2012 (6) TMI 53 - HC - Companies Law

Company under liquidation - transfer and purchase of equity shares. - Since admittedly, the transfer took place after commencement of the winding up, sub-Section (2) of Section 536 states that such a transfer of share is void. In case, the transfer is made after the winding up orders passed by the Court, then it can only be validated by the Court. It means that the transfer is treated as void but the Court which has passed the winding up order has given the power to validate the transfer. Held that - the learned Company Judge rightly observed that when the claims of the secured creditors got settled the members of Gupta family, i.e., the appellants had second thoughts. They not only withdrew the applications filed by them seeking transfer of shares in favour of the propounders, the appellants terminated the agreements thereafter. Significantly, applications were withdrawn with liberty to refile for same relief. In this backdrop, merely alleging misrepresentation on behalf of the propounders would not mean that the applicants have been able to prove the same. When we see the matter in the aforesaid perspective other arguments of the appellants stand automatically answered. We may also place on record that one of the appellants, viz., Akhilesh Gupta, even conceded that he had not revoked the MoU by virtue of which shares had been transferred to the propounders. It is more so when the appellants have been given liberty to challenge the factum of share transfer agreement prior to second motion. - Decided against the appellant with cost.

Issues Involved:
1. Validation of Share Transfer Post-Winding Up Order
2. Applicability of Section 108 of the Companies Act
3. Allegations of Fraud and Misrepresentation
4. Bona Fide Nature of Transactions
5. Public Interest Considerations

Issue-wise Detailed Analysis:

1. Validation of Share Transfer Post-Winding Up Order:
The primary issue revolves around the validation of share transfers executed after the winding-up order dated 18.5.1987. The propounders of the scheme sought validation under Section 536(2) of the Companies Act, 1956. The court recognized that any transfer of shares after the winding-up order is void unless validated by the court. The court has the discretion to validate such transactions if they are deemed bona fide and in the interest of the company. The court referred to precedents, including the Calcutta High Court's judgment in J. Sen Gupta (P.) Ltd. and the Gujarat High Court's judgment in Sidhur Mills Co. Ltd., which emphasized the court's discretion to validate transactions that benefit the company.

2. Applicability of Section 108 of the Companies Act:
The appellants argued that the share transfer violated Section 108 of the Companies Act, which mandates the production of a proper instrument of transfer and prior approval from the Central Government for transfers exceeding 25% of the paid equity share capital. The court, however, distinguished the present case from those involving solvent and functioning companies, stating that Section 108 is not applicable to companies under liquidation. The court relied on the precedent set in H.L. Seth v. Wearwell Cycle Co. (India) Ltd., which held that compliance with Section 108 is not required for companies in liquidation.

3. Allegations of Fraud and Misrepresentation:
The appellants contended that the share transfer agreements were obtained through fraud and misrepresentation. The court dismissed these allegations, noting that the appellants had voluntarily entered into the agreements and accepted consideration. The court emphasized that unless the agreements are set aside by a competent court, they cannot be disregarded as void. The court cited the Supreme Court's judgment in Subodh Kumar Gupta v. Shrikant Gupta, which held that agreements must be set aside through proper legal channels to be considered void.

4. Bona Fide Nature of Transactions:
The court examined the bona fide nature of the transactions, noting that the appellants had entered into the agreements when the company's liabilities exceeded its assets and secured creditors were pursuing personal properties of the original promoters. The court observed that the appellants had voluntarily entered into the agreements to avoid personal liability and salvage whatever they could. The propounders had settled with major secured creditors and invited claims from unsecured creditors, demonstrating their commitment to resolving the company's financial issues. The court concluded that the transactions were bona fide and for the benefit of the company.

5. Public Interest Considerations:
The appellants argued that the validation of the share transfers was not in public interest. The court dismissed this argument, stating that the transactions were in the interest of the company and its creditors. The court emphasized that the propounders had taken significant steps to settle the company's debts and revive its operations. The court also noted that the appellants had been given the opportunity to challenge the share transfer agreements before the second motion petition, ensuring that their rights were protected.

Conclusion:
The court dismissed the appeals, upholding the validation of the share transfers. The court found that the transactions were bona fide, in the interest of the company, and compliant with legal principles. The appellants were ordered to pay costs quantified at Rs. 10,000/- per appeal.

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