2009 (8) TMI 1303 - HC - Companies Law

Issues Involved:

1. Validation of transactions under Section 536(2) of the Companies Act.
2. Mortgage and hypothecation rights of secured creditors.
3. Burden of proof for validation of transactions.
4. Consequences of validation on secured creditors' rights.
5. Evaluation of transaction genuineness and bonafides.
6. Consideration of equitable principles for transaction validation.
7. Procedural directions for handling company assets in liquidation.

Detailed Analysis:

1. Validation of Transactions Under Section 536(2) of the Companies Act:

The primary issue revolves around the applicant's request to validate a transaction under Section 536(2) of the Companies Act, which typically renders any disposition of company property after the commencement of winding-up proceedings void unless the court orders otherwise. The court emphasized that the legislative intent is to treat such transactions as void, with exceptions only when transactions are genuine and bonafide. The applicant bears the burden of proving that the transaction is genuine, bonafide, and not in contravention of statutory provisions.

2. Mortgage and Hypothecation Rights of Secured Creditors:

The court examined the rights of the secured creditor, Bank of Baroda, which had a mortgage and hypothecation over the company's assets, including the plant and machinery in question. The court found that the applicant's contention that the property was not mortgaged was unsupported by evidence. The registration of charge and the affidavit from the bank confirmed the mortgage, and the sale without the bank's consent was deemed to frustrate the bank's rights.

3. Burden of Proof for Validation of Transactions:

The court highlighted that the applicant failed to discharge the burden of proof required for validating the transaction. The invoice lacked details of actual delivery, and there was no evidence of exclusive possession or crediting of the sale consideration to the company's account. The absence of sufficient proof led the court to conclude that the transaction was neither genuine nor bonafide.

4. Consequences of Validation on Secured Creditors' Rights:

The court noted that validating the transaction would adversely affect the rights of the secured creditor, Bank of Baroda, which held the first charge over the property. Such validation would counter the enforcement of the bank's legal rights and was not aligned with the legislative intent of Section 536(2).

5. Evaluation of Transaction Genuineness and Bonafides:

The court assessed the transaction's genuineness and bonafides, finding neither element satisfied. The applicant's failure to demonstrate the transfer of consideration to the company's corpus and the lack of evidence for exclusive possession undermined the claim of a genuine transaction.

6. Consideration of Equitable Principles for Transaction Validation:

The court reiterated that validation of transactions under Section 536(2) should be based on equitable and just considerations. The transaction must be in the ordinary course of business or arise from extreme necessity, neither of which was demonstrated in this case. The court referenced principles from previous judgments, emphasizing the need for bona fide transactions without notice of winding-up proceedings.

7. Procedural Directions for Handling Company Assets in Liquidation:

The court addressed various procedural aspects related to the handling of company assets in liquidation. It directed the Official Liquidator (OL) to conduct fresh valuations and issue advertisements for the sale of assets, ensuring the interests of the company and creditors are protected. The court also provided directions for the apportionment of sale proceeds and the handling of disputes over asset ownership.

In conclusion, the court dismissed the application for transaction validation, affirming the statutory presumption of voidity under Section 536(2) of the Companies Act. The court's decision was grounded in the lack of evidence for transaction genuineness, the adverse impact on secured creditors' rights, and the failure to meet the burden of proof.

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