Madras High Court
The Official Liquidator vs Sri. Khaja Mohideen on 19 November, 2021
Comp.A.Nos.150 and 395 of 2019
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 19.11.2021
CORAM:
THE HON'BLE MR.JUSTICE SENTHILKUMAR RAMAMOORTHY
Company Application Nos.150 and 395 of 2019
in
Company Petition No.153 of 2002
Comp. A.No.150 of 2019
The Official Liquidator
High Court, Madras
at the Prov. Liquidator of
Madura Cements Limited (in liquidation),
Corporate Bhawan, 2nd Floor,
No.29, Rajaji Salai,
Chennai – 600 001. ... Applicant
Vs.
1.Sri. Khaja Mohideen
2.Sri.M.Abdul Rahim
3.Sr.K.K.Kamal Basha
4.Sr.S.Nazirudin
5.Sr.R.L.Dhanapalan
6.The District Revenue Officer,
Tuticorin District.
7.The Sub-Registrar,
Ettayapuram,
Tuticorin District. ... Respondents
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Comp A. No.395 of 2019
Sri.S.Nazirudin ... Applicant
vs.
1.The Official Liquidator
High Court, Madras
at the Prov. Liquidator of
Madura Cements Limited (in liquidation),
Corporate Bhawan, 2nd Floor,
No.29, Rajaji Salai,
Chennai – 600 001.
2.The Sub-Registrar,
Sub Registrar Office,
Ettayapuram, Tuticorin District.
3.The Sub-Registrar,
Sub Registrar Office,
Ottapidaram, Tuticorin District.
4.The Sub-Registrar,
Sub Registrar Office,
Kadampur, Tuticorin District. ... Respondents
PRAYER IN COMP.A.NO.150 of 2019: This Application is filed under Section
460(4), 536 & 537 of the Companies Act, 1956 r/w the Rules 9 and 11(b) of the
Companies (Court) Rules, 1959 to take this report on record; To cancel the sale
transactions of the landed properties of the company in liquidation during
winding up proceedings as stated in para 8 of the report and declare the sale is
void in terms of Section 536 and 537 of the Companies Act; To direct the
Respondents 6 and 7 herein to cancel the sale transaction of the above said
landed properties of the company in liquidation during the winding up
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proceedings as stated in para 8 of this report and to direct that the cost of
this application do come out of the funds of the company in liquidation.
PRAYER IN COMP.A.NO.395 of 2019: This Application is filed under Order XIV
Rule 8 of the original side rules r/w Rules 9 and 11(b) of the Companies (Court)
Rules, 1959 to validate the sale deeds registered with respective Sub
Registrars as mentioned in the schedule of property.
For Applicant : Mr.Bavisetty Sridhar, Deputy OL
(in Comp. A.No.150 of 2019 and 1st
Respondent in C.A.No.395 of 2019)
For Respondents : Mr.E.Om Prakash, Senior Counsel
for Mr.R.Ravi for R-4 in C.A.No.
150 of 2019 and Applicant in
C.A.No.395 of 2019
Mr.Edwin Prabhakar
Spl Govt. Pleader for R6 and R7 in
C.A.No.150 of 2019 and Respondents
COMMON ORDER
C.A.No.150 of 2019 was filed by the Official Liquidator to cancel
specific sale transactions pertaining to the immovable properties of the
company in liquidation (the Company) in terms of Sections 536 and 537 of the
Companies Act, 1956 (CA 1956). An ex-director of the Company filed
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C.A.No.395 of 2019 seeking validation of the above mentioned sale transactions
(the Dispositions) in terms of Section 536(2) of CA 1956.
2. About 65 hectares of land were granted to the Company by the
Government of Tamil Nadu in order to carry out limestone mining. Pursuant to
a request from the company on 17.08.1995, the Government of Tamil Nadu
issued G.O.Ms.No.197, Industries (MMDI) Department, dated 07.10.1996, by
which permission was granted to the Company to dispose of the unsuitable
limestone mines from the Pudhupatti Mines. Pursuant thereto, it appears that
a meeting of the then Board of Directors of the Company took place on
10.06.1997. At such meeting, it was resolved to initiate action for the sale of
the idle dry land of the Company of an extent of about 66.15 hectares. The
Board authorised Mr.S.Nazirudin, Managing Director, to enter into agreements
in relation to the sale of the property. Within about eight days, on 18.06.1997,
an agreement of sale appears to have been entered into purportedly on behalf
of the Company through one S.Khaja Mohideen acting as a power of attorney of
the Company. Such agreement of sale is in favour of one K.Abdul Hameed and
one Smt.Ayeshabee. The subject matter of such agreement of sale is the sale
of unusable mining land to an extent of 65 hectares at Tuticorin District. The
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sale consideration specified therein is a sum of Rs.1,32,00,000/-. The said
agreement records the receipt of an aggregate sum of Rs.6 lakhs at the time of
execution of such agreement of sale. Within about 44 days thereafter, on
30.07.1997, the Board of Directors of the Company made a reference to the
Board for Industrial and Financial Reconstruction (BIFR) under Section 15(1) of
the Sick Industrial Companies (Special Provisions) Act, 1985 (the SICA). The
enclosed Form -A refers to a decision of the Board of Directors on 21.02.1997
to sell the land. The realizable value is indicated therein as Rs.50 lakhs.
3. Meanwhile, the BIFR proceedings continued. Although an
operating agency was appointed by the BIFR, it appears that all efforts to
rehabilitate the sick industrial company failed. Consequently, by order dated
04.07.2002, the BIFR recommended that the Company be wound up. Pursuant
thereto, by order dated 06.03.2006, the Company was ordered to be wound up
and the Official Liquidator took charge of the assets and affairs thereof.
4. More than three years subsequent to the date of winding up
order, by 7 sale deeds executed between April 2009 and August 2010, the
above mentioned 65 hectares of land was conveyed purportedly pursuant to
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the agreement of sale dated 18.06.1997. Since the sale deeds were executed
subsequent to the commencement of winding up, the Official Liquidator filed
an application to cancel the sale deeds. Upon receipt of notice in such
application, an ex-director of the Company filed an application seeking
validation.
5. The question that arises for consideration is whether the
Dispositions are liable to be validated in terms of Section 536(2) of CA 1956.
Since the interpretation of Section 536(2) is at the heart of the controversy,
the said provision is set out below:-
''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 Court
otherwise orders, be void.''
From a plain reading of Section 536(2), it is evident that any disposition of the
property of the company or a transfer of shares in the company or alteration in
the status of its members, if done after the commencement of winding up, is
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void unless the court orders otherwise. In terms of Section 441(2) of CA 1956,
as regards companies which are ordered to be wound-up, the winding up of the
company is deemed to commence at the time of presentation of the petition
for winding up. Consequently, the winding-up of the Company would relate
back and commence from the date of presentation of C.P.No.153 of 2002. As a
corollary, the winding-up in the present case commenced some time in the
year 2002.
6. The ex-director contends that the Dispositions warrant
validation since such transactions were entered into in the interest of the
Company. Moreover, it is contended that the Dispositions were envisaged as
early as in 1997 when the Board of Directors resolved to sell the unusable
mining land. Because the Dispositions were envisaged and acted upon in 1997,
by entering into an agreement for sale, it is submitted that the Dispositions
preceded the commencement of winding up. On behalf of the ex-director, the
relevant minutes of the board meeting were placed as also the relevant
portion of Form-A, which was filed before the BIFR, whereby the BIFR was
informed of the decision to sell the excess mining lands.
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7. It is further submitted on behalf of the ex-director that the
amounts realised from the Dispositions were used to discharge debts due to
secured creditors such as the UCO Bank. Indeed, the ex-director submits that
the UCO Bank provided a no due certificate dated 28.06.2011 indicating that
the amounts due were settled through compromise on 31.03.2004. By relying
on the no due certificate, it is submitted that the Dispositions cannot be said
to be against the interest of the Company.
8. In conclusion, in support of the request for validation, several
judgments are relied upon. The judgments referred to and relied upon by the
ex-director are set out below:
1. Pankaj Mehra and another vs. State of Maharashtra
and others (2002) 2 SCC 756 (Pankaj Mehra).
2.V.G.P. Finances Ltd vs. Neptune Inflatables Ltd and
another (2013) SCC Online Mad 2914 (V.G.P.Finances).
3. Indian Bank vs. V.G.P. Finances Ltd and others (2008)
SCC Online Mad 651.
4. Official Liquidator, High Court of Madras vs.
Collector, Vellore District and others (2013) SCC Online Mad
1092.
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9. In response to the said submissions, the Deputy Official
Liquidator submits that the impugned sale deeds were executed after the
winding-up order was issued. He also submits that all the assets of the
Company, including these 65 hectares, were valued by ITCOT thereafter. He
points out that claims aggregating to Rs.24,40,33,552.96 were adjudicated by
the Official Liquidator and that the aggregate value of the admitted claims is
Rs.23,81,34,675.96. An interim dividend at 2% aggregating to Rs.42,24,744 was
disbursed collectively to SIPCOT, TIIC, workmen, ESI and the CTO and a further
sum of Rs.7,42,739.15 to the Employees Provident Fund Organisation towards
provident fund dues. At present, it is submitted that only Rs.9,16,347 is
available by way of funds. In these facts and circumstances, the Deputy
Official Liquidator seeks rejection of the request for validation.
10. At the outset, it should be noted that a company does not
cease to carry on business merely because a winding-up petition is instituted
against such company. In course of continuing to carry on business after the
presentation of a winding-up petition, dispositions of assets are inevitable.
Such dispositions may be in the ordinary course of business such as the sale of
goods that the company concerned is in the business of selling, the making of
payments for the procurement of components or raw materials for making such
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goods and the like. During such period, it is also possible that dispositions
outside the ordinary course of business, such as the sale of an unused but
valuable asset, may be effected in order to avert insolvency, discharge
liabilities or bolster liquidity. As long as the disposition is bona fide and in the
interest of the company concerned, the jurisdictional companies court may
exercise the power to validate such transactions. There is little reason,
therefore, to whittle down such power, which may be exercised either prior to
or after such disposition. Whether such dispositions are void ab initio was
considered in Pankaj Mehra. After considering the judgment in Kamani
Metallic Oxides Ltd. v. Kamani Tubes Ltd. (1984) 56 Comp Cas 19 (Bom)
(Kamani), the Supreme Court concluded that it is not void ab initio, and that
the use of the expression “unless the court otherwise orders” dilutes the rigour
of the word “void”. In Kamani, the Division Bench of the Bombay High Court
held that, if construed as void ab initio, any disposition after commencement
of winding-up would be void even if the winding-up petition were to be
withdrawn or dismissed subsequently. As indicated therein, upon reading
Section 536(2) along with Section 441(2), the only reasonable interpretation is
that the legal fiction in Section 441(2) of CA 1956 gets triggered only upon a
winding-up order being passed. A logical corollary is that transactions that fall
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within the net are void, unless the court orders otherwise, but not void ab
initio. In the case at hand, the Dispositions are subsequent to the winding-up
order. Therefore, even without recourse to the legal fiction, there is no
escaping the fact that the winding-up was underway. Whether a validation
order can be passed in such scenario is a question that this case throws up and
I propose to circle back to this issue a little later.
11. In V.G.P. Finances, which is one of the judgments relied upon
on behalf of the ex-director, this Court considered about 14 judgments with
regard to the law on validation of dispositions. Upon analysing the principles
laid down in such judgments, the court formulated 8 questions which should be
taken into consideration to decide whether a transaction should be validated.
Paragraph 30 of the said judgment, which deals with this aspect, is set out
below:
''30. As pointed out earlier, my endeavour in an application for
validation of a transaction, in terms of Section 536(2) of the Act, should
be to see -
(i) Whether the transaction was a bona fide one?
(ii) Whether it was carried out and completed in the ordinary
course of current business?
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(iii) Whether it was a case of salvage, of real necessity, to help
the company keep going?
(iv) Whether the transferee viz., the applicant herein, was
wanting in bona fides, if the test of honesty is applied rather than the
test of due care and attention?
(v) Whether the transaction was out of a commercial
compulsion to prevent the day-to-day running of the company getting
paralysed?
(vi) Whether the transaction was for securing old debts, in
order to enable one creditor to score a march over the others?
(vii) Whether this Court would have approved of such a
transaction had its permission been sought at the time when the
transaction was entered into?
(viii) Whether the price for which the property was alienated
was adequate, with reference to its market value?''
The aforesaid questions and the answers thereto would throw considerable
light on whether the Dispositions are liable to be validated. However, as
would be evident from the discussion that follows, it is not a condition
precedent to validation that these tests should be fulfilled cumulatively. For
instance, one of the questions is whether the transaction was in the ordinary
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course of business. The sale of the immovable assets of a company is not in the
ordinary course of business unless such company is in the business of selling
immovable assets. Besides, the present Dispositions pertained to the sale of
an extremely large extent of about 65 hectares in the aggregate. This was
clearly not in the ordinary course of business of the Company. Section 536(2)
of CA 1956 is of wide amplitude and it cannot be said that a transaction which
is not in the ordinary course of business cannot be validated. However, the
threshold for establishing that the transaction was bona fide and in the
interest of the company is higher if the transaction is not in the ordinary
course of business.
12. By bearing in mind this aspect, the Dispositions should be
tested by raising the other questions. For such purpose, the question on
valuation is salient. The admitted position is that no valuation report
pertaining to the relevant assets are on record. The management of the
Company, if acting in the best interest of the Company, should have obtained a
valuation report from a credible valuer before undertaking the sale of such a
large extent of property. A second aspect to be noticed that the agreement of
sale was executed on 18.06.1997, and the reference to the BIFR was made on
30.07.1997, which is less than 45 days thereafter. To put it differently, in less
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than 45 days after entering into an agreement of sale for such a large extent
of property, the Board of Directors concluded that the net worth of the
Company was negative. In addition, while Form – A refers to the Board
meeting on 21.02.1997, reference to the agreement of sale dated 18.06.1997 is
conspicuous by its absence. While on this issue, it should also be noticed that
upon declaring the Company as a sick industrial company under Section 3(1)(o)
of the SICA, by order dated 10.10.1997, the BIFR exercised power under
Section 22-A of the SICA and prohibited sale of the fixed or current assets of
the Company without its consent. A third aspect should also be noticed,
namely, that the agreement of sale was not executed by a director of the
Company. Instead, it was executed by one Khaja Mohideen acting as a power
of attorney of the Company. The Board resolution of 10.06.1997 does not
advert to or authorise the appointment of an agent for the sale of the
properties of the Company.
13. As regards the sale consideration, the agreement of sale
specifies a sum of Rs.1,32,00,000/-. The said agreement of sale does not
contain any indication as to how such sale consideration was arrived at for 65
hectares of land. The said sale agreement also contains endorsements. The
said endorsements have been made on various dates between 18.06.1997 and
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29.01.2010. While the endorsement dated 20.04.2004 indicates that a sum of
Rs.64,74,000/- was paid towards OTS to UCO Bank, there are at least two
endorsements indicating receipt of payment in cash. It is also pertinent to
point out that many of the endorsements pertain to the period subsequent to
the commencement of winding-up and even to the winding-up order. The
report dated 06.10.2021 of the Deputy Official Liquidator indicates that only
2% of the admitted claims of about Rs.23.81 crore could be discharged from
the sale proceeds in course of liquidation. Thus, the Dispositions did not enable
the discharge of liabilities to creditors such as SIPCOT and TIIC or even to meet
workmen's dues.
14. Keeping in mind the above factual context, I revert to an
issue raised earlier: while Section 536 (2) is triggered in respect of all
dispositions which are subsequent to the commencement of winding up, can a
request for validation be made in respect of dispositions effected after the
winding up order was passed? It was contended on behalf of the ex-director
that Section 536(2) of the CA 1956 does not contain any limitation as to
validation even after a winding up order is passed. On a textual and plain
reading of Section 536(2) of CA 1956, the said contention appears prima facie
to have some merit. However, Section 536(2) cannot be construed in isolation,
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as if it operates in a silo. Once a winding-up order is passed, in terms of
Section 456(2) of CA 1956, all the property and effects of the company
concerned shall be deemed to be in the custody of the court, and the Official
Liquidator is required to take into his custody all the property and actionable
claims of the company in terms of Section 456(1) thereof. It is also beyond
doubt that the relevant board of directors stands superseded upon a winding
up order being issued and, therefore, such directors lose the authority to act
on behalf of the company in liquidation. As adverted to earlier, the seven sale
deeds were executed on various dates between April 2009 and August 2010.
These documents were executed by S.Khaja Mohideen pursuant to a purported
power of attorney bearing Document No.1759/2008 dated 26.08.2008. Section
537 (2) of CA 1956 is relevant in this context and provides that any sale,
without the leave of the court, of the properties of a company which is being
wound-up is void. If Sections 536(2) and 537(2) are read together, unless the
Court permits a stakeholder of the company, such as a contributory or ex-
director or promoter to sell the assets of the company in liquidation, or
dispositions are permitted under law, such as in the case of secured creditors,
or the extraordinary circumstances of the case otherwise justify validation,
dispositions without the leave of the court after a winding-up order is passed
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would not be validated.
15. This Court in V.G.P. Finances formulated a significant test
to decide whether a transaction is liable to be validated. The said test is
whether the Court would have approved of such transaction had its permission
been sought at the time when the transaction was entered into. If the said
question were to be posed in relation to the Dispositions, the unequivocal
answer would be that such Dispositions would not have been permitted.
Therefore, the ex-director has failed to make out a case to validate the
Dispositions. On the contrary, the Official Liquidator has established that the
Dispositions are liable to be declared void.
16. Accordingly, C.A.No.150 of 2019 is allowed and C.A.No.395 of
2019 is dismissed. The Official Liquidator may file appropriate consequential
applications. There will be no order as to costs.
19.11.2021
rrg
Index : Yes / No
Internet : Yes / No
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SENTHILKUMAR RAMAMOORTHY J.,
rrg
Comp.A.Nos.150 and 395 of 2019
19.11.2021
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