2009 (5) TMI 537 - HC - Companies Law

Winding up - property sold without reference to the Official Liquidator or the Company Court - Held that - The entire security was lost to the company for satisfaction of the creditor who held the property as his exclusive security. Even in the absence of OTS, the company could have realized the money by sale of the property and if there was still a shortfall and if there had been any personal liability of the Directors, the personal remedy may have been available for the creditor. In such an event, the OTS would have meant saving their own skin against personal liability but obtained no benefit to the company or its other creditors. About the value of the property itself, learned counsel for the applicant suggested that he would have no objection if the property was to be assessed to be valued afresh to satisfy the conscience of the Court that at the relevant point of time, the property had been properly valued. Thus do not propose examine the adequacy of the sale consideration since have already held that there was no bona fides in selling the property that resulted in the only immovable asset belonging to the company being lost. Appeal dismissed.

Summary

Issues:
Validation of property sale by company-in-liquidation without reference to Official Liquidator or Company Court under section 536(2) of the Companies Act.

Analysis:
1. The judgment deals with a post-sale validation application by a company-in-liquidation for a property sale made without reference to the Official Liquidator or Company Court. The company sought validation on the grounds of satisfying a claim by a secured creditor, invoking section 536(2) of the Companies Act.

2. The property in question was mortgaged by the company to a bank, and an attachment was obtained pending adjudication by the Debt Recovery Tribunal. The property was sold to a third party for the same price as agreed in a One-Time Settlement with the creditor bank. The sale was made during the pendency of winding-up proceedings.

3. The petitioner argued that the sale, though made without permission from the Court, should not be void but required post-transaction approval under section 536(2). However, the sale was contested by the Official Liquidator, citing section 537(1)(b) of the Companies Act, which deems any sale without leave of the Court after commencement of winding up proceedings as void.

4. The Court referred to precedents such as First National Bank Ltd. v. Om Parkash Sharma and Travancore Rayons Ltd. v. Registrar of Companies to analyze the validity of transactions during winding up proceedings. It was emphasized that Court permission is crucial to protect the interests of the company and creditors.

5. The Court discussed the interplay between sections 536(2) and 537, highlighting that section 536(2) validates property disposition with Court orders, while section 537 deems sales without Court leave as void. The judgment clarified that the sale in question was void due to lack of Court permission.

6. The Court rejected the petitioner's argument for validation post-sale, emphasizing the lack of bona fides in the transaction. It was noted that the sale resulted in the loss of the company's only immovable asset without benefiting the company or other creditors. The application for validation was ultimately dismissed.

7. The judgment underscores the importance of Court oversight in property sales during winding up proceedings to safeguard the interests of the company and its creditors. The decision provides a detailed analysis of the legal provisions and precedents governing such transactions, emphasizing the need for transparency and Court approval in such matters.