Bombay High Court
Mukesh Khemchandbhai Parmar vs The Official Liquidator And Ors on 30 June, 2017
Bench: A.S. Oka
1 app-442.12
pmw
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL NO.442 OF 2012
WITH
OFFICIAL LIGUIDATOR REPORT NO.356 OF 2010
AND
COMPANY APPLICATION NO.597 OF 2010
IN
COMPANY PETITION NO.369 OF 2003
Mr. Mukesh Khemchandbhai Parmar
48 years old Indian Inhabitant -
claimant worker of the Company S.L.M. )
Maneklal Indusries Ltd. - who has lodged )
claim with the Official Liquidator of )
SLM Industries Ltd., at High Court, Bombay - )
having address at Vivekanand Nagar,
Sector No.2/3, Hathijan, Taluka Dishkoi, )
Dist. Ahmedabad ) ... Appellant
Versus
1. The Official Liquidator, as Liquidator for )
the SLM Industries Ltd. (In Liquidation), )
High Court, Bombay. )
2. M/s. Texraj Realty Private Limited, )
a Company incorporated under the )
Companies Act, 1956, having its )
Registered office at 16, 4th Floor, )
Agrawal Hall, Opp. Bhagwat Vidyapith, )
S.G. Highway, Ahmedabad - 380 061; )
through their Advocates M/s. Singhi & Co. )
having office at 609, Dalamal Tower, 211, )
Nariman Point, Mumbai - 400 021. )
3. S.L. M. Maneklal Industries Ltd. )
(Now SLM Industries Ltd.) )
having its registered office at Hotel )
Heritage Building, Sant Savta Marg, )
Byculla, Mumbai - 400 027. ) ... Respondents
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Mr. V.M. Bhardwaj, for the Appellant.
Mr. Pankaj S. Shah for the Respondent No.2.
Mr. C.N. Mehta for the Respondent No.3.
CORAM : A.S. OKA AND M.S. KARNIK, JJ.
DATE ON WHICH SUBMISSIONS WERE HEARD : 21st NOVEMBER, 2016
DATE ON WHICH JUDGMENT IS PRONOUNCED: 30th JUNE, 2017
JUDGMENT (Per A.S. OKA, J.):-
1 By this Appeal, an exception is taken to the judgment and
order dated 21st October, 2011 passed by the learned Single Judge on
Official Liquidator's Report No.356 of 2010. The question involved in
this Appeal is whether the sale of the movable and immovable assets of
a Company in liquidation should be declared as void.
2 With a view to appreciate the submissions made across the
Bar, few facts will be necessary. In this case, we are concerned with a
company S.L.M. Industries Limited (in liquidation) (for short "the said
company)". By an order dated 14 th March, 2007 passed by the learned
Single Judge in Company Petition No.369 of 2003 (B.I.F.R. Case No.4
of 1991), the Official Liquidator was appointed as a Provisional
Liquidator of the said company. By a subsequent order dated 26 th July,
2010 passed in the said Company Petition, the said company was
ordered to be wound up and the Official Liquidator has been appointed
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as the Liquidator who has been conferred with various powers under
the Companies Act, 1956 (for short "the said Act").
3 Thereafter, the Official Liquidator took steps for
ascertaining the details of the assets of the said company and for
proceeding with the formalities of taking over possession of the assets
of the Company. Notices were issued to Ex-Directors, Secured Creditors
and Union of Workers. The Official Liquidator noticed that certain
assets of the said company were sold in the year 2007. The Official
Liquidator, therefore, submitted a Report bearing No.356 of 2010 before
the learned Company Judge. The Official Liquidator gave a list of assets
sold by the said company in the year 2007. In paragraph 7 of the report,
he claimed that the sale of the assets was void in view of Sections
536(2) and 537 of the said Act. Paragraph 7 of the said report reads
thus :-
"7. That the Official Liquidator submits that on an
examination of the details/ information furnished in the
affidavits, it is notieced that the following assets were
sold.
a) The Plant and Machinery (including entire building
structure) situated at Vatva, Vinzol, Bibi Talav, Hailol -
Kalol have been sold out by the company in favour of
Mr. Yusufbhai I. Parmar and Mr. Deven Rameshbhai
Patel on 17/1/2007.
b) The immoveable assets of non-agricultural land bearing
Survey No.323 admeasuring about 6273 sq mts,
situated at Moje Vinzol, Taluka Daseroi, Ahmedabad - 5
(Narol), were sold in favour of Taxraj Reality Pvt. Ltd.
on 4th June 2007 for a sum of Rs.44,48,888/-.
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c) The immoveable assets of non-agricultural land bearing
Survey No.1037 + 1038 + 1040 + 1041 + 1042 +
1043 + 1046 + 1568 + 1569 and 1572 admeasuring
about 11634 sq mts, situated at Moje Vatva, Taluka -
Daseroi, Ahmedabad - 5 (Narol) has been sold to Taxraj
Reality Pvt. Ltd. on 4th June 2007 for a sum of
Rs.82,50,408/-.
d) The immoveable assets of non-agricultural land bearing
Survey NO.322 + 693/ 1 admeasuring about 50686 sq
mts, situated at Moje Vinzol, Taluka - Daseroi,
Ahmedabad - 5 (Narol) were sold in favour of Taxraj
Reality Pvt. Ltd. on 4th June 2007 for an amount of
Rs.3,59,44,020/-.
e) The immoveable assets of non-agricultural land bearing
Survey No.321/1 to 321/12 admeasuring about 31971
sq mts, situated at Moje Vinzol, Taluka - Daseroi,
Ahmedabad - 5 (Narol) had been sold in favour of
Taxraj Reality Pvt. Ltd. on 4th June 2007 for a sum of
Rs.2,26,72,038/-.
f) The immoveable assets of non-agricultural land bearing
Survey No.750/B admeasuring about 11,534 sq mts,
situated at Moje Vatva, Taluka - Daseroi, Ahmedabad -
5 (Narol) were sold out in favour of Taxraj Reality Pvt.
Ltd. on 4th June 2007 for a sum of Rs.76,81,644/-."
4 The prayers (a) to (c) of the said report read thus :-
"(a) In view of the para 6 and 7 of this report, whether this
Hon'ble Court would be pleased to declare the sale of
the moveable assets to Mr. Yusufbhai I. Parmar and Mr.
Deven Rameshbhai Patel held in January 2007 and the
sale of the immovable properties to M/s. Taxraj Reality
Pvt. Ltd. in June 2007 as null and void and also direct
the purchasers to return the said moveable and
immovable assets to the Official Liquidator.
(b) Whether this Hon'ble Court would be pleased to direct
the ex-directors of the company (in liqn.) who had sold
the moveable and immoveable properties to deposit the
sale proceeds to the Official Liquidator within such
period as this Hon'ble Court may determine.
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(c) In view of the para 10 of this report, whether this
Hon'ble Court would be pleased to permit the Official
Liquidator to take possession of the moveable and
immoveable assets mentioned therein into his
possession."
5 A reply was filed by Shri K.M. Patel, Joint Secretary of
Gujarat Rajya Shramajeevi Karmachari Union which claimed that the
said Union was representing substantial number of workers of the said
company. Shri Patel supported the prayers made in the Report. A reply
was also filed to the report by one Shri Deven Rameshbhai Patel, a
Director of M/s. Texraj Realty Private Limited. As pointed out earlier,
according to the report submitted by the Official Liquidator, the said
M/s. Texraj Realty Private Limited is the purchaser of certain immovable
assets of the said company. The contention raised in the said reply was
that the property was purchased by the purchaser pursuant to one time
settlement scheme between the said company and its Bankers which
was approved by the Debt Recovery Tribunal.
6 A rejoinder was filed by the present appellant to the reply
of M/s.Texraj Realty Private Limited (Purchasers) in which he supported
the report of the Official Liquidator and prayed for setting aside the
sale.
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7 By the impugned Judgment and Order, the learned Single
Judge held that it was too late in the day to declare the alienation as
void. Paragraphs 43 to 45 of the impugned order read thus:
"43] Mr.Bharadwaj and Mr.Ganguli appearing for Unions
argued that company's properties worth more than
Rs.250 Crores have been sold at a throw away price in
favour of M/s.Tex Raj and that itself indicates the under
hand dealing and dishonesty so also fraud of the
company in liquidation. Even Mr.Sen appearing for
Official Liquidator sought to argue that it is not a case
of private sale under Rule 66. Once it is not so and the
procedure was unfair and unjust, there were no bids
invited, no valuation made, no safeguards as in the case
of public auction or open bid, then, the sale will be void
unless ordered otherwise is the submission of the
Official Liquidator. The emphasis of arguments of all
parties opposing M/s.Tex Raj was that this is not a
statutory sale or a sale in terms of Rule 66. I have
already dealt with that aspect of the matter. All that is
then argued is that 353 workmen have not accepted
any payment, they are not party to any settlement and
today there is collusion between the company in
liquidation and auction purchasers. There is also doubt
raised about the settlement dated 12th April 2007. Some
argument is raised about the stamp paper being not
genuine. To my mind, some sweeping allegations
without necessary proof either to show that there was a
under valuation or that the property was sold at throw
away price or that the workers and creditors were de-
frauded, cannot be accepted. Neither the secured
creditors viz., the banks and financial institutions, save
and except GIIC are before the Court nor the Official
Liquidator is referring to any particulars and producing
any proof to show that fraud has been perpetrated by
the officers/ directors of Company in liquidation acting
in collusion with M/s.Tex Raj.
44] In these circumstances, to accept the arguments
canvassed, such as by Mr.Bharadwaj that the valuation
of company's property was Rs.250 Crores will not be
possible. The said allegations are being made more
than 3 years after the sale and now when even Tex Raj
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has alienated part of the property in favour of a third
party. Therefore, much water has flown under the
bridge. Pursuant to the sale and settlement of claims of
the financial institutions and the banks referred to
above so also the satisfaction of the claims of some
workmen, it will not be proper to declare the sale as
void. On the other hand, applying the settled principles
that the sale by the company in liquidation was in the
backdrop of the settlement proposals with the financial
institutions and commitments made in pursuance
thereof, it will be proper to hold that the private sale
may not be permissible, yet, several measures and
steps in pursuance thereof having been initiated and
concluded, it is too late in the day to set aside the
same.
45] The apprehension of Mr.Dhond appearing for GIIC can
be taken care of by clarifying that none of the
statements made in the affidavits filed by M/s.Tex Raj
may be held to be conclusive and binding on GIIC
particularly in the light of the present order. It is open
for GIIC to urge in the pending proceedings that the
sale in favour of Tex Raj is not binding on it and the
property continues to be a security for the claim of GIIC
and the sale effected by the company in liquidation in
favour of M/s.Tex Raj nor any further steps by M/s.Tex
Raj would in any manner defeat the rights and
contentions of GIIC. All pleas of both sides in that
behalf are kept open and can be raised irrespective of
the conclusion rendered in this report. The findings and
conclusions in this order should be read as confined to
this report and the request of the purchaser M/s.Tex
Raj not to disturb or set aside the sale. Beyond that
neither the claim of GIIC nor that of the workers can be
said to be prejudiced or concluded by this order.
Equally this order does not prevent the Liquidator from
taking possession of the other assets and properties,
particularly, those enlisted in para 10 of his report
dated 3rd November 2010. All such steps may be taken
irrespective of the conclusions and findings in this
order and it would be open for the Liquidator to
proceed in winding up in accordance with law. Subject
to above, all applications and reports stand disposed of.
No costs. "
(emphasis added)
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8 The learned counsel appearing for the appellant submitted
that the winding up of a company shall be deemed to have commenced
at the time of presentation of the Petition for winding up which in the
present case commenced on 29th April, 2003. He pointed out that
movable assets of the said company were sold on 21 st March, 2007. He
strongly relied upon the provisions of Sub-Section (2) of Section 536
and Sub-Section (1) of Section 537. His submission is that the learned
Single Judge committed an error by holding that the objections raised
to the sale cannot be entertained after lapse of three years. He relied
upon several decisions of this Court and the Apex Court in support of
his contention. He urged that the learned Single Judge has not followed
the law laid down by the First Court in the case of Laxman Anant
Prabhudesai and others vs. NRC Limited1. He also relied upon some other
decisions. The learned counsel appearing for the second respondent
supported the impugned judgment by pointing out various findings
recorded by the learned Single Judge.
9 We have given careful consideration to the submissions. We
have already quoted paragraph 7 of the report of the Official Liquidator.
Clause (a) of paragraph 7 of the report refers to the sale of plant and
machinery of the company on 17th January, 2007 in favour of Yusufbhai
1 2011(Supp.) Bom. C.R. 243 (O.S.)
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I. Parmar and Mr. Deven Rameshbhai Patel. Clauses (b) to (f) refer to
immovable properties of the Company described therein which were
sold to Texraj Realty Pvt. Ltd. (second respondent). We have perused
the reply filed by the second respondent. In the reply, in paragraphs 4 to
6, the second respondent stated thus :-
"4. I say that the said company arrived at a One Time
Settlement (OTS) with four of its secured creditors i.e.
Bank of Baroda, Bank of India, Dena Bank and Banque
Nationale De Paris, Consortium Partners (hereinafter
referred to as the "said Banks"). I repeat that the
Purchaser has paid total amount of Rs.19,22,53,098/-.
Out of that amount paid to the Banks is
Rs.10,59,43,855/- + other dues cleared like :-
Ahmedabad Municipal Corporation = Rs.1,99,99,411/-,
to Land Revenue Taxes = Rs.30,19,033.65 + Bank of
Baroda Debenture Holders = Rs,80,00,000/- + Torrent
Power Limited = Rs.24,00,000/- + PF Dept =
Rs.1,10,04,799/- + other creditors = Rs.5,52,173.25.
All the above payments have been made as per the
instructions of the said Company thereby settling all
dues of the said Banks. The purchasers have deposited
the entire amount in the Hon'ble Debt Recovery
Tribunal. The Purchasers have also cleared the dues of
1310 workmen as a full and Final Settlement along with
their individual affidavits amounting to
Rs.3,70,90,515/-, vide registered Labour Unions and
approved by the concerned Labour Commissioner. I
crave leave to refer to and rely upon the said Settlement
Orders and Affidavit filed by the Workers. Further the
said amount as per the settlement has been duly
accepted in installments by the workmen without any
disputes whatsoever.
5. The Purchasers have been informed by the Company
that the claims of the Secured Creditors viz. Bank was
to the tune of over Rs.70,00,00,000/- which was under
the OTS agreed to be settled at Rs.10,59,43,855/- and
the said OTS amount has been paid out of the aforesaid
total amount of Rs.19,22,53,098/- paid by the
Purchaser.
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6. I say that the said properties of the Company were
mortgaged with the said Banks and were transferred to
the purchasers by the Company with a view to honour
the OTS as sanctioned by the DRT and the entire
payment has been made by the Purchasers in the DRT
and to the other creditors of the Company, including
statutory creditors, labourers and other creditors. The
total consideration paid by the Purchaser is
Rs.19,22,53,098/-, out of which Rs.10,59,43,855/- have
been used to honour the OTS. Hereto annexed and
marked Exhibit 'A' is a statement giving the details of
the payments made by the Purchasers, pursuant to the
payments made under the OTS by the purchasers on
behalf of the said Company. The Purchasers crave leave
to refer to and rely upon the Sale Deeds being
Registration Nos.i.e. 3814/2007, 3815/2007,
3816/2007, 3817/2007, 3818/2007, 3819/2007 when
produced."
10 In paragraph 7, there is a reference to original application
filed by Bank of Baroda before the Debt Recovery Tribunal, Mumbai for
recovery of a sum of Rs.44 Crores from the said company. A reference is
made to orders passed by the Debt Recovery Tribunal and in particular
the order dated 16th January, 2007 under which the DRT accepted
deposit of Rs.1 Crore made by the second respondent. The amounts
agreed to be accepted by the four Banks by way of One Time Settlement
have been set out in clause (g) of paragraph 7. It is claimed that apart
from the OTS amount of Rs.10,59,43,855/-, additional amounts were
paid by the second respondent to other creditors towards PF dues and
other dues. It is claimed by the second respondent that total amount of
Rs.19,22,53,098/- was paid by the second respondent. It is claimed that
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a sum of Rs.3,70,90,515/- was paid by the second respondent towards
the dues of the workmen of the said company.
11 Before we refer to the findings recorded by the learned
Single Judge, it will be necessary to advert to Sections 536 and 537 of
the Companies Act which read thus :-
"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 alteration 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 Tribunal, 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 Tribunal] otherwise orders, be void.
537. Avoidance of certain attachments, executions, etc.,
in winding up by Tribunal. - (1) Where any company is
being wound up by Tribunal -
(a) any attachment, distress or execution put in force,
without leave of the Tribunal against the estate or
effects of the company, after the commencement of the
winding up; or
(b) any sale held, without leave of the Tribunal of
any of the properties or effects of the company after
such commencement shall be void.
(2) Nothing in this section applies to any proceedings
for the recovery of any tax or impost or any dues
payable to the Government."
(underlines supplied)
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12 The learned Single Judge considered the arguments made
on behalf of the Official Liquidator that the sale of the assets of the said
company is void unless it is in terms of Sub-Section (2) of Section 536
of the Companies Act, the Court orders otherwise. His submission was
that the sale being a private sale and not through DRT, best price could
not be fetched. The learned Single Judge also considered the argument
canvassed on behalf of the Gujarat Industrial Investment Corporation
(GIIC) that the liabilities of the said Corporation have not been cleared.
The learned Single Judge proceeded to consider the scheme of RDB Act
and rules 52 and 66 of the Income Tax Act (Certified Proceedings)
Rules, 1962. The learned Single Judge considered the case made out by
the appellant on merits on behalf of the 353 workers. The learned
Single Judge accepted the case made out by the second respondent
regarding the settlement of claims including the claims of 1300
workers. What is material is the conclusion and finding recorded by the
learned Single Judge in paragraph 34 which reads thus :-
"34. Once a conclusion is reached that the sale in favour of
M/s. Tex Raj is illegal, then, all that remains for
consideration is whether this Court should grant the
request of the Official Liquidator to nullify it or consider
the request made by the purchaser to save the
transaction."
13 Thereafter, the following factors were taken into
consideration by the learned Single Judge:-
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(a) The Liquidator has not questioned the sale of
immovables to private parties;
(b) The second respondent deposited a sum of
Rs.10,59,43,855/- with the Debt Recovery Tribunal and
claimed that all statutory dues have been paid;
(c) Claims of 1350 workers have been settled out of 1600
workers;
(d) The second respondent has entered into an agreement
for sale on 7th August, 2008 with a third party for sale
of land admeasuring 1,08,153 square meters out of
total land admeasuring 2,86,419 square meters;
(e) The third party purchaser has been put in possession of
the land and since then, the said third party is
developing he said land;
(f) There is nothing on record to show that any fraud has
been perpetrated by the officers/ Directors of the said
Company acting in collusion with the second
respondent.
(g) Though private sale may not be permissible, several
measures and steps in pursuance thereof have been
initiated and concluded it is too late in the day to set
aside the sale.
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14 As regards the claim of GIIC and workers in paragraph 45,
the learned Single Judge concluded thus :-
"45. The apprehension of Mr. Dhond appearing for GIIC can
be taken care of by clarifying that none of the
statements made in the affidavits filed by M/s. Tex Raj
may be held to be conclusive and binding on GIIC
particularly in the light of the present order."
15 In paragraph 10 of the Liquidator's Report, details of
immovable properties such as office premises flats etc., have been set
out. The learned Single Judge permitted the Official Liquidator to take
possession of the assets.
16 Thus, the limited question is about the correctness of the
reasons given by the learned Single Judge for not declaring the sale of
assets as void after holding that private sale was not permissible. It will
be, therefore, necessary to consider various decisions relied upon by the
learned counsel appearing for the appellant.
17 In the case of Laxman Anant Prabhudesai and others vs.
NRC Limited (supra), the First Court dealt with the scope of Sub-Section
(2) of Section 536. The First Court held thus:-
"19. With the assistance of the learned Counsel appearing for
parties, we have perused the impugned order, some of the
relevant documents and the statutory provisions in question.
The principles on which Company Court exercises its power
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under section 536(2) are well settled. In a decision (Pankaj
Mehra and another v. State of Maharashtra and others),
reported in AIR 2000 SC 1953, the Supreme Court noticed
relevant sections of the Company Act and in paras 14 to 18
this is what is observed by the Hon'ble Supreme Court :-
"14. In the above backdrop alone we can consider the impact
of the legislative direction in S. 536(2) that any
disposition of the property of the company made after the
commencement of the winding up (i.e. after the
presentation of a petition for winding up) shall be void.
There are two important aspects here. First is that the
word "void" need not automatically indicate that any
disposition should be ab initio void. The legal implication
of the word "void" need not necessarily be a stage of
nullity in all contingencies. Black's Law Dictionary gives
the meaning of the word "void" as having different
nuances in different connotations. One of them is of
course "null, or having no legal force or binding effect."
And the other is "unable in law, to support the purpose for
which it was intended." After referring to the nuances
between void and voidable the Lexicographer pointed out
the following :
"The word 'void' in its strictest sense, means that which
has no force and effect, is without legal efficacy, is
incapable of being enforced by law, or has no legal or
binding force, but frequently the word is used and
construed as having the more liberal meaning of
'voidable'. The word 'void' is used in statutes in the sense
of utterly void so as to be incapable of ratification, and
also in the sense of voidable and resort must be had to the
rules of construction in many cases to determine in which
sense the legislature intended to use it. An act or contract
neither wrong in itself nor against public policy, which has
been declared void by statute for the protection or benefit
of a certain party, or class of parties, is voidable only."
15. For discerning the legislative idea in employing the word
"void" in the context set out in S. 536(2) of the
Companies Act the second aspect to be noticed is that the
provision itself shows that the word 'void' is not employed
peremptorily since Court has power to order otherwise.
The words "unless the Court otherwise orders" are
capable of diluting the rigor of the word "void" and to
choose the alternative meaning attached to that word.
16. In Chittoor District Co-operative Marketing Society
Ltd. v. M/s Vegetols Ltd., 1987 (suppl) SCC 167 a two-
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16 app-442.12
Judge Bench of this Court considered a plea for validation
of payments made by a Company after presentation of a
petition for winding up. One set of payments were made
thereafter. This Court declined to validate such payments
on the ground that "there is no evidence to show that
those payments were made either under compulsion of
circumstances in order to save or protect the property of
the company or that there was any commercial
compulsion to enable it to run its business". The decision
only indicates that such payments could have been made
valid if evidence was adduced to show that there was
compulsion of circumstances. In fact, this decision lends
support to the interpretation that the payments which
were made after the commencement of winding up
proceedings, would not become ab initio void.
17. An early decision of a Division Bench of the Bombay High
Court in Tulsidas Jasraj Parekh v. Industrial Bank of
Western India, AIR 1931 Bombay 2 was sought to be relied
on by most the learned counsel who argued for different
appellant. The question which the Court considered
therein pertained to S. 227(2) of the old Companies Act,
1913 which was identical to S. 536(2) of the present Act.
Certain payments made by a Company after
commencement of the winding up proceedings were
questioned and the Division Bench considered the scope
of the sub-section and noticed that the principle had been
borrowed from the English Companies Act. Hence some of
the English authorities were also referred to by Marten,
C.J., who spoke for the Division Bench. Learned Judges
stated thus :
"Now here as regards S. 227(2) 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. For instance, a mill company might
not be able to buy a ton of coal for the use of its furnaces,
or, on the other hand, it might not to be able to sell any of
its goods in the ordinary course of business. Consequently,
the Court has very properly laid down that, speaking
generally at any bona fide transaction carried out and
completed in the ordinary course of current business will
be sanctioned by the Court under S. 227(2). On the other
hand, it will not allow the assets to be disposed of at the
mere pleasure of the company, and thus cause the
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17 app-442.12
fundamental principle of equality amongst creditors to be
violated. To do so would in effect be to the preferential
debts enumerated in S. 230 a further category of all debts
which the company might choose to pay wholly or in
part."
18. It is useful to refer to the reasoning adopted by a Division
Bench of the Gujarat High Court in Navjivan Mills Ltd., In
re (1986) 59 Comp Case 201 : (1986 Tax LR 1817) in
favour of adopting a pragmatic attitude when a Company
Court was approached for approval of certain dispositions
which a company made after presentation of a petition for
winding up. A clear distinction was drawn by the Division
Bench between the period till the passing of the order for
winding up and thereafter, so far as dispositions are
concerned. The following reasoning is useful for
consideration of the issues involved:
"The Court can exercise the jurisdiction under S. 536(2)
of the Companies Act, 1956, of giving directions
validating proposed transactions pending a petition for
winding up but before the winding up order is made for
the obvious reason that unless these transactions are
saved from the consequence which may ensue, if at all, on
an order of winding up being made, the company might
find it difficult to keep itself going and its business might
be paralysed. The purpose underlying the investment of
the power in Court is for the benefit and interest of the
company so as to ensure that a company which is made
the subject of a winding up petition may nevertheless
obtain the money necessary for carrying out its business
and so as to avoid its business being paralysed. If that is
the purpose and object of the section, it would hardly be
proper and just to stultify the power and restrict its
operation since otherwise it is bound to be counter
productive in the sense that the very purpose of keeping
the company as a going concern so as to ensure the
interest of the shareholders and creditors would be
defeated."
20. Thus, the principles that can be deduced are that the
transactions which have been undertaken under
compulsion of circumstances in order to save or
protect the property of the company could be saved
provided evidence is produced about such compulsion.
The assets of the company cannot be disposed of at
the mere pleasure of the company. If the business is
going to be paralyzed, then, the court in appropriate
cases can, for the benefit and interest of the company,
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18 app-442.12
save the transaction. It is for enabling the company to
continue as a going concern and to protect the interest of
shareholders and creditors that such a power is conferred
and must be exercised."
(emphasis added in paragraph 20)
18 Thus, the test laid down by the First Court is that power
under Sub-Section (2) of Section 536 of declaring a transaction as not
void can be exercised when the transaction has been undertaken under
compulsion of circumstances in order to save or protect the property of
the Company. It is further held that evidence is required to be produced
of such compulsion. It is also held that if business of the company is
going to be paralyzed then the Court may, in appropriate cases, for
benefit and interest of the Company, save the transaction.
19 The First Court has considered its earlier judgment in the
case of Tulsidas Jasraj Parekh Vs. Industrial Bank of Western India 2. In
the said decision, the First Court considered the provision of Section
227(2) of the Indian Companies Act, 1913 (for short "the Old
Companies Act") which is pari materia with Sub-Section (2) of Section
536. In fact, Sub-Section (2) of Section 227 of the Old Companies Act is
quoted in the judgment. It is observed in the said judgment that Sub-
Section (2) of Section 227 intends to prevent any improper alienation
and disposition of the property of a Company under liquidation. It was
2 A.I.R. 1931 Bombay 2
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19 app-442.12
observed that disposition of the property after commencement of the
winding up proceedings shall be void unless the Court otherwise orders.
20 We may also make a useful reference to a decision of the
learned Single Judge of the Madras High Court in the case of Andhra
Bank Ltd. Vs. D.P. Narayana Rao, Provisional Liquidator 3. The learned
Single Judge of the Madras High Court laid down the parameters
discretion of the Court under Sub-Section (2) of Section 227 of the Old
Companies Act. The relevant portion of paragraph 3 reads thus :-
"The result of judicial decisions is that a transaction
bona fide entered into and completed in the ordinary
course of the company's current trade should be
protected; for, otherwise, the result would be that the
presentation of a petition, groundless or well founded,
would ipso facto paralyse the trade of the company, and
great injury would be done to those interested in the
assets of the company, as was pointed out by Lord
Cairns. It is equally clear from the decisions that even if
a winding up petition is well founded, if the disposition
is made for the purpose of preserving the business as a
going concern, then also the discretion of the court
should be exercised, as neatly summarised, if I may say
so with respect, in - 'Ramalal V. Official Liquidator
Benares Bank Ltd.', AIR 1942 All 141 (E), at p.144:
"The principle must prevail, that is, the principle
of 'pari passu' distribution among the creditors. It was
not a case of salvage, of real necessity, nor of the
transaction having been the only means of keeping the
company going."
It may be that in this case, the Andhra Bank were
bona fide (sic, lenders/) in having advanced the said
sums to the company without any notice of the
presentation of the winding up petition. Merely because
3 A.I.R. 1955 MADRAS 247 (Vol.42, C.N.67)
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20 app-442.12
they were bona fide lenders, it does not at once follow
that the transaction in their favour should be validated.
This is a case in which one of two innocent parties has
to suffer, - the applicant Bank to make out a case why
they should be preferred to the general body of
creditors and why the discretion of the court should be
exercised in their favour under S.227 (2) of the Act."
We respectfully agree with the said conclusions.
21 Lastly, we make a reference to a decision of the Apex Court
in the case of Chitoor District Co-operative Marketing Society Ltd. Vs.
Vegetols Ltd. and Another4. In paragraph No.3, the Apex Court held
thus :-
"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 payment 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
payment to the appellant - society were not made, the
business could not have been run. In fact, the running
of the business would result in loss of liquidity and its
operations would have been hampered by making these
payments. It is not shown that there was any
compulsion and the payments were made either in
order to save the property from being sold or that
there was any commercial compulsion. Under the
circumstances, the view taken by the High Court must
be confirmed."
(emphasis added)
4 (2002) 2 Comp LJ 44 (SC)
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21 app-442.12
22 Now, coming back to the impugned judgment, we have
already quoted paragraphs 43 to 45 of the judgment. The substantive
reasons given by the learned Single Judge for not declaring the
transactions as void are in paragraph 44 wherein the learned Single
Judge observed that the sale by the Company in liquidation was in the
backdrop of the settlement proposals with the financial institutions and
commitments made in pursuance thereof, it is too late in the day to set
aside the sale as several measures and steps having been initiated and
concluded. The finding recorded by the learned Single Judge is that the
sale was a private sale and not by way of auction. The learned Single
Judge has observed that the private sale was not permissible. There is
no finding recorded by the learned Single Judge that there was any
evidence produced about any such compulsion of circumstances in
order to save or protect the property of the Company or in order to
avoid paralyzing of the business of the Company. The learned Single
Judge has not tested the case made out by the purchasers on the
touchstone of test laid down by the Apex Court in the decision in the
case of Chitoor District Co-operative Marketing Society Ltd., as well as by
the First Court in the case of Laxman Yeshwant Prabhudesai & Ors., and
in particular paragraph 20 thereof.
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22 app-442.12
23 As there is a finding of the learned Judge that several
measures have been taken and third party is put in possession of the
immovable property, we propose to pass an order of remand directing
the learned Single Judge to consider the case afresh so that the
concerned respondents can get an opportunity to show to the Company
Court that there was an element of compulsion. Accordingly, we pass
the following order :-
ORDER
(i) The impugned order is set aside;
(ii) A fresh adjudication shall be made on the Official
Liquidator's Report in the light of the observations made
by this Court in this Judgment. We request the learned
Company Judge to give necessary priority to the
disposal of the report;
(iii) Appeal is partly allowed on above terms with no order
as to costs.
(M.S. KARNIK, J ) ( A.S. OKA, J )
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23 app-442.12
23 After the Judgment is pronounced, the learned counsel
appearing for the second respondent prays for stay of the judgment and
order. The prayer is rejected.
(M.S. KARNIK, J ) ( A.S. OKA, J )
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