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TMI Blog2013 (12) TMI 1646X X X X Extracts X X X X X X X X Extracts X X X X ..... e Limited, SICOM Limited, SREI Infrastructure Finance Limited, Narayan Sriram Investments Pvt. Ltd., ICICI Bank Limited,ECL Finance Limited, Dr. Vijay Mallya, Kingfisher Finvest India Limited, Diageo plc, a Foreign Company And Relay B.V., THE HON'BLE MR. JUSTICE N. KUMAR AND MRS. JUSTICE RATHNAKALA N. KUMAR J., JUDGMENT All these appeals are preferred against the common order passed by the learned Company Judge in Company Application Nos.437, 441, 440, 439 and 438/2012 in Company Petition Nos.122, 121, 248, 185 and 57/2012 decided on 24th May 2013, where on an application filed under Section 536(2) read with Section 537(1) of the Companies Act, 1956 (for short hereinafter referred to as 'the Act'), granted permission to the Company to sell 13,612,591 equity shares of United Spirits Limited (USL) held by it, to Relay B.V. and Diageo Plc and others acting in concert, at a sale price of ₹ 1,440/- per equity share and other consequential directions. Therefore, all these appeals are taken up for consideration together. 2. For the purpose of convenience, the parties are referred to as they are referred to in the Company Petitions. O.S.A.NO.25/2013 / COMPANY PETIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r & RRPF from time to time under a lease agreement incorporating the terms of the Master Agreement and any appropriate amendments specified in the lease agreement. Pursuant to the master agreement, petitioner & RRPF and the lessee - Kingfisher i.e., respondent, entered into agreements for leasing several aircraft engines. In terms of the aforesaid master agreement, they entered into lease agreement No.1 dated 30th September 2005; lease agreement No.2 dated 30th September 2005 and lease agreement No.4 dated 28th March 2007. 6. Their case is that, the respondent has executed a corporate guarantee dated 27th September 2007 in favour of the petitioner & RRPF for the amounts due under the aforesaid agreements. In fact, three separate deeds of corporate guarantee in respect of each lease were executed. The lessee - Kingfisher defaulted in making payments of amounts due and payable under the lease agreements. The petitioner and RRPF made several demands for payment to the lessee and the respondent. However, the respondent neglected to pay the amounts due to the petitioner - RRPF. Thereafter by letter dated 8th February 2012, the petitioner and RRPF called upon the lessee to make payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, 2007 are entered into. 9. The respondent has executed a Corporate Guarantee dated September 27, 2007 in favour of the petitioner. Separate agreements in respect of each of these lease agreements were executed. The Kingfisher - lessee committed default in making payments of amounts due and payable under the lease agreements. They made several demands on the lessee as well as the respondent. Respondent neglected to pay the amounts due to the petitioner. A letter dated 8th February 2012 was issued calling upon the respondent to pay US$ 10,437,866/- amounting to ₹ 57,94,05,941.70. The said demand notice was duly served on the respondent and it was also informed that in case of default, proceedings will be initiated for winding up of the Company under Section 433 read with Sections 434 and 439 of the Act. The said notice was duly served. The respondent did not dispute the amount claimed nor made any payment. Therefore, they were constrained to file this petition for an order of winding up of the Company on the ground that the respondent is unable to pay the debts. OSA NO. 30/2013/ COMPANY PETITION NO. 57/2013 10. The petitioner is a company organized and existing under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving its registered office and principal place of business at No.1, Allee Pierre Nadot, 31172 Blagnac, France. 12. The petitioner manufactures, owns, manages, maintains, sells and leases aircraft and related equipment and engages in any and all general business activities related and incidental thereto. The petitioner, along with various other third parties, leased a number of aircraft to Kingfisher, the then subsidiary of the respondent company. Under an agreement dated July 21, 2006 called "the Global Maintenance Agreement" the petitioner incurred certain expenses and costs in maintaining various aircraft and supply of spare parts to Kingfisher. Kingfisher and the petitioner signed an agreement for payment of outstanding amounts due and payable i.e., the Payment Agreement on 22.9.2011. The outstanding amount due from Kingfisher to the petitioner was US$ 20,988,224.42. Under clause 12 of the Payment Agreement, Kingfisher was required to provide the petitioner a corporate first demand guarantee of the respondent. Accordingly, respondent issued a corporate First Demand Guarantee dated October 14, 2011 guaranteeing thereby as a principal debtor the payment obligations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h its Counsel. They have filed detailed statement of objections traversing all the allegations made in the company petitions and denying their liability as claimed by the petitioner. The arguments were addressed by the petitioners regarding admission. The argument of the respondent was also heard. However, before their arguments could be concluded, the respondent filed an application under Section 536(2) r/w. Section 537(1)(b) of the Companies Act, 1956 r/w. Rules 6 and 9 of the Companies (Court) Rules, 1959 for permission to sell to Diageo PLC/Relay BV upto 13,612,591 equity shares of United Spirits Limited (USL) held by the respondent. In the said application, they have stated that on 15.01.2013, the respondent Counsel made the following oral statement before the company Court:- "The Respondent (UBHL) agrees not to alienate its investments other than those:- (a) already secured by facilities availed of from various Institutions and Banks pledging/mortgaging/securitizing the company's investments in shares in other body corporates and (b) specifically those United Spirits Limited (USL) shares that are already contracted to be sold in terms of the Concluded deal with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e/subsidiary Relay BV together with Diageo at a price of ₹ 1440/- per share, as per the contract entered into, inter alia between the respondent and Diageo PLC, on 09.11.2012. The said contract was entered into in the ordinary course of business of the respondent. The average price of the shares of USL prevailing in the Bombay Stock Exchange for 12 months period just preceding the date of contract was ₹ 762/- per share. On the date of the contract, the share price was ₹ 1,360/- following the execution of the contract with Diageo PLC, the share price of USL has increased and is currently ₹ 1,900/- per share. In fact, the share price of USL has increased tremendously on the basis of the proposed transaction with Diageo PLC. If the transaction with Diageo goes through, there would be a further increase in the net worth of the respondent, which would be in a better position to pay of its creditors. In the event of the sale not going through, the share prices of USL would go down to far less than the price prevailing as on the date of the contract, between the respondent and Diageo Plc/Relay BV, which will severely affect the net worth of the respondent and would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequent value unlocked through the Diageo transaction, the net worth of the respondent has increased exponentially, to ₹ 7,656 crores, as certified by Grant Thornton India LLP of the Grant Thornton Group, one of the leading international accounting groups. It is therefore submitted that sale of USL shares contemplated by the contract with Diageo is for the purpose of preserving the business of the respondent as a going concern. 22. The respondent also owns certain immovable properties in Bangalore which are mortgaged in favour of lenders. The respondent proposed, to sell the said properties and to that end proposed they would file a separate application. Without prejudice to the rights of the respondent in the winding up petitions and company applications, in order to show the bonafides of the respondent Company, they undertook to deposit before the Company Court after said shares transaction to Diageo, the entire amount of ₹ 119.16 crores from sale of shares which is surplus after paying of the above mentioned creditors, to be dealt with, subject to further orders of the Company Court which may be made at the time of hearing of the winding up company petitions. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving 23,577,293 equity shares of USL amounting to 18% shareholding. On 09.11.2012, the respondent Company has contracted to sell to Diageo 9,070,595 equity shares of USL. However, in December, 2012 the respondent Company has reflected in the BSE that the respondent was holding 23,230,123 equity shares of USL amounting to 17.75% shareholding. In March, 2013, in the BSE reflected that the respondent's holding as 20,573,968 equity shares of USL amounting to 15.73% shareholding. 26. Therefore, plainly, the respondent has been effecting sale of equity shares held in USL, after the filing of the winding up petition by the petitioner. Out of the 13,003,327 equity shares sold in the year 2012-13 which appears that 12,646,157 shares have been sold during the three months period from 01.01.2013 to 31.03.2013 alone. Based on a minimum price of ₹ 1440/- per share, on basis the Diageo offer price, the respondent will have raised atleast ₹ 432 crores, for which there is absolutely no explanation forthcoming as to the justification for such a sale or deployment of its proceeds. The said conduct of the respondent is sufficient to reject the application. They have specifically que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leged pledges only 8 may have some right and the extent of validly created pledges would, in any event, be liable to be duly adjudicated upon by the Company Court. They also accuse the respondent for failure to furnish the full information to the Court which show that the respondent has more to hide than to disclose to the Court. They have set out the documents and the requisitions which are not produced by the respondent before the Court. They have accused the respondent for material suppression of details with regard to the secured and unsecured creditors. They also contend that the request for production of share purchase agreement and ancillary documentation was not complied by the respondent. They have disputed the valuation of the shares. According to them the method of valuation adopted appears to have generated an erroneous valuation, since for instance a DCF method only considers quantitative factors, and qualitative factors like the value of "control" and "controlling stack" etc. are completely ignored. They pointed out that no valuation report has been filed before the Company Court for ascertainment or verification of the basis, if any, on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et the claims of its creditors, a sum in excess of ₹ 3,130/- crores is capable of being realized, as against ₹ 1,960.21 crores claimed to be the sale proceeds that would be liable to be disbursed in terms of the summary statement filed in the Company Court on 08.04.2013. Such a substantial sum is not liable to be left with the respondent to attribute and /or appropriate in a selective manner, preferring certain creditors over others, as it deems fit. They have also pointed out, a sum of ₹ 20 crores apportioned towards legal fees, which is utterly incredulous and entirely unacceptable. Similarly, a tax liability of ₹ 215.62 crores is also not supported. Further a sum of ₹ 9.80 crores is claimed by way of brokerages, which is again unsupported by any form of demonstration and is contrary to the interests of the creditors. 30. In para No.43 of the statement of objections, they have furnished information regarding the share given in the absence of the agreement dated 09.11.2012, which is being made available to them showing the mode of acquisition of the shares, percent of shares and number of remaining shares. In para No.44, they have also set out the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een invoked, in the absence of which the rights of various secured and unsecured creditors, would have to be determined and it is insufficient for the respondent to come forth and contend that a purported meeting of its pledgees must constitute sufficient basis to permit for a sale of pledged shares to occur. The contents of the Grant Thornton Report are entirely meaningless and unreliable, since it concedes that it has not independently investigated the representations of the respondent. The proposal of respondent depositing lacks bona fides. There is no scope for allowing any fund flow directly to the respondent, from and out of any sale to Diageo, irrespective of the point in time and price which the Company Court adjudicates such sale of shares should occur, if at all, for the benefit of all of the creditors of the respondent. The lack of material particulars forthcoming in relation to information relevant to adjudicate its commercial solvency, evince mala fides on the part of the respondent. They have denied the bonafides of the application and apprehend that if the permission sought for is granted it would seriously affect the interest of the creditors. Particularly, the sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company petitions. 34. Aggrieved by the said order, these petitioners have preferred these appeals. After the passing of the impugned order, the sale of shares was effected and out of the consideration so received payments are made to the creditors in whose favour those shares alleged to have been pledged. Therefore, in the appeal the purchaser as well as those creditors were impleaded as parties. OSA NO. 43/2013 35. OSA 43/2013 is filed by 14 banks seeking to set aside the impugned order passed by the learned Company Judge in Company Application No.437/2013 and other connected applications filed in Company Petition No.122/2012 and other connected matters. The appellants are not parties either to the company applications or the company petitions, complaining that the impugned order has seriously affected the interest, they have preferred this appeal challenging the impugned order. 36. To show their interest in the subject matter in this proceedings, they have produced Master Debt Recast Agreement dated 21.12.2010 entered into between them and Kingfisher Airlines Limited. The total amount sanctioned is ₹ 5598.37/- crores and the total amount due as on 28.02.2013 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to all these banks are set out. However, the learned Company Judge without issuing notice to them, without hearing them as all of them are secured creditors has passed the impugned order and permitted payment to the so called secured creditors excluding these Banks. On coming to know the said order, immediately, they filed applications for impleadment and also filed two applications on 06.07.2013 requesting the learned Company Judge to direct the applicant forthwith to deposit before the Hon'ble High Court the entire sale proceeds realized from the sale of shares of USL 13,612,591 equity shares and consequently, for a direction that the said amount be released to the appellants. In the other application, an order of ad-interim order restraining the appellants from paying any part of the amount realized from sale of USL 13,612,591 equity shares to the alleged pledgers/charge holders (alleged secured creditors) was sought. However, in spite of the said applications pending before the Court, it transpires that the payment has been made to those creditors. They were necessary parties to the proceedings. They are disputing the pledges in favour of the secured creditors. The orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sale consideration directly on the ground that those shares had been pledged in their favour, by mere relying on the entries in the balance sheet and without following the procedure prescribed under the Companies Act before such payment could be made. Lastly she contended that admittedly, the value of the shares which were permitted to be sold were listed in the National Stock Exchange and the market price of the share was ₹ 2,340/-, whereas, it was permitted to be sold at the rate of ₹ 1,440/-, the rate actually agreed upon on 09.11.2012. Further it was contended that it is not a mere case of selling of shares. It is a case where the purchaser of shares wanted to have controlling interest in the Company and therefore in those circumstances, it is not mere value quoted in the Stock Exchange, which should be the criteria in deciding the value of the shares. Seen from that angle, the shares worth ₹ 2,340/- has been sold at ₹ 1,440/- and the number of shares sold is roughly about Rs.One crore and thereby the interest of the creditors is seriously jeopardized and the Company Court ought not to have granted permission. For the aforesaid reasons, she submits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that such a narrow construction would affect the working of a company which is facing a winding up petition. Courts have been given the power to grant such permission of transfer, even before the winding up order is passed which stands to reason. Further he submitted that when it is held that even before the order of winding up is passed by the Court, such a power could be exercised when a petition is presented before the Court and it is not necessary that before such power could be exercised, the petition should be admitted or advertised. In support of his contention he relies on Section 441 of the Companies Act, which says "Commencement of the winding up by Court", where it has been held that the winding up of a company by the Court shall be deemed to have commenced at the time of the presentation of the petition for the winding up. He further contended that Rule 9 of the Company Rules 1959 confers on the Company Court the inherent power to give such directions or pass such orders as may be necessary for the ends of justice or to prevent the abuse of the process of the Court. Therefore, when Section 441 of the Companies Act makes it clear that the commencement of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. He also pointed out that all the three authorities also applied their mind regarding the valuation of shares and only being satisfied that it is above the minimum prescribed, they have granted permission and it is only after obtaining the permission, the shares have been purchased and therefore the said transaction cannot be found fault with. How the respondent dealt with the sale consideration would not in any way vitiate the transaction. They have paid the market price, purchased the shares and wants the Court to hold that it is a bonafide transaction. When permission was granted, their interest is fully protected and this Court should not pass any order which would affect their interest. 44. The learned Counsel appearing for the creditors who have been paid out of the sale consideration contended that they are all secured creditors, shares were pledged in their favour, before sale, their consent was obtained, they gave a conditional consent to the effect that if their amounts were going to be paid, they have no objection for the sale of those shares. Accordingly, after sale of shares, out of the sale consideration, the amount due to them have been paid, which is legitimatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who concluded her arguments. For submission of learned counsel for respondent, list on 27.3.2013." 48. On 27.3.2013 arguments were addressed on behalf of the respondent on the matter of admission of the winding-up petition. Since, the arguments were incomplete, the matter stood for completion of hearing on 28.3.2013. On 28.3.2013 though the matter was listed, it did not reach, hearing was adjourned to 1st April 2013. However, on 1.4.2013 the order sheet reads as under:- "Sri.Udaya Holla, learned senior counsel submits that having regard to the report of Grant Thornton, Ex.R5 enclosed to the affidavit dated 15.3.2013 in CA 1130/12 respondent would make available to the Court a proposal of a scheme for repayment of the dues if granted sometime, while reserving liberty to conclude the arguments on the merits of the matter. In the event of any proposal being filed into court, it is needless to state that the respondent to serve a copy of the said proposal on the learned Counsel for the petitioners in all the connected petitions, well in advance. List on 8.4.2013 in the orders list at 2.30 p.m." 49. Therefore, this order makes it very clear the learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the respondents. List these matters on 26.4.2013." 52. The order sheet discloses that the learned counsel for the parties were heard on the Company Application No. 440/2013 till 8.30 PM on 15.5.2013 during summer vacation and the case was reserved for orders. 53. Thus, it is clear even though the learned Company Judge heard the counsel for the petitioner completely and the counsel for the respondent partly regarding admission of the Company Petition, without passing an order for admission he entertained the application filed under Section 536(2) of the Act and has passed the impugned order. Therefore, the question for consideration is, whether such an application was maintainable even before the Company Petition was admitted. 54. Section 536(2) reads as under:- "536 Avoidance of transfers, etc., after commencement of winding up - (1) In the case of a voluntary winding up, any transfer of shares in the Company, not being a transfer made to or with the sanction of the liquidator and any alteration 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 the Tribunal, any dispo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he winding up order. If that were the true effect of the section, the present case would demonstrate that the section is ill designed to meet a kind of risk to the creditors of a company against which one would have expected it to be intended to protect them. He has therefore held that the Court has jurisdiction to make an order "not with standing that no winding up order has yet been made". 57. The law on the point has been stated as follows in Palmer's Company Law, twenty-first edition, page 770: "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." 58. A Full Bench of the Rajasthan High Court in the case of B. GOPAL DAS AND OTHERS .VS. KOTA STRAW BOARD(P) LIMITED [1972 WLN 35] interpreting Sub- section(2) of Section 536 of the Companies Act, 1956 has held as under:- "Section 441(2) provides that the winding up of a company by the Court shall be "deemed" to commence at the time of the presentation of the petition for the winding up. The effect of sub-Section(2) of Section 536, in a case like t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 pendency of a winding up petition if the company has a genuine case requiring early consideration. It has to be appreciated that while this view is advantageous to the company in as much as it saves it from that difficulty or predicament which leads it to the proposed disposition, it does not harm the interest of the creditors from any unfortunate result which many ensue from an eventual winding up order in as much as the same Court, which has the authority to validate the disposition after the winding up order, examines the merits of the disposition at the very out-set. The extent of the eventual protection to the creditors is not therefore mitigated and is available in either case. We are accordingly of the opinion that the Court has jurisdiction to authorize a disposition of the company's property during the pendency of the winding up petition. 59. This Court in the case of MANDYA NATIONAL PAPER MILLS LTD., VS. RAI BAHADUR SHREERAM DURGAPRASAD PRIVATE LTD reported in 1967 Company Cases Vol.XXXV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RADEESH RUBBER PRIVATE LIMITED, BANGALORE AND ANOTHER [1992 (3) Kar. L.J.604] has held as under :- "11. Learned counsel referring to Section 536(2) of the Companies Act has submitted that no transfer of the assets during the pendency of the winding up of petition should be effected. As per Section 536(2) in the case of 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. Thus, it clearly indicates that the Court has power to order transfer or to sell the assets of the company when the winding up petition is pending. There is no inherent indication in the section so as to warrant the conclusion that this power can be exercised only after the winding up order is made. It is difficult to spell out the limits on the jurisdiction of the Court from the opening words in the section viz., "in the case of winding up" so as to mean that only if the company is ordered to be wound up. It would be reading more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy of the creditors, such disposition of properties of the company after commencement of the winding up can be sanctioned if it is necessary in the interest of the company also." 63. The raison-d'etre of these provisions is to prevent disposition of the property of the company made after presentation of the petition for compulsory winding up, without permission of the Court, with a view to avoid fraudulent preferences and to prevent other abuses attendant on transfer of assets of the company in contemplation of its liquidation. The main purpose of the Court's jurisdiction under this sub-section is to ensure that a company is not hampered from carrying out transactions which benefit those interested in the value of assets. The mere presentation of a winding up petition by a share holder or a creditor should not be allowed to interfere with the director's management of a company affairs under this sub- section. The presentation of a petition for winding-up does not by itself disable a company from carrying on its business. Companies in the ordinary course of business have to carry out transactions involving disposition of properties as an incident of their business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. However, it will not allow the assets to be disposed of at the mere pleasure of the company and thus cause the fundamental principle of equality amongst creditors to be violated. To do so in effect would be to add to the preferential debts enumerated in Section 230, a further category of all debts which the company might choose to pay wholly or in part. Thus, the principle that can be deduced is that if the transactions have been undertaken under compulsion of circumstances, in order to save or protect the property of the company, such transaction could be saved provided evidence is produced about such compulsion. It is for enabling the company to continue as a going concern and to protect the interest of shareholders and creditors that such a power is conferred and must be exercised. 65. Therefore, even before an order for winding up is passed, the Court may find it necessary to make appropriate interim orders either for the protection of the company or for the protection of any of the creditors of the company. In such circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, Rule 96 provides that, it shall be posted before the Judge in Chambers for admission of the petition and fixing a date for the hearing thereof and for directions as to the advertisements to be published and the persons, if any, upon whom copies of the petition are to be served. The Judge may, if he thinks fit, direct notice to be given to the company before giving directions as to the advertisement of the petition. Rule 98 provides that, every contributory or creditor of the company shall be entitled to be furnished by the petitioner or by his advocate with a copy of the petition within 24 hours of his requiring the same on payment of the prescribed charges. Subject to any directions of the Court, Rule 99 provides that, the petition shall be advertised within the time and in the manner provided by Rule 24 of these rules. The advertisement shall be in Form No. 48. Once a petition is admitted and advertised, the petition for winding up shall not be withdrawn without the leave of the Court. If an application is filed for leave to withdraw a petition for winding up which has been advertised in accordance with the provisions of Rule 99 it shall not be heard at any time before the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order. A petition for winding up cannot be placed for hearing before the Court, unless the petition is advertised; that is clear from the terms of R.24(2). But that is not to say that as soon as the petition is admitted, it must be advertised. In answer to a notice to show cause why a petition for winding up be not admitted, the Company may show cause and contend that the filing of the petition amounts to an abuse of the process of the Court. If the petition is admitted, it is still open to the Company to move the Court that in the interest of justice or to prevent abuse of the process of Court, the petition be not advertised. Such an application may be made where the Court has issued notice under the last clause of R.96, and even when there is an unconditional admission of the petition for winding up. 70. Therefore it is clear that, when a petition is filed before the High Court for winding up of a company under the order of the Court, the High Court (i) may issue notice to the Company to show cause why the petition should not be admitted; (ii) may admit the petition and fix a date for hearing, and issue a notice to the Company before giving direction about advertisement of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, or that the company has no assets. (2) Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. (3) Where the petition is presented on the ground of default in delivering the statutory report to the Registrar, or in holding the statutory meeting, the Tribunal may - (a) instead of making a winding up order, direct that the statutory report shall be delivered or that a meeting shall be held ; and (b) order the costs to be paid by any persons who in the opinion of the Tribunal, are responsible for the default." 72. A reading of the aforesaid Section makes it clear that, in a petition for winding up, after hearing the winding up petition, the Court can dismiss the petition or make an order for winding up the Company, adjourn the hearing or make an interim order that it thinks fit and any other order that it thinks fit. Therefore, the orders which could be passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency; or may sound only in damages, or for some other reason may not bear a certain value. Section 529 deals with application of insolvency rules in winding up of insolvent companies. Section 530 deals with preferential payments. Section 529A which was inserted by Act No. 35/1985 which came into effect from 24.5.1985 provides that, the workmen's dues and debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu that such dues shall be paid in priority to all other debts. The aforesaid debts payable shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. These provisions are held to be mandatory. Therefore, the Court while exercising its inherent power cannot issue any directions contrary to these mandatory provisions. Similarly, the Court while passing an order under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisement has been issued, calling upon all the creditors to appear before the Court on a date fixed for hearing of the petition. It is only thereafter the Company Court gets the jurisdiction to hear an application filed by the Company for such permission. Otherwise it would run counter to the object with which this power is conferred on the Court. The fundamental principle that must be borne in mind is that the assets of the company should be made available for distribution pari passu amongst the creditors of the company and that no creditor should obtain an advantage over his fellow creditors. In considering whether to make a validating order the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced. The Court's discretion under this section should be exercised in the context of the provisions of this Act relating to winding up and the court should not, in the exercise of the discretion, validate a transaction which results in a pre- liquidation creditor being paid in full at the expense of other creditors, unless to do so would benefit the unsecured creditors as a whole. Otherwise the said provision may be abused by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts let us consider whether the transaction in question is a bona fide one and in the interest of the Company as well as creditors of the Company. 77. The purpose behind sub-section (2) of Section 536 is to prevent improper disposition or dissipation of property so as to affect the assets otherwise available for distribution among the creditors of a company in winding up. Dispositions of the company's property, including actionable claims, made after the commencement of the winding-up are void unless the Court otherwise orders. Any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the Court under Section 536(2). The provisions of sub-section (2) while declaring generally that transactions after the commencement of the winding up are void, leave jurisdiction to the Court to make appropriate orders in bonafide cases which demand protection on equitable considerations. 78. Parliament has used the words "unless the Court otherwise orders" to dilute the rigour of the word "void" by conferring a power on the Court to protect a bona fide transaction. The expression 'unless the Court otherwise order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods." 81. The nature of the proceedings is brought out by the Chancery Division in Re CRIGGLESTONE COAL COMPANY LIMITED at page 331 as under: "A creditor who obtains judgment, and issues execution at law, has a legal right to the means of satisfying his judgment. Subject to qualifications, one of which rests in the fact that the language of the Act is "may" and not "shall", and to the reservation which Lord Cranworth made, and subject to what I shall presently say as to the representative position of the petitioner, it seems to me that the petitioning creditor has, as between himself and his debtor, a similar right ex debito justitiae to seize his debtor' assets by the hand of a liquidator and administer them for the benefit of his class. There are cases in which such an order has been refused on the ground that there were no assets to seize. In my judgment this is no exception to or qualification of the right. It is only affirming that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On that basis, any business would practically have to be stopped if a petition was presented, because it would be unsafe to dispose of any of the company's assets. Any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the court under Section 227(2). It will not allow the assets to be disposed of at the mere pleasure of the company and thus cause the fundamental principle of equality amongst creditors to be violated. To do so would in effect be to add to the preferential debts enumerated in Section 230 a further category of all debts which the company might choose to pay wholly or in part. 83. In the case of KANCHAN KUMAR DHAR, OFFICIAL LIQUIDATOR VS. DR.L.M.VISARAI AND OTHERS reported in 1986 Company Cases Vol.60 746, it has been held as under: "the question is not 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. If the answer to this is in the negative, then the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter the High Court should have in exercise of its powers under Section 536(2) of the Indian Companies Act validated the repayments. Insofar as the payments which have been made after the winding up order was passed, the appeal against the winding up order having been dismissed, it is futile to contend that any payments made during the interregnum should be validated. There is also no evidence to show that these payments were made in a bona fide manner under a commercial compulsion in the course of transactions necessitated for the running of the business. There is nothing to show that if the payments to the appellant-society were not made the business could not have been run. In fact, the running of the business would result in loss of liquidity and its operations would have been hampered by making these payments. It is not shown that there was any compulsion and the payments were made either in order to save the property from being sold or that there was any commercial compulsion. Under the circumstances, the view taken by the High Court must be confirmed. 87. A Division Bench of this Court in the case of A.V.KRISHNA -VS- KARNATAKA LEASING AND COMMERCIAL CORPORATION LIMITED r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew is taken the business of the company would be paralyzed, for, the company may have to deal with very many day-to-day transactions, make payments of salary to the staff and other employees and meet urgent contingencies. An interpretation which could lead to such a catastrophic situation should be averted. That apart, if any such view is adopted, a fraudulent company can deceive any bona fide person transacting business with the company by stage managing a petition to be presented for winding up in order to defeat such bona fide customers. This consequence has been correctly voided by the Division Bench in the impugned judgment. 89. The High Court of Madras in the case of ICICI VENTURE FUNDS MANAGEMENT LIMITED vs NEPTUNE INFLATABLES LIMITED [(2005) 6 COMP LJ 420 (MAD)] has held as under:- "......On the facts of this case, the provisions of Sub-Section (2) of Section 536 cannot be made applicable and, consequently, the contention of the official liquidator that those judgments are applicable only to day-to-day transactions-is not acceptable, as the judgments of the Supreme Court apply to all bona fide transactions of the company and could not be limited only to the day-to-d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies as an incident of their business activities. These transactions are not foreclosed, for to hold otherwise would bring the business to a grinding halt. The law would not permit such a consequence by disabling a company from attending to business in the ordinary course merely because a petition for winding-up is instituted. The law recognizes this position and the practical necessity for a company against which a petition for winding-up has been presented to continue its business. 92. The Madras High Court in the case of K.PERIASAMY GOUNDER V. KOTHARI INDUSTRIAL CORPORATION LTD. AND KOTAK MAHINDRA BANK LIMITED reported in 2010(1) CTC 62 has held as under: "Therefore, a Survey of the English as well as Indian decisions on the issue shows:- (i) that the disposition made or sought to be made, must be honest and bona fide; (ii) that the transaction is in furtherance of the Company's business/interest and in the interest of the creditors; and (iii) that no creditor should obtain an advantage over his fellow creditors." "......This Court also observed that the fundamental principle to be borne in mind is that the assets of the Company should be made av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple that all unsecured creditors are to be paid pari passu. The transaction in question has to be in the interest of the business of the Company or in the interest of the Company in liquidation or its creditors. The Legislature by omitting to indicate any particular principles which should govern the exercise of the discretion vested in the Court must be deemed to have left it entirely at large and controlled only by the general principles which apply to every kind of judicial discretion. 95. It is in this background, we have to see whether the transaction in question is a bona fide transaction, keeping in mind the interest of the Company and its creditors. The answer to the question has to be in the negative for the following reasons: 96. Firstly, dealing with the question, adjudication over pledges of shares in favour of SBI and J&K Bank Limited, the learned Company Judge declined to go into the question on the ground that the disposal of the shares by the pledgees if ought to be declared as void, the said pledges/financial institutions are to be heard, but they are not parties to the proceedings. He left the said question to be decided while making an order of winding-up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds received from DIAGEO on the United Spirits (USL) deal. Exact mechanism and quantum can only be decided only after meeting with DIAGEO and their advisors which are scheduled on February, 19/20th when the DIAGEO's CEO will also be in India as part of the Prime Ministerial Delegation from the United Kingdom to India. This is because DIAGEO will be obligated to comply with SEBI regulations and conditions, if any, imposed by the Competition Commission of India and sale of United Spirits Limited shares to them is the only source of funds for United Breweries Group resulting from the binding DIAGEO transaction. He requested the Consortium of Banks not to precipitate any action to sell the pledged USL share in the market which will seriously derail the transaction with DIAGEO. The Company during the pendency of the Company Petition entered into correspondence with the SBI and some creditors seeking their consent for such sale of shares. It is alleged that such a consent was obtained including SBI. The correspondence which is now produced by Diageo and Associates clearly demonstrate that there was correspondence between the Company and the State Bank of India with reference to the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was handed over to the Court in a sealed cover. The learned Company Judge opened the sealed cover, looked into it and held that, having scrutinized the terms and conditions of the SPA, a copy of which is placed before the Court, material particulars as set out therein are reflected in the PA and regard being had to the term of confidentiality, the imprimatur of the Competition Commission of India on 26.2.2013, Annexure-A, the Securities and Exchange Board of India on 31.1.2013, Annexure-B, and the Reserve Bank of India on 21.3.2013, Annexure-C, cannot but be said that no prejudice is caused to the respondent by not being furnished with a copy of the SPA. The contention to the contrary is without merit. What merits consideration is the fact that permission for sale of shares numbering 13,612,591 of USL are encumbered/pledged in favour of reputed financial institutions, for securing loans to carry on the applicant's business, as indicated in the annual report for the financial year 2011-12 and, therefore, he granted the permission. 99. The petitioners have brought to the notice of this Court, a letter of offer sent to public shareholders of United Spirits Limited, informing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of natural justice is violated. The learned Judge looked into the documents and made the contents of the document as the basis for an order, which is against their interest. It is yet another attempt on the part of the Company to keep the creditors in dark and in particular the petitioners who were before the Court, which demonstrates that the transaction which the Company was entering into is not a bona fide one and there is more than that meets the eye. The learned Company Judge was not justified in denying inspection of the aforesaid agreement. This admitted facts vitiates the order granting permission and renders it liable to be set aside. 103. Thirdly, JM Financial Institutional Securities Private Limited issued the said public announcement under Regulation 15(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 for and on behalf of Relay B.V. together with Diageo Plc to acquire 37,785,214 equity shares of the United Spirits Private Limited (USL). The offer price was ₹ 1,440/- per share calculated in accordance with Regulation 8(2) of the SEBI (SAST) Regulations. Column No.4 gives the details of selling shareholders. It reads as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready for closing and integration. Having completed the share purchase, we will now begin the work to identify and capture the significant growth opportunities within this attractive market". 106. In the Capital Market dated July 5, 2013 under the heading "United Spirits hits record high after Diageo Hikes Stake", it is published that Diageo acquired shares from United Breweries (Holdings) (UBHL), K.F Invest (a subsidiary of UBHL), Palmer Investment Group and UB Sports Management Overseas (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees). Shares owned by the USL Benefit Trust, which were part of the original transaction announced on 9 November 2012 and which represent 2.38% of the enlarged issued share capital of USL, were not part of the sale and purchase announced on Thursday. If the release of all security interests over these shares is obtained they will be purchased separately at a later stage. Diageo said it is the major shareholder in USL after the completion of transaction. Last year, Diageo had announced that it would pick up 53.4% stake in USL in a multi-structured deal. Instead, it now has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncing its agreement to enter into such Joint venture on 28 January 2013. Following today's completion of USL Transaction, the near-term priority of Diageo and Dr Mallya is the integration of USL into Diageo group. Once that is successfully under way, Diageo and Dr Mallya will explore the opportunity of extending their relationship into other emerging markets in Africa and Asia (excluding India) through a further Joint venture relationship on terms and with a scope as yet to be determined. It is not certain whether such a Joint venture will be established or, if so, on what basis. If this wider emerging markets joint venture is established, it is expected that the South African Joint venture would be contributed to it." This parallel arrangement is exacerbated by the 2006 Annual Report of Respondent no.1 indicating divestiture of respondent No.1's interests in the South African brewery business. 108. Another key parallel transaction whereby guarantee facilitation to the tune of US$135 million was agreed to be arranged by Diageo Holdings Netherlands BV, an affiliate of the Diageo Group, for the benefit of respondent No.2's Formula One Racing team Interests held/con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No.1 should not have beeen permitted to receive and/or disburse proceeds of the sale of its USL shares to respondent Nos.4 and/or 5 with minimal fetters, until investigation into the diversion of ₹ 4000 crores was complete, particularly in view of the lack of confidence of the general body of creditors of respondent No.1. 110. Therefore, when the Company Court is hearing an application for permission to sell the assets of the Company, even if that is required to carry on day-to-day business of the Company, it is of utmost importance that all the materials showing the conduct of the Company should be before it. There should be total transparency in the transaction of the Company. Then only the Court will be able to appreciate, whether it is a bona fide transaction. The Court has its own limitations. That is the reason why such a request has to be considered after advertisement and appearance of all the creditors who will be in the know of things and who will be able to place on record the relevant material on the basis of which the Company Court can form its opinion. 111. The learned Company Judge dealing with Scottish Distillery "WHYTE" and "MACKAY", S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of Diageo is not an isolated transaction. It is a scheme under which Diageo was acquiring a substantial portion of shares in USL so as to have a controlling interest in the affairs of the USL. In those circumstances, the price quoted in the National Stock Exchange cannot be the guiding factor. Even otherwise, the rate at which the shares are sold is far less when compared to the rate at which the shares were sold on the day the permission was made and the day the impugned order came to be passed granting such permission. 114. Per contra, it was contended by the learned counsel for the respondent-Company that, the sale of the shares by the applicant in favour of the DIAGEO is in the course of its business as it is an investment company. Prior to their entering into the contract with DIAGEO for a period of nearly one year, the value of the USL shares was hardly around ₹ 762/-. On the day they entered into the agreement it was ₹ 1360/-. Therefore, they agreed to sell the shares at ₹ 1440/- per equity share. Once it became public that DIAGEO is acquiring the shares from others thereby getting a control of USL, the share prices went up to ₹ 2320/-. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling interest in the Company. It is a case of divesting the respondent's interest in USL which has substantially helped the Diageo in acquiring controlling interest. Therefore, it is not done in the course of ordinary business. Though the price quoted on the Stock Exchange is a factor which should be taken note of at the time of valuation of shares, it is not decisive and conclusive. In a transaction of this nature when the Company was divesting its substantial portion of the shares which has resulted in acquiring controlling interest by the purchaser, the valuation by an approved valuer should have been insisted upon. As is clear from the material on record, the shares which was quoted at ₹ 762/- one year prior to the agreement rose up to ₹ 1,360/- in a span of one year without any marked change in the net worth of the USL. If the case of the respondent is to be believed the mere fact that Diageo is negotiating for purchase of shares pushed the value of the share, then on the face of it, it is a case of mere speculation and the said value did not truly represent the value of the shares and the worth of the Company. Further, the learned Company Judge has recorded a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated after the filing of the Company Petition, they do not prima facie qualify for repayment. According to him, in order to effect repayment to the pledges, it is required of the applicant, who admits to have made pledge of shares after 31.3.2012 to establish transaction bona fide entered into and completed in the ordinary course of trade. To be protected, the disposition should have been made for the purpose of preserving the business as a going concern. Further it held, regard being had to the nature of business of the Company and the on going projects of construction activity over its immovable properties, it is possible that the Company may have bona fide, for preserving the business, pledged shares in USL with reputed financial institution. But merely because pledge of shares of USL is made by the applicant in favour of the aforesaid institutions, does not mean that the disposition during the pendency of the Company Petition calls for validation. 118. Therefore, the learned Company Judge makes a distinction between pledges before the filing of the petition and pledges after the filing of the petition and records a finding that the pledges made prior to the filing of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company at the stage when the company is wound up. Further, the said order violates the fundamental principle that the assets of the Company should be made available for distribution pari passu amongst the creditors of the Company and that no creditor should obtain an advantage over his fellow creditors. Certainly the creditors who are not before the Court and who are now paid the entire amount due to them, are placed in an advantageous position over the other secured creditors and unsecured creditors including the petitioner. Therefore, the order passed by the learned Company Judge is contrary to the statutory provisions as well as the spirit behind the said provisions, as such it is illegal and requires to be set aside. 120. In the course of the hearing of the appeal it is not disputed by the parties that in pursuance of the impugned order, the Company has sold the shares and realized the amounts and in fact discharged all the secured creditors in whose favour the shares were pledged prior to the filing of the petition. The material on record discloses that, the purchaser-Diageo was aware of the pendency of the proceedings, the application made by the Company for permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the respondent-Company as per the audit report submitted by the respondent in pursuance of the direction No.III in the operative portion of the impugned order in the fixed deposit in Lakshmi Vilas Bank pending the final disposal of the appeal on merits. 122. In the interim order dated 22-07-2013 passed in OSA No.25 of 2013, this Court has directed, in the interest of the creditors, in addition to the conditions imposed and directions contained in clause (iv) of the impugned order of the learned Company Judge, that the respondent-Company should not in any way sell, transfer, part with possession or do any act in respect of all other assets of the Company, pending further order in this appeal. 123. Now that we have held that the impugned order granting permission to sell the shares is without jurisdiction and is setting aside the said order, in view of the subsequent events which has transpired as set out above, it is necessary for this Court to protect the interest of the Company, its creditors, its shareholders as well as the purchasers of the shares. Hence, we pass the following order. ORDER 1) Appeals are partly allowed 2) The impugned order granting permission to sell 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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