1953 (10) TMI 48 - HC - Companies Law

Summary

Issues Involved:
1. Validation of charge created in favor of Andhra Bank Ltd. by Godavari Sugar and Refineries Ltd. after the commencement of winding-up proceedings.
2. Applicability of Section 227(2) of the Companies Act concerning the voidability of property disposition post-winding-up commencement.
3. Determination of whether the transactions were bona fide and in the ordinary course of business.
4. Competency of the Managing Agents to borrow loans on behalf of the company post-appointment of a provisional liquidator.

Detailed Analysis:

1. Validation of Charge Created in Favor of Andhra Bank Ltd.:
- The application was filed by Andhra Bank Ltd. seeking an order validating the charge created by Godavari Sugar and Refineries Ltd. on 24-4-1952, after the winding-up petition was filed on 14-3-1952.
- The court noted that the company was ordered to be wound up on 29-9-1952, and a provisional liquidator was appointed on 18-4-1952.
- The Bank had advanced Rs. 21,000 to the company post-appointment of the provisional liquidator but before the winding-up order.

2. Applicability of Section 227(2) of the Companies Act:
- Section 227(2) states that any disposition of the company's property post-winding-up commencement is void unless the court orders otherwise.
- The court emphasized that the principle is well-established under English law, which the Indian Companies Act mirrors, that directors are liable for monies not expended in the ordinary course of business during winding-up.
- The court referred to precedents like "In re Wiltshire Iron Co." and "In re Park Ward & Co." to highlight that bona fide transactions in the ordinary course of business are usually validated to prevent paralyzing the company's trade.

3. Determination of Whether Transactions Were Bona Fide and in the Ordinary Course of Business:
- The court examined whether the loans taken by the company were in the ordinary course of business or for preserving the company as a going concern.
- It was noted that the company's counsel admitted on 18-4-1952 that the company could not oppose the winding-up, indicating that the company was not trading normally.
- The court found no evidence that the loans were taken for the ordinary current trade or to preserve the factory as a going concern.
- The court concluded that the borrowings were a violation of company law and not for any bona fide purpose.

4. Competency of the Managing Agents to Borrow Loans Post-Appointment of Provisional Liquidator:
- The Official Liquidator contended that there was a change in the constitution of the Managing Agents, which was not recognized under Section 87-BB, rendering them incompetent to borrow loans.
- The court did not delve deeply into this issue due to a lack of evidence but left it open for examination if the Bank chooses to claim as an ordinary creditor.

Conclusion:
- The court dismissed the application, noting that the transactions were not bona fide and did not serve the ordinary course of business.
- The court emphasized the principle of pari passu distribution among creditors and found that the borrowings were not justified.
- The application was dismissed with costs awarded to the Official Liquidator and the contesting creditor, Messrs. Soundararajan & Co.