2025 (6) TMI 1019 - HC - Companies Law

Seeking validation of the sale and transfer of 2, 34, 000 equity shares in favour of Applicants - valid transfer took place only on the invocation of call option or not - call option granted under the MOU and amended agreement created an irrevocable and legally enforceable right in favour of the Applicants or not - HELD THAT - On March 1 2009 the Respondent No. 2 the company in liquidation and the Applicants herein had executed a Memorandum of Understanding for transfer of shares for certain consideration. The Applicants herein were under the MOU vested with the right to exercise a call option in the event of the company in liquidation not complying with its obligations under the MOU. Company in liquidation failed to comply with its obligations within the stipulated time. Upon such failure the Applicants herein issued notice dated July 2 2010 giving 30 days to TWDPL to infuse the funds failing which the Applicants would invoke call option - It is evident that though this right stood crystallized at that point in time the Company in Liquidation requested the Applicants not to exercise the same and sought extensions time and again. Upon reading of the subsequent Amended Agreement it is clear that the parties have continued to recognize and have preserved the irrevocable nature of the call option and have just provided extension of time till March 31 2013 to exercise the ministerial act of invoking the same. Thus it was the obligation of the Company in Liquidation to infuse the money on failure of which the Applicants had liberty to invoke the rights over the shares which have been given as security. Therefore the Applicants in the present case became legally entitled to exercise their irrevocable right on March 31 2013. No doubt pursuant to Section 441 of the Companies Act winding up of a company by court shall be deemed to have commenced at the time of presentation of the petition which in the present case would be March 28 2014 - Section 536 (2) declares the transactions after commencement of the winding up void but leaves discretion to the court to make appropriate orders in that regard. That the jurisdiction vested is equitable and is meant to be exercised as such. It has been held in Mukesh Mehra v. State Bank of India that an incomplete transaction cannot be validated. It is also settled that if a transfer has not been completed prior to the winding up order no application would lie to the Court for a direction that the Official Liquidator to complete the transfer. Therefore the question that this Court is required to consider before validating the transaction of the Subject Shares under Section 536 (2) of the Act is whether the act of invocation has been completed prior to winding up order. The facts show that there was a pre-existing contract between the parties well before the filing of the winding up proceedings and the subsequent enforcement of the terms cannot be questioned unless such enforcement is contrary to the terms - There can be no assistance to the Official Liquidator from the judgment in the case of Nagabhushanam v. Ramchandra Rao and Others as the same was rendered in a different fact situation. The Madras High Court was deciding in the Second Appeal the priority between the auction purchasers at the Court sales and the transferee under the deed of assignment over the transfer of certain shares in Limited Companies. The Court in that case was dealing with the question of whether a deed not complying with the terms of the Act and the Articles of Association is valid to transfer shares as against a person who has acquired the right to them by a Court-sale in manner required by the provisions of the Civil Procedure Code. But this Court is not considering the same for the reason that the transaction in the present case has been discussed in detail and the right of the Applicants is held to be irrevocable and complete and relevant judgments in that context have been discussed. Whether the Applicants in their Applications have pleaded and proved that the transaction was done in a bona fide manner and in the best interest of the company? - HELD THAT - This Court has in the case of Helbon Engineers Pvt Ltd. v. Ferral Anant Machinery Manufacturers Pvt Ltd held that the discretion to the court by the use of the words unless the court otherwise orders has to be kept in mind. That if all dispositions of property made by a company in liquidation during the interregnum between the presentation of the petition for winding up and the passing of the order for winding up would be null and void that would completely paralyze the business of company. Such interpretation could lead to catastrophic situation which should be averted. In the facts of the case as noted above the Applicants have acted pursuant to a pre-existing contractual agreement entered into well before filing and admission of the winding up proceedings. The Applicants have merely exercised their contractual irrevocable right of call option under Article 5 of the MOU and amended agreement upon TWDPL s continued failure to infuse the agreed funds into WREPL. The invocation of Call Option issuance of consideration and completion of transfer were initiated and acted upon as ministerial action - the transaction has been executed in accordance with rights long crystallized by the MOU and Amended Agreement prior to the admission of the Company Petition and prior to order of winding up and is not only bona fide but also fair just and reasonable and deserves to be protected. Conclusion - The sale and transfer of 2, 34, 000 equity shares of the company in liquidation pursuant to the MOU and its amendment is validated and ratified under Section 536(2) of the Companies Act 1956. The sale and transfer of 2, 34, 000 equity shares of WREPL in favor of Applicants on 4th September 2014 effected pursuant to the Memorandum of Understanding dated 01st March 2009 as amended by agreement dated 23rd December 2011 is ratified - Application allowed.

Summary

The core legal questions considered by the Court in this matter were:

1. Whether the transfer of shares by the company under liquidation pursuant to exercise of a call option under a pre-existing Memorandum of Understanding (MOU) and its subsequent amendment is a bona fide transaction in the ordinary course of business and not void under Section 536(2) of the Companies Act, 1956.

2. Whether the call option granted under the MOU and amended agreement created an irrevocable and legally enforceable right in favour of the Applicants, and whether its exercise constituted a completed transaction prior to the winding up order.

3. Whether the transaction of transfer of shares post-presentation but prior to admission of the winding up petition can be validated by the Court under Section 536(2) of the Companies Act, 1956.

4. Whether the Applicants have sufficiently pleaded and proved the bona fides of the transaction and that it was in the best interest of the company in liquidation.

5. The scope of the Court's discretion under Section 536(2) of the Companies Act, 1956 to validate transactions entered into after the commencement of winding up proceedings.

Issue-wise Detailed Analysis

1. Validity of the Share Transfer under Section 536(2) of the Companies Act, 1956

The legal framework under Section 536(2) provides that any disposition of the property of a company after the commencement of winding up is void unless the Court orders otherwise. The Court recognized that this provision is an enabling one, conferring discretionary power to the Court to save bona fide transactions executed in the interest of justice and equity.

Precedents such as Sunita Vasudeo Warke v. Official Liquidator and Mukesh Mehra v. State Bank of India were considered, which emphasize that incomplete transactions cannot be validated and that bona fides must be established.

The Court noted that the winding up petition was presented on March 28, 2014, and admitted on August 8, 2016. The transfer of shares occurred on September 4, 2014, post-presentation but prior to admission. The Court held that since the transaction was pursuant to a pre-existing contract and was executed in accordance with crystallized rights, it was not void ab initio under Section 536(2).

The Court emphasized the equitable jurisdiction vested in it to protect genuine transactions and avoid paralysis of the company's business during winding up proceedings, citing Helbon Engineers Pvt Ltd. v. Ferral Anant Machinery Manufacturers Pvt Ltd.

2. Nature and Effect of the Call Option under the MOU and Amended Agreement

The Court examined the nature of the call option granted under the MOU dated March 1, 2009, and the amendment dated December 23, 2011. The legal principle adopted was that a call option creates an irrevocable right to receive the subject shares upon fulfillment of stipulated conditions, and its exercise is a unilateral act dependent on the volition of the option holder.

Reliance was placed on precedents including La-Fin Financial Services Pvt Ltd v. IL & FS Services Pvt Ltd and Sakalaguna Nayudu v. Chinna Munuswami Nayakar, which clarified that while the grant of an option is consensual, its exercise is unilateral and binding on the grantor.

The Court found that the Applicants had a legally enforceable right to exercise the call option from March 31, 2013, and the subsequent notices and actions culminating in the transfer of shares were ministerial acts effectuating this right.

The Court rejected the contention that the transfer was incomplete, pointing out that the Applicants had issued fresh cheques as consideration, received revised share transfer deeds, and the Board of Directors of WREPL approved the transfer on September 4, 2014, thereby completing the transaction.

3. Completion of the Transaction and Timing Relative to Winding Up Proceedings

The Official Liquidator argued that the transfer was incomplete and could not be validated as it occurred after the presentation of the winding up petition. The Court distinguished this case from others where transactions were incomplete or initiated post-winding up order.

It was held that the irrevocable right under the call option crystallized prior to the presentation of the winding up petition, and the subsequent exercise and completion of the transfer were within the Court's discretion to validate.

The Court observed that the transaction was not a new or unilateral disposition but enforcement of pre-existing contractual rights, and thus not subject to invalidation under Section 536(2).

4. Bona Fides and Best Interest of the Company

The Official Liquidator contended that the Applicants failed to plead or prove the bona fides of the transaction or that it was in the best interest of the company. The Court applied the principle from Ram Sarup Gupta v. Bishun Narain Inter College that pleadings should be liberally construed to ascertain substance over form.

The Court found that the Applicants had pleaded that the transfer was pursuant to a pre-existing contract and exercised due to default by TWDPL, and that no gains were made by the Applicants. The Court concluded that the transaction was bona fide, fair, just, and reasonable.

It was further noted that the transaction was in the ordinary course of business and protected the Applicants' rights as creditors secured by the pledged shares.

5. Discretion of the Court under Section 536(2)

The Court reiterated that Section 536(2) grants discretion to validate transactions post-commencement of winding up to prevent injustice and protect bona fide dealings. The Court emphasized that strict invalidation would paralyze company operations and harm innocent parties.

It held that the transaction in question deserved protection under this discretionary jurisdiction, given the pre-existing contract, the crystallized rights, and the bona fide nature of the transfer.

Treatment of Competing Arguments

The Official Liquidator's arguments focusing on the timing of the transfer and alleged incompleteness were rejected on the basis that the call option created a legally enforceable right prior to the petition, and the transfer was completed through ministerial acts with consideration and board approval.

Reliance on cases involving incomplete or post-winding up transactions was distinguished on facts. The Court also rejected the argument that the Applicants failed to plead bona fides, applying a liberal approach to pleadings and considering the substance of the transaction.

Significant Holdings

"Section 536 (2) of the Companies Act, 1956 is an enabling provision which does not render a transaction entered into by a company from the date of filing of the winding up petition till the date of winding up order void ab initio. The Court has absolute discretion to declare a transaction entered into by the company in liquidation between the date of filing of the winding up petition and the date of winding up order, and such discretion must be exercised equitably to save transactions that are genuine so that innocent third parties are not to put to a loss."

"A call option creates an irrevocable right to receive the subject shares in favour of the Applicants. Once a call option is granted, it results in a complete, concluded and legally enforceable nature of a concession or privilege, which may be exercised upon the fulfillment of the conditions on which it is made exercisable."

"The exercise of the call option is a unilateral act dependent entirely on the volition of the person granted the option. The Applicants herein became legally entitled to exercise the call option from 31st March 2013 itself and the unilateral exercise of the call option is binding upon the company in liquidation."

"Transactions which are bona fide and shown to be fair, just and reasonable deserve to be protected because of clear equity involved in such matters."

"The transaction has been executed in accordance with rights long crystallized by the MOU and Amended Agreement, prior to the admission of the Company Petition and prior to order of winding up and is not only bona fide but also fair, just and reasonable and deserves to be protected."

"The Official Liquidator's endeavour to give this transaction a colour of a typical call option cannot be countenanced in as much as in the present case, the failure on the part of the Company in Liquidation created an irrevocable right in favour of the Applicants."

The Court finally held that the sale and transfer of 2,34,000 equity shares of the company in liquidation pursuant to the MOU and its amendment is validated and ratified under Section 536(2) of the Companies Act, 1956. The application for validation was allowed, and the Official Liquidator's contrary prayers were rejected. Similarly, the interim application for validation of transfer of additional shares was also allowed.