Whether the CLB has the authority to cancel the purchase of a property by a director in his individual name though the part of the purchase consideration was paid by the company?

Whether the CLB has the authority to cancel the purchase of a property by a director in his individual name though the part of the purchase consideration was paid by the company?

The HIGH COURT OF MADRAS in the case of T. Vinayaka Perusal v. T. Balan in Co. Appeal No. 24 of 2009 and pounced on April 29, 2011, CLB has no authority to cancel the purchase of a property by a director in his individual name though the part of the purchase consideration was paid by the company.

In the instant case, in the year 1989,, sale deed was executed in favour of the respondent-director, while purchasing the land on behalf of the company. The property was mortgaged by the respondent-director in his individual capacity. The parties also came to know about the property being in the name of the respondent-director, when the suit was filed and got settled by respondent-director by redeeming the property. Therefore, it was not open to the company to challenge the sale, that too, in the CLB, after lapse of 15 years. It seems that the object of moving the CLB was, that the respondents No. 1 to 4 thought that the civil suit for claiming the property would not be competent, as the property not only was registered in the name of the sixth respondent but he acted as the absolute owner thereof throughout all these years, to the knowledge of the company and other Directors and members of the company.

Respondents Nos. 1 to 4 filed Company Application No. 171 of 2006 in C. P. No. 7 of 2004 (T. Balan v. Unicentre Agencies Engg. (P.) Ltd. [2011] 167 Comp. Cas. 59/[2009] 96 SCL 71 (CLB-Chennai) to set aside the sale made by Thiru G. George in favour of the appellant, by claiming that the schedule property belonged to M/s. Unicentre Agencies and Engineering P. Ltd., the fifth respondent, though it was registered in the name of the sixth respondent. This was for the reason that a sum of Rs. 1,00,000 (rupees one lakh only), forming part of the sale consideration was paid by Thiru G. George from the funds of the company. Whereas a sum of Rs. 1,50,000 (rupees one lakh fifty thousand only) was paid by Thiru G. George.

The claim of respondents Nos. 1 to 4 was that the lands to the extent of same proportion, i.e., 1.60 acres out of 4.01 acres to be restored to the company.

. The appellant alleged that the learned Company Law Board has erroneously held that sale by the sixth respondent to the appellant was not approved by the shareholders or the board of the company, as also that the Company Law Board, without giving any finding, with regard to the sale consideration, wrongly held that price was inadequate and not beneficial to the company. The jurisdiction of the Company Law Board to set aside the sale is also questioned.

The grounds of challenge by the appellant are that the Company Law Board failed to notice that the land in dispute stood in the name of individual and not in the name of company, so as to bring it within the ambit of mismanagement. The challenge is also on the ground that the learned Company Law Board exceeded the jurisdiction under sections 402 and 403 of the Companies Act, to set aside the sale by the director in his individual capacity. The appellant also challenged the findings of the Company Law Board, that the sale by Thiru G. George in favour of the appellant was hit by lis pendens.

The following questions were put forth by the applellanats.

 “(i)  Whether the Company Law Board is within its jurisdiction under sections 402 and 403 of the Companies Act, 1956, to set aside the sale of immovable properties of an individual by such person in favour of the appellant ?

(ii)  Whether the Company Law Board exceeded its jurisdiction in ordering restoration of a portion of the subject property to the company and thereby wrongly assumed to itself the power of a civil court ?”

It was alleged by the plaintiffs that  “The properties have been purchased for a sum of Rs. 2.50 lakhs, which was met by the company to a tune of Rs. 1 lakh, which works out to 40 per cent. of the total consideration of Rs. 2.50 lakhs and the balance considerations was paid by the second respondent from and out of his resources. The company would therefore be entitled for 40 per cent. of the total extent of the properties,.

Admittedly, in this case, right from the date of purchase, the company never came in possession or in ownership of the property.

It was argued by  the respondents that the Company Law Board could deal with the property, still the limitation prescribed is three months, prior to the filing of the petition. In this case, the property was purchased in the name of the sixth respondent in 1989, therefore, the Company Law Board had no jurisdiction to deal with this property.

There is a statutory bar under section 52 of the Transfer of Property Act against alienation of any property involved in a proceeding, without the authority or the prior permission of the court, as laid down in Dhanalakshmi v. P. Mohan [2005] 2 CTC 254 and G. Krishnamoorthy v.Sukumar [2003] 1 CTC 405. The Privy Council held in Puran Chand Nahatta v. Monmotho Nath Mukherjee, AIR 1928 PC 38, that any purchaser of the property during the pendency of a suit, can enjoy the property subject to any order which may be passed by the court in the pending suit

This proposition again cannot be disputed. In the present case, admittedly, sale deed was executed in favour of the sixth respondent in the year 1989, while purchasing the land on behalf of the company. The property was mortgaged by the sixth respondent in his individual capacity. The parties also came to know about the property being in the name of the sixth respondent, when the suit was filed and got settled by the sixth respondent, by redeeming the property. Therefore, it was not open to the company to challenge the sale, that too, in the Company Law Board, after lapse of 15 years..

 The reliance of this also is misconceived, firstly, for the reason that it is the decision of the Company Law Board, which is not binding and secondly for the reason that in the present case, respondents Nos. 1 to 4 challenged the sale in favour of the sixth respondent after lapse of more than 15 years, which certainly causes prejudice to the sixth respondent, as well as the appellant.

 The finding of the Company Law Board, therefore, cannot be sustained, as the reading of the impugned order shows that the learned Company Law Board proceeded on presumption, that the property of the company has been sold to the appellant, during the pendency of the proceedings, therefore, sale was hit by the principles of “lis pendens”, which is fully wrong. The Company Law Board does not have jurisdiction to set aside the sale in favour of the sixth respondent, as under section 402, limitation to deal with the property to transfer is regarding the sale made three months prior to filing of the company petition, or during the pendency of the proceedings.

 The Company Law Board failed to notice that the material placed on record showed that respondents Nos. 1 to 4 was estoppel by their conduct to challenge the sale, as they permitted the sixth respondent to mortgage the property as collateral security by projecting him to be the owner. Even in the suit filed in the year 1995, the sixth respondent was shown to be the owner of the property mortgaged to the bank, but no steps were taken by respondents Nos. 1 to 4 to seek remedy of getting the sale set aside in favour of the sixth respondent.

 The sixth respondent, being the registered owner, has sold the property to the appellant in his individual capacity, and not as director of the company.

For the reasons stated above, this company appeal is allowed. The order passed by the Company Law Board is set aside. The petition, filed by respondents Nos. 1 to 4 under sections 397 and 398 of the Companies Act, 1956, is ordered to be dismissed. No costs.