Mahbub & Company | Company Bench winds up real-estate company for losing its “substratum”
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Company Bench winds up real-estate company for losing its “substratum”

Company Bench winds up real-estate company for losing its “substratum”

  • A landowner is not barred by the arbitration provision in Real Estate Development and Management Act 2010 from initiating winding up proceedings against a real estate developer
  • The Court has ample power under Section 241 of the Companies Act to wind up a company on the basis that “the substratum of the Company is gone”

Case History:

In Dr. Syed Mustafa Malek (Petitioner) vs. Russell Lodge Holdings Ltd. (Respondent Company), the facts were that the petitioner’s father, being a landowner, had entered into a contract in 2002 with the Respondent Company, a real-estate developer, to develop his land and construct a 6-storey residential building in the heart of Dhaka. The Respondent Company started the construction in 2005 after having obtained relevant construction permissions but failed to complete the project in the two years as stipulated in the contract. Furthermore, the developer lost its membership of REHAB (Real Estate & Housing Association of Bangladesh) in 2012 after series of complaints and the directors of the company allegedly relocated abroad. A series of civil and criminal cases arose between the parties since 2007 until the Petitioner filed a winding up application before the Company Bench of the High Court in 2014.

Several issues were discussed by the court including whether a contractual dispute between a landowner and developer would have to be settled by arbitration under Section 36 the Real Estate Development and Management Act 2010 (“REDMA”) and whether the petitioner being an heir of the original landowner was a “creditor” within the meaning of Section 241 of the Companies Act.  

– A landowner is not barred by the arbitration provision in Real Estate Development and Management Act (REDMA) 2010 from initiating winding up proceedings against a real estate developer

Section 36 of the Real Estate Development and Management Act 2010 states that in case of dispute between land owner and developer, the parties will try to resolve mutually at first attempt. However, if such an attempt fails, then the resolution of the disputed matter shall be governed by the Arbitration Act 2001. If the parties fail to constitute a tribunal, only then can cases be filed against the defaulting party in an appropriate court under the Act of 2010.

The Respondent Company argued unsuccessfully that since the dispute was arbitrable as per Section 36 of the REDMA, a winding up application was not maintainable. The Company Bench held that the REDMA did not bar a winding up application provided the conditions of court enforced winding up are fulfilled.
 
– The Court has ample power under Section 241 of the Companies Act to wind up a company on the basis that “the substratum of the Company is gone” 

The company argued, firstly, that the petitioner, being the son of the landowner was not a “creditor” within the meaning of the Companies Act, and, secondly, that the statutory procedures contained in Section 242 requiring a creditor to give notice of outstanding debt have not been properly complied with.
 
The Court, in order to assess the present status of the company, called for the audit reports, bank statements, income tax returns. The Petitioner was able to show that the company’s audit reports since 2004 showed no sale of flats, no profit or loss, no expenditure, heavy outstanding liability, no existence of office, and so on.
 
The court held that since the documents at hand clearly showed that the company had not been functioning at all for well over a decade, and further finding that the directors and the management of the company were absentees, “the substratum of the Company was gone”. In such a case, the Court has the power to wind up the company considering that it is just and equitable do so and need not delve into the pre-action requirements that are particularly imposed on creditors.
 
Mahbub & Company represented the landowner-petitioner in the winding up application.