Case BriefsHigh Courts

Delhi High Court: Rajnish Bhatnagar, J., upheld the trial court decision in view of no evidence placed on record.

Petitioner is a registered valuer, running his sole proprietorship firm. Raj Kumar Karanwal, Lance Healthcare (P) Ltd., who met Y.P. Singh, Chartered Accountant wherein they discussed the matter of loan to Raj Kumar Karanwal from some banks. In the month of March, 2013 Raj Kumar Karanwal, Y.P. Singh and S.K. Verma discussed the matter of loan in the office of Raj Kumar Karanwal who informed them about his various CC Limits and deposits of his various properties title deeds with the banks.

Allegations against the petitioner were that the property of Karanwal’s were assessed by Ashugosh Nirmal, Satguru Valuers even before the actual application by Karanwal’s was moved to Corporation Bank. Petitioner claimed that he had prepared the valuation report on the asking of Corporation Bank, but according to the record, the said report was never deposited.

Further, it was stated that the petitioner, who is stated to be one of the empanelled valuer of the Corporation Bank is that he prepared inflated valuation reports in regard to the properties offered for mortgage by the borrowers. When the respondent got the same properties valued from the independent valuers, there was a huge difference between the valuation given by the petitioner and those independent valuers.

CBI investigation revealed that the petitioner was one of the bank empanelled valuer and he alongwith other co-accused persons was a part of a conspiracy to get sanctioned and disbursed CorpVyapar OD Limit Loan amounting to Rs 27 Crores to Lancer Healthcare (P) Ltd. and the petitioner alongwith other co-accused was a member of a larger conspiracy where the forged and fabricated documents were prepared of the firms/companies by inflating/exaggerating the financial records, tailor made to ensure sanction of desired loan of Rs 27 Crores. He further argued that the petitioner who was the empanelled valuer submitted false, inflated/exaggerated valuation reports to facilitate loan to the borrower co-accused.

Analysis, Law and Decision

It is a well-settled law that at the stage of framing of charge, the court has power to shift and weigh the evidence for the limited purpose of finding out whether or not a prima-facie case against accused has been made out.

Further, the Bench added that when the material placed before the court discloses great suspicion against the accused which has not been properly explained, the court will be justified in framing charge.

It is not obligatory for the judge at that stage of the trial to consider in any detail and weigh in a sensitive balance whether the facts, if proved, would be incompatible with the innocence of the accused or not. 

Standard Test before recording a finding regarding the guilt

Standard of test and judgment which is to be finally applied before recording a finding regarding the guilt or otherwise of the accused is not exactly to be applied at this stage of deciding the matter under Section 227 or under Section 228 of the Code. But at the initial stage, if there is a strong suspicion which leads the court to think that there is ground for presuming that the accused has committed an offence, then it is not open to the court to say that there is no sufficient ground for proceeding against the accused.

Whether there is a strong suspicion which may lead to the court to think that there is ground for presuming that the accused committed an offence.

Bench stated that the observations made by the trial court against the petitioner in the impugned order were all a matter of evidence which cannot be decided unless and until the evidence is led in the present case.

Therefore, in Court’s opinion the trial court’s decision is upheld. [Ashughosh Kumar Nirmal v. CBI, 2021 SCC OnLine Del 410, decided on 05-02-2021]

Advocates for the parties:

For the Petitioner: Geeta Luthra, Senior Advocate with Amit Singh Rathore, Varun Deewan, Reena Rathore, Advocates.

For the Respondent: Anupam S Sharma, SPP for CBI with Prakarsh Airan and Harpreet Kalsi, Advocates.

Case BriefsSupreme Court

Supreme Court: The bench of AM Khanwilkar and Dinesh Maheshwari, JJ has restored the NCLT order wherein it was held that the lenders of Jaiprakash Associates Limited (JAL) were not the financial creditors of the corporate debtor Jaypee Infratech Limited (JIL) and that the transactions in question were to defraud the lenders of the corporate debtor JIL. The Court held,

“such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL.”

The Court was hearing the case relating to JAL, a public listed company with more than 5 lakh individual shareholders, which was facing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. In the year 2003, JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Coming on the heels of this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL. The banks in question instituted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the NCLT, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.11 crore.

NCLT in it’s order held,

“the transactions in question were to defraud the lenders of the corporate debtor JIL, as 858 acres of unencumbered land owned by the corporate debtor to secure the debt of the related party JAL was mortgaged in the midst of the corporate debtor’s immense financial crunch, while continuing with default towards the home buyers and financial creditors and after it had been declared as Non Performing Asset, in utter disregard to fiduciary duties and duty of care to the creditors; and further that the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor.”

While interpreting Section 43 of the Code, the Supreme Court noticed that the transfers in question could be considered outside the purview of sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. It, however, further explained that even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’.

“It is difficult to even surmise that the business of JIL, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of JIL that it would create encumbrances over its properties to secure the debts of its holding company.”

Holding that the NCLAT had not been right in interfering with the well-considered and justified order passed by NCLT, the Supreme Court said,

“the transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code.”

The Court, hence, concluded:

“1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside.

2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within 171 the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly.

3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited.”

[Anuj Jain v. Axis Bank Ltd., 2020 SCC OnLine SC 237, decided on 26.02.2020]

Amendments to existing lawsLegislation Updates

President grants assent to the National Capital Territory of Delhi (Recognition of Property Rights of Residents in Unauthorised Colonies) Act, 2019.

It is an Act to provide special provisions for the National Capital Territory of Delhi for recognising the property rights of resident in unauthorised colonies by securing the rights of ownership or transfer or mortgage in favour of the residents of such colonies who are possessing properties on the basis of Power of Attorney, Agreement to Sale, Will, possession letter or any other documents including documents evidencing payment of consideration and for the matters connected therewith or incidental thereto.

It is expedient to have a law to recognise and confer rights of ownership or transfer or mortgage to the residents of unauthorised colonies as one time special measure.

** Please read the Act here: The National Capital Territory of Delhi (Recognition of Property Rights of Residents in Unauthorised Colonies) Act, 2019

Ministry of Law and Justice

[Notification dt. 12-12-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Appellate Tribunal for SAFEMA, FEMA, PMLA, NDPS and PBPT Act: Justice Manmohan Singh (Chairman) allowed an appeal filed by a consortium of banks and set aside an order by the Adjudicating Authority which had attached properties of appellant herein (PMT Machines) mortgaged with the banks on the ground that the mortgaged properties were acquired much before the date of the alleged offence and the charge of properties are also much prior to the date of alleged offence committed.

The case of the appellants was that PMT Machines Limited was undergoing a corporate insolvency resolution process (CIRP). Meanwhile, by order of the Directorate of Enforcement (ED), its properties were attached under PMLA. The appellant banks were providing PMT Machines with financial facilities and PMT created charge and rights in favour of the banks. Banks (the creditors), in the instant appeal filed through the Resolution Professional of PMT Machines, were pressing for relief to enable them to maximise the value of assets and recover their debts.

Shri Rajshekhar Rao, on behalf of the appellants, contended that the allegations of money laundering in the complaint pertained to period after charge/mortgage was created. It was also submitted that the assets were acquired by PMT Machines much before the commission of the alleged offence. In addition to this, ED did include Banks as a Respondent in the proceedings before the Adjudicating Authority as required by Section 8(1) of the Prevention of Money Laundering Act, 2002. Due to such attachment, the CIRP was getting delayed and thus the objective of the Insolvency and Bankruptcy Code, 2016 was being defeated. 

Shri Nitesh Rana, on behalf of the respondents, argued that though the banks were entitled to recover the amount, they should approach the Special Court by filing the petition under Section 8(8) of PMLA.

The Appellate Tribunal accepted the contention that the mortgaged properties were acquired much before the date of the alleged offence and the charge of properties are also much prior to the date of the alleged offence committed. The Tribunal looked into the object of both the legislations (PMLA and IBC) and also relied on Delhi High Court Judgment in Directorate of Enforcement v. Axis Bank, 2019 SCC OnLine Del 7854, and opined that if a bonafide third party claimant had acquired interest in the property which is being subjected to attachment at a time anterior to the commission of the criminal activity, the product whereof is suspected as proceeds of crime, the acquisition of such interest in property by the third party cannot conceivably be on account of intent to defeat this law.

Similarly, when a secured creditor being a bonafide third party claimant initiates actions in accordance with law for enforcement of such interest prior to the order of attachment under PMLA, the initiation of the latter action unwittingly having the effect of frustrating the former since both actions are in accord with law, in order to co-exist and be in harmony with each other, it would be appropriate that the PMLA attachment, though remaining valid and operative, takes a back-seat allowing the secured creditor bonafide third-party claimant to enforce its claim by disposal of the subject property, the remainder of its value, if any, thereafter to be made available for purposes of PMLA. The tribunal ordered in favour of the banks and specifically mentioned that ED is not precluded to attach other private properties and assets of the accused. [PMT Machines Ltd. v. Directorate of Enforcement, Delhi, 2019 SCC OnLine ATPMLA 43, decided on 16-09-2019]

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 ]