1953 (10) TMI 31 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the charge created in favor of Andhra Bank Ltd. by Godavari Sugars and Refineries Ltd. after the commencement of winding up proceedings.
2. Whether the transactions were bona fide and in the ordinary course of the company's current trade.
3. The effect of the provisional liquidator's appointment on the validity of the transactions.
4. The principle of pari passu distribution among creditors.
5. The impact of the managing agents' (Aidco Ltd.) authority and any changes in their constitution on the validity of the transactions.

Issue-Wise Detailed Analysis:

1. Validity of the Charge Created in Favor of Andhra Bank Ltd.:
The application was filed by Andhra Bank Ltd. to validate the charge created by Godavari Sugars and Refineries Ltd. in respect of 224 bags of sugar and 21 bales of gunnies on April 24, 1952. The winding-up petition was filed on March 14, 1952, and a provisional liquidator was appointed on April 18, 1952. According to Section 227(2) of the Companies Act, every disposition of the company's property made after the commencement of the winding-up shall be void unless the court orders otherwise. Since the charge was created after the winding-up commenced, it is void unless validated by the court.

2. Bona Fide Transactions and Ordinary Course of Business:
The court examined whether the transactions were bona fide and in the ordinary course of the company's current trade. According to established principles, transactions made in the ordinary course of business and honestly are usually validated to prevent the paralysis of the company's trade. In this case, the court found no evidence of fraud or collusion by Andhra Bank. However, the company's counsel had stated on April 18, 1952, that the company could not oppose the winding-up, indicating the company was not operating in the ordinary course of business. The loans were not for preserving the business as a going concern, as the sugar-crushing season had ended, and the company had sufficient funds to meet its obligations.

3. Effect of the Provisional Liquidator's Appointment:
The appointment of a provisional liquidator on April 18, 1952, indicated that the company was no longer capable of continuing its business. The court noted that the borrowings by the managing director after the appointment of the provisional liquidator were a violation of company law. The loans taken on April 25 and 26, 1952, were not for any bona fide purpose that would justify the court in upholding them.

4. Principle of Pari Passu Distribution:
The court emphasized the fundamental principle that the assets of the company should be distributed pari passu among the creditors, and no creditor should obtain an advantage over others. The court found that the transactions in question did not meet the criteria for exceptions to this principle, such as being necessary for keeping the company going or for salvage purposes.

5. Authority of Managing Agents and Changes in Constitution:
There was a contention that changes in the constitution of the managing agents (Aidco Ltd.) had not been recognized under Section 87-BB, rendering them incompetent to borrow on behalf of the company. Although the court did not have sufficient evidence on this issue, it noted that the same result would follow from the appointment of the provisional liquidator. The court left this question open for the official liquidator to examine if Andhra Bank chooses to prefer a claim as an ordinary creditor.

Conclusion:
The court dismissed the application by Andhra Bank Ltd. to validate the charge, with costs to the official liquidator and the contesting creditor, Messrs. Soundararajan & Co. The transactions were not validated as they were not made in the ordinary course of business or for preserving the company as a going concern. The principle of pari passu distribution among creditors was upheld.