TMI Blog2013 (9) TMI 1273X X X X Extracts X X X X X X X X Extracts X X X X ..... up was allowed by a learned Judge, by an order dated 13.3.1998. But by a judgment dated 9.6.1998, passed in OSA No.85 of 1998, a Division Bench of this Court set aside the order of winding up, on the sole ground that the winding up order was passed without directing the publication of advertisements, in terms of Rules 24 and 96 of the Companies (Court) Rules, 1959. The Division Bench remanded the matter back to the Company Court. 4. Thereafter, an advertisement was issued and a paper publication was effected on 21.11.1998. Following the same, an order for winding up of the Company was again passed by the Company Court on 10.3.1999. The order of the Company Court dated 10.3.1999 was confirmed by the Division Bench in OSA No.85 of 1998, by an order dated 14.7.1999. This order has attained finality and the Company in question stands wound up. 5. After the order of winding up passed by the Company Court on 10.3.1999, which was confirmed by the Division Bench on 14.7.1999, the applicant in this application viz., VGP Finances Limited, filed an application in C.A.No.1275 of 1999, seeking a direction to the Official Liquidator to deliver possession of a property, bearing No.5/259, O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be validated and that the applicant was entitled to possession. 9. Challenging the order of the Company Court dated 9.8.2005, allowing C.A.No.1275 of 1999, 3 creditors, including the second respondent herein, filed 3 appeals in OSA Nos.201, 210 and 211 of 2005. These appeals were dismissed by the Division Bench, by an order dated 9.9.2008. But in the meantime, the possession of the property was handed over to the applicant. However, the Division Bench restrained the applicant from demolishing any structure or removing any machinery. 10. As against the dismissal of their appeal, the second respondent, viz., the Indian Bank filed a special leave petition in SLP(Civil) No.28177 of 2008, on the file of the Supreme Court. The Supreme Court granted leave and eventually allowed the civil appeal C.A.No.2934 of 2009 filed by the second respondent herein (Indian Bank), by an order dated 24.4.2009 and directed this Court to take up the application for validation filed in September 2004 and hear the same and dispose it of after taking note of the availability of assets and the claims of secured and unsecured creditors. 11. It must be pointed out at this stage that the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case it appears that Indian Bank was not heard. It was not even made a party. The Court has not examined the list of creditors both secured and unsecured whose security/ claims would stand defeated on validation of the sale deed. Moreover, it is important to note that there was no prayer for validation in Company Application No.1275 of 1999 and even without said prayer the Court has allowed validation which was erroneous. The High Court has also not considered the question regarding commencement of the winding up proceedings and whether the conveyances stood executed after such commencement? However, to put an end to the controversy, we are restoring to the file of the Company Judge the application dated 13th September, 2004 moved by the respondent No.1 herein for validation. We direct the Company Registrar to give a proper registration to the Company Application for validation dated 13th September, 2004. On giving the registration number we give liberty to respondent No.1 herein, if so advised, to move an application for amendment giving better particulars in support of his claim. We also direct the Company Registrar to inform the Indian Bank regarding the application bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t notice of the filing of the winding up petition; (v) that though the first application filed by the applicant in C.A.No.1275 of 1999 was only for delivery of possession, the Division Bench, which disposed of the first original side appeal in OSA No.13 of 2005, understood and treated the application to be one for validation of the transaction; (vi) that even the Division Bench, which disposed of the subsequent appeals OSA Nos.201, 210 and 211 of 2005, considered the application only as an application for validation; (vii) that the Official Liquidator did not ever come up with any application for setting aside the sale under Section 536(2) on the ground that the sale was intended to defeat the body of creditors; and (viii) that therefore the applicant is entitled to have the transaction ratified. 14. In response to the above contentions, Mr.R.Yashod Vardhan, learned Senior Counsel appearing for the Indian Bank (second respondent) contended (i) that none of the 4 loan agreements dated 11.1.1996, 30.1.1996, 7.2.1996 and 10.1.1997 ever contemplated the creation of any mortgage and hence, the creation of the mortgage on 31.1.1997, after the admission of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void or for any transferee to seek the validation of a disposition of property, made after the commencement of the winding up. 18. As seen from the admitted facts, the following are the sequence of events that have happened in this case:- (i) The Company-in-liquidation entered into a Master Loan Agreement dated 11.12.1995 with the applicant, whereby the applicant agreed to provide finances to the Company; (ii) In pursuance of the Master Agreement, the applicant lent monies and 3 loan agreements were executed on 1.1.1996, 30.1.1996 and 7.2.1996, much before the date of filing of the petition for winding up on 14.10.1996; (iii) The fourth loan agreement was entered into thereafter on 10.1.1997 and the mortgage was created on 31.1.1997; and (iv) The sale took place under two Sale Deeds dated 11.2.1999 and 16.2.1999, much after the publication of the advertisement about the admission of the company petition on 21.11.1998. 19. Therefore, it is clear that the date of commencement of the winding up is 14.10.1996. The date of creation of the mortgage was 31.1.1997, which was subsequent to the date of commencement of winding up. The dates of sale viz., 11.2.1999 and 16.2.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into. The Court also added that such disposition, intended to preserve the business as a going concern, will be approved by the Court. (v) In M.K.Ranganathan vs. Government of Madras {AIR 1955 SC 604}, the Supreme Court held that it is only when the intervention of the Court is sought either by putting in force any attachment, distress or execution within the meaning of Section 232 (1) of the 1913 Act or proceeding with or commencing a suit or other legal proceedings against the company within the meaning of Section 171 that leave of the Court is necessary. But when a secured creditor, standing outside the winding up realises his security without the intervention of the Court, by effecting a sale of the mortgaged property by private treaty or public auction, he need not even seek the leave of the Court. (vi) In Syed Haidar Sahib vs. M.Jayaram Pillai {(1956) 26 CC 164 (Mad.)}, a learned Judge of this Court held that paying a creditor by assigning an asset of the company, especially after the commencement of the winding up, cannot be considered to be a bona fide transaction arising in the ordinary course of current business. (vii) In N.Subramania Iyer vs. Official Rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he initial burden is cast by Section 531-A, upon the person who denies the charge to establish that the transaction was not made in the ordinary course of business of the company or that it lacked good faith. Once the initial onus is discharged, then it will shift upon the creditor. (xii) In Pankaj Mehra vs. State of Maharashtra {2000 (2) SCC 756}, the Supreme Court pointed out that any disposition of property made after the presentation of the winding up petition would not be void ab initio, but that it is only voidable. Citing with approval, the decision of the Bombay High Court in Tulsidas, the decision of the Gujarat High Court in Navjivan Mills, and also its own decision in Chittoor District Cooperative Marketing Society, the Supreme Court held that a company may have to deal with very many day-to-day transactions, make payments of salary to the staff and meet urgent contingencies and that therefore, all transactions cannot be held to be ab initio void. (xiii) In ICICI Ltd vs. Ahmadabad Manufacturing and Calico Printing Co. Ltd {2004 (9) SCC 747}, the Supreme Court rejected the prayer of a creditor of a company-in-liquidation, for creating a first charge on the propertie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of auction on the ground that a still higher price may be obtained may prove to be a self-defeating exercise as has been held in M/s Kayjay Industries (P) Ltd. (1974) 2 SCC 213] and State of Punjab vs. Yoginder Sharma Onkar Rai Co. [(1996) 6 SCC 173], but having regard to the accepted position that the Company Judge in a case of this nature exercises a discretionary jurisdiction; it is bound to act with great circumspection and caution. Such a jurisdiction should ordinarily be exercised in exceptional cases and when necessary for seeing the company as an ongoing concern. (xv) In K.Periyasamy Gounder vs. Kothari Industrial Corporation Ltd {2010 (1) CTC 62}, I had an occasion to consider some of the decisions, including the one in Gray's Inn Construction Co. Ltd {1980 (1) All.E.R.814} and elicited the following principles:- (a) that the disposition must be honest and bona fide; (b) that the transaction is in furtherance of the company's business/ interests and in the interest of the creditors; and (c) that no creditor should obtain an advantage over his fellow creditors. (xvi) Again in M.Lakshmi Narayana Choudhary vs. Official Liquidator {Company Application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntees of two persons by name Pradeep Ranganathan and S.N. Natarajan, as security for the due repayment of the loan, by pledging their share certificates. 25. In other words, though the Master Agreement dated 11.12.1995 contemplated the creation of securities in the assets of the company, all the 4 loan agreements that followed, did not extract any immovable property of the company as security. 26. But all of a sudden, after the presentation of the winding up petition on 14.10.1996, which is the date of commencement of the winding up, the Managing Director of the company makes a declaration on 31.1.1997 in the form of an affidavit, creating a mortgage by deposit of title deeds. Two interesting things are noticed in the declaration dated 31.1.1997, a copy of which is filed by the applicant themselves. They are:- (i) It is typed on non-judicial stamp paper of the value of ₹ 10/-, but the name of the person to whom the non-judicial stamp paper was issued, is conspicuously absent. (ii) The mortgage is created in respect of an antecedent debt, borrowed under 4 earlier agreements, mentioned above. 27. Therefore, it is clear that as on the date of commencement of windi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in partial discharge of the mortgage loan of ₹ 5 lakhs, another portion of the property was sold thereunder for a consideration of ₹ 3,16,080/-. Therefore, it is clear that no consideration passed under both the Sale Deeds. The only consideration for the company-in-liquidation executing the 2 Sale Deeds, was a partial discharge of the mortgage loan. Therefore, it is clear that the company did not stand to benefit in any way, by these 2 Sale Deeds. These 2 Sale Deeds did not ensure any cash flow to the company or any tangible benefit to the company, to keep the company alive and kicking. (iii) The Sale Deeds also disclose that under the first Deed of Sale, the land of the extent of 6 grounds and 1404 sq. ft., in Survey No.265/2 in old No.148, New No.135, Mootaikkaran Chavadi, Okkiyam Thoraipakkam village was sold for a stated consideration of ₹ 2,37,180/-. Under the second Deed of Sale, the land of the extent of 2724 sq. ft., in Survey No.267/2A and 1635 sq. ft., in Survey No.268/2A in old No.148, New No.135, Mootaikkaran Chavadi, Okkiyam Thoraipakkam village was sold for a stated consideration of ₹ 3,16,080/-. In other words, a larger extent was sold for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? (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? 31. My answer to all the above questions, would undoubtedly be, against the applicant. Neither the transaction appears to be a bona fide one nor the applicant appear to be a bona fide transferee. The reasons for this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the second Sale Deed and what was stated as the market value in the first Sale Deed is declared as the sale consideration in the second Sale Deed. This shows the extreme haste and urgency in which the documents had come to be executed. (v) Moreover, both the Sale Deeds are executed for the stated purpose of discharging a single mortgage loan of ₹ 5 lakhs. The total sale consideration adjusted under both the documents, towards the said mortgage loan, was ₹ 5,53,260/- (₹ 3,16,080/- + ₹ 2,37,180/-). If these recitals are true, the applicant herein should have paid the difference between the sale consideration under both the documents and the mortgage loan sought to be discharged. There is no indication in either of the 2 documents as to what happened to the balance amount of ₹ 53,260/-. Therefore, all these extremely suspicious circumstances, create such a huge cloud over the entire transaction that it is impossible for me to look at the applicant as a bona fide transferee. 32.The transaction is also not carried out and completed in the ordinary course of the current business of the company. On the date on which a mortgage was created on 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceed with the mortgage, I would certainly not have given a nod, since the only object of the transaction was to benefit the applicant and not to benefit either the company-in-liquidation or its creditors. 35. As a matter of fact, I have carefully avoided applying the test of bona fides from the point of view of the company-in-liquidation. I have not even applied the test of bona fides upon the applicant, from the point of view of due care and attention. I have simply applied the test of honesty to find out whether the applicant, as a transferee, could be said to have acted honestly. The applicant has failed this test, in view of the highly suspicious circumstances surrounding the execution of the mortgage and the execution of the Sale Deeds. 36. As pointed out by the Supreme Court in NGEF Limited, adequacy of consideration is also one of the relevant factors for proper and reasonable exercise of the judicial discretion vested under Section 536(2). When this test is applied, the transaction miserably fails. As pointed out earlier, the company-in-liquidation purchases this property in February 1996 for a total sale consideration of ₹ 7,72,000/-. But the company sells i ..... 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