1988 (4) TMI 318 - HC - Companies Law

Summary

Issues Involved:
1. Jurisdiction of the court u/s 536(2) of the Companies Act, 1956.
2. Validity of the disposition of property during the pendency of winding-up petitions.
3. Examination of good faith and honesty in the company's application.

Summary:

1. Jurisdiction of the court u/s 536(2) of the Companies Act, 1956:
The applicant, Travancore Rayons Ltd., approached the court u/s 536(2) of the Companies Act, 1956, seeking leave to create a charge over its movable properties. The court examined whether it had the jurisdiction to grant such leave before an actual winding-up order was passed. The court referred to precedents, including decisions from English Law and Indian High Courts, which established that the court has jurisdiction to authorize dispositions during the pendency of winding-up petitions. The court concluded that it possesses the jurisdiction to grant leave for disposition of assets even before a winding-up order is passed.

2. Validity of the disposition of property during the pendency of winding-up petitions:
The court considered whether the disposition of property by the company, while winding-up petitions were pending, would be valid. The court noted that the legislative intent of section 536(2) is to prevent improper disposition of property that could harm the creditors' interests. However, the section also allows the court to validate genuine and honest transactions that are in the best interest of the company. The court emphasized that each case must be examined on its peculiar facts and circumstances, with a focus on good faith and the company's honest intentions.

3. Examination of good faith and honesty in the company's application:
The court scrutinized the company's application to determine if it was made in good faith and with honest intentions. The company had faced financial difficulties due to a strike and a fire, and it sought to rehabilitate itself with the help of a loan from a consortium of financial institutions. The court found that the financiers had carefully assessed the company's situation and were willing to provide substantial loans. The court also noted that the company was included in a notification under the Kerala Relief Undertakings (Special Provisions) Act, 1961, which imposed a moratorium on debt repayments. The court concluded that the company's request was made in good faith and that granting leave for disposition was necessary and expedient in the company's interest.

Conclusion:
The court allowed the petition and permitted Travancore Rayons Ltd. to create a charge of Rs. 511 lakhs over its movable properties in favor of IDBI, ICICI, IFCI, and IRBI. The court held that the reasons provided by the company were reasonable and that the disposition was in the best interest of the company, notwithstanding the opposition from some creditors.