Supreme Court Partially Allows Appeal in Property Dispute: Developer Group India Pvt. Ltd. vs. Surinder Singh Marwah (2023)

Date of the Judgment: 25 January 2023

Citation: 2023 INSC 56

Judges: B.R. Gavai, J., Vikram Nath, J.

Can a court restrain a third party from alienating their properties in a winding-up petition of another company? The Supreme Court recently addressed this question in a case involving a real estate project and allegations of financial fraud. The Court examined whether the High Court was correct in restraining the transfer of properties owned by a third party when the winding-up petition was against another company. The judgment was delivered by a bench comprising Justice B.R. Gavai and Justice Vikram Nath.

Case Background

In 2008, Surinder Singh Marwah and another individual (respondent Nos. 1 and 2) invested in a commercial project called Festival City Mall in Ludhiana, Punjab, which was being launched by respondent No. 3 Company. They were assured returns starting from August 1, 2008, and were allocated 17 shops in the project. However, the project faced difficulties, and construction was halted. Neither the possession of the shops was given nor were the assured returns or interest paid to the investors.

In 2009, the investors filed a winding-up petition against respondent No. 3 Company in the High Court of Delhi. During the proceedings, the High Court ordered respondent No. 3 to deposit Rs. 1.5 crore, which was not complied with. Subsequently, in 2016, respondent No. 3 Company went into liquidation.

Several other investors also filed complaints against respondent No. 3 and its Directors, leading to an FIR being registered in 2015. The investigation revealed that funds meant for the project had been diverted. In 2014, the appellant, a 100% FDI company, entered into a development agreement with a consortium of six land-owning companies for exclusive developmental rights over 11 properties. These six companies were allegedly related to respondent No. 3.

The investors then filed a Company Application to restrain the consortium of six companies from transferring the 11 properties, alleging that respondent No. 3 had siphoned off investor funds to these related companies, who then purchased the land. The High Court initially restrained the six companies from transferring the properties, but later vacated this order. The Division Bench of the High Court, however, reinstated the restraint, leading to the present appeal.

Timeline

Course of Proceedings

The Single Judge of the High Court initially restrained the six land-owning companies from transferring their properties. However, the Single Judge later vacated these orders, noting that the Official Liquidator could take appropriate action if the audit revealed any wrongdoing. The Division Bench of the High Court overturned the Single Judge’s decision and reinstated the restraint on the properties. The Division Bench reasoned that the properties were purchased with funds siphoned from respondent No. 3 Company, and that a status quo order was necessary to prevent further alienation of the properties. This led to the appeal before the Supreme Court.

Legal Framework

The case primarily revolves around Section 339 of the Companies Act, 2013. This section deals with the liability for fraudulent conduct of business during the winding-up process of a company. According to Section 339 of the Companies Act, 2013:

“If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.”

The appellant argued that the powers under Section 339 of the Companies Act, 2013 can only be used against directors, managers, or officers of the company under liquidation or those knowingly involved in fraudulent activities of that company. The appellant contended that since they were not related to respondent No. 3 Company, the High Court could not restrain their property under this provision. The Supreme Court also referred to the case of Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122], which held that the powers under Sections 337 and 339 of the Companies Act, 2013 can be used only in relation to the company under liquidation and not to the business of another company or other persons.

Arguments

Appellant’s Arguments (Developer Group India Pvt. Ltd.):

• The appellant argued that the High Court’s order was unsustainable because neither the appellant nor respondent No. 4 had any connection with respondent No. 3, the company under liquidation.
• The appellant contended that the properties in question were purchased with their own funds, not with funds siphoned from respondent No. 3.
• The appellant submitted that Section 339 of the Companies Act, 2013, only applies to directors, managers, or officers of the company under liquidation, or those knowingly involved in fraudulent activities of that company. Since the appellant did not fall under this category, the High Court could not restrain their properties.
• The appellant pointed out that the Single Judge had vacated the interim injunction with valid reasons and that the Division Bench had erred in reversing this.
• The appellant argued that the claim of the investors was a small amount compared to the total project and that the entire project had been stalled due to the injunction.
• The appellant offered to provide an undertaking not to develop 5 acres of the land, worth approximately Rs. 25 crores, to protect the interests of the investors.
• The appellant relied on the judgment in Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122] to argue that powers under Section 339 of the Companies Act, 2013, cannot be used against third parties.

Respondent’s Arguments (Surinder Singh Marwah and Others):

• The respondents argued that the Division Bench of the High Court had correctly restrained the transfer of properties after lifting the corporate veil.
• The respondents contended that the properties were purchased with funds siphoned from respondent No. 3 Company through intermediate companies.
• The respondents alleged that Dr. Rajesh Aeren had defrauded investors like themselves.
• The respondents submitted that if a status quo order was not passed, it would result in a fait accompli.
• The respondents claimed that the total amount due to all defrauded investors was approximately Rs. 31 crores.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue addressed by the Court was:

• Whether the Division Bench of the High Court was justified in restraining the transfer, selling, or alienation of properties of the appellant and respondent No. 4, which were not the company under liquidation (respondent No. 3) in a winding up petition.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122] to hold that the powers under Section 339 of the Companies Act, 2013 cannot be extended to third parties not related to the company under liquidation.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors:

• The Court was concerned that the Division Bench of the High Court had passed a blanket order restraining the alienation of all 11 properties, which was causing irreparable injury to the appellant and respondent No. 4 by stalling the entire project.
• The Court also considered that the claim of the investors, while significant, was not large enough to justify stalling the entire project. The Court noted that the investors’ interests could be protected by restraining the alienation of 5 acres of land, which had a market value of Rs. 25 crores, and directing the appellant to file an undertaking.
• The Court relied on Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122], to hold that the powers under Section 339 of the Companies Act, 2013 cannot be extended to third parties not related to the company under liquidation.
• The Court also took into account the audit report, which revealed that the appellant had invested a significant amount of money in the properties.

The Court’s reasoning was based on a combination of factual considerations and legal principles. The Court balanced the need to protect the interests of the investors with the need to avoid causing irreparable injury to the appellant and respondent No. 4 by stalling the entire project. The Court also relied on the legal principle that the powers under Section 339 of the Companies Act, 2013, cannot be extended to third parties not related to the company under liquidation.

The Supreme Court considered alternative interpretations, such as upholding the Division Bench’s order in its entirety, but rejected it because it would cause irreparable harm to the appellant and respondent No. 4. The Court also considered the interpretation that Section 339 of the Companies Act, 2013, could be extended to third parties, but rejected this interpretation based on the judgment in Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122]. The Court reached its final decision by balancing the interests of all parties and ensuring that the investors’ interests were protected without causing undue harm to the appellant and respondent No. 4.

The Supreme Court stated, “While passing an order of injunction, the Courts are required to be guided by the principles of prima facie case, balance of convenience and irreparable injury.”

The Supreme Court also noted, “We are, therefore, of the considered view that a blanket order directing maintenance of status quo in respect of the all 11 properties admeasuring 115 acres is not justified.”

The Court further stated, “Insofar as the interests of the respondent Nos. 1 and 2 are concerned, the same can be protected by directing the appellant and the respondent No.4 to file an undertaking before this Court that until further orders are passed in Company Petition No.482 of 2009, they shall not create any third party rights in respect of the properties mentioned in Paragraph 16 herein above.”

Key Takeaways

• The Supreme Court clarified that the powers under Section 339 of the Companies Act, 2013, cannot be extended to third parties who are not related to the company under liquidation or knowingly involved in fraudulent activities of that company.
• The Court emphasized that when issuing injunctions, courts must consider the principles of prima facie case, balance of convenience, and irreparable injury.
• The Court highlighted the importance of balancing the interests of all parties involved in a dispute and avoiding blanket orders that may cause undue hardship to one party.
• The Court demonstrated a willingness to consider alternative solutions, such as directing the appellant to provide an undertaking, to protect the interests of the investors without stalling the entire project.

Directions

The Supreme Court issued the following directions:

• The appeal was partly allowed, and the Division Bench’s order was set aside.
• The appellant and respondent No. 4 were directed to file an undertaking before the Supreme Court within four weeks that they would not create any third-party rights in respect of the specified properties (5 acres).
• The undertaking was made subject to further orders by the Single Judge of the High Court in the Company Petition.
• The Single Judge was requested to decide the issue regarding final orders with regard to the said properties as expeditiously as possible, preferably within one year.

Specific Amendments Analysis

There was no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the powers under Section 339 of the Companies Act, 2013, cannot be used to restrain the alienation of properties of third parties who are not related to the company under liquidation or knowingly involved in its fraudulent activities. This judgment reinforces the principle established in Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122]. There is no change in the previous position of law, but the case clarifies the application of Section 339 in the context of third-party properties.

Conclusion

The Supreme Court partially allowed the appeal, setting aside the Division Bench’s order that had restrained the transfer of properties owned by the appellant and respondent No. 4. The Court held that a blanket order restraining the alienation of all 11 properties was not justified and that the interests of the investors could be protected by restraining the alienation of 5 acres of land and directing the appellant to file an undertaking. The Court’s decision was based on the principle that the powers under Section 339 of the Companies Act, 2013, cannot be extended to third parties not related to the company under liquidation and the need to balance the interests of all parties involved in the dispute.