India: Restraint On "Disposition & Sale" Of "Property Of The Company"

Background

Section 334 of the Companies Act, 2013 (Act) inter alia provides that in the case of winding up of a company, any disposition of the property of the company after the commencement of the winding up shall be void unless the Court orders otherwise. Further, Section 335 of the Act1 inter alia provides that any sale of the properties of the company, which is made without the leave of the Court after the commencement of winding up proceedings, shall be void. However, the expression 'property of the company' has not been defined under the Act.

Issue

In the absence of any guidance under the Act regarding the scope and ambit of the expression 'property of the company', there have been instances under the Companies Act, 1956 (1956 Act), where the Official Liquidator (legal custodian of the company in liquidation upon commencement of winding up) had applied to the Court seeking a declaration that transfer / termination / cancellation of provisional allotments standing in the name of company be held void under Sections 536 and 537 of the 1956 Act, if made without  the leave of the Court.

This article addresses the interpretation of the expression 'property of the company' under Sections 334 and 335 of the Act, in the context of immovable properties.  Section 54 of the Transfer of Property Act, 1882 (TPA) provides that a right / interest in an immovable property is transferred only by way of a registered instrument i.e. the conveyance deed and the said right / interest is not said to have been transferred:

  1. where the party only has a provisional allotment in its name upon execution of an agreement for sale;
  2. where the entire consideration is yet to be paid;
  3. where the possession is yet to be handed over; and
  4. where the registered conveyance deed is yet to be executed.

Clearly, in cases of provisional allotments of immovable property, the property does not pass on to the company until the sale deed is executed and registered. Consequently, prior to that stage, the right, title, ownership and interest in the property vests solely in the actual owner in whose favour the title deeds exist, and with whom the Company has executed the Agreement for Sale. Such owner is free to deal with the property till the execution and registration of the sale deed. The owner may even sell the property to a third party, in the event that the company breaches any of the material terms of the agreement for sale. Cancellation / termination of such agreement for sale and consequent sale to a third party in case of breach by the company cannot be challenged under Sections 334 and 335 of the Act on the ground that such sale / transfer / cancellation has been carried out without obtaining the leave of the Court. The leave of the Court is only to be obtained in cases of disposition and sale of 'property of the company', which a provisional allotment is not.

Analysis

Imposing an obligation, either on the provisional allottee, i.e. the company, or the owner, to obtain leave of the Court under Sections 334 and 335 of the Act, before carrying out any sale / transfer / cancellation of a provisional allotment is not legally justifiable for the reasons set out below.

In the absence of any guidance under the Act to ascertain the meaning and scope of the expression 'property of the company', reference may be made to the general law governing and regulating the transfer of property, i.e.  Transfer of Property Act, 1882 (TPA).the TPA. Chapter III of the TPA deals with sale of immovable property. Section 54 of the TPA defines 'sale' as a transfer of ownership in exchange for a price. It further provides that such transfer in the case of tangible immoveable property whose value exceeds INR 100 (Indian Rupees One hundred) can only be made by a registered instrument. It further defines a 'contract for sale' as a contract stipulating that a sale of the subject property shall take place on the terms settled between the parties. It provides that a contract for sale does not create any interest in or charge on such property on its own.

Further Section 3(26) of the General Clauses Act, 1897 defines 'immovable property' as including land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

Further the Hon'ble Supreme Court in Suraj Lamp & Industries Pvt. Ltd. vs.v State of Haryana & Others2 upon an analysis of Section 54 of TPA held that a transfer of immoveable property by way of a sale can only be made by a deed of conveyance, i.e. a sale deed. The Court has held that in the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property can be transferred. While analysing the sanctity of an agreement / contract for sale, the Court held that such agreement / contract, not being a registered deed of conveyance (deed of sale) would fall short of the requirements of Sections 54 and 55 of TPA and would not confer any title or transfer any interest in an immovable property. The Hon'ble Supreme Court in A Jitendernath v Jubilee Hills3 while dealing with provisional allotment of a property had held that by reason of such provisional allotment, the allottee would not derive any legal right at all, far less an indefeasible one. The Court further held that such provisional allotment would acquire permanence provided the requirements stipulated therein were complied with. Admittedly, theThe material requirements arewere payment of balance consideration amount, obtaining possession, execution of sale deed and registration thereof, which were not met in the aforesaid case.

Some assistance in this regard can also be drawn from the UK Insolvency Act, 1986, Sections 127 and 128 which are in pari materia with Sections 334 and 335 of the Act. While interpreting Sections 127 and 128 of the UK Insolvency Act 1986, Palmer's Company Law4 opines that to constitute 'property of the company', the asset in question - whether tangible or intangible - must be in the beneficial ownership of the company at the time of the alleged disposition. Further the expression 'beneficial ownership' has been defined to mean the right to enjoyment of property as one's own, and a 'beneficial owner' has been defined to a person who is entitled to the possession and use of land for his own benefit.5

However, in the Indian context, particularly in view of Section 54 of the TPA, the buyer is not conferred the right to use the property and / or the buyer is not handed over possession of the property at the time of execution of the contract / agreement for sale, or the issuance of provisional allotment letter. In other words, the right of possession or similar beneficial interest does not accrue to the buyer until the execution and registration of sale deed upon payment of entire consideration.6 Therefore, even if we were to apply the principle of beneficial ownership in the present context, provisional allotments in the name of the company will fall short event of this definition as the companies are typically not handed over possession upon execution of the contract / agreement for sale or issuance of the provisional allotment letter. 

Therefore, provisional allotments made in favour of the company, pursuant to execution of an agreement / contract for sale would be governed and regulated by the provisions and principles enshrined under the TPA, particularly Section 54and the law laid down by the Hon'ble Supreme Court. Thus, the bar on the disposition and sale of 'property of the company' in the context of immovable property will have to be understood as including only such properties of the Company where a registered conveyance deed has been executed, upon payment of sale consideration. Provisional allotments of immovable properties where the company still needs to remit the balance consideration amount, obtain possession, and have the sale deed executed and registered cannot be brought within the scope of the expression 'property of the company' under Sections 334 and 335 of the Act.

Thus there cannot be any bar / restriction on the otherwise lawful owner of such property to deal with it (by disposing / selling it) in the event the company commits a breach / default of the terms and conditions of the proposed sale. In the event of the otherwise lawful owner's disposition/ sale of the property, such disposition/ sale cannot be challenged under Sections 334 and 335 of the Act, as having been made without obtaining the leave of the Court, as such leave is only required where a 'property of the company' is being disposed or put to sale.

Footnotes

1 The corresponding Sections in the Companies Act, 1956 are Sections 536 and 537, which are identical. 

2 (2012) 1 SCC 656

3 (2006) 10 SCC 96

4 Palmer's Company Law, Sweet & Maxwell, Part 4, Para 15.531, Page15201

5 P Ramanatha Aiyer's Advanced Law Lexicon, Volume 1 (4th ed.), pg. 519

6 Gulshan Malik v Commissioner of Income Tax [ITA 55/2014, C.M. Appl. 2383/2014 & 2384/2014]

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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