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Garware Marine Industries Limited, M/s. Henkel Chemicals (I) Ltd. Versus Garware Nylons Limited (In liquidation)

2015 (8) TMI 93 - BOMBAY HIGH COURT

Validation of pledge of shares when winding up was initiated – Applicant by liquidating shares supplied raw materials and made payments to some of key contractors of Company - Official Liquidator's Report considered subject transfer of shares violative of Section 531A of Companies Act, 1956 having taken place within six months prior to commencement of winding up - Held that:- Considering agreement of pledge and its enforcement, it transpires that agreement appeared to be in ordinary course of Co .....

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act that share certificates along with duly executed transfer deeds were not lodged with Company or that such transfers were not registered in record of Company does not detract from completeness of transfer – Thus, pledge of shares by Company in liquidation and transfer of shares effected during pendency of winding up were both bona fide and in interest of Company in liquidation –Official Liquidator's Report disposed of – Decided in favour of Applicant. - Company Application No. 250 of 2014, Co .....

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of (i) a pledge agreement between the Applicant and the Company in liquidation, (ii) invocation of the pledge and (iii) transfer of shares belonging to the Company in liquidation. 2. Garware Nylons Limited is a Company in liquidation (hereinafter referred to as the Company ). The Applicant was a purchaser of yarn from the Company before the winding up petition was presented. Since its inception in the year 1975, the Applicant has been purchasing yarn from the Company. On 8 October 1992, the pre .....

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agreement was arrived at between the Applicant and the Company, in terms of which the Applicant agreed to supply raw material to the Company upto a certain quantity annually for its manufacturing purposes. The Company agreed to supply yarn to the Applicant at market rates less quantity based discounts as applicable. Between December 1994 and May 1995, the Applicant procured and supplied raw material, namely, caprolactum, worth about ₹ 2.43 crores to the Company. The Company, however, supp .....

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any to make payment of its dues. On 31 May 1995, this pledge agreement with a right of redemption was duly recorded in the Minutes of the Meeting of the Board of Directors. Following this, the Applicant also wrote to the GOSL confirming its lien on 14,99,988 equity shares of GOSL owned by the Company. GOSL, by its letter dated 9 April 1996, confirmed its having noted the Applicant's lien in respect of the subject shares. Between May 1995 and August 1996, the Applicant supplied raw materials .....

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he Applicant to further support the Company in its working capital requirements, against which it offered to transfer 2,21,420 shares of GOSL held by the Company to the Applicant, thereby seeking to reduce the outstandings substantially. In pursuance of this offer, which was accepted by the Applicant, the Company, by a letter dated 14 January 1997, forwarded duly signed Transfer Deeds along with share certificates of 2,21,420 shares of GOSL. On 27 January 1997, these shares were duly transferred .....

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nership of the pledged shares at their current market value to the Applicant.(The current value at that date was of ₹ 82,49,934/.) On 17 May 1997, the Company confirmed the transfer of 14,99,998 equity shares of GOSL to the Applicant for a consideration of ₹ 82,49,934/. (Even after this transfer, an amount of ₹ 10,97,791/was till outstanding and owed by the Company to the Applicant.) Following this transfer, the Applicant wrote to the Share Department of GOSL about its acquisit .....

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in the present Company Petition in respect of the Company. On 18 October 1997, the Applicant wrote to the Provisional Liquidator putting him to notice that the Applicant was enforcing its option to transfer the subject shares to its name. Thereafter, on 18 December 1998, this Court, pursuant to the BIFR recommendation, permitted the Company to be wound up and directed the Official Liquidator to take charge of the affairs, assets and property of the Company. The transfer of 14,99,988 shares was r .....

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. The Official Liquidator's Report was on the footing that the subject transfer of shares was violative of Section 531A of the Act having taken place within six months prior to the commencement of the winding up. Thereupon, the present Company Application was taken out by the Applicant seeking validation of the Pledge Agreement as well as the subsequent invocation of the pledge and transfer of shares in favour of the Applicant. 3. On behalf of the Applicant it is submitted by Mr. Dwarkadas, .....

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J. Kathawalla, J. dated 5 September 2012 in support of his submissions. (This judgment was confirmed in Appeal by a Division Bench of this Court in the case of Sunita Vasudeo Warke vs. Official Liquidator 2013(2) Mh.L.J. 777.) Learned Counsel further submits that the pledge, which was created bona fide and for the benefit of the Company, was validly invoked under Section 176 of the Contract Act, 1872 and the transfer of shares was made validly in pursuance of such invocation. Learned Counsel rel .....

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9,998 shares, (ii) transfer of 2,21,420 shares and (iii) transfer of 14,99,998 shares, effected on different dates and in that order. It is submitted that each of these transactions must satisfy the test of Section 536(2) of the Act. Secondly, it is submitted that there was no necessity for these transactions and no corresponding benefit to the Company and what these transactions have effectively done is converting an unsecured creditor (i.e. the Applicant) into a secured creditor in fraudulent .....

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nsaction offends the provision of Section 531A of the Act, this ground has since been given up by the Official Liquidator. The contest is now under Section 536(2) of the Act. 5. As provided under Section 536(2) of the Act, any disposition of the property of a company made after the commencement of winding up, is void unless the court otherwise orders. As held by the learned Single Judge of our Court in the case of Hindustan Transmission Products Ltd. (supra), for seeking validation of a transfer .....

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that the transfer was in the interest of the Company. Section 536 (2) of the Act provides that any disposition of property made after commencement of winding up shall, unless the Court otherwise orders, be void. Some of the situations in which a transfer may be validated under Section 536 (2) of the Act were enumerated in the judgment of a Division Bench of this Court in Tulsidas Jasraj Parekh vs. Industrial Bank of Western India (supra). While sounding a note of caution that the discretion conf .....

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urt in J. Sen Gupta (Pvt.)Ltd. (supra) as follows: 1. The Court has an absolute discretion to validate a transaction. 2. This discretion is controlled only by the general principles which apply to every kind of judicial discretion. 3. The Court must have regard to all the surrounding circumstances, and if from all the surrounding circumstances it comes to the conclusion that the transaction should not be void, it is within the power of the Court under Section 536 (2) to say that the transaction .....

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whether Respondent No.1 acted bona fide or he was a victim of a deception or a fraud practiced on him by the Company. The question is whether the transaction in question is in the interest of the business of the Company or in the interest of the Company (now in liquidation) or its creditors. 6. Applying these tests, we have to now see whether the impugned transfer is within the principles laid down by this Court for validation of transfer. Though there are three transactions in the present case .....

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een December 1994 and August 1996, the Applicant agreed to pay for the supply of raw material, i.e. caprolactum, to the Company in consideration of the Company agreeing to supply finished yarn. This agreement appears to be in the ordinary course of the Company's business and bona fide in the interest of the Company. Had it not been for this agreement, the business of the Company would have ceased in 199495 itself. The agreement of pledge is very much a part of this agreement. It was entered .....

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is pending before BIFR and all the stakeholders are interested in the revival of the Company, such agreement can certainly be termed as an agreement in the ordinary business and bona fide in the interest of the Company. As a matter of fact, the Official Liquidator has not joined issues with any of these facts nor does the Official Liquidator in terms impugn the initial transaction of pledge of shares. Evidently, it was in pursuance of this agreement of pledge that the Applicant continued to fina .....

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nsfer during the pendency of the winding up. Under Section 176 of the Contract Act, a pledgee is entitled in the event of a default of the pledgor to retain the goods pledged as a security or at its option, to bring the property pledged to sale with notice to the owner. The Official Liquidator does not question the fact of non-payment of the Applicant's dues by the Company in pursuance of the agreement of pledge and, in the premises, the subsequent enforcement of the pledge by effecting a tr .....

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or Counsel appearing for the Official Liquidator, relied on the judgment of the Division Bench in Sunita Vasudao Warke (supra) and submitted that even if the pledge in favour of the Applicant was valid when created, the transfer effected subsequent to the winding up order in favour of the Applicant was still void, since after the winding up order no new rights could be created or no incomplete rights could be completed. He submitted that doing so would be contrary to the rights of the creditors .....

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p order. It is, however, submitted that under Section 108 of the Act, the transfer is not complete unless and until the shares along with duly executed transfer deeds are lodged with the Company and registered in the Register of Members of the Company. It may be that as between both the transferor and transferee on the one hand, and the Company, whose shares are sought to be transferred, on the other, the transfer may not be complete until the share certificates along with duly executed transfer .....

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ansferee. The Division Bench of Madras High Court in the case of M. Ramaswamy (supra) has considered the transfer of shares as between the donor and donee of shares pending completion of formalities of transfer. The Court in that case held as follows : A question arose as to whether, on the facts and in the circumstances of the case, there was a complete transfer of shares even during the lifetime of the donor. The Supreme Court held that the requirements of both Sections 122 and 123 of the Tran .....

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ompanies concerned, which were necessary to enable the donee to exercise the rights of a shareholder, were mere enforcement of that right, and the mere fact that such transfers had to be recorded in accordance with the company law did not detract from the completeness of what was donated. According to the said decision of the Supreme Court, if the transferor has transferred the right to get the share certificates from the company in the name of the donee, then, as between the transferor and the .....

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