Karnataka High Court Holds Pre‑Winding-Up Lease By Mysore Kirloskar Ltd To KIAMS Fraudulent

The Karnataka High Court on 17 February held that a lease executed by the erstwhile management of Mysore Kirloskar Ltd in favour of Kirloskar Institute of Advanced Management Studies (KIAMS) was a fraudulent and sham transaction intended to defeat creditors and was therefore void from inception.

A Division Bench of Justices D.K. Singh and Venkatesh Naik T heard an appeal by the official liquidator, challenging the Company Court's 21 July 2015 order that had rejected a request to cancel the lease due to limitation.

The Court observed:

“The transaction between the Company in liquidation and KIAMS is not at arm's length but with a related party and against the interest of the Company, its creditors, and shareholders. Valuable properties worth several crores were sought to be given for a pittance to a related party just before the winding-up petition. The lease deed is a sham, bogus, and fraudulent transaction transferring valuable assets in favour of KIAMS, a related party.”

The dispute arose from a lease agreement dated 22 January 2000, under which 6.29 acres of land along with buildings, machinery, and other assets were leased to KIAMS for 28 years at a nominal rent of Rs. 1,250 per month. The agreement also provided that ownership would transfer to the lessee at the end of the lease without further consideration.

The official liquidator argued that the lease was executed just before the initiation of winding-up proceedings and outside the ordinary course of business. He contended that the transaction transferred valuable assets worth several crores to a related party for a pittance, prejudicing creditors and stakeholders.

The High Court noted that the lease was executed shortly before the filing of the winding-up petition on 14 March 2000 and after the statutory notice. It observed that the lease terms were highly one-sided and not at arm's length.

Holding that the transaction amounted to a “fraudulent preference” under Section 531 of the Companies Act, the Court ruled it void ab initio, not merely voidable. The Court said:

“Therefore, merely mentioning Section 531A in the application filed by the official liquidator (CA No. 826/2011) does not change the nature of the transaction, which was void ab initio.”

Accordingly, the High Court set aside the company court's order and directed the official liquidator to take possession of the property and sell it through public auction for the benefit of creditors.

For Appellant: Advocate Krutika Raghavan

For Respondent: Advocate K.G. Raghavan