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TMI Blog2011 (10) TMI 512X X X X Extracts X X X X X X X X Extracts X X X X ..... RDER Arun Mishra, Chief Justice - The Hon'ble Supreme Court vide order dated 11.3.2011 passed in the Petition for Special Leave to Appeal (Civil) No. 3580/2011 has observed that the Division Bench of this Court while passing the order dated 25.10.2010 in D.B.C.Special Appeal No. 2/2010 while dealing with the issue whether the applicant-Poddar Finance Private Limited (hereinafter referred to as the "Poddar Finance") was a contributory or not, has only relied upon the balance sheet of the Company to say that the applicant-Poddar Finance was not a contributory and at the same time, the matter was disposed of in the alternative on the assumption that it may be a contributory. Hence, the Apex Court has required the High Court to record finding on the above issue after taking into consideration all the documents. 2. Pursuant to the aforesaid order of the Apex Court, the applicant-Poddar Finance has filed misc. application no. 49/2011 before the Division Bench of this Court on 22.3.2011. It is averred in the application that the applicant-Poddar Finance is holding 1,65,010 equity shares of Rs.10/- each and 12,478 preference shares of Rs.100/- each of M/s Jaipur Spinning and Wea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y High Court in Company Petition No. 308/78, which was presented on 25.4.1978. After presentation of petition, shares could not have been transferred. Transfer of shares is void by virtue of provisions of section 536 (2) of the Act. Reliance has also been placed on the provisions of sections 531 and 531A of the Act. There is no clear mention in the balance sheet of the applicant-Poddar Finance that money was invested for acquisition of shares in question. The applicant-Poddar Finance has failed to establish that it is a contributory of the company in liquidation. 4. A rejoinder has been filed by the applicant-Poddar Finance. It is submitted that it was obligatory on the part of the Official Liquidator to finalize list of contributories. Reliance has been placed on the provisions contained in section 428 of the Act. There was no infirmity in the shares obtained by the applicant. The creation of folio and recording thereof on the reverse of the share certificates was the common accepted legal practice that existed at the relevant time. The provisions of sections 531, 531A and 536 of the Act are not applicable. The Official Liquidator of Shakti Mills in the Company Petition No. 70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y price constituting 65% of the paid-up capital of Jaipur Spinning Mills in liquidation. ( ii ) That balance sheets ending on 31.3.1980 and 31.3.1982 have not been furnished by the applicant, while copies of the balance sheets for the years 1981 and 1983 were not certified to be true copies by Registrar of Companies. ( iii ) That in the balance sheets of subsequent years 1984 onwards, the applicant-Poddar Finance has not shown investments made in shares of Jaipur Spinning Mills. ( iv ) That there is no due compliance of section 108A, 108B and 108D of the Act and without prior approval/intimation to the Central Government, shares could not have been acquired. ( v ) That transfer of shares in question was void in terms of sections 531, 531A and 536(1)(b) of the Act. ( vi ) That transfer of shares in question in terms of section 536(2) after commencement of winding up proceedings of Shakti Mills is void. ( vii ) That applicant-Poddar Finance has failed to submit any application in any court for validation of transfer of shares in question. ( viii ) That transfer of shares in question is under-valued." 7. The Company Judge has assigned the following reasons while reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-Poddar Finance has to be treated as contributory of Jaipur Spinning Mills in liquidation. The Bombay High Court has not declared the transaction to be void. The Official Liquidator of Shakti Mills has filed application before the Bombay High Court for realization of Rs. 17,08,069 on the ground that transaction was under-valued, but not for declaring it to be void. It is for the Bombay High Court to record finding as to invalidity of the transaction of transfer of shares. The application regarding under-valuation of the shares in question is still pending consideration. Thus, transaction cannot be said to be void. This Court cannot consider the validity of the transfer of shares in question. The learned Senior Counsel has placed reliance on the decision of the Apex Court in Pankaj Mehra v. State of Maharashtra [2000] 2 SCC 756 and submitted that finding be recorded that applicant-Poddar Finance is a contributory of Jaipur Spinning Mills in liquidation. 11. Per contra, Mr.G.K.Garg, learned Senior Advocate appearing with Mr.Anuroop Singhi and Mr.Kunal Jaiman on behalf of the respondent-Official Liquidator has submitted that transfer of shares in question is void in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson alleged to be a contributory. Section 536(2) of the Act provides that in the case of a winding up by the Court, any transfer of shares in the company or alteration of the status of its members, made after the commencement of the winding up, shall, unless the Court otherwise orders, be void. 14. There is power given to the court to validate the transfer which has taken place after the commencement of the proceedings for winding up of the company. In the instant case, it is admitted fact that petition for winding up of Shakti Mills was presented in the Bombay High Court on 25.4.1978 and its winding up was ordered on 21.1.1981. The transfer of shares in question of Jaipur Spinning Mills was made by Shakti Mills in favour of applicant-Poddar Finance on 10.5.1979. As per provisions of section 441(2) of the Act, winding up order relates back to the date of presentation of the petition for winding up. In the instant case, winding up of Shakti Mills has been ordered and since the transfer of shares in question was made after commencement of the winding up proceedings, the same is void under section 536(2) of the Act unless otherwise ordered by the Court. It is not the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id ab initio but become void on the passing of an order for winding up or on appointment of a provisional liquidator. What section 536(2) read with section 441(2) provides for is to convert what was otherwise valid into void by virtue of the legal fiction. Thus the voidness takes effect on the passing of the order of winding up or appointment of provisional liquidator. By virtue of the legal fiction, in section 441(2), it then relates back to the date of presentation of the petition for winding up." 17. Under section 443 of the Act, the Court may dismiss the petition or make an order of winding up. Under sub-section (2) of Section 443, the Court may refuse to make order of winding up. Before appointing a provisional liquidator, the Court has to give notice to the company and reasonable opportunity to make representation. As per Section 449 of the Act, on a winding up order being made in respect of a company, the official liquidator becomes the liquidator of the company. In the instant case, the order of winding up of Shakti Mills has been passed and official liquidator has been appointed by Bombay High Court with respect to Shakti Mills and thus, transaction in question has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping the company going or keeping the things going generally. It is also to be shown as to what were the compelling circumstances necessitating the company in liquidation to enter into such transaction during the pendency of winding up action. In absence of such pleadings that transaction was for the benefit and in the interest of company or for keeping the company going or for keeping things going generally, the question of validating such transaction by the court does not arise. No improper transaction which is covered by section 536(2) of the Act can be validated by the Court. In Ramesh Gandhi ( supra ), the Madras High Court has considered the provisions of section 536(2) of the Act and has observed that the object of section 536 seems to be to prevent improper disposition or dissipation of the property or transfer of shares of the company otherwise available for distribution among the creditors of the company in liquidation. If the transfer is not bona fide, in terms of section 536(2), the transaction would be void. Once winding up has been ordered, the provisions of section 536(2) are attracted. 22. In Re:Shivshakti Builders Financial Co. Ltd. ( supra ), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in section 536(2) of the Act need not automatically indicate that any disposition would be ab initio void . The provision itself shows that the word 'void' is not employed peremptorily since the court has power to order otherwise. The Apex Court has considered difference between the words 'void' and 'voidable' and laid down that the word 'void' used in section 536(2) of the Act is not employed peremptorily. The Apex Court has further laid down that it cannot be accepted that disposition during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be irretrievably void. The Apex Court held thus:- "It is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralysed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt has not ordered otherwise under section 536(2) and even no application has been filed by the applicant for validation in court so as to order otherwise. The applicant has failed to satisfy as to bona fide nature of the transaction in question. Thus, we are of the opinion that transfer in question is to be treated as void in term of section 536(2) of the Act. On the basis of such transaction, applicant cannot claim to be contributory. 29. No application for validation of transaction in question has been filed by the applicant-Poddar Finance for the last 30 years. In ICICI Ltd. v. Ahmedabad Manufacturing Calico Printing Co. Ltd. [2004] 9 SCC 747, the Apex Court considered the question that ICICI Bank advanced loans to the Company between 23.2.1976 till 10.7.1986 and on 10.7.1986, an application for winding up was filed and thereafter, two further loans were sanctioned by ICICI to the Company. In 1990, the Company as well as ICICI made an application under section 536(2) of the Act for allowing the disposition of the company's properties "which may have to take place" as a consequence of the loans advanced by the ICICI to the company from 1976. The Division Bench set a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent preference are not attracted. However, it provides that any transfer within six months before the commencement of winding up in the event of company being wound up shall be deemed a fraudulent preference and be invalid. In the instant case, transfer is after commencement of winding up proceedings. Similarly, provisions contained in section 531A of the Act provide that any transfer of property by a company not being in good faith or is not in ordinary course of business if made within one year before the presentation of a petition for winding up by the Court, shall be void against the Liquidator. Section 537 of the Act provides for avoidance of certain attachments, executions etc., in winding up by Court. Sub-section (1) of section 537 provides that where any company is being wound up by the Court, any attachment, distress or execution without leave of the court after commencement of the winding up, shall be void. Though the aforesaid provisions are not attracted, but intendment is to prevent fraudulent preference, transactions which are not in good faith or are not effected in ordinary course of business and even attachment, distress or execution are avoided unless permitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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