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

Date of the Judgment: January 25, 2023

Citation: 2023 INSC 842

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

Can a court impose a blanket injunction on all properties of a company when the dispute involves a smaller claim and the company is not directly related to the company under liquidation? The Supreme Court of India recently addressed this question, modifying a High Court order that had restrained a company from alienating its properties. The court, while acknowledging the need to protect investor interests, emphasized the importance of balancing this with the need to avoid stalling large-scale projects. This case highlights the complexities of corporate disputes and the judiciary’s role in ensuring equitable outcomes.

Case Background

In 2008, Surinder Singh Marwah and another respondent (Respondent Nos. 1 and 2) invested in a commercial project, “Festival City Mall,” in Ludhiana, Punjab, launched by Respondent No. 3 Company, based on the representation of Dr. Rajesh Aeren, the Managing Director (MD) of Respondent No. 3. They were promised returns from August 1, 2008, and allocated 17 shops in the project. A term loan of Rs. 100 Crore was also availed from a consortium of banks for the project.

However, the project stalled, and neither possession of the shops nor the assured returns were provided. In 2009, Respondent Nos. 1 and 2 filed a winding-up petition against Respondent No. 3 Company in the High Court of Delhi. The High Court ordered Respondent No. 3 to deposit Rs. 1.5 crore, which was not complied with, leading to the company going into liquidation in 2016.

Several other investors also filed complaints, leading to an FIR in 2015 and a charge sheet in 2016, alleging that funds meant for the project were diverted. The Appellant, a 100% FDI company, entered into a development agreement in 2014 with a consortium of six land-owning companies for 11 properties. Respondent Nos. 1 and 2, based on the charge sheet, filed a Company Application to restrain these six companies from alienating the properties, alleging that Respondent No. 3 had siphoned off investor funds through intermediate companies to these six land-owning companies, which were allegedly related to Respondent No. 3. The Single Judge of the High Court initially restrained the six companies from transferring the properties, but later vacated the 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, selling, or alienating the 11 properties based on the allegations of siphoning of funds. However, the Single Judge later vacated these interim orders on February 21, 2019, also appointing Ellahi Goel and Co., Chartered Accountants, to audit the books of accounts of Respondent No. 3 Company. Aggrieved by the vacation of the interim orders, Respondent Nos. 1 and 2 appealed to the Division Bench of the High Court. The Division Bench allowed the appeal, reinstating the restraint on the properties, which led to the current appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of Section 339 of the Companies Act, 2013. This section deals with the liability for fraudulent conduct of business during the winding-up process. Specifically, it states:

“339. Liability for fraudulent conduct of business.—(1) 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 core issue is whether the actions of the Appellant and the six land-owning companies fall within the ambit of this provision, and whether they can be held liable for the debts of Respondent No. 3 Company, which is under liquidation.

Arguments

Appellant’s Arguments:

• The Appellant argued that it has no connection with Respondent No. 3, which is under liquidation.
• It was submitted that the properties were purchased with the Appellant’s funds, not with those of Respondent No. 3.
• It was contended that Section 339 of the Companies Act, 2013, can only be applied to directors, managers, officers, or those knowingly involved in fraudulent activities of the company under liquidation (Respondent No. 3), which the Appellant is not.
• The Appellant highlighted that the Single Judge of the High Court had rightly vacated the interim injunction after giving cogent reasons.
• The Appellant argued that the claim of Respondent Nos. 1 and 2 is small compared to the value of the project, and the injunction was causing significant losses.
• The Appellant offered an undertaking not to develop 5 acres of the land to protect the interests of Respondent Nos. 1 and 2, which was valued at approximately Rs. 25 crores.
• The Appellant relied on the case of Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122], to argue that powers under Section 339 of the Companies Act, 2013, can only be used concerning the company under mismanagement and not to other companies or persons.

Respondent No. 4’s Arguments:

• Respondent No. 4 supported the submissions of the Appellant, stating that the Respondent Nos. 1 and 2 are commercial investors who willingly take risks.
• It was submitted that the Respondent Nos. 1 and 2 invested in the “Festival City Mall” project, which was constructed by Respondent No. 3, and their claim should be against that company only.
• Respondent No. 4 argued that Respondent No. 3 is under liquidation, and Respondent Nos. 1 and 2 can raise their claims in those proceedings.

Respondent Nos. 1 and 2’s Arguments:

• The Respondents argued that the Division Bench of the High Court rightly lifted the corporate veil and found that all transactions were controlled by Dr. Rajesh Aeren.
• It was contended that the properties in question were purchased with funds invested in Respondent No. 3 Company through surreptitious means.
• The Respondents alleged that Dr. Rajesh Aeren had committed fraud upon investors like them.
• The Respondents argued that if a status quo order was not passed, it would result in a fait accompli.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue that the court addressed was:

• Whether the Division Bench of the High Court was justified in passing a blanket order of injunction restraining the transfer, selling or alienating of all 11 properties admeasuring 115 acres, when the claim of the Respondent Nos. 1 and 2 was for a much smaller amount and the Appellant was not directly related to the company under liquidation.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

• Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122] – Supreme Court of India
  • This case was cited by the Appellant to argue that the powers under Section 339 of the Companies Act, 2013, can only be used concerning the company under mismanagement and not to other companies or persons.
• Section 339 of the Companies Act, 2013
  • The Court considered this provision to determine if the Appellant could be held liable for the debts of Respondent No. 3.

Judgment

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

How each authority was viewed by the Court?

• The Court relied on Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122]* to support its view that the powers under Section 339 of the Companies Act, 2013, should be used with respect to the company under liquidation and not to other companies or persons.

The Supreme Court held that while the Division Bench of the High Court had found a prima facie case in favor of the Respondent Nos. 1 and 2, a blanket injunction on all 11 properties was not justified. The Court emphasized that the entire project should not be stalled for a claim of a few crores. The Court noted that the audit report revealed that a significant amount of money had been received by A.R. Developers Private Limited and part of it was used to pay the consortium of six land-owning companies. The Court observed that the interests of the Respondent Nos. 1 and 2 could be protected by directing the Appellant and Respondent No. 4 to provide an undertaking not to create any third-party rights in respect of the properties mentioned in paragraph 16 of the judgment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by a need to balance the interests of all parties involved. The Court was concerned that a blanket injunction on all 11 properties would cause irreparable harm to the Appellant and Respondent No. 4 by stalling the entire project, especially considering the claim of the Respondent Nos. 1 and 2 was for a much smaller amount. The Court was also influenced by the fact that the Appellant had offered an undertaking not to create any third-party rights on 5 acres of land, which had a market value of approximately Rs. 25 crores. This offer was seen as a reasonable way to protect the interests of the Respondent Nos. 1 and 2 while allowing the project to proceed. The Court also took into account the audit report, which revealed that a significant amount of money had been received by A.R. Developers Private Limited and part of it was used to pay the consortium of six land-owning companies.

The Court’s reasoning was based on the principle of balancing the equities. The Court held that while the interests of the Respondent Nos. 1 and 2 needed to be protected, the entire project could not be stalled for a claim of a few crores. The Court also considered the fact that the Appellant had offered an undertaking not to create any third-party rights on 5 acres of land, which was a reasonable way to protect the interests of the Respondent Nos. 1 and 2. The 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 Court also observed:

“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. If such an order is allowed to continue, it will cause irreparable injury to the appellant and the respondent No.4 inasmuch as the entire development would be stalled.”

The Court further noted:

“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

• A blanket injunction on all properties of a company is not justified when the claim is for a smaller amount and the company is not directly related to the company under liquidation.
• Courts must balance the need to protect investor interests with the need to avoid stalling large-scale projects.
• An undertaking by the Appellant not to create any third-party rights on specific properties can be a reasonable way to protect the interests of the Respondent Nos. 1 and 2 while allowing the project to proceed.
• The case highlights the importance of considering the principles of prima facie case, balance of convenience, and irreparable injury when granting injunctions.

Directions

The Supreme Court issued the following directions:

• The Appellant and Respondent No. 4 were directed to file an undertaking before the Court within four weeks that they shall not create any third-party rights in respect of the properties mentioned in Paragraph 16 of the judgment.
• The undertaking would be subject to further orders passed by the Single Judge of the High Court in Company Petition No. 482 of 2009.
• The Single Judge of the High Court was requested to decide the issue regarding final orders with respect to the properties mentioned in paragraph 16 as expeditiously as possible, preferably within one year from the date of the order.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that a blanket injunction on all properties of a company is not justified when the claim is for a smaller amount and the company is not directly related to the company under liquidation. The Court emphasized the need to balance investor protection with the need to avoid stalling large-scale projects. This decision clarifies that courts should consider the principles of prima facie case, balance of convenience, and irreparable injury when granting injunctions. There is no change in the previous position of the law, but this judgment emphasizes the need to apply the existing law with a balanced approach.

Conclusion

The Supreme Court partially allowed the appeal, setting aside the Division Bench of the High Court’s order that had imposed a blanket injunction on all 11 properties. The Court directed the Appellant and Respondent No. 4 to provide an undertaking not to create any third-party rights on specific properties, thus protecting the interests of the Respondent Nos. 1 and 2 while allowing the project to proceed. The Court emphasized the need to balance investor protection with the need to avoid stalling large-scale projects and directed the High Court to expedite the final decision of the matter.

Category

• Company Law
  • Winding Up
  • Fraudulent Conduct
  • Section 339, Companies Act, 2013
• Property Law
  • Injunction
  • Property Dispute
• Companies Act, 2013
  • Section 339, Companies Act, 2013

FAQ

Q: What does this judgment mean for investors in stalled projects?

A: This judgment highlights that while investor interests need to be protected, courts must also consider the impact of injunctions on large-scale projects. A blanket injunction on all properties may not be justified if the claim is for a smaller amount and the company is not directly related to the company under liquidation.

Q: Can a court stop all development on a project if some investors have a grievance?

A: Not necessarily. This judgment suggests that courts should balance the need to protect investor interests with the need to avoid stalling large-scale projects. An undertaking by the developer not to create any third-party rights on specific properties may be a reasonable alternative.

Q: What is an “undertaking” in this context?

A: An undertaking is a formal promise given to the court. In this case, the Appellant and Respondent No. 4 promised not to create any third-party rights on specific properties until the High Court makes a final decision, ensuring the properties are available to satisfy the claims of the investors if the court finds in their favour.

Q: What is the significance of Section 339 of the Companies Act, 2013, in this case?

A: Section 339 deals with the liability for fraudulent conduct of business during the winding-up process. The court considered whether the actions of the Appellant and the six land-owning companies fell within the ambit of this provision, and whether they can be held liable for the debts of Respondent No. 3 Company.

Q: How does this judgment impact future cases involving similar issues?

A: This judgment reinforces the principle that courts should consider the principles of prima facie case, balance of convenience, and irreparable injury when granting injunctions. It also highlights the need to balance investor protection with the need to avoid stalling large-scale projects.