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SUBHRA MUKHERJEE V. BHARAT COKING COAL LTD. (2000) 3 SCC 312

SUBHRA MUKHERJEE V. BHARAT COKING COAL LTD. (2000) 3 SCC 312

 

FACTS

  • Bharat Coking Coal Ltd. (BCCL), the respondent, was a coal company involved in the mining and distribution of coal. The company had entered into a transaction involving the sale of a bungalow and a piece of land to the wives of its directors.
  • The property’s sale was called into question, with allegations that it was an attempt to prevent the property from vesting in the Central Government under the Coal Mines (Nationalisation) Act, 1973. The sale of the property was the subject of scrutiny.
  • BCCL purportedly executed a resolution to sell the property to the wives of its directors. The resolution mentioned a sale consideration of Rs. 5,000. However, a receipt was produced as evidence indicating that a payment of Rs. 7,000 was made for the sale. This discrepancy in the sale consideration raised suspicions about the transaction’s genuineness.
  • The discrepancy in the sale consideration, combined with inconsistencies in the documentation, led to doubts regarding the legitimacy of the sale. The claimants (Subhra Mukherjee, the petitioner) argued that the transaction was not a bona fide sale, but rather a façade. They contended that the resolution to sell was antedated, and the transaction was a device employed by the directors to retain control over the property while giving an appearance of ownership transfer.
  • The Coal Mines (Nationalisation) Act, of 1973, aimed to nationalise coal mines, vesting their ownership and control in the Central Government. Therefore, any attempt to evade this vesting by manipulating transactions was a matter of significant concern and legal consequence.

 

ISSUE

  • Whether the transaction in question is a bona fide and genuine one or is a sham, bogus and fictitious transaction as held by the trial court?
  • Whether in view of Section 3 (1) read with Section 2(h)(xi) and the entry at Serial No. 133, in the Schedule to the Act, the property in question stood transferred to and vested in the Central Government free of all encumbrances, on the appointed day under the Coal Mines (Nationalisation) Act?

 

HELD

The court concluded that the transaction was indeed a sham. The court held that the transaction was not bona fide, and the property continued to be the property of BCCL. Consequently, under the Coal Mines (Nationalisation) Act, of 1973, the property vested in the Central Government upon nationalisation.

 

  • The court addressed the discrepancies in the documentation, including the inconsistency in sale consideration and the possible antedating of the resolution. These factors raised suspicions about the authenticity and legitimacy of the transaction.
  • The court also considered the crucial aspect of control retention by BCCL over the property even after the sale. The fact that the wives of the directors did not exercise their rights over the property until the lawsuit and that the property remained under the company’s use added weight to the claim that the transaction was not bona fide.
  • The court invoked the principle of piercing the corporate veil, which allows the court to disregard the separate legal identity of a company and look into the real substance and parties behind a transaction. In this context, the court sought to determine whether the transaction was truly between the directors and their wives, despite the company being used as an intermediary.
  • The discrepancies in documentation, coupled with the evidence of control retention and lack of independent action by the directors’ wives, led the court to believe that the transaction was not genuine.
  • The court noted that the sale was designed to avoid the property’s vesting in the Central Government under the Coal Mines (Nationalisation) Act, 1973.

 

COMMENTARY

“The property is vested in the company as a body corporate, and no changes of individual membership affect the title. The property, however much the shareholders may come and go, remains vested in the company, and the company can convey, assign, mortgage, or otherwise deal with it irrespective of these mutations. On the nationalisation of the coal mines of a company, it was found that it had sold an item of its immovable property to the wife of one of its directors. The court ripped open the veil to probe into the genuineness of the transaction and discovered it to be sham. The property continued to be that of the company and became vested in the Government. The assets of a company were not allowed to be used for payment of a shareholder's debts. Unless a company's incorporation can be viewed as a sham, its property would fall outside the distribution of matrimonial assets on divorce. In a partnership, on the other hand, the distinction between the joint property of the firm and the private property of the partners is often not clear.

Properties of a company including licences, permits, concessions and leases are not property of shareholders, only of the company. Transfer of shares, change of management, company becoming a subsidiary of another company, rights belonging to the company remain as they were before.”