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TMI Blog2013 (12) TMI 1646X X X X Extracts X X X X X X X X Extracts X X X X ..... ayan Sriram Investments Pvt. Ltd., ICICI Bank Limited,ECL Finance Limited, Dr. Vijay Mallya, Kingfisher Finvest India Limited, Diageo plc, a Foreign Company And Relay B.V., THE HON'BLE MR. JUSTICE N. KUMAR AND MRS. JUSTICE RATHNAKALA N. KUMAR J., JUDGMENT All these appeals are preferred against the common order passed by the learned Company Judge in Company Application Nos.437, 441, 440, 439 and 438/2012 in Company Petition Nos.122, 121, 248, 185 and 57/2012 decided on 24th May 2013, where on an application filed under Section 536(2) read with Section 537(1) of the Companies Act, 1956 (for short hereinafter referred to as 'the Act'), granted permission to the Company to sell 13,612,591 equity shares of United Spirits Limited (USL) held by it, to Relay B.V. and Diageo Plc and others acting in concert, at a sale price of ₹ 1,440/- per equity share and other consequential directions. Therefore, all these appeals are taken up for consideration together. 2. For the purpose of convenience, the parties are referred to as they are referred to in the Company Petitions. O.S.A.NO.25/2013 / COMPANY PETITION NO.248/2012: 3. The petitioner - BNP P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease agreement incorporating the terms of the Master Agreement and any appropriate amendments specified in the lease agreement. Pursuant to the master agreement, petitioner RRPF and the lessee - Kingfisher i.e., respondent, entered into agreements for leasing several aircraft engines. In terms of the aforesaid master agreement, they entered into lease agreement No.1 dated 30th September 2005; lease agreement No.2 dated 30th September 2005 and lease agreement No.4 dated 28th March 2007. 6. Their case is that, the respondent has executed a corporate guarantee dated 27th September 2007 in favour of the petitioner RRPF for the amounts due under the aforesaid agreements. In fact, three separate deeds of corporate guarantee in respect of each lease were executed. The lessee - Kingfisher defaulted in making payments of amounts due and payable under the lease agreements. The petitioner and RRPF made several demands for payment to the lessee and the respondent. However, the respondent neglected to pay the amounts due to the petitioner - RRPF. Thereafter by letter dated 8th February 2012, the petitioner and RRPF called upon the lessee to make payment of the outstanding amount aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The respondent has executed a Corporate Guarantee dated September 27, 2007 in favour of the petitioner. Separate agreements in respect of each of these lease agreements were executed. The Kingfisher - lessee committed default in making payments of amounts due and payable under the lease agreements. They made several demands on the lessee as well as the respondent. Respondent neglected to pay the amounts due to the petitioner. A letter dated 8th February 2012 was issued calling upon the respondent to pay US$ 10,437,866/- amounting to ₹ 57,94,05,941.70. The said demand notice was duly served on the respondent and it was also informed that in case of default, proceedings will be initiated for winding up of the Company under Section 433 read with Sections 434 and 439 of the Act. The said notice was duly served. The respondent did not dispute the amount claimed nor made any payment. Therefore, they were constrained to file this petition for an order of winding up of the Company on the ground that the respondent is unable to pay the debts. OSA NO. 30/2013/ COMPANY PETITION NO. 57/2013 10. The petitioner is a company organized and existing under the laws of Switzerlan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered office and principal place of business at No.1, Allee Pierre Nadot, 31172 Blagnac, France. 12. The petitioner manufactures, owns, manages, maintains, sells and leases aircraft and related equipment and engages in any and all general business activities related and incidental thereto. The petitioner, along with various other third parties, leased a number of aircraft to Kingfisher, the then subsidiary of the respondent company. Under an agreement dated July 21, 2006 called the Global Maintenance Agreement the petitioner incurred certain expenses and costs in maintaining various aircraft and supply of spare parts to Kingfisher. Kingfisher and the petitioner signed an agreement for payment of outstanding amounts due and payable i.e., the Payment Agreement on 22.9.2011. The outstanding amount due from Kingfisher to the petitioner was US$ 20,988,224.42. Under clause 12 of the Payment Agreement, Kingfisher was required to provide the petitioner a corporate first demand guarantee of the respondent. Accordingly, respondent issued a corporate First Demand Guarantee dated October 14, 2011 guaranteeing thereby as a principal debtor the payment obligations of Kingfisher under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey have filed detailed statement of objections traversing all the allegations made in the company petitions and denying their liability as claimed by the petitioner. The arguments were addressed by the petitioners regarding admission. The argument of the respondent was also heard. However, before their arguments could be concluded, the respondent filed an application under Section 536(2) r/w. Section 537(1)(b) of the Companies Act, 1956 r/w. Rules 6 and 9 of the Companies (Court) Rules, 1959 for permission to sell to Diageo PLC/Relay BV upto 13,612,591 equity shares of United Spirits Limited (USL) held by the respondent. In the said application, they have stated that on 15.01.2013, the respondent Counsel made the following oral statement before the company Court:- The Respondent (UBHL) agrees not to alienate its investments other than those:- (a) already secured by facilities availed of from various Institutions and Banks pledging/mortgaging/securitizing the company's investments in shares in other body corporates and (b) specifically those United Spirits Limited (USL) shares that are already contracted to be sold in terms of the Concluded deal with Diageo. 15. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y BV together with Diageo at a price of ₹ 1440/- per share, as per the contract entered into, inter alia between the respondent and Diageo PLC, on 09.11.2012. The said contract was entered into in the ordinary course of business of the respondent. The average price of the shares of USL prevailing in the Bombay Stock Exchange for 12 months period just preceding the date of contract was ₹ 762/- per share. On the date of the contract, the share price was ₹ 1,360/- following the execution of the contract with Diageo PLC, the share price of USL has increased and is currently ₹ 1,900/- per share. In fact, the share price of USL has increased tremendously on the basis of the proposed transaction with Diageo PLC. If the transaction with Diageo goes through, there would be a further increase in the net worth of the respondent, which would be in a better position to pay of its creditors. In the event of the sale not going through, the share prices of USL would go down to far less than the price prevailing as on the date of the contract, between the respondent and Diageo Plc/Relay BV, which will severely affect the net worth of the respondent and would also adversely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iageo. In exercise of its right of redemption the respondent company is entitled to require these secured creditors to sell the shares over which they claim security to sell to Diageo Group at the agreed price of ₹ 1,440/- per equity share and which sale proceeds will exceed to the amount claimed by the secured creditors which is due from respondent prorate, which will leave a balance sale proceed which will come into the hands of the respondent Company, being an amount of ₹ 119.16 crores. 21. As a result of sale of shares and consequent value unlocked through the Diageo transaction, the net worth of the respondent has increased exponentially, to ₹ 7,656 crores, as certified by Grant Thornton India LLP of the Grant Thornton Group, one of the leading international accounting groups. It is therefore submitted that sale of USL shares contemplated by the contract with Diageo is for the purpose of preserving the business of the respondent as a going concern. 22. The respondent also owns certain immovable properties in Bangalore which are mortgaged in favour of lenders. The respondent proposed, to sell the said properties and to that end proposed they would file a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the filing of the winding up petition which would tantamount to dispossession of the property, would be rendered in capable of and liable to be set aside and/or declared void unless the respondent were in a position to establish an element of bonafides. 25. They have further contended that the records of the respondent filed with the Bombay Stock Exchange, when compared with the disclosures made in the form of public announcement in relation to the intended sale of stock in USL to Diageo reflects that on 09.11.2012, the respondent Company was having 23,577,293 equity shares of USL amounting to 18% shareholding. On 09.11.2012, the respondent Company has contracted to sell to Diageo 9,070,595 equity shares of USL. However, in December, 2012 the respondent Company has reflected in the BSE that the respondent was holding 23,230,123 equity shares of USL amounting to 17.75% shareholding. In March, 2013, in the BSE reflected that the respondent's holding as 20,573,968 equity shares of USL amounting to 15.73% shareholding. 26. Therefore, plainly, the respondent has been effecting sale of equity shares held in USL, after the filing of the winding up petition by the petitioner. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is the actual amount due? There is no bona fides in creation of those pledges and they are void-ab-initio. They further contend that the pledges in favour of Motilal Oswal, LKP Finance, SICOM, SREI and Narayan Shriram are not entitled to, for any such ostensible pledges nor they are entitled to receive any monies whatever received from any purported sale of equity shares belonging to the said respondent in priority over unsecured creditors of the respondent. They want such ostensible pledges to be declared as void and unenforceable. Out of 13 alleged pledges only 8 may have some right and the extent of validly created pledges would, in any event, be liable to be duly adjudicated upon by the Company Court. They also accuse the respondent for failure to furnish the full information to the Court which show that the respondent has more to hide than to disclose to the Court. They have set out the documents and the requisitions which are not produced by the respondent before the Court. They have accused the respondent for material suppression of details with regard to the secured and unsecured creditors. They also contend that the request for production of share purchase agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of several hundred crores from the sale of Diageo shareholding, which has been rejected by the concerned authorities. Such purported plan clearly establishes the intention of the respondent to misuse the funds from such anticipated sale, in a manner noncomplisant with priority and ranking of creditors, seeking to give priority to airport authorities and fuel companies over other creditors, in order to revive the company is not permissible. At the present market value of such shareholding, as is intended to be sold by the respondent to meet the claims of its creditors, a sum in excess of ₹ 3,130/- crores is capable of being realized, as against ₹ 1,960.21 crores claimed to be the sale proceeds that would be liable to be disbursed in terms of the summary statement filed in the Company Court on 08.04.2013. Such a substantial sum is not liable to be left with the respondent to attribute and /or appropriate in a selective manner, preferring certain creditors over others, as it deems fit. They have also pointed out, a sum of ₹ 20 crores apportioned towards legal fees, which is utterly incredulous and entirely unacceptable. Similarly, a tax liability of ₹ 215.62 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of a share, and the very fact that the public offer has failed on 26.04.2013 only establishes that the earlier quoted price of USL was below its fair market value. They dispute the listing of pledges or amounts asserted by the respondent, whether or not, such listing of pledges has been furnished by the respondent and where they have priority over the unsecured creditors is the matter which requires verification. Further more, no accurate information is forthcoming from the respondent as to the level of corporate guarantees that have been invoked, in the absence of which the rights of various secured and unsecured creditors, would have to be determined and it is insufficient for the respondent to come forth and contend that a purported meeting of its pledgees must constitute sufficient basis to permit for a sale of pledged shares to occur. The contents of the Grant Thornton Report are entirely meaningless and unreliable, since it concedes that it has not independently investigated the representations of the respondent. The proposal of respondent depositing lacks bona fides. There is no scope for allowing any fund flow directly to the respondent, from and out of any sale to Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also directed to pay ₹ 250/- crores in the Court immediately on the conclusion of the transaction and receipt of sale consideration and directed the registry to keep the said amount in a term deposit in a Nationalised Bank for an initial period of one year and to retain the balance of the sale consideration without deploying the same for its business activity, subject to further orders. He also directed the respondent to refrain from creating pledge/ hypothecation/charge/ encumbrance over its movable and immovable properties pending disposal of the company petitions. 34. Aggrieved by the said order, these petitioners have preferred these appeals. After the passing of the impugned order, the sale of shares was effected and out of the consideration so received payments are made to the creditors in whose favour those shares alleged to have been pledged. Therefore, in the appeal the purchaser as well as those creditors were impleaded as parties. OSA NO. 43/2013 35. OSA 43/2013 is filed by 14 banks seeking to set aside the impugned order passed by the learned Company Judge in Company Application No.437/2013 and other connected applications filed in Company Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial Delegation from the United Kingdom to India. This is because DIAGEO will be obligaged to comply with SEBI regulations and conditions, if any, imposed by the Competition Commission of India and sale of United Spirits Limited shares to them is the only source of funds for United Breweries Group resulting from the binding DIAGEO transaction. He requested the Consortium of Banks not to precipitate any action to sell the pledged USL share in the market which will seriously derail the transaction with DIAGEO. In the balance sheet of the application, the amount due to all these banks are set out. However, the learned Company Judge without issuing notice to them, without hearing them as all of them are secured creditors has passed the impugned order and permitted payment to the so called secured creditors excluding these Banks. On coming to know the said order, immediately, they filed applications for impleadment and also filed two applications on 06.07.2013 requesting the learned Company Judge to direct the applicant forthwith to deposit before the Hon'ble High Court the entire sale proceeds realized from the sale of shares of USL 13,612,591 equity shares and consequently, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by them as in the public advertisement it was made clear all public share holders could have a look at the said document. But unfortunately the learned Company Judge did not take note of these facts and has held they were justified in claiming confidentiality and such non-furnishing of the said copy in no way affects the interest of the petitioner, which is illegal and it requires to be set aside. She further contended it is not a mere permission to sell. The Court by the impugned order permitted the respondent to pay the creditors who are not before the Court out of the sale consideration directly on the ground that those shares had been pledged in their favour, by mere relying on the entries in the balance sheet and without following the procedure prescribed under the Companies Act before such payment could be made. Lastly she contended that admittedly, the value of the shares which were permitted to be sold were listed in the National Stock Exchange and the market price of the share was ₹ 2,340/-, whereas, it was permitted to be sold at the rate of ₹ 1,440/-, the rate actually agreed upon on 09.11.2012. Further it was contended that it is not a mere case of sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to pay the other secured creditors, is contrary to the scheme of the Companies Act and cannot be sustained. 41. The learned Counsel appearing for the other petitioners/appellants adopted the said argument. 42. Sri Udaya Holla, learned Senior Counsel, appearing for the respondent, contended that the opening words of Sub-section (2) of Section 536 of the Companies Act, 1956 gives an impression that permission to transfer shares of a company would be granted only after winding up order is passed which was the view expressed by the Courts earlier. Subsequently, it has been held that such a narrow construction would affect the working of a company which is facing a winding up petition. Courts have been given the power to grant such permission of transfer, even before the winding up order is passed which stands to reason. Further he submitted that when it is held that even before the order of winding up is passed by the Court, such a power could be exercised when a petition is presented before the Court and it is not necessary that before such power could be exercised, the petition should be admitted or advertised. In support of his contention he relies on Section 441 of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from any angle, the transaction in question is a bona fide transaction entered into in the course of regular business and it is for the benefit of the body of the creditors, and the Company Court rightly granted the permission and it cannot be found fault with. 43. Sri Aditya Sondhi, learned Counsel appearing for the purchaser of shares, M/s Diageo, contended that the prices at which these shares were sold is a fair market value. In fact, along with the statement of objections, he has produced the correspondence and statistics to show how the share value was calculated. He also pointed out that all the three authorities also applied their mind regarding the valuation of shares and only being satisfied that it is above the minimum prescribed, they have granted permission and it is only after obtaining the permission, the shares have been purchased and therefore the said transaction cannot be found fault with. How the respondent dealt with the sale consideration would not in any way vitiate the transaction. They have paid the market price, purchased the shares and wants the Court to hold that it is a bonafide transaction. When permission was granted, their interest is fully prote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a copy on the learned counsel for the petitioner. On 21.3.2013 at the request of the learned counsel for the respondent, the matter was listed on 22.3.2013 on payment of cost of ₹ 5,000/- each in all the petitions. The order sheet dated 25.3.2013 discloses that the learned senior counsel for the petitioner addressed her arguments on the first of the defences raised by the respondent company. The case was ordered to be listed on 26.3.2013. The proceedings on 26.3.2013 discloses as under:- Order in COP 122/2012 Heard Miss Fereshte Sethna, learned counsel for the petitioner who concluded her arguments. For submission of learned counsel for respondent, list on 27.3.2013. 48. On 27.3.2013 arguments were addressed on behalf of the respondent on the matter of admission of the winding-up petition. Since, the arguments were incomplete, the matter stood for completion of hearing on 28.3.2013. On 28.3.2013 though the matter was listed, it did not reach, hearing was adjourned to 1st April 2013. However, on 1.4.2013 the order sheet reads as under:- Sri.Udaya Holla, learned senior counsel submits that having regard to the report of Grant Thornton, Ex.R5 enclosed to the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondent company to furnish information in relation to matters of pledged shares, as also as to its creditors, both secured and unsecured, and adjourned the matter to 17.4.2013. The order sheet dated 17.4.2013 reads as under:- Sri Udaya Holla, learned senior counsel files a memo enclosing the list of the pledgers of shares and total number of shares pledged in their favour, the Balance Sheet of the United Spirits Limited, copies of Form-W filed with the depository. The memo is placed on record. The petitioners are permitted to file their objections to the application filed by the respondents. List these matters on 26.4.2013. 52. The order sheet discloses that the learned counsel for the parties were heard on the Company Application No. 440/2013 till 8.30 PM on 15.5.2013 during summer vacation and the case was reserved for orders. 53. Thus, it is clear even though the learned Company Judge heard the counsel for the petitioner completely and the counsel for the respondent partly regarding admission of the Company Petition, without passing an order for admission he entertained the application filed under Section 536(2) of the Act and has passed the impugned ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft Ltd.(1948) 1 A.E.R. 225 that the Court had no jurisdiction to make an order under Section 173 of the Companies Act, 1929, in the absence of a winding up order. Buckley J. has effectively dealt with the argument which prevailed with Vaisey J. and expressed his view as follows: It does not appear to me, with the utmost respect to Vaisey J., that the language of the section necessarily requires an order to be made in respect of a company which is in fact being wound up by the Court at the date when the order under Section 227 is made, that is to say, after the date of the winding up order. If that were the true effect of the section, the present case would demonstrate that the section is ill designed to meet a kind of risk to the creditors of a company against which one would have expected it to be intended to protect them. He has therefore held that the Court has jurisdiction to make an order not with standing that no winding up order has yet been made . 57. The law on the point has been stated as follows in Palmer's Company Law, twenty-first edition, page 770: The Court has jurisdiction under Section 227 to authorise a disposition of the company's property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in such a case these is no reason why it should not be permissible for the Court to authorize the disposition before the making of the winding up order. 4. As has been stated, Section 536 finds a place in that portion of the Act which deals with the effect of winding up on antecedent and other transactions, and there is nothing in sub- Section(2) of the schemes of the Act to show that the Court cannot authorize a disposition in a case where winding up petition is pending but a winding up order has not been made. On the other hand, it may well be argued that, in the absence of any prohibition in the law, there is no reason why the Court should be precluded from examining the propriety of a proposed disposition during the pendency of a winding up petition if the company has a genuine case requiring early consideration. It has to be appreciated that while this view is advantageous to the company in as much as it saves it from that difficulty or predicament which leads it to the proposed disposition, it does not harm the interest of the creditors from any unfortunate result which many ensue from an eventual winding up order in as much as the same Court, which has the authority t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising between the date of presentation of the winding-up petition and the order of winding-up is not sound, because on the passing of a winding-up order, the date of commencement of winding-up is related back to the date of presentation of the petition, and secondly, even before an order for winding up is passed, the court may find it necessary to make appropriate interim orders either for the protection of the company or for the protection of any of the creditors of the company. 60. This Court in the case of SMT. USHA R. SHETTY AND OTHERS vs M/S RADEESH RUBBER PRIVATE LIMITED, BANGALORE AND ANOTHER [1992 (3) Kar. L.J.604] has held as under :- 11. Learned counsel referring to Section 536(2) of the Companies Act has submitted that no transfer of the assets during the pendency of the winding up of petition should be effected. As per Section 536(2) in the case of winding up by or subject to the supervision of the Court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members made after the commencement of the winding up, shall, unless the Court otherwise orders, be vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown to him, he would not have taken the aforesaid view. 62. The High Court of Madras in the case of M/s K. CO., vs M/S ARUNA SUGARS AND ENTERPRISES LIMITED [AIR 1999 MADRAS 45] has held as under:- 17. The above decisions rendered by various Courts would go to show that the hands of the Court are not fettered under Section 433(1) of the Companies Act from exercising its inherent powers. If the transaction is bona fide and it has been done in the ordinary course of business without causing any harm to the general body of the creditors, such disposition of properties of the company after commencement of the winding up can be sanctioned if it is necessary in the interest of the company also. 63. The raison-d'etre of these provisions is to prevent disposition of the property of the company made after presentation of the petition for compulsory winding up, without permission of the Court, with a view to avoid fraudulent preferences and to prevent other abuses attendant on transfer of assets of the company in contemplation of its liquidation. The main purpose of the Court's jurisdiction under this sub-section is to ensure that a company is not hampered from carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. Another example is, it is in the interests of the creditors generally that the company's business should be carried on. This could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods. A fraudulent company can deceive any bona fide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. However, it will not allow the assets to be disposed of at the mere pleasure of the company and thus cause the fundamental principle of equality amongst creditors to be violated. To do so in effect would be to add to the preferential debts enumerated in Section 230, a further category of all debts which the company might choose to pay wholly or in part. Thus, the principle that can be deduced is that if the transactions have been undertaken under compulsion of circumstances, in order to save or protect the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entertained and considered, the order made by the Court ultimately would enure to the benefit of all the creditors and contributories. 68. The procedure for hearing a winding up petition is provided under the Company (Court) Rules, 1959 (for short hereinafter referred to as the Rules ). Rule 95 provides that, a petition for winding up a company shall be in Form No.45, 46 or 47, as the case may be, with such variations as the circumstances may require, and shall be presented in duplicate. Upon the filing of the petition, Rule 96 provides that, it shall be posted before the Judge in Chambers for admission of the petition and fixing a date for the hearing thereof and for directions as to the advertisements to be published and the persons, if any, upon whom copies of the petition are to be served. The Judge may, if he thinks fit, direct notice to be given to the company before giving directions as to the advertisement of the petition. Rule 98 provides that, every contributory or creditor of the company shall be entitled to be furnished by the petitioner or by his advocate with a copy of the petition within 24 hours of his requiring the same on payment of the prescribed charges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt for winding up of a company under the order of the Court, the High Court (i) may issue notice to the Company to show cause whey the petition should not be admitted; (ii) may admit the petition and fix a date for hearing, and issue a notice to the Company before giving direction about advertisement of the petition; or (iii) may admit the petition, fix the date of hearing of the petition, and order that the petition be advertised and direct that the petition be served upon persons specified in the order. A petition for winding up cannot be placed for hearing before the Court, unless the petition is advertised; that is clear from the terms of R.24(2). But that is not to say that as soon as the petition is admitted, it must be advertised. In answer to a notice to show cause why a petition for winding up be not admitted, the Company may show cause and contend that the filing of the petition amounts to an abuse of the process of the Court. If the petition is admitted, it is still open to the Company to move the Court that in the interest of justice or to prevent abuse of the process of Court, the petition be not advertised. Such an application may be made where the Court has issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up petition, the Tribunal may - (a) dismiss it, with or without costs ; or (b) adjourn the hearing conditionally or unconditionally ; or (c) make any interim order that it thinks fit ; or (d) make an order for winding up the company with or without costs, or any other order that it thinks fit : Provided that the Tribunal shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets. (2) Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. (3) Where the petition is presented on the ground of default in delivering the statutory report to the Registrar, or in holding the statutory meeting, the Tribunal may - (a) instead of making a winding up order, direct that the statutory report shall be delivered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is specifically provided, the said power has to be exercised in accordance with the said provision of law. At the same time, such a power cannot be exercised contrary to a statutory provision contained in an enactment. The Court has to keep in mind the provisions under the Act before exercising its jurisdiction to pass an order under Section 536(2) of the Act. Section 528 of the Companies Act deals with proof of debts. It provides that, in every winding up, all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency; or may sound only in damages, or for some other reason may not bear a certain value. Section 529 deals with application of insolvency rules in winding up of insolvent companies. Section 530 deals with preferential payments. Section 529A which was inserted by Act No. 35/1985 which came into effect from 24.5.1985 provides that, the workmen's dues and debts due to secured creditors to the extent such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmitted and advertisement is issued. Though per se sub-section (2) of Section 536 of the Act gives an impression that the said provision is applicable only after a winding up order is passed, by a judicial interpretation, now it has been held that even before such winding up order an application is maintainable. But, at the same time keeping in mind the interest of the Company, the creditors, the Company Court can pass an order under the aforesaid provision only after the petition is formally admitted and advertisement has been issued, calling upon all the creditors to appear before the Court on a date fixed for hearing of the petition. It is only thereafter the Company Court gets the jurisdiction to hear an application filed by the Company for such permission. Otherwise it would run counter to the object with which this power is conferred on the Court. The fundamental principle that must be borne in mind is that the assets of the company should be made available for distribution pari passu amongst the creditors of the company and that no creditor should obtain an advantage over his fellow creditors. In considering whether to make a validating order the court must always do its bes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company Petition. No reasons are assigned and no discussion on this point. A finding without reasons is void. Hence, it cannot be sustained. Accordingly, it is liable to be set aside. POINT NO.2: IS IT A BONAFIDE TRANSACTION IN THE INTEREST OF THE COMPANY OR CREDITORS 76. We have held that the application under Section 536(2) was not maintainable, much less the Court had jurisdiction to pass an order allowing the application, even before the Company Petition is admitted. However, even on merits let us consider whether the transaction in question is a bona fide one and in the interest of the Company as well as creditors of the Company. 77. The purpose behind sub-section (2) of Section 536 is to prevent improper disposition or dissipation of property so as to affect the assets otherwise available for distribution among the creditors of a company in winding up. Dispositions of the company's property, including actionable claims, made after the commencement of the winding-up are void unless the Court otherwise orders. Any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the Court under Section 536 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion, clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body. If, for example, it were in the interests of the creditors generally that the company's business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods. 81. The nature of the proceedings is brought out by the Chancery Division in Re CRIGGLESTONE COAL COMPANY LIMITED at page 331 as under: A creditor who obtains judgment, and issues execution at law, has a legal right to the means of satisfying his judgment. Subject to qualifications, one of which rests in the fact that the language of the Act is may and not shall , and to the reservation which Lord Cranworth made, and subject to what I shall presently say as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fundamental principle is that in a winding up, all unsecured creditors are to be paid pari passu, the object being to prevent the injustice and scrambles and intrigues which would arise if the company were to be at liberty to prefer one creditor to another. The Court has to steer a middle course between two extremes. On the one hand, the words of the section are wide enough to include any sale or payment that a company may make after the date of the winding up petition. On that basis, any business would practically have to be stopped if a petition was presented, because it would be unsafe to dispose of any of the company's assets. Any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the court under Section 227(2). It will not allow the assets to be disposed of at the mere pleasure of the company and thus cause the fundamental principle of equality amongst creditors to be violated. To do so would in effect be to add to the preferential debts enumerated in Section 230 a further category of all debts which the company might choose to pay wholly or in part. 83. In the case of KANCHAN KUMAR DHAR, OFFICIAL LIQUIDATO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction is not void. 4. If it be found that the transaction was for the benefit of and in the interests of the company or for keeping the company going or keeping things going generally, it ought to be confirmed. 86. The Apex Court in the case of CHITTOOR DISTRICT CO-OPERATIVE MARKETING SOCIETY LIMITED VS. M/S. VEGETOLS LIMITED AND ANOTHER reported in 1987 (Supp) SCC 167, has held as under: 3. Counsel for the appellant next contended that in any view of the matter the High Court should have in exercise of its powers under Section 536(2) of the Indian Companies Act validated the repayments. Insofar as the payments which have been made after the winding up order was passed, the appeal against the winding up order having been dismissed, it is futile to contend that any payments made during the interregnum should be validated. There is also no evidence to show that these payments were made in a bona fide manner under a commercial compulsion in the course of transactions necessitated for the running of the business. There is nothing to show that if the payments to the appellant-society were not made the business could not have been run. In fact, the running of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings and the effect of the ultimate order that may be made by the Court. 88. The Apex Court in the case of PANKAJ MEHRA AND ANOTHER VS. STATE OF MAHARASHTRA AND OTHERS REPORTED IN AIR 2000 SC 1953, has held as under: 20. 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 paralyzed, 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 situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bona fide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. This consequence has been correctly voided by the Division Bench in the impugned judgment. 89. The High Court of Madras in the case of ICICI VENTURE FUNDS MANAGEMENT LIMITED vs NEPTU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring a power on the Court to protect a bona fide transaction. This principle is incorporated to protect bona fide transactions carried out and completed in the ordinary course of the current business of a company. The presentation of a petition for winding-up does not by itself disable a company from carrying on its business. Companies in the ordinary course of business have to carry out transactions involving a disposition of properties as an incident of their business activities. These transactions are not foreclosed, for to hold otherwise would bring the business to a grinding halt. The law would not permit such a consequence by disabling a company from attending to business in the ordinary course merely because a petition for winding-up is instituted. The law recognizes this position and the practical necessity for a company against which a petition for winding-up has been presented to continue its business. 92. The Madras High Court in the case of K.PERIASAMY GOUNDER V. KOTHARI INDUSTRIAL CORPORATION LTD. AND KOTAK MAHINDRA BANK LIMITED reported in 2010(1) CTC 62 has held as under: Therefore, a Survey of the English as well as Indian decisions on the issue shows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly. The transaction should be a bona fide one entered into and completed in the ordinary course of trade. It should be for the purpose of preserving the business as a going concern. It should ensure that the interest of creditors, in particular, unsecured creditors will not be prejudiced. The right ex debito justitiae is not his individual right, but his representative right. The powers so exercised should not be contrary to the fundamental principle that all unsecured creditors are to be paid pari passu. The transaction in question has to be in the interest of the business of the Company or in the interest of the Company in liquidation or its creditors. The Legislature by omitting to indicate any particular principles which should govern the exercise of the discretion vested in the Court must be deemed to have left it entirely at large and controlled only by the general principles which apply to every kind of judicial discretion. 95. It is in this background, we have to see whether the transaction in question is a bona fide transaction, keeping in mind the interest of the Company and its creditors. The answer to the question has to be in the negative for the following reasons: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement on 09.11.2012 to sell 13,612,591 equity shares in favour of M/s.DIAGEO and Associates. Further, on 02.04.2013, when a demand was made on behalf of all the 14 banks, calling upon the Company to pay a sum of ₹ 6493.29/- crores, in reply thereto, they were assured by the Managing Director by email dated 14.2.2013, that United Breweries Group will make a significant payment to the Kingfisher Airlines Limited Bank Consortium out of the proceeds received from DIAGEO on the United Spirits (USL) deal. Exact mechanism and quantum can only be decided only after meeting with DIAGEO and their advisors which are scheduled on February, 19/20th when the DIAGEO's CEO will also be in India as part of the Prime Ministerial Delegation from the United Kingdom to India. This is because DIAGEO will be obligated to comply with SEBI regulations and conditions, if any, imposed by the Competition Commission of India and sale of United Spirits Limited shares to them is the only source of funds for United Breweries Group resulting from the binding DIAGEO transaction. He requested the Consortium of Banks not to precipitate any action to sell the pledged USL share in the market which will serio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39 equity shares constituting 17.4% shares in USL, where under the Company together with its subsidiary King Fisher Finvest India Limited have agreed to sell 19,536,648 equity shares in USL held by the Company and 12,676,342 being 9% of equity shares held by KFL. When the petitioners sought for a copy of the said Share Purchase Agreement to have their say in the matter, it was denied on the ground of confidentiality. However, a copy of the said agreement was handed over to the Court in a sealed cover. The learned Company Judge opened the sealed cover, looked into it and held that, having scrutinized the terms and conditions of the SPA, a copy of which is placed before the Court, material particulars as set out therein are reflected in the PA and regard being had to the term of confidentiality, the imprimatur of the Competition Commission of India on 26.2.2013, Annexure-A, the Securities and Exchange Board of India on 31.1.2013, Annexure-B, and the Reserve Bank of India on 21.3.2013, Annexure-C, cannot but be said that no prejudice is caused to the respondent by not being furnished with a copy of the SPA. The contention to the contrary is without merit. What merits consideration is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confidential document, copies cannot be made available to the petitioners. If a document was available for public inspection to the public shareholders, the case of confidentiality put forth before the Company Court is without any substance. Denying a copy of the said document, certainly prevented the petitioners from putting forth their case effectively pointing out the irregularities of the transaction entered into. At any rate, the principles of natural justice is violated. The learned Judge looked into the documents and made the contents of the document as the basis for an order, which is against their interest. It is yet another attempt on the part of the Company to keep the creditors in dark and in particular the petitioners who were before the Court, which demonstrates that the transaction which the Company was entering into is not a bona fide one and there is more than that meets the eye. The learned Company Judge was not justified in denying inspection of the aforesaid agreement. This admitted facts vitiates the order granting permission and renders it liable to be set aside. 103. Thirdly, JM Financial Institutional Securities Private Limited issued the said public ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been settled today. Separately, Diageo had acquired 58,668 additional USL shares in the tender offer for a total consideration of ₹ 8.57 crores. With completion of the share purchase agreement, the shareholders' agreement between Diageo, United Breweries (Holdings) Limited and KF Invest is now effective. It also published that Diageo Chief Executive Ivan Menezes said Since we received approval for this transaction we have been getting ready for closing and integration. Having completed the share purchase, we will now begin the work to identify and capture the significant growth opportunities within this attractive market . 106. In the Capital Market dated July 5, 2013 under the heading United Spirits hits record high after Diageo Hikes Stake , it is published that Diageo acquired shares from United Breweries (Holdings) (UBHL), K.F Invest (a subsidiary of UBHL), Palmer Investment Group and UB Sports Management Overseas (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees). Shares owned by the USL Benefit Trust, which were part of the original transaction announced on 9 November 2012 and which represent 2.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to acquire a 50% interest in the company which owns United National Breweries' traditional sorghum beer business in South Africa on 27 June 2013. The remaining 50% is held by a company affiliated with Dr Mallya. Diageo has acquired its 50% interest for $36 million (approximately 24 million), subject to customary adjustments. Diageo announced its intention to form this Joint venture on 9 November 2012, subsequently announcing its agreement to enter into such Joint venture on 28 January 2013. Following today's completion of USL Transaction, the near-term priority of Diageo and Dr Mallya is the integration of USL into Diageo group. Once that is successfully under way, Diageo and Dr Mallya will explore the opportunity of extending their relationship into other emerging markets in Africa and Asia (excluding India) through a further Joint venture relationship on terms and with a scope as yet to be determined. It is not certain whether such a Joint venture will be established or, if so, on what basis. If this wider emerging markets joint venture is established, it is expected that the South African Joint venture would be contributed to it. This parallel arrangement is exacerbat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent Nos.1's explanation was unacceptable, and in deferring Investigation, contrary to the interests of the general body of creditors of respondent No.1, since such diversion of ₹ 4000 crores was bound to have an indirect impact on respondent No.1 and its general body of creditors, by virtue of a 27.72% stake held at the material time by respondent No.1 in USL. Respondent No.1 should not have beeen permitted to receive and/or disburse proceeds of the sale of its USL shares to respondent Nos.4 and/or 5 with minimal fetters, until investigation into the diversion of ₹ 4000 crores was complete, particularly in view of the lack of confidence of the general body of creditors of respondent No.1. 110. Therefore, when the Company Court is hearing an application for permission to sell the assets of the Company, even if that is required to carry on day-to-day business of the Company, it is of utmost importance that all the materials showing the conduct of the Company should be before it. There should be total transparency in the transaction of the Company. Then only the Court will be able to appreciate, whether it is a bona fide transaction. The Court has its own limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra, it were negotiated parallely by the Company, a substantial portion of the consideration has been diverted in the aforesaid manner and the price at which the shares were sold do not represent the true market value. Further, it was also contended that, in the light of the facts set out in the above chart, the sale of shares held by the Company in favour of Diageo is not an isolated transaction. It is a scheme under which Diageo was acquiring a substantial portion of shares in USL so as to have a controlling interest in the affairs of the USL. In those circumstances, the price quoted in the National Stock Exchange cannot be the guiding factor. Even otherwise, the rate at which the shares are sold is far less when compared to the rate at which the shares were sold on the day the permission was made and the day the impugned order came to be passed granting such permission. 114. Per contra, it was contended by the learned counsel for the respondent-Company that, the sale of the shares by the applicant in favour of the DIAGEO is in the course of its business as it is an investment company. Prior to their entering into the contract with DIAGEO for a period of nearly one year, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the object of getting substantial control over USL. The facts on record do disclose that it is a case where the purchaser of shares wanted to have a controlling interest in the Company. It is not an isolated transaction. The purchaser have purchased substantial number of shares from four group companies of the respondent thereby they acquired controlling interest in the Company. It is a case of divesting the respondent's interest in USL which has substantially helped the Diageo in acquiring controlling interest. Therefore, it is not done in the course of ordinary business. Though the price quoted on the Stock Exchange is a factor which should be taken note of at the time of valuation of shares, it is not decisive and conclusive. In a transaction of this nature when the Company was divesting its substantial portion of the shares which has resulted in acquiring controlling interest by the purchaser, the valuation by an approved valuer should have been insisted upon. As is clear from the material on record, the shares which was quoted at ₹ 762/- one year prior to the agreement rose up to ₹ 1,360/- in a span of one year without any marked change in the net worth of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the claims of secured creditors. However, it further held though the pledge in favour of the aforesaid creditors was prior to the filing of the petition, the Company pledged the shares of USL in favour of Motilal, LKP Finance, SICOM, SREI and Narayan Shriram and ICICI to a total extent of ₹ 490.92 crores and, therefore, as these pledges are created after the filing of the Company Petition, they do not prima facie qualify for repayment. According to him, in order to effect repayment to the pledges, it is required of the applicant, who admits to have made pledge of shares after 31.3.2012 to establish transaction bona fide entered into and completed in the ordinary course of trade. To be protected, the disposition should have been made for the purpose of preserving the business as a going concern. Further it held, regard being had to the nature of business of the Company and the on going projects of construction activity over its immovable properties, it is possible that the Company may have bona fide, for preserving the business, pledged shares in USL with reputed financial institution. But merely because pledge of shares of USL is made by the applicant in favour of the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king such an order has created a new class of creditors other than provided in the statute under Section 529 and 529A of the Companies Act. To give recognition to such preferential right would certainly mean to recognise preferential right which has no sanction of law and it would also operate to the great prejudice in the matters of discharge of obligations of the company at the stage when the company is wound up. Further, the said order violates the fundamental principle that the assets of the Company should be made available for distribution pari passu amongst the creditors of the Company and that no creditor should obtain an advantage over his fellow creditors. Certainly the creditors who are not before the Court and who are now paid the entire amount due to them, are placed in an advantageous position over the other secured creditors and unsecured creditors including the petitioner. Therefore, the order passed by the learned Company Judge is contrary to the statutory provisions as well as the spirit behind the said provisions, as such it is illegal and requires to be set aside. 120. In the course of the hearing of the appeal it is not disputed by the parties that in pursuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is a Scheduled Bank. The Company Court directed that the respondent-Company shall not sell the balance shares i.e., 3,471,154 without permission of the Court. Further the respondent-Company was directed to invest the entire amount of ₹ 14,75,6012/- (Rupees fourteen crores seventy five lakhs six thousand and twelve only) lying in the current account of the respondent-Company as per the audit report submitted by the respondent in pursuance of the direction No.III in the operative portion of the impugned order in the fixed deposit in Lakshmi Vilas Bank pending the final disposal of the appeal on merits. 122. In the interim order dated 22-07-2013 passed in OSA No.25 of 2013, this Court has directed, in the interest of the creditors, in addition to the conditions imposed and directions contained in clause (iv) of the impugned order of the learned Company Judge, that the respondent-Company should not in any way sell, transfer, part with possession or do any act in respect of all other assets of the Company, pending further order in this appeal. 123. Now that we have held that the impugned order granting permission to sell the shares is without jurisdiction and is setti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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