand Sanjay Nuli, Rohini
Musa, Sudarshan Rajan, Nishanth Patil, B. Subrahmanya
Prasad, Shankar Divate, Naresh Kaushik, Manoj Joshi (for
H
718
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A Lalita Kaushik) for the appearing parties.
The Judgment of the Court was delivered by
A.K. SIKRI, J. 1. Delay condoned.
B
2. Leave granted.
3. In this appeal the appellant has assailed the judgment
and order dated 11.2.2010 passed by the High Court of
Karnataka in Company Appeal which was preferred by the
C appellant herein against the orders dated 3.9.2009 by the
Company Judge of the said court. Respondent No. 2 namely
M/s. Relectronics Ltd. (hereinafter referred to as the 'Company')
is ordered to be wound up and liquidation proceedings are
pending before the Company Court. Respondent No. 1 i.e.
Karnataka Industrial Areas Development Board (hereinafter
D referred to as the 'Board') had allotted an industrial plots to the
Company on lease-cum-sale basis for a period of 11 years.
The Board terminated the lease. The Company Judge, on
application filed by the Board, had directed the liquidator to
release the said land to the Board and the appeal by the
E appellant against this order has been dismissed by the Division
Bench of the High Court, not on merits but for want of locus
standi of the appellant to question the orders. The appellant
herein is questioning the veracity of the orders on the ground
that it was the property of the Company which could not have
F been released in favour of the Board.
4. Before we mention about the credentials and locus
standi of the appellant, we deem it appropriate to cull-out the
seminal facts from the record leading to the passing of the
G impugned order. The Board had leased 13,657 sq. mtrs. of land
in Plot No. 19 (A+B) of Sadramangala Industrial Area to the
Company under the Lease Agreement dated 21.12.1984, on
certain terms and conditions, for the purpose of establishing an
industry for manufacture of AH/ FM Radio, Audio Tape
H Recorder in combination with radio. The Board executed lease-
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 719
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI, J.]
cum-Sale agreement ("Agreement") in favour of the Company
A
in respect of Plot No. 19 (A+B), measuring 13,657 sq. m. (3.5.
acres) situated in Sadarmangala Industrial Area,
Krishnarajapuram, Bangalore South. The consideration paid by
the Company towards the same was Rs. 3,07, 102/- as initial
deposit/premium and the lease rentals @ Rs. 6,921/- per
B
annum were to be paid for a period of 11 years.
5. By its letter dated 10.1.1989, the Board assigned an
additional plot bearing No. 18 measuring 20,337.87 sq. m (5
acres) to the Company. The consideration paid by Respondent
C
No. 2 towards the same was Rs. 13,31, 182/- after adjusting a
sum of Rs. 10,19,441/- which was paid as rentals to
Respondent No. 1 for Peenya Lands and further payment of Rs.
3, 11, 7 41 vide receipt No. 32754 dated 3.1.1989. However, no
lease-cum-sale agreement was executed for this allotment.
Possession of additional plot bearing No. 18, measuring
D
20,337.87 sq. m (5 acres) was given to the Company on
19.1.1989.
6. As mentioned above, the Board had allotted the
aforesaid plots of lands to the Company for the purpose of
E
establishing a factory to manufacture radio and TV sets. As per
the appellant, though the Company started the construction of
the factory sometime in the year 1989-1990 but could not
complete the same due to the ill health of the Managing
Director Mr. T.R. Mulchandani. The Company was also unable
F
to pay debts of its various creditors as it was running in losses.
One of the secured creditors namely M/s. Sanmar Financial
Limited filed a petition seeking winding up of the Company
which was registered as Company Petition No. 18 of 1994.
Industrial Development Bank of India (IDBI), another creditor
G
also joined as supporting creditor. Vide orders dated
15.11.1996, the High Court of Karnataka ordered the winding
up of the Company. All the assets and liabilities were got
transferred to Official Liquidator (OL) who took charge thereof.
7. The Board sent notice dated 23.12.1997 to the
H
720
SUPREME COURT REPORTS
[2014) 3 S.C.R.
A
Company for the resumption of the aforesaid industrial plots on
a ground that Company had committed the br~ach of the terms
and conditions of the Lease Agreement and had not
established any factory for which purpose land was allotted to
it. Thereafter, vide notice dated 19.1.2002 the Board terminated
B the agreement in respect of the two industrial plots. This order
was also served upon the OL. Subsequent thereto application
was preferred before the Company Judge by the Board seeking
resumption of these Industrial Plots. This application was
opposed by the OL. After hearing the parties, the Company
c Judge passed the orders dated 3.9.2009 allowing the said
application and directing the OL to handover the possession
of the industrial plots to the Board. In support, the Company
Judge gave the following reasons:-
D
E
F
(a) KIADB had taken steps and measures as required
under the provisions of the Act in placing the Company in
liquidation on notice of its breach and its intention to
resume the industrial plots after cancellation of the
allotment.
(b) The benefit of industrial plots cannot be granted to a
Company in liquidation to enhance its assets. The
enrichment of the Company in liquidation at the cost of
KIADB is not just and legal. Hence the termination of
allotment by KIADB is proper.
8. The Official Liquidator did not contest the order of the
Company Judge. However, the appellant herein, who claims to
be the promoter/ shareholder of the Company, challenged this
order by filing appeal before the Division Bench. His
submission was that he is a bonafide person as promoter/
G shareholder of the Company and is evincing genuine interest
to revive this Company and for this purpose retention of land
is very crucial. This contention of the appellant has not been
accepted by the Division Bench of the High Court primarily on
the ground that the merits of the appeal could not be gone into
H at the instance of the promoter/ shareholder which lacks
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 721
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI, J.]
bonafide~. On that basis, the appeal has been dismissed.
A
9. Mr. T.R. Andhyarujina, learned Senior Counsel
appearing for the appellant questions the aforesaid wisdom of
the High Court in dismissing the appeal of the appellant on the
ground of want of bona tides. His submission in this behalf was
B
that it is the Official Liquidator who is the custodian and trustees
of the properties of the Company in liquidation and, therefore,
it was his prime responsibility to file the appeal against the
order of the Company Judge. As such the order was not in the
interest of liquidation proceedings. He argued that a valuable
C
asset of the Company was taken away by the Board and the
Company Judge had given permission to the Board to do so.
Therefore, it was the bounden duty of the O.L. to challenge such
an order when huge amount of debts were payable by the
Company to the Public Financial Institutions. He further
submitted that in any case the appellant had also vital interest
D
in the matter. The Company had taken financial
accommodations from the financial institutions and against
those loans etc. the Directors/ Promoters including the appellant
had given personal guarantees. In the event of non-payment of
dues to those financial institutions by the Company, liability was
E
likely to fall upon the promoters as contributors. Further, the
promoters as contributors had a right to intervene in the
liquidation proceedings at any stage, if they have a scheme of
revival. In these circumstances the appeal of the appellant could
not have been dismissed for purported lack of bonafides. He
F
also submitted that the Division Bench could have imposed
suitable terms for the appellant which could be complied with
by the appellant to establish his bona fides, instead of
summarily dismissing the appeal. In this behalf he sought to
demonstrate that in the meanwhile one of the two promoters,
G
viz. Mr. G. Mohan Rao had offered to invest sufficient funds for
reviving the business of the Company. So much so he had
offered to pay off all the debts which are due from the Company
to its creditors. The appellant along with Mr. G. Mohan Rao was
ready to revive the business of the Company and even willing
H
722
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A to agree to the condition not to alienate the land in question.
10. Since it was agreed by and between the Counsel for
the parties that in case the appeal filed by the appellant before
the Division Bench of the High Court is held to be competent
B by this Court, then this Court itself should consider and decide
the matter on merits, instead of remitting the case back to the
High Court, we have heard the Counsel for the parties on merits
as well.
11. As already pointed out above on an application filed
C by the Board, the Company Judge permitted the Board to
resume the aforesaid two industrial plots which were allotted
to the Company. Mr. Andhyarujina, learned Senior Counsel,
drew our attention to the reply which was filed by the O.L. before
the Company Judge opposing the aforesaid application of the
D Board. This reply shows that OL had contested the application
E
F
on two grounds namely;
(i) There could not have been any termination of Lease
Agreement by the Board without seeking prior permission
of the Company Court, since the Company was under
liquidation.
(ii) The two plots, in fact, had become the property of the
Company, as the Company had paid the entire
consideration in respect of these plots. Therefore, there
was no question of termination of the lease and resumption
of the plots.
12. Before us the order of the High Court was assailed on
these very grounds. Referring to clause 7 of the Lease
G Agreement dated 21.12.1984 it was argued that the lease was
for a period of 11 years initially and the amount of rent paid by
the Company for the period of lease was to be adjusted
towards the balance of the value of the property. The value of
the property was to be fixed in the manner stated in the
H agreement and on payment of the consideration as fixed,
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 723
INDUSTRIAL AREAS DEVP. BOARD [AK. SIKRI, J.]
Clause 7 further provided that on payment of entire price as
A
fixed by the Board the property in question was to be sold to
the Company. He submitted that virtually the entire price had
been paid by the Company in the form of rents which were to
be adjusted and, therefore, the only requirement that was left
was to execute sale deed in favour of the Company, which
B
could not be done as in the meantime the Company had gone
into liquidation. He submitted that the order of Company Court
is totally erroneous, in as much as:
(a)
In the first instance, the Court could not have given
C
its imprimatur to the Order of termination of the
Board dt. 19.1.2002 because such an order of
termination, after an order of winding up, could not
have been passed without the leave of the
Company Court. For this proposition he referred to
the judgment of the Karnataka High Court in the
D
case of Kamataka State Electronics Development
Corporation Ltd. v. The Official Liquidator of Mis
Anco Communication Ltd. decided on 20.6.2005.
(b)
Secondly, all the assets of a Company in liquidation
E
after an order of liquidation belong to the creditors
and shareholders and it is not open to the Company
Court to give up the assets of the Company in
liquidation except by way of disclaimer of onerous
property under Section 535 of Company Act.
F
13. In support of second contention, the learned Senior
Counsel referred to the judgment of this Court in United Bank
of India v. Official Liquidator and Ors.; 1994 (1) SCC 575 and
paras 10 and 11 which reads as under:
"10. While the aforesaid direction will dispose of the
appeal, we would like to say, having heard counsel on the
merits of the appeal, that we are not satisfied that the
Division Bench appreciated the purpose of the provisions
G
of Section 535 of the Companies Act. Thereunder the
H
A
B
c
D
E
F
G
H
724
SUPREME COURT REPORTS
[2014] 3 S.C.R.
High Court may give leave to the Official Liquidator to
disclaim land of any tenure which is part of the property of
the Company in liquidation if it is burdened with onerous
covenants. 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 covenants, puts the party in whose favour the
covenants are, to serious disadvantage. The Court must
therefore, be fully satisfied that there are onerous
covenants, covenants which impose a heavy burden upon
the Company in liquidation, before giving leave to disclaim
them.
11. We are of the view that the High Court ought to have
appreciated that it was rather unlikely that the party who
had the benefit of onerous covenants would apply for
disclaimer and ought to have viewed the Official
Liquidator's application to disclaim made pursuant to the
Trust's letter to him in that behalf, in that light. We find it
difficult to see how such a large area of land leased to the
Company in liquidation for 99 years with the option of
renewal for a further 99 years for the meager rent of Rs.
1200 per annum can be said to be land burdened with
onerous covenants. We do not think that the High Court
was justified in debating and holding in proceedings under
Section 535 that the lease of the said land had been validly
terminated so that the Official Liquidator became liable to
pay mesne profits to the Trust, and that this coupled with
arrears of rent, in five figures made the lease onerous. We
are also of the view that the Bank's offer to pay the arrears
of rent to the Trust should have been accepted by the High
Court. The Bank to protect and keep alive its security, had
put official liquidator in funds in regard to other matters and
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 725
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI-, J.]
was eager to meet this liability. Had this been done
A
valuable property of the Company in liquidation could have
been retained so that its undertaking, which stood on the
said land, could have been sold as a running concern, as
has been done upon intervention of this Court, for the
benefit of its creditors."
B
14. Deprecating the inaction on the part of the O.l. in not
filing the appeal and thereby protecting the property of the
Company in question he relied upon the judgment in the case
of Rajratna Naranbhai Mills Co. Ltd. v. New Quality Bobbin
C
Works; 1973 (43) Company Cases 131, holding that the most
important task assigned to the liquidator under the Companies
Act while acting as liquidator of a Company ordered to be
wound up is to collect assets of the Company and sell them
and to distribute the realization amongst all those who have
claims against the Company and payment must be made
D
according to priorities fixed by law. This appears to be not only
the foremost but the most basic duty of a Liquidator of a
Company ordered to be would up. Now, if the liquidator in
course of winding up is required to file suit for recovery of
properties and assets of the Company, one has only to imagine
E
at what length of time winding up proceedJngs can be brought
to a close.
15. Mr. Andhyarujina, further mentioned that on 11.1.2010,
Mr. Mohan Rao had offered to revive the Company and pay off
F
the debts of the Company. In this behalf he also drew our
attention to the orders dated 19.7.2009, 16.8.2010 and
11.2.2011 passed in the present case. In this context, his
submission was that there was every chance of the Company
to be revived and, therefore, a valuable asset of the Company
G
should not be allowed to be frittered away.
16. Mr. Patil, Senior Advocate, appearing for the Board
stoutly refuted the aforesaid submissions. His argument was
that the plots in question were allotted by the Board to the
Company on lease-cum-sale basis with clear stipulation that the
H
726
SUPREME COURT REPORTS
[2014] 3 SC R
A Company was to construct factory thereupon and complete the
project within 24 months .The Company had miserably failed
to implement the project in time for which show cause notices
were given and all these happened much before the passing
of the winding up order of the Company by the High Court. He
B further submitted that on failure of the Company to complete
the project, lease-cum-sale agreement dated 21.12.1984 gave
categorical right to the Board to resume the land. He, thus.
submitted that the Company never became the owner of the
land that too when no sale deed was executed in favour of the
c Company. Moreover, due procedure was followed before
terminating the lease by giving appropriate and due opportunity
to the Company which had even replied to the show cause
notices. He further argued that before terminating the lease no
prior permission under Section 537 of the Companies Act was
0 required. It was only for resumption of the land, after termination
of the lease, that such a permission was necessitated and
keeping in view this legal requirement the Board had filed the
application before the Company Judge which has been allowed
by the impugned order. The learned Counsel relied upon the
E judgment of Karnataka High Court in the case of M/s.
Hanuman Silks & Anr. v. Kamataka Industrial Areas
Development Board and Ors.; AIR 1997 Kar 134. He also
referred to the provisions of Karnataka Industrial Areas
Development Act, 1966 (hereinafter referred to as 'KIAD Act')
under which the Board has been constituted. Predicted on the
F provisions of this Act his submission was that the action, taken
in terms of the said provisions, was absolutely justified and
legal.
17. We may mention at this juncture that after the
G permission given by the learned Single Judge to the Board to
resume the land, the possession of the plots was taken by the
Board. The Board has made fresh allotment in favour of M/s.
Relectronics Ltd , Respondent No. 3 herein. This action of the
Board making allotment in favour of respondent No.3 was
H challenged by the appellant in the form of Writ Petitions filed in
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 727
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI, J.]
B
the High Court of Karnataka. Those Writ Petitions have also_ A
been dismissed by the High Court vide judgment dated 22nd
June 2011 and the correctness thereof is challenged by the
appellant in appeals arising out of S.LP.(Civil)No ... CC 1417714180/2011. Counsel for the parties conceded that the
outcome of appeal arising out of S.L.P.(Civil) No.14161/2010
shall govern these appeals as well. Mr. Sundram, learned
Senior Counsel appeared for Respondent No. 3 also
endeavoured to justify the action of the Board in terminating the
lease. He heavily relied upon the judgment of the Karnataka
High Court in the case ~f M/s. Hanuman Silks (supra) and c
submitted that as per the said judgment it was permissible for
the Board to issue termination notice but for further action of
taking possession, permission of the Court was to be taken
which was done in the present case. He further referred to the
provisions of the Lease Agreement dated 21.12.1984 and
D
submitted that the allotment was on certain terms and conditions
with specific purpose, viz. to set up industry. Since this could
not be accomplished by the Company, action of the Board in
resuming the land was justified. In such a scenario, the
payment of money in the form of rental by the Company to the
Board was totally immaterial. He further pointed out that
E
resumption order was of the year 1992 i.e. before the winding
up order was passed which was even challenged up by the
Company by filing Writ Petition in the High Court and the said
writ petition was dismissed. Thereafter, keeping in view the
spirit of M/s Hanuman Silk's case, termination notice was given
which is duly reflected in the show cause notice/ termination
letter itself. This termination was never challenged by the
Company or the O.L He thus argued that in this manner once
the termination is found to be valid, the Company Judge did
F
not commit any error in allowing the Board to resume the land.
G
18. We have given our considered thoughts to the various
issues involved on which arguments were addressed by the
Counsel for the parties. We would like to point out, at the outset,
that we are not venturing into detailed discussion on the
H
728
SUPREME COURT REPORTS
[2014] 3 S.C.R.
A question of maintainability of the appeal filed by the appellant
before the Division Bench of the High Court against the order
of the Company Judge. Prima facie, we are of the opinion that
this appeal was maintainable and should not have been
dismissed on the ground that the appellant did not have locus
B standi to prefer the said appeal. The appellant is very much
concerned with the outcome of the proceedings in as much as,
if the ownership of the land in question vests with the Company
and proceeds from the sale of this land comes into the kitty of
the Company, the effect of that would be to reduce the liability
c of the creditors, particularly the financial institutions. In turn, it
may result in reducing the personal liability of the appellant who
has given guarantees to the financial institutions for the loan
advances to the Company. However, we leave the matter at
that, as Counsel for the respondents did not press the issue of
0 maintainability very seriously.
19. In so far as the dispute on merits is concerned, it has
various facets which give rise to the following questions:
Q.1
Whether the Company had acquired the ownership
E
of the two plots in question and, therefore, the Board
was precluded from terminating the lease and
resuming the plots?
F
G
H
OR
Whether the property in question continued to be
leasehold property as per the Lease Agreement
dated 21.12.1984?
Q.2
In the event it is decided that the property was on
lease with the Company, whether the notice
terminating the Lease Agreement was legal and
justified?
Q.3 Whether prior permission of the Company court
was required to terminate the Lease Agreement by
the Board since the Company was under
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 729
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI, J.)
liquidation?
Q.4 Whether the circumstances warranted the
Company court to allow the application of the Board
to resume the said land and take possession
thereof?
20. We proceed to answer the aforesaid questions in
seriatim:-
Q.1 Re: Status of the property in question:-
21. Admittedly, the Lease Agreement dated 21.12.1984
was entered into between the Board and the Company vide
which the Board had agreed to lease to the Company the land
in question upon certain terms and conditions. In consideration,
A
B
c
the Company had paid a sum of Rs. 3,07, 102/- as the initial
D
deposit/ premium and it was also to pay the yearly rent of Rs.
6,921/- for the period of lease which was 11 years, computed
from 4.8.1984. Clause 2 of the Lease Agreement stipulated
various others covenants. Having regard to the nature of
functions which the Board performs, which has been constituted
E
for industrial development in that area, the plots in question
were given to the Company exclusively for the purpose of
establishing an industry/ factory for manufacture of AH/ FM
Radio Audio Tape Recorder in combination with radio. The
lease provided that the premises shall be used only for the
aforesaid purpose and not for any other purpose. The lease
also provided that the civil construction work and erection of
factory shall be completed within stipulated period which was
F
24 months from the date of letter of allotment i.e. 21.02.1983.
This time, however, could be extended in writing for good and
sufficient reasons furnished by the Company. On extension
G
being given, the Company was to complete the number of
works within the extended period. For this purpose time bound
schedule was provided in clause 2(P)(1) of the Lease
Agreement which is reproduced below:
H
730
A
8
c
D
E
F
G
H
SUPREME COURT REPORTS
[2014] 3 S.C.R.
"2{P) (1) (i) To submit the property of the plan of the civil
construction to him lessor or prior approval within six
months from the date of receipt of letter of allotment within
two months from the due date of.
(ii) The civil constructions works within three months from
the approval of the blue prints, after obtaining licence from
the Chief Inspector of Factory and Boilers of Karnataka
State.
(iii) To complete civil construction works and erection of
factory within twenty months from the date of letter of
allotment that is the TWENTY FIRST day of February One
Thousand nine hundred and Eighty Three.
(iv) To commence production within twenty four months
from the ate of letter of allotment that is the Twenty First
day of February one thousand nine hundred and Eighty
Three.
For good and sufficient reasons, the Lessor may extend
the time in writing in any of the cases mentioned in sub
clauses (i) to (iv) above, by such period as the Lessor. In
his discretion deem fit and the Lessee shall complete the
item of works for which extension of the time given within
such extended time.
Failure to fulfill any of the conditions (I) to (IV) mentioned
above shall result in allotment begin cancelled and
agreement being terminated under clause 4 and a sum not
exceeding 5% of the cost of land as indicted in Clause 1
of the lease agreement subject to a maximum of
Rs.10,000/- and minimum of Rs.1000/- and interest due
and payable as per clause 1 from the date of taking
possession to the date of resumption of the land by the
Board shall be forfeited to the Lessor."
22. It was further specifically mentioned that in case there
PHATU ROCHIRAM MULCHANDANI v. KARNATAKA 731
INDUSTRIAL AREAS DEVP. BOARD [A.K. SIKRI, J.]
is a failure on the part of the Company to fulfill the said
A
condition, it would result in allotment being cancelled and
agreement being terminated under Clause 4.