2005 (7) TMI 369 - HC - Companies Law

Winding up - Avoidance of transfer, etc. after commencement of, Winding up - Fraudulent preference

Summary

Issues Involved:
1. Ownership of the shares in question.
2. Validity of the transfer of shares under sections 531, 531A, and 536(2) of the Companies Act.

Detailed Analysis:

1. Ownership of the Shares:
The court examined whether the shares in question belonged to the applicant-company. It was established that MSL, a 100% subsidiary of the applicant-company, held the shares initially. A pledge agreement dated January 4, 1999, executed by the then chairman of the applicant-company, pledged 61,740 equity shares of Divi's Laboratories Ltd. to the respondent. The shares were transferred to the applicant-company by a board resolution on January 14, 1999, in lieu of a loan repayment. The court concluded that the shares, after the board resolution, belonged to the applicant-company, as evidenced by the communication from MSL and the absence of these shares in MSL's subsequent balance sheet. Therefore, the court held that the shares were assets of the applicant-company.

2. Validity of the Transfer of Shares:
The court analyzed the transfer of shares under sections 531, 531A, and 536(2) of the Companies Act.

Section 531 (Fraudulent Preference):
The court noted that section 531 deals with transfers made within six months before the commencement of winding-up proceedings. The winding-up petition by Mr. Avichi was filed on November 4, 1999, and the transfer of shares occurred on January 31, 2000. Since the transfer happened after the commencement of winding-up proceedings, section 531 was deemed inapplicable.

Section 531A (Avoidance of Voluntary Transfer):
Section 531A invalidates transfers not made in the ordinary course of business within one year before the presentation of a winding-up petition. The court determined that the transfer of shares on January 31, 2000, during the pendency of the winding-up petition filed by Mr. Avichi, did not fall under section 531A.

Section 536(2) (Avoidance of Transfers After Commencement of Winding Up):
Section 536(2) states that any transfer of shares after the commencement of winding-up proceedings is void unless the court orders otherwise. The court found that the transfer of shares on January 31, 2000, during the pendency of the winding-up petition, was void under section 536(2). The court emphasized that the transaction was not bona fide, as it occurred during winding-up proceedings and involved a tripartite agreement without proper rights over the shares.

Conclusion:
The court declared the transfer of 61,740 shares to the respondent null and void. As the shares were sold during the pendency of the application, the court directed the respondent to return the monetary equivalent of the shares, dividends, and other benefits to the company in liquidation within two months. The application was ordered accordingly.