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TMI Blog2010 (7) TMI 780X X X X Extracts X X X X X X X X Extracts X X X X ..... eration in the status of the members of the company, made after the commencement of the winding up, shall be void. (2) In the case of a winding up by or subject to the supervision of the court, 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." The issue covered in this case relates to section 536(2) and particularly, the first portion of it, by which disposition of assets including actionable claims of the company which is facing an order of winding up by the court, after the commencement of winding up proceedings, is declared void unless the court otherwise orders. 3. Therefore, the power of this court under section 536(2) of the Act is to save any such disposition of assets of the company under liquidation which can be possible for this court by taking into consideration the interest of the company in carrying out its business and such order is intended, in order to avoid paralysing of the company and to avoid counter productivity and to protect the interest of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and to obtain a letter of acknowledgment in respect of the memorandum of understanding and the said supply agreement. 6. There is also a condition to the effect that on opening of escrow account, letter of consent should be obtained from the principal secured creditor, viz., Asset Reconstruction Co. (India) Ltd., (ARCIL) and consent from the authorised representative of the corporate debt restructuring (CDR) empowered group. It is stated by the applicant that the respondent has in fact fulfilled all the conditions of the memorandum of understanding and thereafter the parties have executed escrow agreement on April 23, 2010, apart from supply agreement dated April 24, 2010. 7. It is stated that as per the escrow agreement, the respondents should open an escrow account with the State Bank of India, Patiala making the applicant as the sole beneficiary. The supply agreement enables the applicant to supply naphtha and furnace oil in order to ensure that the respondent would manufacture urea and other fertilizers and the payment in respect of such supply is required to be made through the above said escrow account. It is also stated that the respondent has agreed and undertaken t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t given by ARCIL which is relevant are extracted as follows : "ARG II/SK/FY11/235 April 5, 2010 Southern Petrochemical Industries Corporation Ltd., SPIC House, 88, Mount Road, Guindy, Chennai-600 032. Dear Sir, Sub : Issuance of no objection certificate This has reference to your letter dated April 1, 2010, requesting us to issue our no objection letter for resumption of supplies of Naphtha and Furnace Oil by Indian Oil Corporation Ltd. (IOC) and settlement of the old outstanding dues of IOC. We are agreeable to the following arrangement with IOC : (i) SPIC shall open and operate an escrow account with State Bank of Patiala, or any other bank as may be acceptable to IOC with IOC as the sole beneficiary in which credit with respect to future subsidies on account of future supplies for naphtha and furnace oil would be credited. (ii) Department of fertilizer (DOF) shall remit on priority basis all payments of subsidy on urea to SPIC on fortnight basis to the above escrow account. (iii) The past dues of IOC amounting to Rs. 296.97 crores shall be paid through an upfront amount of Rs. 80 crores (Rs. 30 crores lying in the TRA account and Rs. 50 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments and the submissions made by Mr. Arvind P. Datar, learned senior counsel appearing for the applicant, inasmuch as the winding up petition against the respondent-company is pending, any payments made under the above said arrangements by the respondent-company pending the petition to the applicant must be protected failing which such payments made either under the memorandum of understanding, escrow agreement or supply agreement would be hit by section 536(2) of the Companies Act, 1956. 16. It is no doubt true that such payments which are agreed to be made including the amount of Rs. 80 crores stated to have been made by the respondent would become invalid as per the statutory provision stated above unless such payments are protected by orders of the court. That depends upon the exercise of powers of the court by making such protection orders, in order to save such disposition. It is common knowledge that any order of winding up passed by the court will be effective from the date of filing of the petition for winding up and thereafter, the powers of the company under liquidation in any transaction are restricted since the winding up order acts for the benefit of the creditors o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by Buckley J. in the case of A. I. Levy (Holdings) Ltd., In re [1964] 34 Comp. Cas. 720 ; [1964] 1 Ch. D 19. The learned judge also quoted the law on this point stated in Palmer's Company Law, Twenty-first edition, page 770. The relevant observations are as follows : 'The court has jurisdiction under section 227 to authorise a disposition of the company's property for the benefit of creditors, notwithstanding that a winding up order has not yet been made.' We would also like to quote the observations appearing in paragraph 4 of the judgment in B. Gopal Das's case [1972] Tax. LR 2285 (Raj), at page 2286 : 'As has been stated, section 536 finds a place in that portion of the Act which deals with the effect of winding up on antecedent and other transactions, and there is nothing in sub-section (2) or the scheme of the Act to show that the court cannot authorise a disposition in a case where the winding up petition is pending but a winding up order has not been made. On the other hand, it may well be argued that, in the absence of any prohibition in the law, there is no reason why the court should be precluded from examining the propriety of a proposed disposition during the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment was stayed and there was a moratorium and no further action could be taken on the petitions, four public financial institutions and its bank came forward to give financial aid for running the mill and the company applied to the court under section 536(2) for an order so as to ensure the institutions that the dispositions of its properties in their favour as security for the advances may not be avoided in the future if and when a winding up order should be made, the validity of the disposition of property intended by the company for securing the advance of loans from those institutions on the security of its property and the payment of monies by the company in the ordinary course of business for carrying on its trade should be protected by an order of the court under section 536(2)." 21. The said decision of the Gujarat High Court has been approved by the Apex Court in Pankaj Mishra v. State of Maharashtra [2000] 25 SCL 13, in the following words: "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 Cas 201, in favour of adopting a pragmatic attitude when a company court was approached for a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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