Assets of a company in liquidation cannot be disposed of at mere pleasure of company

If the business is going to be paralysed, then, the court in appropriate cases can, for the benefit and interest of the company, save the transaction involving sale of assets of a company in liquidation; 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 under section 536(2) of the Companies Act.

CASE LAWS DETAILS

HIGH COURT OF BOMBAY

Laxman Yeswant Prabhudesai Vs NRC Ltd.,

Appeal No. 461 of 2009 in Company Application No. 593 of 2008 in Company Petition No. 731 of 1998,

Decided on March ___, 2010

RELEVANT PARAGRAPH

16. Shri Rajadhyaksha, learned Senior Counsel appearing on behalf of the applicants did not seriously dispute that the subject property was assigned by the Director of the Company in liquidation in favour of its sister concern M/s. Aminex Holdings and Investments. He did not dispute that this is a partnership firm of the Ex-Director of the company in liquidation. He does not dispute that on 18th December, 1998 M/s. Aminex Holdings and Investments have assigned the subject plot to Anwar Ismail Merchant and Ismail Hashan Merchant. On 15th February, 1999, the Merchants (respondent Nos.8 to 10) incorporated the company by the name of Arsh International Chemical Pvt.Ltd. The subject plot was brought in by the Merchants as an asset of Arsh International Chemical Pvt.Ltd. However, Shri Rajadhyaksha submits that the applicants had no knowledge of the order dated 21st April, 2007 passed by this court as they were not parties to the same. By this order, the court set aside the assignment dated 18th December, 1998 which was in favour of the sister concern of the company in liquidation. Shri Rajadhyaksha submits that when the court passed an order of winding up and appointed the Official Liquidator as Liquidator of the said company, for a period of 8 years, the Liquidator did not take any steps with regard to the subject plot. This was a clear indication that the Liquidator was not sure about the said plot being an asset of the company in winding up. It is in such circumstances the applicants acting bonafide on the representation of M/s. Arsh International Chemical Pvt.Ltd. acquired the rights in respect of the subject plot. Therefore, this is a fit case where the Single Judge should have exercised the power conferred by section 536(2) of the Companies Act, 1956 and regularised the transaction between M/s. Arsh International Chemical Pvt.Ltd. and the applicants, appellants before us. He submits that there is nothing by which the applicants could be said to be acting in bad faith or malafide. On the other hand, complete inaction on the part of the Official Liquidator and when for nine long years he did not take any steps to take possession of the subject plot, the Single Judge should not have rejected the company application. The transaction could have been regularised and saved as the applicants are bonafide purchasers of the subject plot. For all these reasons, this is a fit case where the Liquidator should be directed to hand over the possession of the subject plot to the applicants after regularisation of the deal. More so, when the applicants had parted with Rs.1,80,00,000/ – already and they would be badly affected in the business.

17. On the other hand, Ms. Pai appearing on behalf of the Official Liquidator invited our attention to the report of the Official Liquidator which was filed pursuant to the orders of the Division Bench of this court. She submits that the Official Liquidator while denying all the allegations of inaction, negligence and collusion, has pointed out the true and correct position at site. He has in paras 5 to 7 of the report dated 4th January, 2010 explained the position. Ms. Pai submits that the Official Liquidator should be permitted to go ahead and dispose of the subject plot so that the creditors of the company in liquidation are paid their dues. She, therefore, submits that there is no substance in the appeal and it be dismissed.

18. Although there are several parties impleaded to the appeal as respondents other than the Official Liquidator, none other than the Official Liquidator addressed us.

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 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. Vs M/s Vegetols Ltd., 1987 (suppl) SCC 167 a two-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 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 paralysed, then, the court in appropriate cases can, for the benefit and interest of the company, 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.

21. In a decision of this court reported in 1976 Mh.L.J. 150 (S.P. Khanna, Dy. Official Liquidator, Laxmi Bank Ltd., Nagpur v S.N. Ghosh), the same principles are summarised. These are no different than what have been set out in the decisions relied upon by Shri Rajadhyaksha. However, assuming that the court has power to save bonafide deals and transactions by applying the aforementioned principles, we are of the opinion that in the facts and circumstances of the present case, the learned Company Judge was in no error in dismissing the company application. From the record it is apparent that the Directors of the company in liquidation upon presentation of the petition entered into the first transaction with the sister concern of the company in liquidation. Thereafter, followed a chain wherein the ex-Directors of the company in liquidation alienated the subject plot fully knowing the consequences of their acts. As they were aware that the petition was before this court, the winding up order was passed, yet, they went on entering into further deals and transactions. Their acts are nothing but an attempt to keep the valuable assets in the form of the subject plot out of the reach of the court and the Official Liquidator. In such circumstances, it cannot be said that the transaction with the applicants was in good faith and honest intention. It may be true that the applicant has paid the monies to the Merchants in good faith unaware of any orders of this court. Further, the Liquidator may not have moved in the matter for nine years but that by itself without anything more cannot be a ground to save the subject deal and transaction. That would amount to putting a premium on the acts of the ex-Directors of the Company in liquidation.

22. It is in such circumstances that we had suggested to Shri Rajadhyaksha that instead of pursuing the company application and the appeal, the applicants must take recourse to filing substantive proceedings against all including the Official Liquidator and claim appropriate declarations and reliefs pertaining to their title. However, on instructions, Shri Rajadhyaksha made a statement that the applicants do not wish to do so but would be content with applying to this court to exercise its powers under section 536(2) of the Companies Act. After applying the afore-stated principles to the facts of this case, we are of the view that this is not a fit case wherein the powers conferred by section 536(2) of the Companies Act, 1956 can be exercised. The acts of taking away the property and assets of the company in winding up are by the ex-Directors of the Company in liquidation. The transaction with the sister concern of the company in liquidation is after the winding up petition was presented to this court. In fact, it was within three days thereafter. Further, the assignment in favour of the firm of Ex-Directors is also after the date of presentation of the petition. The Ex-Directors had knowledge of the proceedings. Each one of them is aware and in fact stated that the company in liquidation was carrying on its business and manufacturing activities on the subject plot. That it was adjacent to plot No.R-35 and possession of that plot was taken by the Liquidator. In such circumstances, by their acts, they prevented the Official Liquidator from attaching and taking possession of the subject plot, thereby they prevented the court from attaching a valuable asset of the company in liquidation. The court protects assets and properties so as to effectively and properly wind up the affairs of the company in liquidation. The court ensures payment of all legal dues to the creditors of the company in liquidation as per their priorities. When such is the intent of the winding up proceedings, then, in the admitted set of facts, it is not possible to agree with Shri Rajadhyaksha that this is a fit case for giving the subject plot and the transaction in that behalf.

NF