Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A 2-Member Bench of Justice S.J. Mukhopadhaya (Chairperson) and Justice Bansi Lal Bhat, Member (Judicial), set aside the order of National Company Law Tribunal (Allahabad), whereby it had cancelled the mortgage of 858 acres of land worth around Rs 5900 crores made by Jaypee Infratech Ltd. (Corporate Debtor) to secure debt of Jaiprakash Associates Ltd.

Notably, Jaiprakash Associates is the holding company of JIL, which is currently under the insolvency process. The Resolution Professional of JIL filed an application before NCLT for cancelling the mortgage deeds made by the Promoters and Directors of JIL in the years 2016 and 2017 by way of which the above transaction was entered into. It was alleged that there were fraudulent and wrongful transactions within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016. By the impugned order, NCLT allowed the said application. Aggrieved, the Banks/Financial Institutions– the creditors in whose favour the mortgage deeds were made– filed the present appeal.

The stand of the Resolution Professional was that although the mortgage of land by a company to its related party may not be forbidden under law, yet it becomes questionable if it has been done in complete disregard to the interest of creditors and stakeholders of such company (in this case, such company being JIL).

The Appellate Tribunal perused Section 66 (fraudulent trading or wrongful trading) and noted that from a bare perusal of section, it is clear that if during the Corporate Insolvency Resolution Process or Liquidation Process, it is found that any business of the Corporate Debtor has been carried on with intent to defraud its creditors or for any fraudulent purpose, the Adjudicating Authority is empowered to pass appropriate order under Section 67.

In the present case, however, the Appellate Tribunal found that the mortgages were made by JIL in the ordinary course of its business. It was observed: 

The ‘Corporate Debtor’ being one of the group company, like a guarantor, executed mortgage deed(s) in favour of the Appellants- ‘Banks and Financial Institutions’. We have seen that none of the transactions were ‘preferential transaction’ or ‘undervalued transaction’. It has not been alleged that the transactions, in question, were made to defraud the creditors in terms of Section 49 so allegation has been made that such transactions amount to ‘extortionate credit’ as defined under Section 50. Therefore, the Adjudicating Authority in the absence of any such finding is not empowered to pass an order under Section 51. Further, as we have held that the transactions were made in the ordinary course of business in absence of any contrary evidence to show that they were made to defraud the creditors of the ‘Corporate Debtor’ or for any fraudulent purpose, on mere allegation made by the ‘Resolution Professional’, it was not open to the Adjudicating Authority to hold that mortgage deeds, in question, were made by way of transactions which come within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66.

For the aforesaid reasons, the impugned order dated 16-05-2018 passed by NCLT, Allahabad insofar it relates to the appellants herein was set aside. The appellants were held entitled to exercise their rights under IBC. The appeals were accordingly disposed of. [Axis Bank Ltd. v. Resolution Professional for Jaypee Infratech Ltd., 2019 SCC OnLine NCLAT 435, decided on 01-08-2019]

Case BriefsHigh Courts

Kerala High Court: P. Somarajan, J. allowed the second appeal in a matter related to the redemption of mortgage, against the order of dismissal by the trial court and the first appellate court.

In the present case, the dispute centred around the nature of an ‘Ottikuzhikanam Deed’ (deed) that was executed by the original owner of the property in favour of his nephew and niece. But according to the appellants, it was a mortgage whereas respondents asserted it as a lease arrangement. The trial court referred the matter to the Land Tribunal under Section 125 of the Kerala Land Reforms Act, 1963 (the Act). The Land Tribunal held that the deed was a lease arrangement and passed an order, granting fixity of tenure in favour of respondents. Both the trial court and the first appellate court accepted this finding of the Tribunal and held that ‘Ottikuzhikanam Deed’ was a lease deed and the relief of redemption of the mortgage was rejected concurrently. As a result, a second appeal was filed.

The Court noted that definition given to the expression ‘Ottikuzhikanam’ under Section 2 (39A) of the Act excluded a mortgage within the meaning of Transfer of Property Act. It observed that “A mere clause enabling the beneficiary under a deed to enjoy the property and to make improvements therein included as part of normal terms and conditions, would not bring the matter within the sweep of ‘Ottikuzhikanam’ as defined under Section 2(39A) of the Act, but it must be the essential term of the contract and for that essential term and purpose, the contract must be entered into, otherwise, it cannot be brought under the purview of ‘Ottikuzhikanam’, a lease as defined under Section 2(39A) of the Act.” Reliance was placed on the decision in Velayudhan Vivekanandan v. Ayyappan Sadasivan, 1975 KLT 1, where a document which is styled as ‘Ottikuzhikanam’ appended to the judgment found to be a mortgage and not a lease. 

The Court found, “The mortgage amount involved in the instant case comes to Rs 5,000 in the year 1962 and the property mortgaged comes to only 1 Acre 2 cents which is another indication of nature of Ext.A4 as a mortgage rather than a lease.” Thus, the decree and judgment of the trial court and the first appellate court was set aside, and order was passed for a decree of redemption of mortgage on payment of amount of Rs 5000 with interest at 12 per cent per annum from the date of suit till the date of judgment and thereafter at 6 per cent per annum to the principal sum of Rs 5000 and also the cost of defendants in the first appeal and in the second appeal, together with the improvements over the property which could be ascertained at the time of passing of the final decree.[C. Vijaya Thulasi v. D. Sudarsanan, 2019 SCC OnLine Ker 1411, decided on 02-04-2019]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Sanjiv Khanna and Chander Shekhar, JJ. allowed a writ petition filed challenging the order of the Debt Recovery Appellate Tribunal, and remanded the matter back to be heard on merits.

The petitioner filed an application under Section 17(1) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest  Act, 2002 questioning the initiation of action by the respondent bank under Section 13(4). The petitioner had bought the land concerned, the original owner of which was one Vipin Chopra. Subsequently, the petitioner executed a registered sale deed of the said land, in the name of her husband. The respondent bank claimed that the said Vipin Chopra had mortgaged the land with State Bank of Bikaner and Jaipur, and the right over the same was transferred to the respondent bank. The Debt Recovery Tribunal held that the respondent bank had a right over the land and not the petitioner. The petitioner preferred an appeal before the Debt Recovery Appellate Tribunal which rejected the appeal in limine holding that the petitioner had no locus to proceed with the matter as she was no more the owner of the land in question and her husband who was a necessary party was not impleaded. Aggrieved thus, the petitioner filed the present petition.

The High Court observed that the petitioner was not properly guided and informed that her husband should have been impleaded as a party. Moreover, the petitioner being a power of attorney holder, who had executed the sale deed, had interest in contending the proceedings. She was also residing in the property. The Court felt that the petitioner and her husband should not be denied a hearing on merits on account of technical lapse and failure to understand the impact and legal effect of executing the sale deed. The petitioner was misguided and did not have benefit of proper legal advice. Accordingly, the order impugned was set aside and the matter was remanded back to the Appellate Tribunal for hearing in merits. [Devender Kaur v. Punjab and Sind Bank,2018 SCC OnLine Del 10441, dated 02-08-2018]

Case BriefsSupreme Court

Supreme Court: While hearing the matter relating to mortgagor’s right of redemption by appellant, the bench comprising of Navin Sinha and Ranjan Gogoi JJ. held that where the mortgaged property has already been put to auction sale and sale certificate has been issued, there remains no property mortgaged to be redeemed and hence, the mortgagor cannot claim the right to redemption of the mortgaged property by the virtue of section 60 of the Transfer of property Act 1882.

The mortgagor had contended that the mortgagor has a right of redemption even after sale has taken place. On the other hand, it was contended by the defendant that the sale in its favour stood concluded, sale certified issued along with possession delivered, long before the suit for redemption was filed, hence, the right of redemption stood extinguished. Rejecting the mortgagor’s contention, the Court held that the mortgagor has a right of redemption even after sale has taken place pursuant to the final decree, but before the confirmation of sale. [Allokam Peddabbayya v. Allahabad Bank, 2017 SCC OnLine SC 671, decided on 19.06.2017]

Case BriefsHigh Courts

High Court of Bombay: In a case where the petitioners were charged against unanticipated dues on a property by the Sales Tax authorities long after they had purchased the property, the division bench of B. P. Colabawalla and S.C. Dharmadhikari, JJ., held that even though the property was bought on an “as is where is basis” by the petitioners, they, having no knowledge (either actual or constructive) of the dues of the sales tax authorities before they purchased the said property, the sale tax authorities cannot recover their dues from the petitioners by enforcing their charge against the said property.

The petitioners purchased the said property pursuant to a sale conducted by the Nationalized Banks under the provisions of the SARFAESI Act, 2002. Petitioners contented that the Sales Tax Authorities cannot enforce their alleged charge on the said property purchased by the Petitioners as the alleged Sales Tax dues of the Defaulter Company were never disclosed to the Petitioners, and if at all the Sales Tax have any charge, it would have to be recovered from the sale proceeds which lie in the hands of the secured creditors i.e. the banks who had sold the mortgaged property. The Respondents submitted that once the sales tax dues were in arrears and they were always payable, then it is a charge on the properties of the dealer or any other person within the meaning of Section 38C of Bombay Sales Tax Act, 1969. This would enable the Sales Tax Department to go after the properties of the Defaulter Company and recover the sales tax dues. It was submitted that the sale being on ‘as is where is basis’ position, the Petitioners ought to have made their own inquiry to ascertain whether there were any encumbrances on the said property. Not having done so, the petitioners cannot contend that the claim of the Sales Tax Authorities cannot be enforced against the said property. Relying upon the Section 100 of the Transfer of Property Act,1882, which states that a ‘charge’ may not be enforced against a transferee if she/he has had no notice of the same, unless by law, the requirement of such notice has been waived, the Court rejected the aforesaid contention of the Respondents.

The Court noticed that the petitioner had merely purchased the said property which originally belonging to the Defaulter Company and which was mortgaged with the Respondents. Since, the Defaulter Company did not pay its dues to the Respondents, they, exercising their rights under the provisions of the SARFAESI Act, sought to enforce their security interest and sell the secured asset (the said property) to the Petitioners. Hence, the Court observed that the Petitioners can by no stretch of the imagination be termed as a successor of the business of the Defaulter Company to enable the Sales Tax Authorities to recover their dues from the Petitioners by enforcing their alleged charge against the said property purchased by the Petitioners under the provisions of the SARFAESI Act. However, it was clarified that its order and direction does not mean that the Sales Tax Authorities cannot proceed against the Defaulter Company.  [Sonoma Management Partners Pvt. Ltd. v. Bank of Maharashtra, 2016 SCC OnLine Bom 9649, decided on 22.11.2016 ]