Case Note & Summary
The appeal arose from a dispute concerning winding up proceedings against respondent No. 3 Company, which had launched the Festival City Mall project in Ludhiana. Respondent Nos. 1 and 2 had invested in this project but neither received possession nor assured returns. They filed Company Petition No. 482 of 2009 for winding up, and respondent No. 3 Company went into liquidation on 18th March 2016. During investigation, an FIR and charge sheet alleged diversion of funds from respondent No. 3 Company through intermediate companies to a consortium of six land-owning companies, which purchased 11 properties totaling 115 acres. The appellant, a 100% FDI company, entered into a development agreement with this consortium in 2014 for exclusive developmental rights over these properties for Rs. 43 crores. Respondent Nos. 1 and 2 filed a Company Application under Sections 339, 340, 342 and 347 of the Companies Act, 2013, seeking injunction against transfer of these properties. The Single Judge initially granted interim injunction on 11th July 2018 and 16th August 2018, but vacated it on 21st February 2019 while appointing auditors. The Division Bench allowed the appeal on 16th December 2019, restoring the injunction. The core legal issue was whether properties of unrelated companies could be restrained in winding up proceedings under Section 339. The appellant argued that Section 339 applies only to directors, managers, officers, or persons knowingly party to wrongful trading of the company in liquidation, not to unrelated third parties. They cited Usha Ananthasubramanian v. Union of India (2020) 4 SCC 122, which held that powers under Sections 337 and 339 apply only to the company regarding which mismanagement is alleged. Respondent Nos. 1 and 2 argued that corporate veil should be lifted as transactions were entered into by Dr. Rajesh Aeren fraudulently. The Supreme Court analyzed that the Division Bench's order restraining 115 acres of property for claims of approximately Rs. 4 crores was disproportionate. The Court held that Section 339 does not extend to unrelated entities, and without specific findings of fraud justifying corporate veil lifting, the injunction was unsustainable. The Court restored the Single Judge's order vacating the injunction, finding it appropriately balanced interests by protecting creditors through audit while avoiding irreparable harm to the appellant's investment.
Headnote
A) Company Law - Winding Up Proceedings - Section 339 Companies Act, 2013 - Scope of Liability - The Supreme Court examined whether properties of unrelated third parties could be restrained in winding up proceedings against a different company - Held that Section 339 applies only to directors, managers, officers, or persons knowingly party to wrongful trading of the company in liquidation, not to unrelated entities - The Court found no evidence that the appellant or consortium companies fell under these categories (Paras 6, 9). B) Company Law - Interim Injunctions - Balancing of Interests - The Court considered whether restraining 115 acres of property was justified for claims of approximately Rs. 4 crores - Held that interim relief must balance competing interests and avoid causing irreparable harm disproportionate to claims - The Single Judge's approach of vacating injunction while protecting creditors through audit was appropriate (Paras 8, 13). C) Company Law - Corporate Veil - Lifting Requirements - The Division Bench lifted corporate veil to find transactions entered into by Dr. Rajesh Aeren - The Supreme Court found this approach required specific findings of fraud or misuse of corporate personality - Without such findings, restraining properties of unrelated companies was unsustainable (Para 12).
Issue of Consideration
Whether the Division Bench of the High Court was justified in restraining the transfer of properties purchased by a consortium of six land-owning companies in winding up proceedings against respondent No. 3 Company under Section 339 of the Companies Act, 2013
Final Decision
The Supreme Court allowed the appeal, set aside the impugned judgment and order of the Division Bench of the High Court, and restored the order dated 21st February 2019 passed by the learned Single Judge of the High Court
Law Points
- Section 339 of Companies Act
- 2013 applies only to directors
- managers
- officers
- or persons knowingly party to wrongful trading of the company in liquidation
- not to unrelated third parties
- interim injunctions must balance competing interests and avoid causing irreparable harm disproportionate to claims
- corporate veil lifting requires specific findings of fraud or misuse of corporate personality
