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TMI Blog2022 (3) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... raj, learned counsel for Official Liquidator COMMON ORDER Comp.A.No.859 of 2017 was filed by Zylog Systems Limited (Zylog), represented by its Administrator, and Comp.A.No.359 of 2019 by Quess Corporation Limited (Quess Corp or Purchaser) (formerly known as Ikya Human Capital Solutions Limited). 2. In Comp. A. No.859 of 2017, Zylog prays for setting aside the transfer of 7,000,100 shares of Brainhunter Systems Limited (Brainhunter), which were held by Zylog, to and in favour of Quess Corp. Consequential orders are prayed for in respect of the said 7,000,100 shares. In Comp. A.No.359 of 2019, Quess Corp seeks validation of the purchase of 7,000,100 shares of Brainhunter, which were held by Zylog, upon enforcement of the pledge by ICICI Bank Limited, India (ICICI Bank India) on 23.10.2014. 3. A winding up petition was filed against Zylog in C.P.No.372 of 2013. By order dated 03.07.2014, the Official Liquidator was appointed as the Provisional Liquidator. The said order was carried in appeal before the Division Bench. The Division Bench restrained the Official Liquidator from taking steps to close the company but directed that all administrative decisions be taken with the concurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue and payable are not paid within 15 days of notice, the collateral would be sold by way of private sale. 7. As stated earlier, the Official Liquidator was appointed as the Provisional Liquidator of Zylog on 03.07.2014. Subsequent thereto, by a communication dated 02.09.2014, the Official Liquidator informed the addressees to such communication, including ICICI Bank India, that the Division Bench of the High Court had directed the Official Liquidator to take over all money transactions and accounts of Zylog. In reply to this communication, ICICI Bank India addressed the Official Liquidator on 23.09.2014 and informed the Official Liquidator that the Security Trustee would shortly complete the sale of shares since Zylog failed to make payments as demanded by the Security Trustee. By a further communication dated 27.11.2014, ICICI Bank India informed the Official Liquidator that it is entitled to stand outside the winding up and enforce the security without obtaining the leave of the Companies Court. In these circumstances, Zylog, represented by the Administrator, filed Comp. A.No.589 of 2017 seeking a declaration that the sale of shares is void. About two years later, the Purchaser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator is required to take into custody all the properties and effects of the company concerned immediately upon an order being passed for the appointment of a provisional liquidator. In fact, it was contended that the assets of the company are deemed to be in the custody of the court upon commencement of winding up. The second contention was that it is not in the interest of other creditors and stakeholders that one secured creditor be permitted to enforce a pledge after the winding up commenced and, thereafter, seek validation several years down the line. 11. The Purchaser made submissions to the contrary. The first contention of the Purchaser was that credit facilities were availed of by both by Brainhunter and Zylog. As security for the grant of facilities to Zylog, the lender demanded that a security be created by Zylog. The pledge was provided as security. All the following events: the creation of the security by way of pledge; default by Brainhunter and Zylog; and the invocation of the pledge, preceded the order of appointment of the Provisional Liquidator. Therefore, it was submitted that this is a bona fide transaction by a secured creditor to enforce its security. The Purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to dispositions that were made in the interregnum between the presentation of a winding up petition and the order appointing a provisional liquidator and dispositions made thereafter. It was also highlighted that a winding up order has not been issued in this case till date, and that, therefore, the case for validation is fortified. 14. In support of these submissions, the Purchaser referred to and relied upon the following judgments: (1) M.K.Ranganathan v. Government of Madras and others, AIR 1955 SC 604 (M.K.Ranganathan). (2) Official Liquidator v. Khaja Mohideen, (2022) 230 Company Cases 185 (MAD). (3) International Coach Builders v. Karnataka State Financial Corporation, 2003 10 SCC 482 (International Coach Builders). (4) Pankaj Mehra and Another v. State of Maharashtra and Others, 2000 2 SCC 756)(Pankaj Mehra). (5) Iftex Oil & Chemicals Pvt. Ltd. v. Official Liquidator of Dhake Dyes & Chemicals Pvt. Ltd. and others, (1998 SCC Online Bom 516). (6) V.G.P. Finance Limited v. The Official Liquidator (2013 SCC Online Mad 2914)(VGP Finance). (7) Henkel Chemicals (I) Ltd. v. Garware Nylons Limited, 2015 SCC online 8715. 15. On behalf of ICICI Bank India, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the estate or effects of the company, after the commencement of the winding up; or (b) any sale held, without leave of the court of any of the properties or effects of the company after such commencement, shall be void. (2) Nothing in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government.]" 18. Upon perusal of Section 537, it is evident that it deals with attachment, distress, execution and sale of the estate, properties and effects of a company after commencement of winding up. It further prescribes that any of the above, if undertaken without the leave of the court, after the commencement of winding up, is void. On a textual reading, Section 537 does not exclude secured creditors from its ambit. However, in M.K.Ranganathan, the Hon'ble Supreme Court interpreted Section 232 of the Indian Companies Act, 1913, which is in pari materia with Section 537 of CA 1956. Upon interpreting Section 232, the Hon'ble Supreme Court concluded that it does not apply to a secured creditor and that, therefore, a secured creditor does not require leave under Section 232. The law underwent a significant change, thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or from creditors, including workmen. Therefore, there is no basis to draw the definitive conclusion that there are no workmen. Moreover, in a winding up, the Official Liquidator represents the interest of all the stakeholders of a company, except the secured creditor seeking to enforce the security by standing outside the winding up. For instance, if a suit or other legal proceeding were to be instituted or proceeded with against a company in liquidation, in order to enforce a security or otherwise, the Official Liquidator would represent the company and be entitled to be heard, whether with regard to the valuation of the security interest or otherwise. Even the special legislations referred to in the preceding paragraphs provide for the same. This process cannot be circumvented or bypassed by undertaking a private sale, whether by using a power of attorney or through the Security Trustee, as in this case. Therefore, in the context of a private sale, even de hors the pari passu charge in favour of workmen, in my view, the leave of this Court was necessary. 21. CA 1956 prescribes the leave requirement not only in Section 537 but also in Section 446 (1) of CA 1956. Leave under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money transactions and the accounts pertaining thereto. The consequence of appointing the Official Liquidator as the provisional liquidator is that he takes charge of the assets and affairs of the company concerned. When all the above factors are concerned, the only reasonable conclusion is that the legal fiction also gets triggered upon the appointment of the Official Liquidator as provisional liquidator. 22. The next question to be considered is the consequence of not obtaining leave under Section 537. Section 537 provides that the attachment, distress, execution or sale of the estate, properties and effects of the company in liquidation after commencement of winding up, without leave of the court, is void. In Pankaj Mehra, the Hon'ble Supreme Court held that the sale is not void ab initio by referring to and relying upon the judgment in Kamani Metallic Oxides Ltd. v. Kamani Tubes Ltd, 1982 SCC online Bombay 396. The rationale for concluding that such dispositions are not void ab initio is that the court is conferred with the power of validation and leave, respectively, under Sections 536(2) and 537 of CA 1956. In turn, the rationale for such power is that the company conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same terms or otherwise, if its approval had been sought before the transaction was concluded. Indeed, it may not be advisable to exhaustively catalogue the criteria for validation or the situations in which such power would be exercised as it may not be feasible to foresee all contingencies. Nonetheless, the above may serve as guiding principles. 24. If the above tests were applied to the case at hand, the documents on record reveal that the Facility Agreement between ICICI Bank India and Zylog was executed on 22.12.2010, much before the winding up petition was presented. Such loan was in relation to the grant of credit facilities to its wholly owned subsidiary by ICICI Bank Canada. The Pledge Agreement also preceded the presentation of the winding up petition. The default by Brainhunter, the consequential call on the SBLCs and the demand on Zylog to make payment occurred on or before 16.10.2013. The communication to the Security Trustee dated 28.10.2013 enclosing the acceleration notice was issued one day prior to the presentation of the winding up petition. However, all subsequent communications are subsequent to the presentation of the winding up petition. The notice dated 01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchaser to the Reserve Bank of India (the RBI) and to the Bombay Stock Exchange (BSE) and the National Stock Exchange (the NSE). In its report dated 05.01.2022, the Official Liquidator states that the Purchaser disclosed, in its draft red herring prospectus, that an objection had been raised to the acquisition of Brainhunter on the ground that it was subsequent to the commencement of winding up, but the relevant document is not on record. It should also be borne in mind that the Purchaser is a company incorporated in and carrying on business in India. When these facts and circumstances are considered holistically, the only reasonable inference is that the Purchaser was probably aware that the pledgor was a company in liquidation and, without doubt, had the means to discover the same on exercise of reasonable due diligence. Therefore, either the pledgee or the Purchaser should have requested for leave before enforcing the pledge. 26. Another aspect of significance is that the enforcement of the pledge would ordinarily have entailed the direct involvement of the pledgor. In this case, the necessity to involve the pledgor was obviated by having a power of attorney executed in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding on the valuation methodology or principles so as to protect the interest of the company in liquidation. 29. The status of Zylog, as on date, is significant while deciding on the request for validation. The learned Administrator filed a rejoinder affidavit dated 20.01.2022. In such rejoinder affidavit, it is stated that a final report dated 30.06.2019 was filed by the learned Administrator communicating that options for revival of Zylog were exhausted. In addition, it is stated that it is in the best interests of Zylog that its assets be sold at the earliest by the Official Liquidator. Thus, it is evident that the original plan to revive Zylog did not fructify. 30. The Purchaser says that it invested considerable sums to revive Brainhunter after the acquisition by relying upon the financial statement for the financial year ended 31.03.2021 in contradistinction to the financial statement for the financial year ended 31.03.2014 when the acquisition took place. While the accumulated losses have reduced and the share capital has increased, no definitive conclusions may be drawn since too many variables are at play. Nonetheless, the undisputed position that emerges is that more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchaser within 60 days from the date of receipt of the valuation reports. For avoidance of doubt, it is clarified that any additional costs, taxes, and any other expenses as a result of the revaluation and payments pursuant thereto, whether in Canada or India, shall be to the Purchaser's account and no adjustments in relation thereto are permissible. This is, however, without prejudice to the Purchaser's right to raise disputes, if so advised, with ICICI Bank India in view of this order and its implications, financial or otherwise. Zylog shall be fully indemnified in respect thereof by the Purchaser. The disposition in favour of the Purchaser is validated subject to and contingent on the fulfillment of the above requirements. If the above requirements are not fulfilled, the disposition stands declared ipso facto void. In such event, it is open to the Administrator and the Official Liquidator to file any consequential applications. In order to verify whether the conditions precedent have been fulfilled, upon receipt of the two valuation reports and after arranging for the differential consideration in terms thereof, the Purchaser shall file an application before this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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