Overview
In this case, the Madras High Court considered whether a mortgage which is created over a property attached by the Court shall be considered valid when a prohibitory order was in force.
It was held by the Division Bench that the mortgage was illegal under Section 64 of the Code of Civil Procedure, 1908. It held that the respondents intentionally disobeyed the attachment of the Court as well as the prohibitory orders. However, the Court allowed the continuation of the insolvency proceedings before the National Company Law Tribunal. It also refused to interfere with keeping the auction proceedings in abeyance.
Facts of the Case
On 17 September 1987, Vanbey Holdings entered into a Builder’s Agreement with the respondents for a commercial space. After a suit was filed challenging the agreement, a consent compromise decree was entered into by the parties on 13 September 1993. The decree extended the time for construction and provided that refund will be given with interest if the terms were breached. It also recognised a charge over the property until the amounts were settled.
When the decree was not obeyed, Vanbey Holdings moved forward with execution proceedings in E.P. No. 194 of 2004. The property was attached by the Court on 19 April 2005 and a prohibitory order was issued on 21 April 2005, which restrained the alienation of the property and prevented others from receiving it.
Despite these orders, a loan agreement dated 19 June 2009 was executed, followed by alleged equitable mortgage, and deposit of title deeds in 2015 and a registered memorandum in 2018. The documents did not refer to the execution proceedings or the attachment by the Court and prohibitory order.
Insolvency proceedings were also initiated before the NCLT in 2018, which resulted in a moratorium and delaying of the auction.
The Single Judge held that the respondents were guilty of intentionally disobeying the orders and declared that the alleged mortgage and subsequent transactions were illegal and void. Aggrieved by this order, the parties filed the present appeals before the Division Bench.
Legal Issues
- Whether the mortgage which was created over the property violated the prohibitory and attachment order of the Court.
- Whether the mortgage and other documents were void under Section 64 of CPC.
- Whether the application of contempt could be treated as the application of civil contempt under Article 215 of the Constitution.
- Whether the auction could proceed while the NCLT insolvency proceedings and moratorium were still going on.
Decision
The Division Bench dismissed all the original side appeals and the findings of the Single Judge were upheld. It was agreed by the Court that the attachment and the prohibitory orders were passed with an intention to prevent any further encumbrances over the property. Since the alleged mortgage resulted in a private transfer of interest in the attached property, it was considered to be void under Section 64 of the CPC.
The Court also agreed that the respondent intentionally disobeyed the orders and that the contempt application could be treated as civil contempt after following the principles of natural justice.
However, the Court held that the auction proceedings could remain in abeyance until the NCLT decided the maintainability and other related issues in the insolvency proceedings. The connected applications were also closed with liberty to the parties to approach the Court again.
There was no order as to costs and the original title documents were to remain in the custody of the Court.
