2006 (6) TMI 213 - HC - Companies Law

Rights of Financial Corporations in case of default, Winding up - Avoidance of certain attachments, executions, etc.

Issues Involved:
1. Whether the sale effected by the first respondent is void in view of the provisions of sections 537 and 441.
2. Whether the sale of the assets of the company under liquidation by the first respondent is liable to be set aside.

Issue-wise Detailed Analysis:

1. Whether the sale effected by the first respondent is void in view of the provisions of sections 537 and 441:

The Official Liquidator argued that the sale of the company's assets by the A.P. Industrial Development Corporation (APIDC) was void as it was conducted without the leave of the court during the pendency of winding-up proceedings. The relevant legal provisions include section 537(1) of the Companies Act, which states that any sale held without the leave of the court after the commencement of winding-up proceedings shall be void. Section 441(2) defines the commencement of winding-up as the time of presentation of the petition for winding-up. The court noted that the winding-up proceedings commenced when the Board for Industrial and Financial Reconstruction (BIFR) communicated its order to the court on 12-2-1997. Therefore, any sale conducted after this date without court permission is void.

2. Whether the sale of the assets of the company under liquidation by the first respondent is liable to be set aside:

The sale by APIDC was conducted on 9-2-1998, after the commencement of winding-up proceedings, without obtaining leave from the court, making it void under section 537. Additionally, the BIFR had explicitly rejected APIDC's request to seize the assets and directed it to approach the court. APIDC's action violated this order and the provisions of the Sick Industrial Companies (Special Provisions) Act (SICA), specifically section 22(1), which prohibits proceedings against the assets of a sick company without the consent of the BIFR or the appellate authority.

The court referred to several precedents, including the Karnataka High Court's decision in Mysore Surgical Cottons (P.) Ltd. v. Karnataka State Financial Corpn. and the Supreme Court's decision in Rajasthan Financial Corpn. v. Official Liquidator, which established that sales conducted without court permission during winding-up proceedings are void. The court also cited the Supreme Court's decision in Rajasthan Financial Corpn. v. Official Liquidator, which emphasized that the rights of financial corporations under the State Financial Corporations Act (SFC Act) are restricted by sections 529 and 529A of the Companies Act, which protect the interests of workmen.

Despite the arguments from APIDC and APSFC that their actions were justified under section 29 of the SFC Act, the court held that the amendments to sections 529 and 529A of the Companies Act override the SFC Act, requiring the association of the official liquidator and court supervision in the sale of assets. The court declared the sale by APIDC as null and void but declined to set it aside due to the significant lapse of time and the investments made by the auction purchaser.

Conclusion:

The court directed APIDC to deposit the entire sale proceeds with interest with the official liquidator within four weeks and imposed exemplary costs of Rs. 10,000 on APIDC for its deliberate violation of the BIFR's order and the provisions of the Companies Act. The company applications were disposed of accordingly.

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