' This order will also dispose of four other similar applications namely, C. M. 204, 236, 290 and 378/L of 1980, which involve common questions. It has been prayed therein that either sale-deeds be executed by way of specific performance of the agreements to sell or leave be granted to file suits for specific performance of the agreements to sell executed between the applicants and the company, with regard to immovable properties of the respondent-company, in liquidation.
2. Briefly, the facts of the case are that the applicants separately entered into five different agreements between the 3rd September to 30th September, 1979, to purchase immovable property belonging to the respondent-company. They are said to have paid substantial amounts, on the signing of the agreements, leaving behind very meagre sums to be paid, on registration of the sale-deeds. However, before the deeds could be completed, a Provisional Liquidator was appointed on 22nd October, 1979, He was replaced by an Official Liquidator on 20th February, 1980, when the winding up order was passed.
3. It is contended by the learned counsel that the insolvency rules would apply to the case in hand and in view of the case-law cited on the point, the applications are likely to succeed. Reference has been made to Currimbhoy & Co. Ltd. v. L. A. Creet and others (1) in support. The finding of the Court in that case was that the effect of a company going into liquidation, while a contract entered into by the company before liquidation is subsisting, is the same as when a party to the contract becomes bankrupt or insolvent. It was observed that it may be for the benefit, of the bankrupt or insolvent or of his estate, to complete the contract and the bankruptcy or insolvency may not alone, necessarily, result in such an incapacity to perform the contract as to entitle the other party to treat it as broken and to claim damages, It was further stated that law does not require that the trustee in bankruptcy should give express notice within a reasonable time after the date of bankruptcy of his adoption of the contract. The Court relied on the English law to say that the trustee may disclaim a contract if it was not beneficial.
4. The law laid down in the English cases has also been cited before me. In Ex parte Taylor (2), it.Was held that an agreement to sell creates an equitable right of the purchaser in the property and, therefore, the
(1) AIR 1930 Cal. 113 (2) 102 AIR 84 (86)
' Court may sanction its spectific performance. In Ex parte Rabbldge (1) and 84 L T R 525, the Court took the same view to hold that a person entering into an agreement to purchase an immovable property has an enquitable right in the property and the Court may allow specific performance.
5. I have also been able to lay hands on a few judgments which further explain the position about specific performance in bankruptcy proceedings. In Pearce v. Bastable's Trustee In Bankruptcy (2).
Bastable agreed with Pearce to sell a leasehold house for 85E, which was subject to a mortgage of 300E. The agreement provided that Pearce should pay 42 lOs as a deposit on execution of the agreement in part payment and balance on 16th July, 1900, when purchase will be complete and Pearce entitled to possession. Pearce paid the deposit on the execution of the agreement and accepted vendor's title to the property. On 21st August, 1900, Bastable was adjudged a bankrupt.
The trustee in Bankruptcy approved the draft of assignment. To Pearce and sent it for execution.
Later, the trustee refused to execute the agreement without payment of the entire balance amount. The county Court dismissed motion of Pearce. The Divisional Court in appeal held that as the engrossm ent had already been approved and the property assigned, the trustee's act amounted to disclaiming the contract without disclaiming the lease which is not allowed.
6. The same case was then taken before the Court of Appeal (1901) 2 K B 518 but it was dismissed.
The Court recognized the legal position that a trustee could get rid of an onerous property under section 55 of Bankruptcy Act, but found that there was no burden on the property involved and its transfer would not have adversely affected the rights of the other persons. It was further held that by payment of a part of the price, the purchaser had acquired an equitable interest in the property and the contract bindls the trustee as much as it did the bankrupt, subject to right of the trustee to disclaim the contract, if it was onerous. It was thus on the view that the trustee had not disclaimed the entire contract that the Court directed the trustee to convey the property.
7. In re: Oriental Bank Corporation ex parte Guillemin (3), the view taken was that the contract which was entered into by the officers of the foreign branch on behalf of the company, without any notice of the winding up proceedings and, therefore, before revocation of their authority, was not invalidated and accordingly the creditors in respect of such transactions were not entitled to have their money refunded but should prove for amount under winding up pari passe with other creditors.
8. In re : Maughan (4), it was held that the right of a purchaser who had an uncompleted contract for the purchase of land ought not to stand in any better position than any other person who had dealt with a bankrupt. ' It was further observed that the purchaser might have a lien on the property for his deposit and expenses but the trustee is not bound to carry out the contract. In Rose v.
Watson (5) the House of Lords ruled that the position of a purchaser is that of a
(1) 48 L J R 15 (2) (1901) 2 Ch. 122
(3) (1884) 48 Ch. D 634 (4) (1885) 14 Q B D 98
(5) (1864) 10 H L C 672, 674, 684 ' secured creditor who has a charge or a lien on the property for the amount which he has paid and the costs. The only difference between the legal position of a purchaser of land and disposition in equity is that in equity there is a right to specific performance of a contract which does not remain after the bankruptcy of the vendor and is superseded by the right of other creditors of the bankrupt. The trustee is thus entitled to disclaim everything which is unprofitable.
9. Section 229 of the Companies Act applies some of the insolvency rules in winding up of insolvent companies. Under section 34 of the Provincial Insolvency Act, 1920, a claim arising out of a contract is a provable debt. It is thus not necessarily specifically enforceable. According to para. 1365 of the Halsbury's Laws of England, Vol. 7, 4th Edition, no proceeding or action against the company be proceeded with or commenced against a company by a person capable of proving in the winding up except by the leave of Court. In para. 1367 it is further stated that where the claim is for specific performance or for recovery of possession, the proceedings may be allowed to continue. Reference is made there to Thames Plate Glass Co. v. Land and Sea Telegraph Co. (1).
10. The principles deducible from the above judgments are
(1) That the trustee can disclaim contracts which are onerous, unprofitable or their completion might adversely affect the othe creditors.
(ii) The trustee cannot disclaim a part of the contract. He must, if he wants to, disclaim the contract, as a whole.
(iii) The purchaser of an immovable property under an uncompleted contract does acquire an equitable right in the property but cannot compel the trustee to specifically enforce the contract if it is found to be onerous to the estate..
(iv) The purchaser of an uncompleted contract has a lien on the property for his deposit and is to be treated as a secured creditor.
(v) Suits for specific performance filed before the insolvency may be allowed to continue.
11. The Joint Official Liquidators have not controverted the correctness or genuineness of all the transactions. They rather accept the receipt of the amounts and other contents. It is, however, stated by them that the price of the property in dispute when purchased by the company ranged between 11 and 13 thousand rupees per kanal. The rate in the transaction in dispute was between 15 and 17 thousand rupees. According to the scheme of arrangement submitted by the ex- management the existing price is shown to be about Rs, 32,000 per kanal. In this view of the matter, these are onerous contracts and they state that any order permitting specific performance will give undue preference to the applicants over other creditors. They, consequently, pray that the request of the applicants may not be allowed.
12. According to section 49 of the Registration Act, no right in an immovable property vests in a purchaser unless the sale deed is duly registered, right to specific performance is conferred by law only under, section 12 of the Specific Relief Act but its scope is limited as stated,lil above. The rest is based on mere equity. It must be clear that the; equity enters a situation only where the law has left a vacuum and it can!
(1) 1870 L R 11 Eq. 248 ' in no case replace express provisions of law, howsoever, inequitable they may look to be. The Courts in such a case will never grant an equitable relief as it will amount to illegality. Reference be made to Kurri Veeraredi v. Kurri Bapireddi (1) and T. Nagabhushanam, etc. v, S. Ramachandoh Rao, etc. (2).
13. The appointment of a Provisional Liquidator or the passing of an order for winding up, makes every disposition of property of the company and every transfer of shares or alteration in the status of its members, after the commencement of the winding up, void unless the Court orders otherwise under section 227 of the Companies Act. According to section 171, no suit or other legal proceedings shall be proceeded on winding up order except with the leave of the Court. Under section 178 the property, effects an actionable claim to which the company is or appears to be entitled have to be taken into custody by the Official Liquidator and they shall be deemed to be in the custody of the Court as from the date of the order for winding up of the company. Even any attachment, distress or execution to be in force, without leave of the Court, against the assets or effects of any sale, held without leave of the Court, of any of the properties of the company, after the commencement of the winding up, shall be void under section 232 (1). Further, preferential rights of the claimants for satisfaction of their claims are to be determined in accordance with section 230 of the Act.
14. As said above, the company's assets on winding up also include executory contracts. These contracts are liable to be disclaimed if unprofitable under section 230-A (I) by the Liquidator and rescinded by the Court at the instance of any person who, as against the Liquidator is entitled to any benefit or is subject to the burden of the contract, on such terms as the Court thinks just. Any person injured by the disclaimer shall be deemed to be a creditor and he may prove the amount as a debt. Section 323 (5) of the English Companies Act, 1948 is similar to section 230-A. There also a party to a contract may apply to the Court to rescind it which the Court may do on such terms as it thinks just and if it awards damages, to the applicant, against the company, the damages are provable as a debt in the winding up. Also refer to Sale Continuation Ltd. v. Austin Taylor & Co. Ltd.
(3).
15. Even if a decree has already been obtained, the very execution is also subject to leave of the Court as laid down in section 171 read with Catrant Bank v. Mekhant (4) saying the other legal proceedings' include execution also. In Shukantla v. The People Bank of Northern India Ltd. (In liquidation (5), it was held that where in execution of a decree obtained by a company in liquidation, certain property has been attached as belonging to the judgment-debtor and a third person has unsuccessfully objected to the attachment, on the ground that the property belonged to him and not to the judgment-debtor, such person cannot bring a suit under Order XXI, rule 63, C.
P. C., against the company for a declaration of his title, without first obtaining, under section 171 of the Indian Companies Act, the leave of the Court, which had passed the winding up order. Under the English law also, in a compulsory winding up, any execution by a judgment-creditor and any distress by the company, landlord or any other parson, but into force against the company's assets,
(1) (1908) 29 Mad. 336 (2) AIR 1923 Mad. 241
(3) (1967) 2 All E R 1092 (4) (1943) M L J 448
(5) (1941) 22 I L R 760 ' after the commencement of winding up, is void according to Masters and Crews of Motor Vessels v. Owners of Motor Vessels Constellations, Regency and Surveyor (1). The Court may, under its power restrain the decree-holder from proceeding further so that he will lose the benefit of execution of distress unless he has already completed it as was held in Westbury v. Twigg & Co.
(12) and Re : Margot Bywaters Ltd. (3). The Court, however, will not pass the order. If the company is solvent so that other creditors will not be prejudiced as held in Govard v. Wooth of Paris Ltd. (4).
16. The only execution appears to be where the execution is complete before the winding up and the execution is completed not by the appointment of a receiver but when the Court has either ordered in whom the legal title to the property is vested to pay or transfer it to the receiver.
Reference be made to Crowshow v. Lyndhurst Ship Co. (5). A mere order of sale secured by a decree-holder which has not been carried out does not amount to completion of execution as held in re Overseas Aviation Engineering, etc. (6). A purchase at Court sale by a person without knowledge of insolvency proceeding was held to be'valid and preferred over a subsequent sale by a receiver in Sm. Katyani Debi v. Florid= Addhya (7). In re ! Wlitshire Iron Co. (8) the Court ruled that Court cannot approve a disposition of property made after the presentation of winding up unless the title to the property has already passed to the purchaser before a winding up order is made.
The other party is only entitled to move and prove in winding up for his debt. Also see Re : Oriental Bank Corporation ex parte Guilleman (9).
17. It will thus be seen that except where the title to the property has already passed, and apart from the cases where leave has been granted by the Court, as from the date of winding up, all claims have to be filed before the Official Liquidator and it is for him to consider them all under section 179. The question arising for determination thus is why is it necessary to seek leave of the Court in all the above matters and how should the Court be guided in deciding as to in which circumstances, leave be granted? The main principle deducible from the legal provisions and the case-law discussed above appears to be that the Court must keep in view the interest of creditors and Make sure that no undue preference is given to one at the cost of others.
18. In Firm of Seth Arjundas Vasudev by partner Chhugomal v. S. R. Narayana Pillai (10) a learned Single Judge of Madras High Court observed that the insolvency law has a two-fold purpose to serve. One is to give relief to the debtor from the harassment of his creditors whose claims he is unable to meet and the other is to prevent a scramble among the creditors to get at the assets of the debtor promoting fraud and collusion between the creditor and debtor and facilitating the vicious principle of each one for himself and Devil take the hindmost, and provide a machinery by which all creditors are equitably satisfied. A similar view was taken-in Attorney-General of British Columbia v. Attorney-General of Canada (11).
(1) (1965) 3 All E R 873 (2) (1892) 1 Q B 77
(3) (1941) 3 All E R 471 (4) (1936) 2 All E R 905
(5) (1897) 2 Ch. 154 (6) (1962) 3 All E R 12
(7) (1948) 53 C W N 304 (8) (1968) 3 Ch. App. 443
(9) (1884) 28 Ch, D 634 (10) AIR 1956 Mad. 157
(11) AIR 1937 P C 95
19. The relief being sought for in this Court comprises an actionable claim against a company under liquidation. The transaction and its genuineness has been admitted by the Joint Official Liquidators. What falls for determination thus in this case is :- Whether permitting specific performance in this case at this stage may amount to undue performance to the petitioners?
20. In view of the position taken by the Liquidators as given in para. 11 above, the agreements are onerous though the Liquidators have not disclaimed the same. It may also amount to undue preference and affect other creditors adversely if specific performance is allowed at this stage.
According to the judgments cited in paras. 7 and 8 above the petitioners, who are parties to agreements to sell, shall rank as secured creditors so far as their deposits and costs are concerned. They may also prove any damages in addition and claims as ordinary creditors. These applications are, therefore, rejected. Let the winding up proceedings as well as the consideration of the scheme of the ex-management be concluded at the earliest. In case it is shown, at any time, that the company is solvent, the request of the petitioners for specific performance may be reconsidered.
' There will be no order as to costs.