2008 (9) TMI 550 - HC - Companies Law

Avoidance of transfer after commencement of winding up - Held that - The purpose underlying the investment of the power in court is for the benefit and the interest of the company so as to ensure that a company which is made the subject of a winding up petition may nevertheless obtain the money necessary for carrying out its business and so as to avoid its business being paralysed. It is also pointed out that if that was the purpose and object of the section, it would hardly be proper and just to stultify the power and restrict its operation since otherwise it was bound to be counter-productive in the sense that the very purpose of keeping the company as a going concern so as to ensure the interest of the shareholders and creditors would be defeated. Taking into consideration the sequence of events and the facts and circumstances attendant, this court is of the view that the transactions entered into, are bona fide. So long as the court is able to see bona fide transactions, no doubt it would fall within the clause unless the Tribunal orders otherwise , and hence these transactions cannot be declared as void under section 536(2) of the Companies Act, 1956. Therefore, this court has to necessarily affirm the order of the learned single judge. Appeals dismissed.

Summary

Issues Involved:
1. Validity of the sale transactions under Section 536(2) of the Companies Act, 1956.
2. Bona fide nature of the transactions.
3. Rights and objections of secured and unsecured creditors.
4. Role and actions of the official liquidator.
5. Procedural propriety and evidence consideration by the learned single judge.

Issue-wise Detailed Analysis:

1. Validity of the Sale Transactions under Section 536(2) of the Companies Act, 1956:
The primary contention revolves around whether the sale transactions executed by the company in liquidation after the commencement of winding up proceedings but before the winding up order are void under Section 536(2) of the Companies Act, 1956. The court examined the legislative intent behind the provision, noting that the term "void" does not automatically imply nullity. The provision includes a discretionary clause "unless the Tribunal otherwise orders," allowing the court to validate transactions if they are found to be bona fide. The apex court's interpretation in Pankaj Mehra v. State of Maharashtra [2000] 100 Comp Cas 417 (SC) was cited, emphasizing that not all dispositions made during the winding-up process are void ab initio and can be validated if they serve the company's interests and are made under commercial compulsion.

2. Bona Fide Nature of the Transactions:
The court assessed whether the transactions were bona fide. The company in liquidation had mortgaged the property and executed sale deeds to discharge part of its credit facilities. The loan facilities were extended before the winding-up petition was filed, and the transactions were duly registered. The court found no evidence suggesting that the transactions were intended to defraud creditors. The sequence of events and the financial needs of the company indicated that the transactions were bona fide. The apex court's observations in Chittoor District Co-operative Marketing Society Ltd. v. Vegetols Ltd. [1987] (Suppl) SCC 167 supported the view that transactions made under commercial compulsion to keep the company operational should be validated.

3. Rights and Objections of Secured and Unsecured Creditors:
The appellants, including Indian Bank, contended that their rights as secured creditors were overlooked and that the transactions should be declared void. However, the court noted that Indian Bank did not have a charge over the immovable property in question and had remained inactive for years. The court emphasized that the rights of secured creditors must be individually safeguarded and that the Companies Act does not mandate sharing exclusive security among all creditors. The statutory exception under Section 529A was also considered, but it was found inapplicable to Indian Bank.

4. Role and Actions of the Official Liquidator:
The official liquidator opposed the application, arguing that the transactions were not bona fide and were void under Section 536(2). The liquidator had taken possession of the property following the winding-up order. The court, however, found that the liquidator's actions were not supported by evidence of fraudulent intent behind the transactions. The liquidator's role in representing the entire body of creditors was acknowledged, but the court concluded that the transactions were bona fide and should be validated.

5. Procedural Propriety and Evidence Consideration by the Learned Single Judge:
The appellants argued that the learned single judge decided the matter without allowing the parties to present evidence. The court noted that the matter had been remitted for fresh consideration, and the learned single judge had allowed the application based on the evidence presented. The court found that the procedural requirements were met, and the transactions were rightly validated by the learned single judge.

Conclusion:
The court dismissed the appeals, affirming the learned single judge's order to deliver possession of the property to the applicant. The transactions were deemed bona fide and valid under Section 536(2) of the Companies Act, 1956. The court emphasized the legislative intent to allow bona fide transactions to ensure the company's operational continuity and protect the interests of shareholders and creditors.