₹1,250 Rent for 6.29 Acres? Karnataka HC holds ‘Sham’ Lease Executed Shortly Before Petition to Wind Up Company is Void [Read Order]

The Karnataka High Court recently held that a lease agreement under which 6.29 acres of land belonging to Mysore Kirloskar Ltd. was let out at a monthly rent of ₹1,250 was void, terming the transaction ‘sham’ and ‘fraudulent’ as it was executed shortly before the filing of a petition to wind up the company.

The lease agreement dated January 22, 2000 saw Mysore Kirloskar Limited grant 6.29 acres of land along with buildings, structures, facilities, plant and machinery situated at Harihar in Karnataka to M/S. Kirloskar Institute Of Advanced Management Studies (KIAMS) at a monthly rent of ₹1,250 for a period of 28 years.

The winding-up petition against Mysore Kirloskar Ltd. was presented on March 14, 2000. The company was subsequently ordered to be wound up on April 1, 2004, and the Official Liquidator was appointed under Section 449 of the Companies Act, 1956.

The OfficialLiquidator of Mysore Kirloskar filed a Company Application in 2011, seeking a declaration that the lease deed was void against him and sought cancellation of the agreement.

The Company Court dismissed the application on July 21, 2015 on the ground of limitation. The Company Court rejected the application giving liberty to the KIAMS to buy the property as and when the property in question would be sold in public auction. It would always be open to the petitioner to participate in such auction.

Aggrieved by the order of the company court, the Official Liquidator has preferred the present appeal before the High Court.

Counsel for the Official Liquidator contended that the lease was executed after issuance of statutory notice and merely weeks before the winding-up petition, and that the valuable property had been leased to a related entity for a paltry consideration, but such activity prejudices the interests of creditors, workmen and shareholders of Mysore Kirloskar.

Counsel appearing on behalf of KIAMS argued that the transaction was at best voidable under Section 531A of the Companies Act and further reiterated that the application filed by the Liquidator was barred by limitation.

The Division Bench of Justice D K Singh and Justice Venkatesh Naik T held that the lease deed was not an arm’s length transaction but a device to transfer valuable assets of the company to a related party for a pittance just before presentation of thewinding up petition.

The Court noted that the property, which was worth several crores had been leased for a total consideration of approximately ₹2.84 lakh over 28 years, and that certain clauses even contemplated conveyance of the property to the lessee upon expiry of the lease term.

In a strongly worded order, the Court stated that the lease deed is nothing but sham, bogus and fraudulent transaction in transferring the valuable assets in favour of the KIAMS, a related party.

Accordingly the Karnataka High Court set aside the impugned order and directed the Official Liquidator to take possession of the property and put it to public auction to realise fair market value for payment of creditors.

The Court further directed that KIAMS shall be liable to pay market rent for the assets in its possession from the date of the lease until possession is taken over, with the rent to be assessed by an approved valuer.

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