2004 (4) TMI 312 - SC - Companies Law

Winding up - prayer under section 536(2) was to allow the company to execute documents creating a first charge over the company s properties in favour of the appellants - Held that - Appeal partly allowed. The company s properties as of today are not properties belonging to the company. Apart from it being a practical impossibility to allow the appellant s prayer at this stage, the Division Bench did not err in rejecting the application of the appellant at least insofar as it pertained to the loan transactions prior to 10-7-1986. There is no explanation forthcoming from the appellant as to how these advances were made for over a period of ten years without obtaining any security. The appellant ultimately sought to create securities in respect of these transactions only in 1990. The Division Bench was also correct that the grant of leave under section 536(2) would not be appropriate after this delay. The High Court erred in setting aside the learned Single Judge s order even in respect of the post 10-7-1986, loans on the simple ground that this was beyond the scope of the appellant s appeal. The appellant could not be in a worse position by having preferred the appeal from the order of the learned Single Judge.

Summary

Issues:
1. Interpretation of section 536(2) of the Companies Act, 1956 regarding granting leave for disposition of company's assets.
2. Consideration of timing and necessity for granting leave under section 536(2).
3. Conversion of unsecured creditor into a secured creditor for old debts.
4. Review of High Court's decision setting aside the Single Judge's order regarding post-10-7-1986 loans.

Analysis:

Issue 1: The main issue in this case revolved around the interpretation of section 536(2) of the Companies Act, 1956, concerning the granting of leave for the disposition of a company's assets. The Single Judge initially allowed the application in part, granting leave for post-winding up loans but refusing it for prior transactions. The Division Bench emphasized that such leave should be granted if necessary for the company's benefit or in the interest of creditors, with publicity to allow objections. The High Court refused to interfere with the Single Judge's decision but set aside the post-10-7-1986 loans' aspect.

Issue 2: The timing and necessity of granting leave under section 536(2) were crucial considerations. The Division Bench highlighted the importance of timely applications and the benefit to the company or creditors. The delay in seeking security for old debts and the practical impossibility of creating a first charge over the company's properties at a later stage were key factors in rejecting the appellant's application for pre-10-7-1986 loans.

Issue 3: The issue of converting an unsecured creditor into a secured creditor for old debts was also addressed. The appellant's attempt to secure old debts dating back over a decade without obtaining any security until 1990 raised questions about the validity and appropriateness of such a conversion. The Division Bench emphasized that granting leave under section 536(2) should benefit the company or its creditors in general, not just one creditor retrospectively seeking security.

Issue 4: The High Court's decision to set aside the Single Judge's order regarding post-10-7-1986 loans was reviewed. The Supreme Court found the High Court's action beyond the scope of the appellant's appeal, as it could not worsen the appellant's position by appealing. Consequently, the appeal was partially allowed concerning post-10-7-1986 loans, with no costs awarded, and the order was to be communicated to the official liquidator for necessary action.