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TMI Blog2022 (3) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... it - By Act 35 of 1985, the proviso to Section 529(1) was inserted and a pari passu charge was created in favour of the workmen of a company to the extent of the workmen's portion in every secured asset of the company in liquidation. Indeed, by virtue of Clauses (a) and (b) of such proviso, the official liquidator concerned was conferred the statutory right of representing the workmen for purposes of asserting and enforcing the rights of the pari passu charge holder. Besides, Section 529A was introduced in the statute and workmen's dues became entitled to priority over all other debts. On the facts of this case, the Official Liquidator was restrained from taking steps to close the company, but all administrative decisions were required to be taken with his concurrence and he was directed to take over all money transactions and the accounts pertaining thereto. The consequence of appointing the Official Liquidator as the provisional liquidator is that he takes charge of the assets and affairs of the company concerned. When all the above factors are concerned, the only reasonable conclusion is that the legal fiction also gets triggered upon the appointment of the Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should obtain the concurrence of the learned Administrator and the Official Liquidator and appoint two renowned chartered accountants as valuers - The disposition in favour of the Purchaser is validated subject to and contingent on the fulfillment of the above requirements. If the above requirements are not fulfilled, the disposition stands declared ipso facto void. In such event, it is open to the Administrator and the Official Liquidator to file any consequential applications. In order to verify whether the conditions precedent have been fulfilled, upon receipt of the two valuation reports and after arranging for the differential consideration in terms thereof, the Purchaser shall file an application before this Court seeking permission to proceed to conclude the transaction in terms of this order. Application disposed off. - Company Application Nos.859 of 2017 and 359 of 2019 in C.P.No.372 of 2013 - - - Dated:- 18-2-2022 - Hon'ble Mr. Justice Senthilkumar Ramamoorthy For the Applicant : Mr.P.H.Aravindh Pandian Senior Counsel for M/s.Harishankar Mani (Applicant's Counsel in C.A.No. 859 of 2017 and 2nd Respondent's Counsel in C.A.No.359 of 2019) And Mr.Vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Therefore, Zylog applied for credit facilities and such facilities were sanctioned by ICICI Bank India on the security of a pledge of its 100% shareholding in Brainhunter. In relation to the pledge, a pledge agreement dated 13.01.2011 (the Pledge Agreement) was executed by Zylog in favour of BNY Trust Company of Canada (BNY Trust or Security Trustee), in its capacity as security trustee for and on behalf of the lender, ICICI Bank India. 6. Brainhunter defaulted in the discharge of its obligations under the facilities agreement with ICICI Bank Canada. Therefore, a call was made on the SBLCs. In turn, ICICI Bank India invoked the pledge. For such purpose, by letter dated 16.10.2013, ICICI Bank India informed Zylog that ICICI Bank Canada had invoked the SBLCs. Therefore, Zylog was called upon to make payment. ICICI Bank India, by a separate letter dated 28.10.2013, informed the Security Trustee that certain events of default had occurred. Accordingly, the Security Trustee was called upon to declare that amounts due and payable by Zylog in accordance with Section 3.1 of the Security Trustee Agreement be paid immediately. By notice dated 30.10.2013, the Security Trustee called upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the relief prayed for in Comp.A.No.359 of 2019, it was submitted on behalf of the Administrator that the said application was filed by Quess Corp in the year 2019 to validate a purchase on 23.10.2014. Therefore, the admitted position is that the sale of shares was subsequent to the order appointing the Provisional Liquidator and much subsequent to the commencement of winding up. The next contention was that the sale was entered into at an aggregate value of CDN $ 100,000, which is minuscule in comparison to the investment of CDN $ 35 million by Zylog in Brainhunter. In support of these contentions, reliance was placed on the following judgments: (1) Official Liquidator v. Khaja Mohideen, (2022) 230 Company Cases 185 (MAD ) (Khaja Mohideen). This judgment was relied upon for the proposition that, in contrast to dispositions between the presentation of a winding up petition and the order of appointment of the Official Liquidator as Provisional Liquidator or the order of winding up, a disposition after the appointment of the Provisional Liquidator would ordinarily not be validated. (2) Administrator, MCC Finance v. Ramesh Gandhi, (2005) 127 Company Case 85 (MAD), where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no collusion between the lender, ICICI Bank India, and the Purchaser. As regards valuation, the Purchaser relied upon the valuation report and pointed out that the valuation was done as per the discounted free cash flow method [DCF], which is an internationally recognised method of valuation of the shares of companies. Such method is in consonance with Canadian law which is the law governing the pledge and the enforcement thereof. The next contention was that the Official Liquidator was informed on 23.09.2014 that the pledge was invoked. Zylog and its wholly owned subsidiary, Brainhunter, were in financial stress at the relevant point of time. As a result of the transaction, the liabilities of Brainhunter were considerably reduced. As the holding company, indirect benefit flowed to Zylog. 13. The Purchaser further submitted that it consummated the transaction in 2014. Subsequently, it made significant investments in Brainhunter. By drawing reference to the financial statements of Brainhunter, the Purchaser emphasised that the financial position of Brainhunter had improved dramatically over this period on account of the financial and other resources deployed in Brainhunter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quidator. For all these reasons, it was submitted that leave of the Court was not required under Section 537 of CA 1956. 16. In support of these contentions, ICICI Bank India relied upon the following judgments: (1) M.K.Ranganathan v. Government of Madras and others, AIR 1955 SC 604. (2) ICICI Bank Ltd v. SIDCO Leathers Ltd. Others,(2006) 10 Supreme Court Cases 452. 17. In light of the rival contentions, the first question that arises for consideration is whether a secured creditor requires leave under Section 537 of CA 1956. The discussion and analysis, in such regard, should commence by examining Sections 536 537 of CA 1956, which are set out below: 536. Avoidance of transfers, etc. after commencement of winding up: (1) In the case of a voluntary winding up, any transfer of shares in the company, not being a transfer made to or with the sanction of the liquidator, and any alternation in the status of the members of the company, made after the commencement of the winding up, shall be void. (2) In the case of a winding up by the court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured creditor can no longer bring secured assets for sale without involving the official liquidator concerned in the process. 19. Another dimension to the above question is whether a secured creditor requires leave in spite of subsequent legislations such as the Recovery of Debts and Bankruptcy Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. In such context, the Hon'ble Supreme Court, in cases such as Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, and Rajasthan State Financial Corporation v. Official Liquidator, (2005) 8 SCC 190, held that the jurisdictional Debts Recovery Tribunal (DRT) may, in exercise of overriding powers under the statute, sell the assets albeit after issuing notice to the Official Liquidator. However, those cases dealt with sales under specific enabling statutes, which contain non-obstante clauses and also provide an in-built mechanism to provide a notice to the Official Liquidator so as to involve him in the process. By contrast, in this case, the sale was a private sale in exercise of pure contractual rights by the secured creditor. Therefore, there is little doubt that I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment under Section 537(1) is triggered upon commencement of winding up. Is this a distinction without a difference? Section 441 deals with commencement of winding up and sub-section (2), which deals with winding up other than voluntary winding up, provides that the winding up of a company shall be deemed to commence at the time of presentation of the petition for winding up of the company concerned. Since this is a legal fiction, does it get triggered only upon a final winding up order or even upon appointment of the Official Liquidator as provisional liquidator? In Sudarsan Chits (I) Ltd. v. O.Sukumaran Pillai, (1984) 4 SCC 657, the Supreme Court held that the powers under Section 446(2) of CA 1956 may be exercised upon appointment of the Official Liquidator as provisional liquidator, and not only upon a winding up order being passed. In paragraph 45 of Orkay Industries Ltd. v. State of Maharashtra 1998 SCC Online Bom 248, a Division Bench of the Bombay High Court held that Sections 536 and 537 of CA 1956 would get triggered either upon a winding up order being passed or upon appointment of the Official Liquidator as provisional liquidator. Section 450 of CA 1956, which deals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions outside the ordinary course of business may be undertaken, such as the sale of a valuable but under used or unused asset or even the sale of the business as a going concern to a suitor. In relation to prior obligations and liabilities, secured creditors may also undertake actions to enforce their securities. Without the power of validation or the power of granting leave, the relevant transactions cannot be salvaged. The texts of Sections 536 and 537 of CA 1956 do not impose fetters on such power and, therefore, such power may be exercised, in appropriate cases, prior to or after the Official Liquidator was appointed either as provisional liquidator or even after a winding up order was passed. The threshold for validation would, however, be set at a higher level if a party seeks validation of a disposition that took place after the Official Liquidator was appointed provisionally or otherwise. 23. In order to decide whether a particular disposition warrants validation, courts have evolved various criteria. In VGP Finance , this Court formulated several questions to be taken note of while deciding whether a transaction should be validated. In my view, the foremost criterion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The last three key events took place after the order appointing the Official Liquidator as the Provisional Liquidator. When these facts are considered cumulatively, it cannot be concluded that the creation of the security by way of pledge was not bona fide . Indeed, it cannot be said that the call on the pledge was not bona fide . However, the enforcement of the pledge was undoubtedly completed subsequent to the order of appointment of the Official Liquidator as Provisional Liquidator. This leads to the question whether the Purchaser was aware of the appointment of the Provisional Liquidator. From the communication dated 02.09.2014 from the Official Liquidator to ICICI Bank India, it is beyond doubt that ICICI Bank India was informed about the appointment of the Official Liquidator as the Provisional Liquidator. Such information was evidently provided before the enforcement of the pledge was concluded. Thus, the pledgee was fully aware of the commencement of winding up. In fact, the subsequent communication dated 27.11.2014 from ICICI Bank India to the Official Liquidator makes it abundantly clear that ICICI Bank India was of the view that it did not require the leave of the Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reasons set out above, it bears repetition that ICICI Bank India or the Purchaser was required to obtain leave of this Court before enforcing the pledge. Moreover, the Security Trustee should not have acted without the leave of this Court while enforcing the pledge. This leads to the question whether the transaction is liable to be validated, notwithstanding the above conclusions, in view of the earlier conclusion that the transaction is bona fide . 28. One of the significant considerations while deciding whether to validate a disposition is to ask the question whether the valuation is reasonable, and whether this Court would have granted leave on the same terms if leave had been sought at the time of the transaction. In the present case, the documents indicate that the investment of Zylog in Brainhunter was of the order of about 35-40 million CDN $ in the form of equity and debt. From the financial statement of Brainhunter for the financial year ended 31.03.2014, there is definite indication that the financial position of Brainhunter was not sound in 2014 when the disposition took place. It appears from the valuation report produced by the Purchaser that the valuation was do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The valuation of the shares of Brainhunter shall be arrived at as on the date of acquisition by the Purchaser. As regards the pledgee, ICICI Bank India, it was satisfied with the price realised on the basis of the earlier valuation. Therefore, it is just and necessary that ICICI Bank India should not be entitled to any additional consideration even if the shares are found to be of higher value on revaluation. Instead, the entire additional consideration, if any, should accrue to the benefit of Zylog. For purposes of carrying out such valuation, the Purchaser should obtain the concurrence of the learned Administrator and the Official Liquidator and appoint two renowned chartered accountants as valuers. The valuers should adopt any internationally recognised valuation methodology, which is also valid under Canadian law, since the shares of a Canadian company are being sold. Such methodology, any models of capital asset pricing in relation thereto, the relevant assumptions, principles, considerations and the like should also be decided with the concurrence of the learned Administrator and the Official Liquidator. All material documents shall be shared by the Purchaser with the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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