Yusuf Engineering Co Pvt Ltd v. Vijay Kumar Kapoor & Ors

judgment:- "(ii) that the payments from the company in liquidation to M/s Flying Colours/Smt. Anita Jain were amounted more than claimed by Smt. Anita Jain to be due from the company in liquidation;

(iii) that the records of company in liquidation further

showed that Smt. Anita Jain have been receiving regular payments of her dues from the company in liquidation;

(iv) that thus the dues from the company in liquidation to Smt. Anita Jain were not clearly established and the transaction in favour of Smt. Anita Jain could not be said to be a bonafide one;

(v) that Smt. Anita Jain had closed the business of advertising agency in or about January, 1999 due to non payment of outstanding bills by the company in liquidation;……

(x) the aforesaid also showed collusion between the appellant, Smt. Anita Jain and the company in liquidation;" **************

***********

¶14We therefore do not find any merit in this appeal and dismiss the same. Though we have found the appellant to be in collusion with the company in liquidation and Smt. Anita Jain but we refrain from imposing any cost on the appellant."

¶23Ms. Anita Jain was an associate of Mr. V.K. Sharma from 1996 onwards and was used as a conduit for clandestine money transfers, as her advertising company M/s Flying Colours was created only for diverting money and for receiving excess money. Land barter was used as the device for transfer of land in her name in the first instance and then the same was sold off for cash. The entire purpose was to create multiple title disputes. This is evident from the Division Bench judgment in Smt. Benu Berry's case (supra). Further reference also made to the decision of this Court in Col. M.R. Bhakshi v. Fintra Systems Ltd. & Anr. 2008 (151) DLT 1, where, it was held that: "10. Having considered the respective submissions, I am, as at present advised, inclined to agree with the submissions of Mr. Rajiv Shakdher, Sr. Advocate the learned Amicus Curiae.

Keeping in view the purpose for which Section 542 has been enacted, and the fact that timely action is of the essence, not only to prevent the presentation of a fiat accompli by the fraudulent Directors of the company, but also to provide relief to the victims of the fraud, it seems that the establishment of the fraudulent conduct for attracting the provision of Section 542 of the Companies Act does. not require the same standard of proof as in a criminal trial and the rigours of the law of evidence as apply to a criminal trial would not apply to establish the commission of fraudulent acts and omissions by the Directors and Managers of a company. It has also to be kept in mind that by its very nature, fraud is not easy to establish. This is even more so, when the fraudulent conduct is undertaken by the Directors of a company, sitting in their own office, with a view to defraud the creditors/investors who, though the victim of the fraud, are not involved in the transactions which constitute such conduct and may have no personal knowledge of the same. In K. T. Dharanendrah v. R. T. Authority, AIR 1987 SC 1321, the Supreme Court, while dealing with a case under the Customs Act, 1962, observed that "an economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community. A disregard for the interest of the Community can be manifested only at the cost of forfeiting the trust and faith of the Community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest."

Analysis and Conclusions

¶24It can be seen from the above analysis that the main contention on behalf of the appellants in both the proceedings i.e., the execution appeals' revival applications and the company appeals is that, Yusuf was always the owner of and had title to the suit property, which could not be held responsible for the debts and liabilities of a third party viz. ARD. In other

words, that Anita Jain was the proprietor of ARD did not make any difference; Yusuf properties could not be attached and sold to satisfy the award, which implicated ARD. The corollary to this argument is that the fluctuating shareholding pattern in Yusuf and the extent of shares held by VK Sharma or by Anita Sharma could not in any manner have affected Yusuf's legal ownership of the suit property which could not have been legitimately auctioned. DK's additional argument is that it is a bona fide purchaser of property from the valid and true owner, Yusuf, and that its claim has to prevail over that of the auction purchaser.

¶25The record of execution proceedings would reveal that after institution notice was issued; the court order noted (on 26th August, 2010) that the JD (Anita Sharma nee Jain) refused to accept notice. It, therefore, directed attachment of the suit property. She entered appearance and stated on 22nd December 2010 that steps would be taken to challenge the award. The orders in execution proceedings also note that the JD's challenge to the award was unsuccessful; ultimately the decree arising from the award became final. The proclamation of sale of the suit property which had been attached on 26th August, 2010, was issued; it was directed to be published in, inter alia, the daily newspaper "The Hindu" as well as a local, vernacular newspaper. The sale was conducted and finalized after this event. There is, and cannot be any dispute that the auction purchaser is a bona fide purchaser, without notice of dispute regarding the title to the suit property.

¶26The rule approved in Chinnammal (supra) i.e. that an innocent, third party bona fide auction purchaser's rights cannot be affected because of irregularity in the manner the decree was obtained, or as to the subsequent fate of the litigation, was first approved in a Full Bench ruling of the Nagpur

High Court, in Shankar and Anr v. Jawaharlal AIR 1928 Nag 265 where it was held that: " a private satisfaction of a decree certified in court after the sale of immovable property has been held and before the confirmation of the sale is ordered, does extinguish the decree and prevent the Court from confirming the sale in favour of the auction purchaser, if he be the decree-holder himself, but it does not extinguish the decree and prevent the court from confirming the sale where a third person has purchased the property bonafide at the auction sale."

In a later judgment in Janak Raj v. Gurdial Singh AIR 1967 SC 608, it was held as follows:

"it must be held that the appellant-auction purchaser was entitled to a confirmation of the sale notwithstanding the fact that after the holding of the sale the decree had been set aside. The policy of the Legislature seems to be that unless a stranger auction-purchaser is protected against the vicissitudes of the fortunes of the suit, sales in execution would not attract customers and it would be to the detriment of the interest of the borrower and the creditor alike if sales were allowed to be impugned merely because the decree was ultimately set aside or modified."

Gurjoginder Singh v. Jaswant Kaur & Anr (1994) 2 SCC 368, relied on the judgment rendered by the Privy Council held that the status of a bona fide purchaser in an auction sale in execution of a decree to which he was not a party stood on a distinct and different footing from that of a person who was inducted as a tenant by a decree-holder-landlord. It was held as follows: "A stranger auction purchaser does not derive his title from either the decree-holder or the judgment-debtor and therefore restitution may not be granted against him but a tenant who obtains possession from the decree-holder landlord cannot

avail of the same right as his possession as a tenant is derived from the landlord."

Padnathil Ruqmini Amma v. P. K. Abdulla (1996) 7 SCC 668, reiterated the principle as follows: "11. In the present case, as the ex parte decree was set aside, the judgment-debtor was entitled to seek restitution of the property which had been sold in court auction in execution of the ex parte decree. There is no doubt that when the decree-holder himself is the auction-purchaser in a court auction sale held in execution of a decree which is subsequently set aside, restitution of the property can be ordered in favour of the judgment-debtor. The decree-holder auction-purchaser is bound to return the property. It is equally well settled that if at a court auction sale in execution of a decree, the properties are purchased by a bona fide purchaser who is a stranger to the court proceedings, the sale in his favour is protected and he cannot be asked to restitute the property to the judgment-debtor if the decree is set aside. The ratio behind this distinction between a sale to a decree-holder and a sale to a stranger is that the court, as a matter of policy, will protect honest outsider purchasers at sales held in the execution of its decrees, although the sales may be subsequently set aside, when such purchasers are not parties to the suit. But for such protection, the properties, which are sold in court auctions, would not fetch a proper price and the decree-holder himself would suffer. The same consideration does not apply when the decree-holder is himself the purchaser and the decree in his favour is set aside. He is a party to the litigation and is very much aware of the vicissitudes of litigation and needs no protection."

¶27It is clear, therefore, that previous judgments have made a distinction between one class of purchasers in court auctions and another: if a decree holder purchases the property and the sale is upset because the underlying

decree is reversed, or for other reason, the sale transaction can be avoided. On the other hand, if the purchaser is a third party, bona fide buyer of the property, he is immune to the vicissitudes of the underlying litigation as the law deems that he has no notice of such developments.

¶28The relevant provisions of the Companies Act are Sections 441, 536 and 537. The relevant extracts of Sections 536-37 are reproduced below: "536. Avoidance of transfers, etc. after commencement of winding up-. xxxxxxxxxxxxxxxx

(2) In the case of a winding up by [the Tribunal], any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall [unless the Tribunal] otherwise orders, be void." "537. Avoidance of certain attachments, executions, etc,. in winding up by Tribunal- (1) Where any company is being wound up by Tribunal-xxxxxxxxxxxxxxxx

(b)any sale held, without leave of the Tribunal of any of the properties or effects of the company after such commencement shall be void." Section 441 on the other hand, enjoins that upon admission of a winding up petition, it shall be "deemed to" relate back to the date of its filing. Whilst there is no doubt that upon winding up order being passed, there would be a "relation back" to the date of its presentation, yet the corollary that prior to the making of an order for winding up the legal consequence of dispositions (especially a court auction) being rendered void does not follow. In other

words disposition is rendered void if and when an order for winding up is passed. However, the Company Judge has the discretion to hold that an individual transaction made during the interregnum is valid. This position emerges from a reading of Gorakhpur Electric Supply Co. Ltd. v. Nariman & Co. (1947) 17 Comp Cas 87, A.C. Goel v. First National Bank Ltd., Delhi AIR 1960 P & H 476, S.P. Khanna v. S.N. Ghosh, 1976(6) TLR 1740 and Re Sidhpur Mills Company Ltd., (1987)1 Comp LJ 71. On an application of the principles underlying those authorities, it is therefore held, that in the present case, since the winding up order had not been made on the date of attachment, and later, the date of auction, the exercise of discretion by the learned Single Judge cannot be faulted.

¶29The relationship between Anita Sharma, nee Jain and VK Sharma, apparently did not begin with their marriage; the SFIO report stated that funds of JVG Finance, (the affairs of which were investigated by the SFIO) were used to buy various properties, including the suit property. This emerges from a reading of the order in Rohan Mehta v VK Sharma (CCP(CO.) 17/2007 in CP 265/1998 order dated 30th April, 2012) "22. Further, the SFIO in its report has found that M/s. Yusuf Engineering Company Pvt. Ltd. owning property bearing No. A-24, Okhla Industrial Area, Phase-I, New Delhi, had been purchased from the funds of JVG Finance Limited. The amount of money transferred by JVG Finance Limited to Yusuf Engineering Pvt. Ltd. as well as to its ex-Directors is reproduced hereinbelow:…" Again, in Brain Bridge Advertising v. Ambica Research and Development

(P) Ltd (order dated 8th May 2012 in CP 123/2010) it was stated that:

"The modus operandi adopted by accused / Petitioner Vijay Kumar Sharma is that he floats a large number of companies and rotates the Directors, funds and MOUs between these companies to keep the innocent investors and government agencies in dark. The Petitioner Vijay Kumar Sharma and other directors are having interconnected links in several companies including M/s PSG Developers & Engineers Ltd, M/s Vian Infrastructure Ltd., M/s JVG groups of companies, M/s Yusaf Eng. Ltd., etc. The accused persons / directors of these companies in active collusion with each other rotated themselves in these companies and transferred / siphoned off / utilized the funds collected from the innocent investors by opening a large number of bank accounts in the name of these companies. The present petitioner / accused Vijay Kumar Sharma is the mastermind behind these activities."

The other orders adverted to by the learned Single Judge also reveal that ARD too, apparently, was a front set up to ferret or tap the monies of investors. On the other hand, there is nothing on the record to suggest that the transaction, which was the basis of the arbitration award, was not bona fide. In the light of these facts, it is held that the submissions of Yusuf that it could not be held responsible for the liabilities of its shareholder or director, are without force.

¶30The court is of opinion that the learned Single Judge, in lifting the corporate veil, to discern the real involvement of individuals who set up a network of corporate entities to evade their liabilities and also to dupe the innocent public, cannot be faulted. The doctrine of lifting the corporate veil has been resorted to by the Supreme Court in several decisions, such as Commissioner of Income Tax v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819; Life Insurance Corporation of India v. Escorts Ltd. (1986) 1 SCC 264 and New Horizons Ltd. and Anr. v. Union of India & Ors. 1995 (1) SCC 478. In

a recent decision, State of Rajasthan v. Gotan Lime Stone Khanij Udyog (P) Ltd 2016 (4) SCC 469 it was held that: "23. The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion[7] but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation[8]. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc."

¶31In the present case, the lifting of ARD and Yusuf's corporate veil was justified and warranted. Given that V.K. Sharma and Anita Sharma had shareholding in Yusuf to the extent of 97% (and Anita Sharma also had corporatized ARD after the liabilities arose) the SFIO's report was correctly appreciated in the impugned order.

¶32As far as D.K. Warehouse goes, it is significant to note that the application filed by Yusuf did not mention about an agreement to sell with it at all. Furthermore, the agreement is unregistered. It was entered into after the auction sale. There is nothing mentioned in the application to say that DK Warehousing had not inspected the properties, which had been attached, or that it had no notice of the court auction. In these circumstances, the court is of opinion that the learned Single Judge's conclusion that its claim to have purchased the property in a bona fide manner, after the auction sale, is without foundation.

¶33In the light of the foregoing analysis the company appeals are dismissed; the applications to recall the order dismissing the execution appeals is also, for the same reason, dismissed. There shall be no order on costs.

S. RAVINDRA BHAT (JUDGE)

DEEPA SHARMA (JUDGE) MARCH 16, 2017

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 11.05.2016 Pronounced on: 16.03.2017 + CO.APP.50/2013 & C.M. NOS. 11516/2013 & 11518/2013 VIJAY KUMAR SHARMA ..... Appellant Versus VIJAY KUMAR KAPOOR AND ORS. ..... Respondents + EFA (OS) 9/2012 YUSUF ENGINEERING CO. PVT. LTD. ..... Appellants Versus MR. VIJAY KUMAR KAPOOR AND ANR. ..... Respondents + EFA (OS) 12/2012 YUSUF ENGINEERING CO. PVT. LTD. ..... Appellant Versus MR. VIJAY KUMAR KAPOOR AND ORS. ..... Respondents + CO. APP.61/2013 & C.M. NOS. 13310-13312/2013 D.K. WAREHOUSE PVT. LTD. ..... Appellant Versus BRAINBRIDGE ADVERTISING AND MARKETING PVT. LTD. AND ANR. ..... Respondents Through: Sh. Hitender Kapur and Sh. Sagar Chawla, Advocates, for D.K. Warehouse in Co.App.50/2013, EFA(OS) 9/2012, EFA (OS) 12/2012 & Co.APP.61/2013. Sh. Aruneshwar Gupta and Ms. Parul Bose, Advocates, for D.K. Warehouse, in EFA (OS) 12/2012. Sh. Vivek Gupta, Advocate, for D.K. Warehouse, in Co.App.50/.2013. Sh. Manjit Singh Ahluwalia, Advocate, for ARD with Ms. Anita Jain, in Co.App.50/2013. Sh. Rajiv Bahl, Advocate, for OL, in Co.App.50/2013, EFA(OS) 9/2012, EFA (OS) 12/2012 & Co.APP.61/2013. Sh. Deepak Khadaria, Sh. C. Mohan Rao and Sh. Lokesh Sharma, Advocates, for Sh. Manish Katyal, auction purchaser. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MS. JUSTICE DEEPA SHARMA MR. JUSTICE S. RAVINDRA BHAT % 1. This common judgment disposes off four appeals (two execution appeals and two company appeals), because of the twining of facts. They relate to one property A-24, Okhla Industrial Estate, Phase I (hereafter "the suit property"). The first set of two appeals are preferred by Yusuf Engineering Co (P) Ltd (hereafter "Yusuf" or "YECPL") which had filed EA 668-69/2011 claiming an order to set aside the sale of the suit property pursuant to a court order dated 30.09.2011 and a further stay of proceedings in Execution Petition No. 135/2010. The other application, EA 5/12 was by Manish Katyal (hereafter "the auction purchaser") who sought confirmation of the auction sale. Yusuf's applications were dismissed and those of the auction purchaser were allowed, by the learned Single Judge, in the order dated 02.03.2012. Yusuf prefers the two execution appeals, i.e. EFA 9 and 12/2012 against the said judgment (the said two appeals are hereafter referred to as the "execution appeals"). The second set of appeals is by Vijay Sharma (Co. A. No. 50/2013) and D.K. Warehouse Pvt. Ltd (Co. A. No. 61/2013- hereafter "D.K. Warehouse"). These appeals, preferred under Section 483 of the Companies Act, 1956 (hereafter called "company appeals") are directed against an order of the Company Judge dated 07.05.2013 in CP 265/1998. The company appeals also pertain to the suit property. Facts relevant to the execution appeals 2. Yusuf purchased the suit property by a registered deed dated 22.12.1992. Its predecessor-in-interest had acquired perpetual leasehold rights from the Delhi Development Authority (DDA) through a deed dated 25.09.1980. It is alleged that on 27.11.2003, the suit property was let out to M/s Ambica Research Development (hereafter "ARD") a proprietorship concern of Ms. Anita Jain. It is stated that such an arrangement had the approval of the concerned authorities and that later, a greater portion of the suit property on the ground and first floors etc. were let out through a lease deed for three years to ARD on 10.02.2006, by a lease deed. Another lease deed was later executed on 01.08.2009. Apparently, in the meanwhile, on 01.09.2005, Ms. Anita Jain married Mr. V.K. Sharma (appellant in one of the company appeals). A dispute had, in the meanwhile arisen between ARD and one Vijay Kapoor (hereafter called the "decree holder" or "DH"), was referred to arbitration. An award was rendered, adverse to ARD, i.e. the proprietorship concern of Ms. Anita Jain, on 6th January, 2010, holding her liable to pay `21,01,875.37 with interest @ 9% per annum from 2006. This award became the subject matter of the