Yogesh Kanayalal Shah And 3 Ors vs The Official Liquidator
2022 Latest Caselaw 11375 Bom

             Digitally signed by
SANTOSH SANTOSH
         SUBHASH
SUBHASH KULKARNI
KULKARNI Date: 2022.11.10
         19:41:59 +0530
                                                         1                   15-IA-1110-20+



                           IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                                   ORDINARY ORIGINAL CIVIL JURISDICTION


                                    INTERIM APPLICATION NO.1110 OF 2020
                                                    IN
                                     COMPANY PETITION NO.1068 OF 1997


        Yogesh Kanaiyalal Shah and Ors                                 ...Applicants
        In the matter between
        Ralli Brothers and Coney                                        ...Petitioner
                           Versus
        The Official Liquidator of Swadeshi Mills                      ...Defendant
        Company Ltd

        Ms. Dipsay Sequeira i/b Agam Joshi, for Applicants.
        Mr. Aditya Pimple, for Official Liquidator.

                                        CORAM:               N. J. JAMADAR, J.

                                        RESERVED ON:         12th OCTOBER, 2022
                                        PRONOUNCED ON: 10th NOVEMBER, 2022
        ORDER:-

1. This application is preferred seeking approval to the

transfer of 6600 shares of Svadeshi Mills Company Ltd (in

liquidation), initially in the name of the applicant No.1 and,

thereafter, further, out of those shares, 2800 shares in the joint

names of applicant Nos. 2 and 3 and another lot of 2800 shares

in the name of applicant No.4, purportedly under Section 536

(2) of the Companies Act, 1956 ("the Act, 1956").

2. The substance of the application can be stated as under-

                                      2                  15-IA-1110-20+

      a)      Yogesh Kanaiyalal Shah, the applicant No.1, claimed

to have purchased 6600 shares of the company in liquidation

during the period 28th march, 1998 to 4th April, 1998 at the

stock exchange through Trendsetter Investment Private Limited,

a sub-broker of Latin Manharlal Securities (P) Limited, the stock

broker, vide BSE settlement No.A0298. The applicant No.1 has

thus acquired ownership of 6600 shares of the company in

liquidation the, particulars of which are furnished in Exhibit-A

annexed to the application.

b) By an order dated 13th February, 2022, the Official

Liquidator came to be appointed as the Provisional Liquidator of

the company in liquidation. By subsequent order dated 5 th

September, 2005, the company in liquidation was ordered to be

wound up and the Official Liquidator was appointed as the

Liquidator.

c) The applicants aver that due to oversight and

inadvertence the applicant No.1 could not get the 6600 shares

transferred in his name. Though the applicant No. 1 is in

possession of physical shares along with transfer forms duly

signed by the transferrors and the endorsement of the broker,

the name of the applicant No. 1 has not been reflected in the

share register of the company in liquidation. The sub-broker has 3 15-IA-1110-20+

confirmed the purchase of 6600 shares by applicant No.1 vide

letter dated 7th April, 2014. On 25th August, 2014, the applicant

No. 1 filed an affidavit of proof of debts, along with supporting

documents, with the office of Official Liquidator. Original share

certificates have also been duly verified by the Official

Liquidator.

d) In the meanwhile, the applicants claim, the applicant

no.1 had entered into an agreement dated 25 th April, 2019 to sell

and transfer 2800 shares in favour of the applicant Nos. 2 and

3. Likewise the applicant No. 1 has entered into another

agreement to transfer another lot of 2800 shares in favour of

applicant No. 4. According to applicants, the present status of

ownership of those 6600 shares is as under-

     i)       Yogesh Kanaiyalal Shah-1000 shares
     ii)      Shardul Jasvantlal Shah & Ravi Vijay
              Ramaiya-2800 shares
     iii)     Bipin Jivrajbhai Bagadia-2800 shares


     e)       The applicants aver that if the aforesaid transaction

are not validated and the shares are not transferred in the name

of the applicants, the applicants would suffer irretrievable

prejudice and irreparable loss. Hence this application.

4 15-IA-1110-20+

3. An affidavit-in-reply is filed on behalf of the Official

Liquidator, resisting the prayers in the application. At the

threshold, the Official Liquidator assails the tenability of the

application on account of inordinate delay and latches, as the

application has been preferred after 23 years of the alleged

acquisition of the shares, in the year 1998. Relying upon the

provisions contained in Section 108 of the Act, 1956, which

prescribe a mandatory procedure for transfer of shares, the

Official Liquidator contends that the applicant No. 1 has not

submitted the requisite documents with the company in

liquidation, before winding up order, and with the Official

Liquidator, after winding up order. Therefore, at this stage, no

direction can be given to the Official Liquidator to complete the

transaction which has not been completed before the winding

up order. The Official Liquidator has also contested the prayer to

validate the professed transfer of shares by applicant No. 1 in

favour of applicant nos.2 and 3, and applicant No. 4, despite

being fully cognizant of the fact that the company in liquidation

has been ordered to be wound up.

4. I have heard Ms. Dipsay Sequeira, the learned Counsel for

the applicants and Mr. Aditya Pimple, the learned Counsel for

the Official Liquidator at some length. The learned Counsel have 5 15-IA-1110-20+

taken the Court through the averments in the application reply

thereto and the documents placed on record in support of the

application.

5. Ms. Dipsay Sequeira, the learned Counsel for the

applicants submitted that the prayer for grant of approval to the

transfer of the shares of the company in liquidation is, in a

sense, innocuous . The Official Liquidator does not contend that

the transfer of the subject shares is against interest of the

company, its creditors and shareholders or public in general. It

was further urged that there is no prohibition in law to validate

the transfer of shares, after the winding up order, as the

winding up process is still underway and the company in

liquidation has not yet been dissolved.

6. To lend support to these submissions, the learned Counsel

for the applicants placed reliance on a judgment of Division

Bench of Delhi High Court in case of H.L. Seth Vs. M/s

Wearwell Cycle Company (India) Ltd & Others DRJ 1992 (22)

354 and an order passed by a learned Single Judge of this

Court in the case of Suresh Murlidhar Talreja & Anr Vs.

Svadeshi Mills Co. Ltd (in liquidation) in Company Application

No.1615 of 2008 in the very Company Petition No.1068 of 1997 .

6 15-IA-1110-20+

7. In opposition to this, Mr. Pimple, the learned Counsel for

the Official Liquidator submitted that the inordinate delay in

claiming the ownership over the subject shares and seeking

validation of the transfer cannot be said to be inconsequential.

Laying emphasis of the mandatory character of the provisions

contain in Section 108 of the Act, 1956, Mr. Pimple would urge

that, in the least, this inordinate delay should put the Court on

guard. Secondly, there is no complete transfer of the shares. Mr.

Pimple would urge that an incomplete transfer cannot be sought

to be validated under Section 536 (2) of the Act, 1956. Nor the

Official Liquidator can be directed to complete an incomplete

transaction. Thirdly, according to Mr. Pimple, there can be no

validation of transfer after a winding up order.

8. In the case at hand, the material shows that the applicant

No. 1 (whose name is yet to be registered in the share register of

the company (in liquidation)) has professed to transfer the

shares in favour of the applicant Nos. 2 and 3, and 4, as late as

in the year 2019. Thus, in the face of the winding up order

passed in the year 2005, of which the applicants have been fully

cognizant, the application does not deserve countenance, urged

Mr. Pimple 7 15-IA-1110-20+

9. Section 536 (2) of the Act, 1956 reads as under-

Avoidance of transfers, etc., after commencement of winding up-

(1)....... .........

(2) In the case of 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.

10. On a plain reading post an order of winding up any

disposition of property of, and transfer of shares in, the

company or alteration in the status of its members, made, after

the commencement of the winding up, is void unless it is

otherwise ordered by the Court/Tribunal. Undoubtedly, the

exercise of power to validate the transfer which is otherwise in

teeth of sub section (2) of Section 536, is in the realm of

discretion. It is trite such discretion has to be exercised in a

judicious manner.

11. In the instant case, the applicant No. 1 claimed to have

acquired the subject shares in the year 1998. It seems that the

Company Petition No.1068 of 1997, was presented in the year

1997. Indisputably, the applicant No. 1 made no efforts to get

the shares transferred in his name till the year 2014. The

applicant banks upon a communication dated 7 th April, 2014,

addressed by Trendsetter Investment Private Limited, a sub-

broker of Latin Manharlal Securities (P) Limited, the stock

broker at BSE, to bolster up of his case that he had purchased 8 15-IA-1110-20+

6600 shares of the company in liquidation. Interestingly, in the

said letter dated 7th April, 2014 itself, the sub-broker adverted to

the fact that Svadeshi Mills Company Limited has gone into

liquidation. Thereupon, on 22nd August, 2014, the applicant No.

1 seems to have lodged an affidavit of proof of debt dated 19 th

July, 2014, against the company in liquidation. Copies of the

share certificates were purportedly annexed to the said affidavit

in proof of debts.

12. From perusal of the copies of the share certificates

annexed to the application, it appears that the shares stood in

the name of Investment Corporation India Limited. The

applicant No. 1 had annexed those share certificates and

transfer forms allegedly duly executed by the transferor in

support of the affidavit of proof of debts.

13. It would be contextually relevant to note that under

agreement to sale shares executed on 25th April, 2019, the

applicant No. 1 professed to transfer 2800 shares apiece, in

favour of applicant Nos. 2 and 3, and applicant No. 4 for

consideration, part of which was promised to be paid post the

registration of the shares in the names of the transferries.

14. In the light of the aforesaid facts, the question which thus

wrenches to the fore is, whether the Court would be justified in 9 15-IA-1110-20+

exercising the discretion to validate the transfer. In the case of

Pankaj Mehra and Anr V. State of Maharashtra and Anr .1 the

Hon'ble Supreme Court had an occasion to consider the import

of the provisions contained in Section 536 in the light of other

provisions of the Act, 1956. The Supreme Court expounded the

import of legislative edict in Section 536 (2), in the following

words-

14. In the above backdrop alone we can consider the impact of the legislative direction in Section 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 contin-gencies. Black's Law Dictionary gives the meaning of the word !'void" as having different nuances in different connotations. Once 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 an 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 construc-tion 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."

1 (2000) 2 Supreme Court Cases 756 10 15-IA-1110-20+

15. For discerning the legislative idea in employing the word "void" in the context set out in Section 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 order" are capable of diluting the rigor of the word "void" and to choose the alternative meaning attached to that word.

(emphasis supplied)

15. The Supreme Court also advertted to the pronouncement

of the Division Bench of this Court in the case of Tulsidas

Jasraj Parekh V. Industrial Bank of Western India 2 and Division

Bench of Gujrath High Court in the case of Navjivan Mills Ltd.,

In re, wherein the considerations which should with the Court

in exercising the discretion were enunciated. The relevant

observations in paragraph No. 17 and 18 read as under-

"17..... .......

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 he 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 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, any bona fide trans-action 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 fundamental principle of equality amongst creditors to be violated. To do so would in effect be to add 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 Company Cases 201 in favour of adopting a pragmatic attitude when a Company Court was approached for approval of certain

2 AIR 1931 Bombay 2.

11 15-IA-1110-20+

dispositions which a com-pany made after presentation of a petition for winding-up. A clear distinc-tion 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 section 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 ia court is for the benefit and the 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 paralyzed. 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. It is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void. If such a view is taken the business of the company would be paralysed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bona fide person transact-ing business with the company by stage-managing a petition to be presented for winding up in order to defeat such bona fide customers. This conse-quence has been correctly voiced by the Division Bench in the impugned judgment.

16. A Division Bench of this Court in the case of Rathnam P.V.

Vs. Premier Automobiles Limited,3 after adverting to the

aforesaid pronouncement in the case of Pankaj Mehra (Supra)

as well as other precedents culled out the principles as under-

On an analysis of the above decisions, the following principles emerge:-

(i) The jurisdiction of the Court under section 536(2) is extant till such time the company is dissolved.

3(2012) 2 AIR Bom R 752 12 15-IA-1110-20+

(ii) The application, if any, under section 536(2) may be made at `any time after the transfer of shares', which transfer must have taken place after presentation of the winding up petition, but before passing of the winding up order.

(iii) That such an application is in the form of application against the Official Liquidator but in fact is against the company.

(iv) That the Court will apply the principles of equity and justice in exercising its discretion.

(v) That the Court will bear in mind the object of the section is to prevent a share holder from defeating the winding up by disposing off his liability in respect of his shares."

17. The Division Bench, albeit with reference to the facts of

the said case, went on to further postulate that it is obvious

that the power under Section 536 (2) would not be available to

the company Court for approving or confirming the transaction

which would be void ab initio. Obviously, upon passing of

winding up order by the Company Court, the Official Liquidator

shall, by virtue of his office, become the liquidator of the

company, as provided in Section 449 of the Act, and the

properties of the company including the shares would vest in

the Official Liquidator and there can be no question of approving

and validating any purported transfer of shares which might

have taken place after passing of winding up order. The decision

of the Supreme Court in Pankaj Mehra's Case (Supra) also

clearly indicates that the power under Section 536 (2) is to be

exercised in respect of transaction after presentation of winding

up petition and before the date of winding up order.

13 15-IA-1110-20+

18. Mr. Pimple, placed a strong reliance on another Division

Bench Judgment of this Court in the case of Sunita Vasudeo

Warke Vs. Official Liquidator and others4. In the said case, after

considering the pronouncement of the House of Lords in the

case of the Governor and Company of the Bank of Scotland Vs.

Macleod and Others5 and the Supreme Court Judgment in the

case of J. K. (Bombay) Private Limited Vs. M/s New Kaiser-I-

Hind Spinning and weaving Co. Ltd and Others 6, the Division

Bench of this Court held that it is now well settled principle of

law that if a transfer is not completed before order of winding up

has been passed an application would not be maintainable

before the Court, for a direction to the Official Liquidator to

complete the transfer. This principle necessarily follows the

settled legal position that upon passing of an order of winding

up, no new rights can be created and no incomplete rights can

be completed.

19. In the light of the aforesaid enunciation of the legal

position, reverting to the facts of the case, it is imperative to

note that the applicants essentially seek twin validations. First,

the purported acquisition of the shares by applicant No. 1 in the

year 1998, post the commencement of the winding up

4 2013(2) Mh.L.J. 777.

5     (1914) AC 311
6     AIR 1970 SC 1041.
                                     14                    15-IA-1110-20+

proceedings with the Company Petition No.1068 of 1997.

Second, the applicants seek a further validation of the transfer

of shares by applicant No. 1 in favour of applicant Nos. 2 and 3,

and applicant No. 4. Implicit in these prayers are further

directions for registering the shares in the name of applicant No.

1, initially, and, thereafter registering the shares in the name of

applicants Nos. 2 to 4 to the extent they claimed to have

purchased 5600 shares from applicant No. 1.

20. The parameters for exercise of discretion are well neigh

settled. The court has absolute discretion to validate a

transaction. Exercise of discretion is controlled by the principles

which govern exercise of a judicious discretion in other

jurisdictions. The Court must be cognizant of all the attendant

circumstances and if from all the surrounding circumstances,

the Court comes to the conclusion that the transaction,

otherwise hit by Section 536 (2) of the Act, 1956, should not be

rendered void, the Court would be justified in making a

declaration that transaction is not void. Of pivotal consideration

is whether a transaction is for benefit or in the interest of the

company for keeping the company a going concern or for

keeping the things going generally. Bona fide of the parties

indisputably bear upon the exercise of discretion.

15 15-IA-1110-20+

21. If the facts of the case are appraised on the touchstone of

aforesaid principles, aspect of delay in laying a claim of

ownership over the subject shares can not be said to be wholly

inconsequential. Such a claim was made for the first time in the

year 2014. What exacerbates the situation is the fact that

despite being fully aware of the company being in liquidation

and the transaction being hit by the bar under Section 536 (2),

the applicants professed to effect transfer of the shares

specifically incorporating in the share transfer agreements the

fact that the company is in liquidation. Applicants cannot urge

that the transactions were entered into being unaware of the

winding up order. Evidently, the applicant No. 1 has received a

substantial amount as a part consideration for transfer of

shares in favour of applicant Nos. 2 to 4. Such enrichment is

clearly in teeth of the prohibition contained in Section 536 (2) of

the Act, 1956.

22. To sum up the transactions in question, the validation of

which is sought, have been entered into being fully cognizant of

the prohibition in law. No element of benefit to the company in

liquidation is manifest, even remotely. In the circumstances, the

Court cannot give its imprimatur to such transactions. In a

given case, the Court may be justified in validating the 16 15-IA-1110-20+

transaction entered into even after the passing of the winding

up order. However, in the facts of the case, such exercise of

discretion would not be justifiable.

23. I am therefore not persuaded to exercise the discretion in

favour of the applicants. Hence, the following order.

                                 ORDER

       i)    The application stands rejected.

ii) Applicant No. 1 is, however, at liberty to lodge

a fresh claim with the Official Liquidator and the

same shall be adjudicated by the Official Liquidator

in accordance with law.

(N. J. JAMADAR, J.)