2022 (11) TMI 1075 - HC - Companies Law

Transfer of shares before liquidation - company in liquidation was ordered to be wound up - Seeking approval to the transfer of 6600 shares of Svadeshi Mills Company Ltd (in liquidation), initially in the name of the applicant No.1 and, thereafter, further, out of those shares, 2800 shares in the joint names of applicant Nos. 2 and 3 and another lot of 2800 shares in the name of applicant No.4, purportedly under Section 536 (2) of the Companies Act, 1956. HELD THAT - The parameters for exercise of discretion are well neigh settled. The court has absolute discretion to validate a transaction. Exercise of discretion is controlled by the principles which govern exercise of a judicious discretion in other jurisdictions. The Court must be cognizant of all the attendant circumstances and if from all the surrounding circumstances, the Court comes to the conclusion that the transaction, otherwise hit by Section 536 (2) of the Act, 1956, should not be rendered void, the Court would be justified in making a declaration that transaction is not void. If the facts of the case are appraised on the touchstone of aforesaid principles, aspect of delay in laying a claim of ownership over the subject shares can not be said to be wholly inconsequential. Such a claim was made for the first time in the year 2014 - Applicants cannot urge that the transactions were entered into being unaware of the winding up order. Evidently, the applicant No. 1 has received a substantial amount as a part consideration for transfer of shares in favour of applicant Nos. 2 to 4. Such enrichment is clearly in teeth of the prohibition contained in Section 536 (2) of the Act, 1956. The validation of which is sought, have been entered into being fully cognizant of the prohibition in law. No element of benefit to the company in liquidation is manifest, even remotely. In the circumstances, the Court cannot give its imprimatur to such transactions. In a given case, the Court may be justified in validating the transaction entered into even after the passing of the winding up order. However, in the facts of the case, such exercise of discretion would not be justifiable. Application dismissed.

Summary

Issues Involved:
1. Approval of transfer of 6600 shares of Svadeshi Mills Company Ltd (in liquidation).
2. Delay and latches in claiming ownership and seeking validation of share transfer.
3. Compliance with Section 108 and Section 536(2) of the Companies Act, 1956.
4. Validity and completion of share transfer post winding-up order.

Detailed Analysis:

1. Approval of Transfer of Shares:
The applicants sought approval for the transfer of 6600 shares initially in the name of applicant No.1 and subsequently to applicant Nos. 2, 3, and 4. The shares were purchased between 28th March 1998 and 4th April 1998. The Official Liquidator was appointed as Provisional Liquidator on 13th February 2022, and the company was ordered to be wound up on 5th September 2005. The applicants claimed that the shares were not transferred due to oversight and inadvertence and that the transfers should be validated to avoid irretrievable prejudice and irreparable loss.

2. Delay and Latches in Claiming Ownership:
The Official Liquidator opposed the application, citing an inordinate delay of 23 years since the alleged acquisition of the shares in 1998. The applicant No.1 did not make efforts to transfer the shares in his name until 2014 and only lodged an affidavit of proof of debts on 25th August 2014. The delay in claiming ownership and seeking validation was argued to be significant and not inconsequential.

3. Compliance with Section 108 and Section 536(2) of the Companies Act, 1956:
The Official Liquidator contended that the applicant No.1 did not comply with the mandatory procedure for transfer of shares under Section 108 of the Act, 1956, before the winding-up order. Section 536(2) states that any disposition of property and transfer of shares after the commencement of winding up is void unless ordered otherwise by the Tribunal.

4. Validity and Completion of Share Transfer Post Winding-Up Order:
The Court emphasized that the power to validate a transfer under Section 536(2) is discretionary and must be exercised judiciously. The applicant No.1 claimed to have acquired the shares in 1998 but did not make efforts to transfer them until 2014. Despite being aware of the winding-up order, the applicants entered into agreements to transfer shares in 2019. The Court noted that the transactions were entered into with full knowledge of the prohibition in law, and no benefit to the company in liquidation was evident. The Court concluded that the transactions could not be validated as they were not in the interest of the company or its creditors.

Conclusion:
The Court rejected the application for validation of the share transfers. However, applicant No.1 was granted liberty to lodge a fresh claim with the Official Liquidator, which would be adjudicated in accordance with the law.