High Court of Punjab and Haryana

S.P. Jain

v.

Official Liquidator

VIJENDER JAIN, C.J.

And RAJIVE BHALLA, J.

CO. APPEAL NO. 4 OF 2007

And Co. Petition Nos. 121 of 1998 and 660 of 2002

April 18, 2007

Section 530 read with section 520 of the Companies Act, 1956 - Winding up - Preferential payments - Whether where liquidator retained possession of leasehold premises even after termination of lease to ensure and facilitate successful sale of assets of company in liquidation lying stored in that premises claim of landlord for mesne profits/rent would necessarily partake nature of expenses of liquidation and would, thus, have to be accorded priority in matters of payment - Held, yes

FACTS

The company in liquidation was a tenant in the premise owned by the appellants. On 17-7-1989, the appellants served a legal notice upon the company, terminating its tenancy and calling upon it to hand over vacant possession of the tenanted premises. As the company did not hand over vacant possession of the premises, the appellants, filed in the court of Additional District Judge. During the pendency of the aforementioned suit, the company was ordered to be wound up. The appellants proceeded with the suit with leave of company court. On 8-3-2001, the Additional District Judge, decreed the suit and passed a decree for possession and mesne profits at Rs. 25,000 per month with effect from 1-10-1989. The appellants filed petition for execution of the decree. The official liquidator sought for time to enable sale of the assets of the company stored therein, whereafter possession of the premises would be delivered to the petitioner. The company court granted necessary time to the Official Liquidator who, after auctioning the assets lying in the tenanted premises, handed over the vacant possession of the premises to the petitioner, with the permission of the company court.

The petitioner claimed that as the tenanted premises was occupied by the official liquidator to store the company’s assets so as to facilitate the sale of the company’s assets, the rent/mesne profits payable for the relevant period partook the nature of liquidation expense, in terms of section 530(6) and should be paid by assigning priority over and above the other creditors. The Single Judge held that though it was open to the appellants to seek rescission of the contract of tenancy after the order of winding up was passed, they instead sought permission to continue with the suit for possession and, therefore, payment of rent for use and occupation of the premises would rank as an ordinary debt, payable on a pro rata basis along with other creditors. An application for review of the aforementioned order, filed by the appellants, was dismissed.

On appeal:

HELD

Two categories of claims for rent/mesne profits may be raised with respect to a company-in-liquidation. Where a liquidator retains possession of the leasehold property to ensure and facilitate a successful fruition of the proceedings of winding up, the claim for mesne profits/rent would necessarily partake the nature of expenses of liquidation and would, thus, have to be accorded priority in matters of payment. Where, however, possession of the premises remains with the liquidator and it does not appear or is not shown that the property was used for the purpose of winding up, the claim for rent/mesne profits would partake the nature of an ordinary debt with no priority being accorded to it in matters of payment. As to the category in which claims for rent/mesne profits fall, would depend upon the facts and circumstances of each case. The onus to establish these facts lies upon the person claiming that the debt forms a part of expenses of liquidation. [Para 18]

In the instant case, the official liquidator, in response to the application for execution, pleaded in no uncertain terms that it was necessary for him to retain possession of the premises to ensure a successful fruition of the liquidation proceedings, for otherwise the assets lying in the premises would go waste, and their value would be seriously impaired, thus adversely affecting the interest of the creditors of the company in liquidation. Thus, it was necessary for the liquidator to hold possession of the leased property, so as to ensure a successful conclusion of the sale of the company’s assets and, therefore, the retention of the premises by the Official Liquidator could, by no stretch of imagination or legal hyperbole, be categorized as possession of the premises in the ordinary course of duties. The appeallants claim would necessarily partake the nature of expenses of liquidation and could not have been categorized as an ordinary debt, and would be entitled to be accorded priority in matters of payment, in accordance with the provisions of section 520. [Para 21]

The company judge declined relief to the appellants primarily, by holding that after the company went into liquidation, the appellants, instead of praying for rescission of the contract, prayed for permission to continue with the suit and, therefore, the mesne profits would be an ordinary debt. The company judge did not notice the contract of lease stood terminated/rescinded prior to the filing of a petition for winding up and/or passing of the order of the winding up. As the contract of lease stood determined, there was no occassion for the appellants to pray for rescission of the contract. A contract that does not subsist, cannot be rescinded or terminated and, therefore, the Company Judge erred in holding that as the appellants sought permission to continue with the suit, their claim for mesne profits would rank as an ordinary debt. [Para 22]

Hence, the claim of the appellants for according priority to the mesne profits/rent due to them from 15-7-1999 to 29-12-2001, would partake of the nature of costs of liquidation/expenses of winding up and would, therefore, have to be accorded priority in accordance with law. Consequently, the instant appeal was to be allowed and the impugned order was to be set aside.

CASE REVIEW

Official Liquidators, U.P. Union Bank Ltd. v. Rameshwar Nath Agarwal [1960] 30 Comp Cas 114; (SC) relied upon.

Board of Trustees for the Port of Kolkata v. Official Liquidator, Gauhati High court [2006] 130 Comp Cas 595 (Gau.) relied upon.

R.K. Manik v. Altos India Ltd. [2003] 114 Comp. Cas 470 /46 SCL 306 (Punj. & Har.) relied upon S.S. Chawla & Co. v. Global Motors Ltd. (In Liquidation) [1987] 62 Comp. Cas. 815 (Delhi); relied upon.