COMA/157/1999 1/30 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD COMPANY APPLICATION No. 157 of 1999 In COMPANY PETITION No. 126 of 1990 with COMPANY APPLICATION No. 191 of 1999 In COMPANY PETITION No. 126 of 1990 with COMPANY APPLICATION No. 292 to 296 of 1999 In COMPANY PETITION No. 126 of 1990 with COMPANY APPLICATION No.342 of 1999 In COMPANY PETITION No. 126 of 1990 with COMPANY APPLICATION No. 447 of 1999 with COMPANY APPLICATION No. 454 of 1999 with OJ CIVIL APPLICATION No. 205 of 1999 with COMPANY APPLICATION No. 315 of 2000 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL ============================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ============================================================== STAR CHEMICALS (BOMBAY) LTD. - Applicant(s) Versus VITTA MAZDA LTD. & 1 - Respondent(s) ============================================================== COMA/157/1999 2/30 JUDGMENT Appearance : MS DARSHANA S PANDIT for Applicant(s) : 1, MR RM DESAI for Respondent(s) : 1, NOTICE SERVED for Respondent(s) : 2,4 - 5, 9, NOTICE UNSERVED for Respondent(s) : 3,6 - 8. ================================================================== CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL Date : 24/11/2005 ORAL JUDGMENT 1.Since in all the applications the common question arises for consideration, they are being considered by this common order. 2.Company Application No.157 of 1999 is for validating 9 sale transactions entered into between the Company for the aggregate value of Rs.3,95,000/- against the decretal amount of Rs.17,20,000/- and such validation is prayed under Section 536(2) of the Companies Act, 1956 (hereinafter referred to as “the Act”). The applicant has also prayed for directing the Official Liquidator not to interfere with the possession of the property by the applicant. As per the applicant, the applicant had to recover the amount and the suit was filed being Summary Suit No.1698 of 1993 before the High Court of Bombay and in the said Suit a consent decree was passed on 27.6.1993. Based on the said consent decree, the applicant preferred execution COMA/157/1999 3/30 JUDGMENT proceedings before the High Court of Bombay and it is the case of the applicant that in the said execution proceedings as per the precept, the 9 plots in question being Survey No.78 were attached by the Court and thereafter pending the said proceedings the company M/s.Vitta Mazda Limited (hereinafter referred to as “the Company in liquidation) agreed to execute the sale deed for the consideration of Rs.3,95,000/-. The Company is ordered to be wound up on 27.9.1998 by this Court in the proceedings of Company Petition No.126 of 1990 and No.212 of 1994. However, as per Section 441(2) of the Act, the order of winding up has the effect from the date of filing of the petition which would be 14.8.1990 in view of the proceedings of the Company Petition No.126 of 1990 and, therefore, the present applicant has preferred this application. It may also be recorded that the applicant has stated in the application that initially the applicant did file Company Petition No.49 of 1991 and No.58 of 1993 for winding up of the Company and as per the applicant, Company Petition No.49 of 1991 was admitted in the year 1991 and the order was also passed for advertisement in the Time of India and Gujarat Mitra. It is also stated by the applicant that pending the said proceedings, Company Application No.355 of 1993 was COMA/157/1999 4/30 JUDGMENT preferred in Company Petition No.49 of 1991 by the applicant, restraining the Company from making any right issue of shares and further injunction from accepting money. However, with the consent of both the sides, as the parties were desirous to settle, the matter was adjourned to 19.5.1993. The aforesaid makes it clear that the applicant Company was aware about the proceedings of the winding up initiated by itself before this Court. 3.Company Application No.191 of 1999 is preferred for the relief to validate the transaction of sale of sub-plot No.126 of Final Plot No.78 admeasuring 4231.86 sq. ft. (394.14 sq., mtrs.) dated 30.11.1993 for the consideration of Rs.63,000/-. As per the application, the first applicant is a house-wife and the second applicant is the son of the first applicant, who is a practising Chartered Accountant at Mumbai. 4.Company Application No.292 of 1999 is for validation of the transaction entered into between the company in liquidation and the applicant for the aggregate value of Rs.4,20,000/- against the decretal amount of Rs.10,61,727/- and consequently the sale deed for the sale of the land of the Plots bearing Survey No.78/203, 78/226, 78/231, 78/227, 78/238, 78/225 and 78/239 of Village Katira, Nani Daman by the Company in COMA/157/1999 5/30 JUDGMENT liquidation. As per the present applicant, the applicant was aware that the company application No.85 of 1989 was preferred for winding up of the Company and the applicant had also preferred application for substitution in place of the petitioners of the Company Petition No.85 of 1989 by preferring the Company Application No.26 of 1990 and as per the applicant, the Company Petition for winding up was admitted in the year 1992 and the orders were passed for advertisements. As per the applicant, the aforesaid proceedings Suit No.2273 of 1990 was filed before the High Court of Bombay and in the said Suit a settlement was arrived at and consent decree was passed and it is the case of the applicant that out of the said settlement properties of the Plots of the company are conveyed by registered sale deed in favour of the applicant. 5.Company Application No.293 of 1999 is preferred for validating the transaction entered into between the Company in liquidation and the applicant for a value of Rs.60,000/- against the decretal amount of Rs.10,61,727.58 in Suit No.2273 of 1990 and consequently for the sale of the property bearing Survey No.78/226 at Village Katira, Nani Daman. The applicant has also prayed for directing the Official COMA/157/1999 6/30 JUDGMENT Liquidator to hand over the possession of the property to the applicant. The stand of the applicant is more or less at par with the applicant of Company Application No.292 of 1999. 6.Company Application No.294 of 1999 is preferred for validating the transaction entered into between the respondent Company and the applicant for Rs.60,000/- against the decretal amount of Rs.10,61,727.58 in Suit No.2273 of 1990 consequently for the Plot bearing Survey No.78 and the applicant has also prayed for directing the Official Liquidator to hand over the possession of the Plot bearing Survey No.78/227 at Village Katira, Nani Daman. The stand of the applicant is more or less at par with the applicant of Company Application No.292 of 1999. 7.Company Application No.295 of 1999 is preferred for validating the transaction of Rs.60,000/- between the Company and the applicant against the very decretal amount in Suit No.2273 of 1990 and consequently for the sale of the property bearing Survey No.78/231 at Village Katira, Nani Daman and the applicant has also prayed to direct the O.L., to hand over the possession of the Plot to the applicant. The stand of the applicant is more or less at par with the applicant of Company Application No.292 of 1999. COMA/157/1999 7/30 JUDGMENT 8.Company Application No.296 of 1999 is preferred for validating the transaction of Rs.60,000/- for the very decretal amount in Suit No.2273 of 1990 and consequently for conveying the property bearing Survey No.78/230 at Village Katira, Nani Daman and the applicant has also prayed for directing the Official Liquidator to hand over the possession of the plot to the applicant. The stand of the applicant herein is more or less at par with the applicant of Company Application No.292 of 1999. 9.Company Application No.342 of 1999 is preferred for validating the transaction entered into between the applicant and the Company in liquidation for Rs.60,000/- for the very decretal amount in Suit No.2273 of 1999 and consequently for the sale of the property bearing Survey No.78/225 at Village Katira, Nani Daman and the applicant has also prayed for directing the O.L., to hand over the possession of the plot in question to the applicant. The stand of the applicant is more or less at par with the applicant of Company Application No.292 of 1999. 10.Company Application No.315 of 2000 is preferred by the applicant for validation of the transaction of sale deed between the applicant and and the company in liquidation of sub-plot No.92 of Plot No.78 admeasuring COMA/157/1999 8/30 JUDGMENT 2421.36 sq., ft. (224.95 sq., mtr.) of Village Katira, Nani Daman and the applicant has consequently prayed for directing the O.L., to hand over the possession of the plot to the applicant. The first applicant is a house-wife and the second applicant is the husband of the first applicant and a practising Chartered Accountant at Mumbai. As per the applicant, on account of the winding up proceedings of Company Petition No.126 of 1990 and the order passed by this Court for winding up of the Company in liquidation and taking effect from the date of presentation of the petition being Company Petition No.48 of 1990, the present application is preferred for validation of the transaction. 11.Company Application No.447 of 1999 is preferred for validation of the transaction of the sale by the company in liquidation of the land admeasuring 332.46 sq., mtr., bearing Survey No.78, Block No.25 and the applicant has consequently prayed for declaration for the said property does not belong to the company in liquidation and the Sub-Registrar be directed to register the sale deed made between Shri Karsanbhai B. Tandel and the present applicant. The case of the applicant is that on account of the winding up proceedings taking effect from the year 1990, the COMA/157/1999 9/30 JUDGMENT present petition is preferred for validation of the transaction and for relief prayed for in the application. 12.Company Application No.454 of 1999 is for the relief of validation of the transaction and for the declaration that the property bearing Survey No.78 peki Block No.46, admeasuring 3118 sq., mtrs., situated at Village Katira, Nani Daman is not the property of the company in liquidation and the basis in the application is that on 14.2.1992 the property was purchased by the applicant from the company in liquidation by registered sale deed and on account of the winding up proceedings taking effect from the year 1990 in the proceedings of Company Petition for winding up, the present petition is preferred. 13.Civil Application No.205 of 1999 is for joining as party by one Keshabhai Bhanabhai Tandel as petitioner No.2 as petitioner No.2 contending, inter alia, that the applicant has purchased the plot of Survey No.78, Block No.25, admeasuring 332.46 Sq. Mtrs., which is subject matter of Company Application No.447 of 1999 from the applicant therein and, therefore, he is affected by the litigation. 14.Heard Ms.Pandit and Ms.Mardavin, learned Counsel appearing for the concerned applicants of the concerned COMA/157/1999 10/30 JUDGMENT applications and Mr.Desai, learned Counsel appearing for the Official Liquidator in all the applications and as such though in some of the applications, the Company in liquidation earlier came to be represented through another Advocate, but as on account of winding up, the Official Liquidator has stepped into the shoes of the Company in liquidation, he is directly affected party and Mr.Desai has represented on behalf of the Official Liquidator for representing the interest of the company in liquidation. 15.Section 536(2) of the Act, which is relevant for the present petition, reads as under: “S.536(2) Avoidance of transfers, etc., after commencement of winding-up: In the case of a winding up by [the Tribunal], 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 Tribunal] otherwise orders, be void.” 16.Therefore, if after the commencement of the proceedings of winding up if disposition of the property of the company has taken place, then unless COMA/157/1999 11/30 JUDGMENT the same is otherwise ordered by this Court, such disposition would be void. There is no dispute on the commencement of the proceedings of the winding up in the year 1990 on account of the winding up order being passed by this Court in Company Petition No.126 of 1990. Hence, the intention of the legislature under Section 536(2) appears to see that no transaction after the commencement of the proceedings of winding up are given lawful effect unless it is otherwise so declared by the Company Court. The major purpose appears to be that once the winding up proceedings having been commenced no preferential payment be permitted by the company, which is facing the winding up proceedings, nor the company who is facing the winding up proceedings may enter into a transaction which may result into giving voluntary preference to any of its creditors which may otherwise not be illegally permissible. Since Section 536(2) of the Act leaves room to the Company Court for declaration of the transaction as valid or legal, it cannot be said that all transactions would be void, but it can rather be said that unless the transaction is declared valid, all transactions would be void. Therefore, declaration of validity of the transaction is to be read as an exceptional category to the normal rule and such COMA/157/1999 12/30 JUDGMENT declaration may fall only if it is established to the fullest satisfaction of the Company Court that the transaction is genuine, bonafide and is not with a view to frustrate the rights of the other creditors. The Company Court while undertaking the exercise for declaring the transaction as valid in normal circumstances would give more weightage to the bonafide of the party who has secured interest by such transaction and whether such bonafide or the transaction is without prior notice of the proceedings of winding up or not would be one of the major crucial tests. So far as the company in liquidation is concerned, once the proceedings of winding up are initiated it can hardly be denied by them that they were not aware of the proceedings of winding up. Therefore, it would be for the party asserting the right as bonafide purchaser or beneficiary of bonafide transaction to assert and establish that since the transaction is bonafide, the same cannot be invalid or rather would be valid to protect his right. Such validation can rather be said as for protecting the equitable interest of the parties. The burden of establishing that the transaction is bonafide would be upon the party who asserts for validation of the transaction. If such burden is not satisfactorily COMA/157/1999 13/30 JUDGMENT discharged, the Court may decline the declaration for validation of transaction. The reference may be made to the decision of this Court in case of “Siddhpur Mills Company Ltd.”, reported in 1987 (61) Company Cases, 756 observing that the Court can validate such impugned transactions in those bonafide cases which demand protection of equitable considerations. 17.Ms.Pandit, learned Counsel appearing for some of the applicants relied upon th decision of Calcutta High Court in the case of “J.Sen Gupta (Private) Limited”, reported in 32 Company Cases, 876 and contended that this Court has an absolute discretion to validate the transaction of the Companies' Assets made after the commencement of winding up process and while exercising the discretion the Court can validate even the transactions which are not entered into in ordinary course of business. If this Court finds that the transaction was for the benefits of all interested of the company, such transaction may be validated by the Court even if it was not made in the ordinary course of business in the company. Ms.Pandit contended that, therefore, if this test is applied as the company was facing proceedings of execution and if the properties are conveyed pending execution proceedings such transactions deserve to be declared as bonafide or this COMA/157/1999 14/30 JUDGMENT Court may validate such transaction as the transaction can be said as in the interest of the company. For supporting her contention she also relied upon the decision of this Court in case of Commercial Ahmedabad Mills Co. Ltd.”, reported in 1986 (60) Company cases, 717 for contending that if the transaction is entered into in normal course of business so that with the help of the borrowing, the company would restart its mill, then such transaction can be said as bonafide transaction entered into by the company. 18.In order to appreciate the contention, the reference can be made to the decision of Bombay High court in case of “Provisional Liquidator, The Godavari Sugars & Refineries Ltd.”, 1954 (24) Company Cases, 149, whereby view taken is that the Court should bear in mind the fundamental principle that the assets of the company should be made available for the distribution on pari passu amongst the creditors of the Company and no creditor should obtain an advantage over the fellow creditors. The reference may also be made to the another decision of Bombay High Court in case of “Monark Enterprises v. Kishan Tulpule and Ors.”, reported in 1992(74) Company Cases, 89. 19.It may be recorded that in case of one of the COMA/157/1999 15/30 JUDGMENT beneficiaries of the transaction by the company in liquidation of Shri Aspi F. Langrana, who is the financial consultant at Mumbai, this Court (Coram: R.R.Tripathi, J.) in Company Application No.213 of 2000 in Company Petition No.126 of 1990, while examining the aspects for validation of the transaction for purchase of the two plots bearing Survey No.14 and 23 situated at the very village Kathiria Nani Daman at paragraphs 17 and 18 observed as under: “17. After hearing both the sides and taking into consideration, the submissions made by all the parties, it is crystal clear that the documents which are produced by the petitioner did not inspire any confidence, more particularly, because the agreement for sale is executed at Bombay on 14th September, 1993 and at that time, in Clause-3, it is stated that, "...Meanwhile, the Purchasers are entitle to use, occupy and possess the said property and the Vendors herein have granted licence to the Purchasers for the same." 18. The certificate produced by the Chartered Accountant at page 63 depicts that amount of Rs.70,000=00 each, totaling to COMA/157/1999 16/30 JUDGMENT Rs. 1,40,000=00, was paid in cash. The Court is not going into the aspect of validity of such transaction which may be held to be invalid on the ground of the amount being paid in cash, for the present, the Court is not to pronounce on the validity of that transaction. The Court is only considering as to whether on assumption that the transaction is true, the Court should grant reliefs as prayed for by the petitioners. In view of the fact that the transaction is subsequent in point of time to the service of notice as stated by Smt. N.J. Patel, Tax Recovery Officer, Valsad, in her affidavit, paragraph 2, and in view of the fact that an order under Section 281(1) is already passed, which is not challenged by filing an appropriate proceeding, and in view of the fact that 'statement of affairs' is not filed by Ex.Directors of the company and 'books of accounts' are not made available, any relief(s) as prayed for can be granted. The answer is 'no'. In the result, this application must fail.” 20.Mr.Desai, learned Counsel appearing for the OL heavily relied upon the aforesaid decision and raised the COMA/157/1999 17/30 JUDGMENT contention that property of the Company in liquidation was under the attachment of the Income Tax Authority in the year 1993 and, therefore, he submitted that if the properties were under the attachment of the Income Tax Authority the transaction could not have been entered into and in his submission the application may be dismissed by this Court since the transaction results into ex-facie illegality since transfer of the property which was under the attachment of the Income Tax Department. He additionally submitted that there was also attachment by the Government Authority for recovery of the revenue dues and, therefore, he submitted that as the action of the Ex-Directors of the Company in liquidation was ex-facie in contravention to the statutory provisions as the transfer was barred, this Court may declare the transaction as invalid or may not validate the transaction as prayed for in the application. 21.It appears that the attachment by the Government Authority or may be by the Income Tax Authority is one of the relevant circumstances which this Court may consider for invalidation of the transaction, since as per law once there is an order of attachment by competent authority, the rights of the owner in the property stands attached and legally the property COMA/157/1999 18/30 JUDGMENT cannot be conveyed in favour of any party. However, such situation does not absolutely take care of the interest of the bonafide purchaser, who may have been duped by the Ex-Directors of the Company, who by non- disclosure of the relevant order of attachment and/or order might transfer the property of the company during the pendency of winding up petition. 22.Therefore, while exercising power under Section 536(2) of the Act, the matter can be broadly summarised as under: (1) In normal circumstances, the transactions entered into after the commencement of the proceedings of winding up are void unless and otherwise declared by the Company Court as valid. (2) The validation of the transaction by the Court would be only in exceptional category and on equitable and just considerations. (3) The transactions entered into in ordinary course of business by the Company for running day- to-day business may stand excluded from the purview of Section 536(2) of the Act and Section 536(2) of the Act would apply to the transactions entered into by the company otherwise than for running its day-to-day business of the company. (4) The burden of proving that the transaction is COMA/157/1999 19/30 JUDGMENT bonafide would be upon the beneficiary of the transaction (5) The Court may at the time when transaction is to be considered for its validation, examine the aspects as to whether such transaction was for conferring additional benefits to the properties of the Company or not. (6) If the Court is satisfied on equitable consideration that the transaction is fully bonafide without notice of the proceedings of winding up, the Court normally would declare such transaction as valid. (7) If the transaction is in breach of any prohibitory order of the competent authority or there were prohibitions against the transfer of the property of the company, then also while declaring the validity of the transaction, the Court may provide for the suitable conditions to make loss good in case the Court is satisfied that the purchaser entered into transaction in bonafide. As the whole exercise of the power is on just and equitable consideration, the Court may also put the company in liquidation to fulfill suitable conditions even if the transaction is to be treated as invalid. COMA/157/1999 20/30 JUDGMENT 23.If the matter is examined in light of the aforesaid principles, it appears that so far as the applicant of Application No.157 of 1999 is concerned, it was fully aware about the proceedings of winding up and not only that but the company itself had also preferred the winding up proceedings. The applicant company is also governed by the provisions of the Act and, therefore, it is difficult to conclude that the applicant Company would not be aware about the consequence of the pending winding up proceedings. The ground as sought to be canvassed of the suit before the Bombay High Court and the consent decree and the execution proceedings, if considered as it is, then also all such proceedings were without leave of the Company