2010 (7) TMI 780 - HC - Companies Law

Winding up - huge amount is due from the respondent since the respondent-company had stopped the manufacturing process Held that - agreements entered into with the approval of the secured creditors the manufacturing process of the respondent-company was allowed to commence on supply of materials by the applicant with the main intention that the applicant which is one of the creditors has to receive large amounts from the respondent and therefore not only public interest is involved in the said agreements but the agreements also work for the betterment of the respondent-company and its creditors particularly the secured creditors since the agreements gave scope for revival of the respondent-company and ultimately in that event it would result in the dismissal of the company petition itself application stands allowed

Issues Involved:
1. Validity of payments made or proposed to be made under specific agreements during pending winding up proceedings.
2. Interpretation and application of Section 536(2) of the Companies Act, 1956.
3. Protection of the interests of creditors, shareholders, and the public during winding up proceedings.

Issue-Wise Detailed Analysis:

1. Validity of Payments Made or Proposed to Be Made Under Specific Agreements During Pending Winding Up Proceedings:
The petitioner sought an order under Section 536(2) of the Companies Act, 1956, declaring that payments made or proposed to be made under the memorandum of understanding (MOU) dated April 19, 2010, escrow agreement dated April 23, 2010, and supply agreement dated April 24, 2010, are valid. These agreements were intended to facilitate the resumption of supply of naphtha and furnace oil to the respondent, which had defaulted on payments amounting to Rs. 296.96 crores and had shut down its urea plant.

2. Interpretation and Application of Section 536(2) of the Companies Act, 1956:
Section 536(2) states that any disposition of the property of the company made after the commencement of winding up proceedings shall be void unless the court orders otherwise. The court's power under this section is to save any disposition of assets of the company under liquidation by considering the company's interest in continuing its business, avoiding paralysis, and protecting the interests of shareholders and creditors. The court emphasized that bona fide dispositions during pending winding up proceedings should be protected if they are in the ultimate interest of the creditors and the company.

3. Protection of the Interests of Creditors, Shareholders, and the Public During Winding Up Proceedings:
The respondent company, engaged in the production of fertilizers, had entered into agreements to restart its urea plant by resuming the supply of raw materials from the petitioner. The agreements included conditions for payment through an escrow account and partial discharge of debts. The Corporate Debt Restructuring Empowered Group (CDR) and the principal secured creditor, ARCIL, had approved these arrangements. The court noted that these agreements were in the public interest, as they promoted the agricultural sector and benefited the creditors, shareholders, and employees of the respondent company.

Detailed Analysis:
1. Facts and Background:
- The respondent company defaulted on payments for raw materials supplied by the petitioner, leading to winding up proceedings.
- The MOU, escrow agreement, and supply agreement were intended to facilitate the resumption of supply and restart the respondent's urea plant.
- The agreements included conditions for payment through an escrow account and partial discharge of debts.

2. Court's Power Under Section 536(2):
- The court has the power to save dispositions of assets during winding up proceedings if they serve the interest of the company and creditors.
- The court emphasized the need to protect bona fide dispositions to avoid paralyzing the company's business and to ensure the interest of creditors and shareholders.

3. Public Interest and Creditor Protection:
- The agreements were in the public interest, promoting the agricultural sector and benefiting the respondent company's creditors, shareholders, and employees.
- The CDR and ARCIL had approved the arrangements, indicating that the agreements were in the interest of the secured creditors.

4. Legal Precedents:
- The court referred to decisions of the Bombay High Court and the Gujarat High Court, which supported the view that the court can protect bona fide dispositions during pending winding up proceedings.
- The court cited the case of Kamani Metallic Oxides Ltd. v. Kamani Tubes Ltd., where the Bombay High Court held that the court has jurisdiction under Section 536(2) to authorize dispositions for the benefit of creditors even before a winding up order is made.

5. Conclusion:
- The court concluded that the petitioner is entitled to an order protecting the payments made under the agreements, as they were in the interest of the respondent company's creditors and the public.
- The application was allowed, and the payments made under the MOU, escrow agreement, and supply agreement were declared valid.

The judgment underscores the court's role in balancing the interests of the company, its creditors, and the public during winding up proceedings, while interpreting Section 536(2) of the Companies Act, 1956.

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