Case: IDBI BANK LIMITED THROUGH DGM (LEGAL) Vs. THE OFFICIAL LIQUIDATOR, OFFICE OF THE OFFICIAL LIQUIDATOR OF COMPANIES AND ANR

for this reason, as there were several secured creditors (including SBI) who had still not been satisfied and had consequently approached the DRT. It was observed that before dismissing the winding up petition, all the secured creditors to whom KOFL owed money, should have been called by the Official Liquidator to inquire whether they wanted to step into the shoes of the original petitioner. Taking a broad interpretation of Rule 101, the Division Bench held that the Rule cannot be read as an absolute bar on the continuation of winding up proceedings, where the petitioning creditor fails to advertise the petition. Adverting to the inherent powers vested with the Company Court under Rule 9 and given the absence of a specific provision mandating that the advertisement shall only be published by the petitioning creditor, the Division Bench observed that the Company Court has the discretion to direct the provisional liquidator to publish the advertisement, where the situation so demands. In view of this, C.P. No. 179 of 2001 was revived and the Official Liquidator was directed to continue the winding up proceedings. 11. Upon examining the relevant rules and the decisions rendered by the learned Company Judge and the Division Bench, we are inclined to agree with the view taken by the latter. 11.1 By order dated 05.12.2001, the learned Company Judge had directed the publication of C.P. No. 179 of 2001 in an English and Tamil daily as well as the Government Gazette. However, despite this order, no such advertisement was made. To this extent, we agree with the Division Bench that there has been a violation of the advertisement requirements under Rules 96, 99 and 24, which are mandatory in nature [see National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279 ; Lt. Col. RK Saxena v. Imperial Forestry Corporation, 2001 CLC 1746]. 11.2 Given this failure to advertise, the option of substitution provided in Rule 101 becomes relevant. In this respect, both the Courts below have found that no other creditor or contributory expressed willingness to prosecute the original winding up petition. At the same time, as noted by the Division Bench, there are other unsatisfied secured creditors of KOFL who were not given the option to step into the shoes of the petitioning creditor in terms of Rule 101. 11.3 Against this backdrop, the crucial question that arises for our consideration is whether a winding up petition can be dismissed solely on the ground of lack of a prosecuting creditor under Rule 101, or whether the Company Court has the power to direct the publication of an advertisement by the Liquidator of the company, especially in cases where other unsatisfied creditors still remain. For answering this question, it is important to bear in mind that winding up proceedings are proceedings in rem and have an impact on the rights of people, in general. Thus, it is mandatory to advertise such proceedings, so as to ensure that they receive the widest possible publicity and all relevant stakeholders have adequate notice. This implies that in a situation where the petitioning creditor fails to advertise the petition and no other creditor or contributory comes forward to prosecute it, Rule 101 should not be read in a manner that absolutely bars the continuation of a winding up petition. This is particularly so when there are unsatisfied creditors who should have been given an opportunity to prosecute the petition, but were deprived of the same due to the failure to advertise. Indeed, Rule 101 is only limited to instances where the petitioning creditor fails to advertise the petition. However, there is nothing in the language of Rules 24, 96, or 99 to indicate that only such petitioning creditor can advertise the petition. In our considered opinion, given the absence of a specific provision mandating that the petition only be advertised by petitioning creditor, the Company Court has the discretion to direct the publishing of an advertisement to secure the interest of other creditors. In such situations, the winding up proceedings cannot be dismissed, as it would frustrate the very objective of securing the interest of all creditors. 11.4 In light of this discussion, we find that it would be unjust to dismiss the winding up petition in the instant case solely on the ground that there is no other person willing to substitute the original creditor in terms of Rule 101. Here, due to the lack of adequate advertisement of the winding up petitions, it appears that the secured creditors of KOFL were constrained to approach the DRT for recovery of their dues by filing O.A. Nos. 139 of 2001, 978 of 2000; and 14 of 2002. Further, upon learning of the decision of the Company Judge dated 04.10.2013 dismissing the winding up petition, one of the secured creditors (SBI) also approached the DRT to secure its interest. Based on this, vide order dated 13.12.2013, the DRT had directed that the amount to be returned to KOFL be attached so that the banks have an opportunity to recover their dues from KOFL. This clearly goes on to show that the secured creditors of KOFL were relevant stakeholders who were affected by the non-advertising of the winding up petition. They should have been called upon to indicate whether they would want to step into the shoes of the petitioning creditors as per Rule 101. 11.5 Clearly, the submission of the learned Senior Counsel for the Petitioner that the winding up petition deserves to be dismissed as all creditors of KOFL have been satisfied is belied by the existence of the proceedings before the DRT. The records show that the settlement of dues has only been with respect to the unsecured creditors of KOFL, which was carried out pursuant to the orders issued by the Company Judge. This is supported by the fact that the advertisement dated 24.08.2005 issued by KOFL inviting claims from recoveries made by its Administrator, was only limited to the depositors or unsecured creditors of the company.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]10. As noted supra, a Division Bench of the High Court set aside the order of the Company Court in appeal. While it was observed that the winding up petitions had not been advertised by the petitioning creditor in accordance with the 1959 Rules, it was held that it would be unjust and inequitable to wind up the company only for this reason, as there were several secured creditors (including SBI) who had still not been satisfied and had consequently approached the DRT. It was observed that before dismissing the winding up petition, all the secured creditors to whom KOFL owed money, should have been called by the Official Liquidator to inquire whether they wanted to step into the shoes of the original petitioner. Taking a broad interpretation of Rule 101, the Division Bench held that the Rule cannot be read as an absolute bar on the continuation of winding up proceedings, where the petitioning creditor fails to advertise the petition. Adverting to the inherent powers vested with the Company Court under Rule 9 and given the absence of a specific provision mandating that the advertisement shall only be published by the petitioning creditor, the Division Bench observed that the Company Court has the discretion to direct the provisional liquidator to publish the advertisement, where the situation so demands. In view of this, C.P. No. 179 of 2001 was revived and the Official Liquidator was directed to continue the winding up proceedings11. Upon examining the relevant rules and the decisions rendered by the learned Company Judge and the Division Bench, we are inclined to agree with the view taken by the latterFor answering this question, it is important to bear in mind that winding up proceedings are proceedings in rem and have an impact on the rights of people, in general. Thus, it is mandatory to advertise such proceedings, so as to ensure that they receive the widest possible publicity and all relevant stakeholders have adequate notice. This implies that in a situation where the petitioning creditor fails to advertise the petition and no other creditor or contributory comes forward to prosecute it, Rule 101 should not be read in a manner that absolutely bars the continuation of a winding up petition. This is particularly so when there are unsatisfied creditors who should have been given an opportunity to prosecute the petition, but were deprived of the same due to the failure to advertise. Indeed, Rule 101 is only limited to instances where the petitioning creditor fails to advertise the petition. However, there is nothing in the language of Rules 24, 96, or 99 to indicate that only such petitioning creditor can advertise the petition. In our considered opinion, given the absence of a specific provision mandating that the petition only be advertised by petitioning creditor, the Company Court has the discretion to direct the publishing of an advertisement to secure the interest of other creditors. In such situations, the winding up proceedings cannot be dismissed, as it would frustrate the very objective of securing the interest of all creditors11.4 In light of this discussion, we find that it would be unjust to dismiss the winding up petition in the instant case solely on the ground that there is no other person willing to substitute the original creditor in terms of Rule 101. Here, due to the lack of adequate advertisement of the winding up petitions, it appears that the secured creditors of KOFL were constrained to approach the DRT for recovery of their dues by filing O.A. Nos. 139 of 2001, 978 of 2000; and 14 of 2002. Further, upon learning of the decision of the Company Judge dated 04.10.2013 dismissing the winding up petition, one of the secured creditors (SBI) also approached the DRT to secure its interest. Based on this, vide order dated 13.12.2013, the DRT had directed that the amount to be returned to KOFL be attached so that the banks have an opportunity to recover their dues from KOFL. This clearly goes on to show that the secured creditors of KOFL were relevant stakeholders who were affected by the non-advertising of the winding up petition. They should have been called upon to indicate whether they would want to step into the shoes of the petitioning creditors as per Rule 10111.5 Clearly, the submission of the learned Senior Counsel for the Petitioner that the winding up petition deserves to be dismissed as all creditors of KOFL have been satisfied is belied by the existence of the proceedings before the DRT. The records show that the settlement of dues has only been with respect to the unsecured creditors of KOFL, which was carried out pursuant to the orders issued by the Company Judge. This is supported by the fact that the advertisement dated 24.08.2005 issued by KOFL inviting claims from recoveries made by its Administrator, was only limited to the depositors or unsecured creditors of the company16. As noted supra, the Division Bench affirmed the order of the Company Court in appeal on the basis that it would be unjust to allow the sale transaction, especially since the property in question was the only and prime immovable asset of KOFL and was to meet the demands of several secured and unsecured creditors. In light of this, it was held that the Board resolution dated 31.03.1999 was insufficient and a resolution of the general meeting of KOFL approving the sale transaction was necessary, as required under Section 293(1). The Division Bench further held that the Petitioner only had an agreement to sell in its favour, which did not accord it with any rights by itself. Moreover, since the agreement to sell provided that the possession of the property be delivered to the vendee only at the time of completion of the transaction (which would be the time of registration of the sale deed), it was observed that the transfer of possession on 06.11.2000 reflected the intention of the management of KOFL to met out preferential treatment to the Petitioner. Lastly, it was held that the Petitioner could not claim exclusion from Section 531 on the basis that the agreement to sell had been entered into before the six-month twilight period. This was done because the Division Bench read Section 531 as relating to transfers of property only, and accordingly held the agreement to sell in question is different from a transfer which only occurs through a sale deed in terms of Section 54 of the Transfer of Property Act, 1882. Thus, the Division Bench ruled that the Petitioner could not benefit from Section 531, even though the agreement to sell had been executed almost sixteen months before the winding up petitions were filed17. Upon examining the relevant rules and the decisions rendered by the learned Company Judge and the Division Bench, we agree with the conclusion of the Division Bench that C.A. No. 1208 of 2002 filed by the Petitioner for execution of a sale deed in its favour is liable to be dismissed. This is primarily because the requirements of Section 293(1) of the 1956 Act have not been met17.1 As stated supra, Section 293(1) requires the consent of the general meeting of a company in case of a sale or disposition of the whole or substantial whole of its property. It is also well-settled that the sale of an immovable property can only be effectuated through a sale deed and an agreement to sell does not transfer any right, title or interest in the immovable property [see Suraj Lamp & Industries (P) Ltd. (2) v. State of Haryana, (2012) 1 SCC 656 ; Bank of India v. Abhay D. Narottam, (2005) 11 SCC 520 ]. Given that C.A. No. 1208 of 2002 seeks execution of a sale deed in favour of the Petitioner based on a prior agreement to sell, the approval of the general meeting of the company in terms of Section 293(1) becomes relevant. Contrary to the submission made by the learned Senior Counsel for the Petitioner, this provision is applicable to the present case in view of the categorical finding by both the Courts below that the subject property is the only immovable property of KOFL. Notably, no approval from the general meeting of KOFL has been obtained. There is only a Board resolution dated 31.03.1999 permitting Respondent No. 1 to execute agreements of sale and other documents for the purpose of selling the subject property. In the absence of the requisite approval from the general meeting, the instant application for execution of a sale deed cannot be allowed as doing so would be allowing the Petitioner to sidestep the mandatory requirements of Section 293(1). Therefore, in our considered opinion, C.A. No. 1208 of 2002 deserves to be dismissed on this ground alone17.2 Be that as it may, in light of the contentions raised by both the parties on whether the agreement to sell in question amounts to a fraudulent preference, we consider it necessary to address the same. We differ with the Division Bench inasmuch as the said agreement cannot be termed as a fraudulent preference under Section 531. Under Indian company law, Section 531 of the 1956 Act (now Section 328 of the Companies Act, 2013) is the cornerstone provision that lays down the requirements for a transaction to amount to a fraudulent preference. Framed along the lines of Section 320 of the English Companies Act of 1948, it provides that any act relating to the property of a company may qualify as a fraudulent preference if two conditions are met. First, the dominant motive in the mind of the company (as represented by its directors or general body of shareholders) should be to prefer a particular creditor [see Jayanthi Bai v. Popular Bank Ltd., AIR 1966 Ker 296 ; Official Liquidator, Victor Chit Fund (P.) Ltd. v. Kanhiya Lal & Ors., (1972) 42 ComCas 196 (Del)]. Second, the said act must be undertaken during the period of six months preceding the filing of the winding up petition of the company. While the first requirement ensures that the dominant intention to defraud creditors is detected, the second ensures that there is a level of commercial certainty and finality of transactions for those interacting with the company17.3 In light of this, when we look to the facts of the instant case, it appears that the Division Bench has entirely ignored the second requirement under Section 531. Solely based on an examination of factors indicating a dominant motive of the management of KOFL to benefit the Petitioner, it went on to hold that the agreement to sell constitutes a fraudulent preference. In doing so, it has failed to appreciate that the said agreement was executed on 17.02.2000, while the winding up petitions were filed on 02.07.2001, signifying that there was a gap of over sixteen months between the two events, as opposed to the six-month period contemplated under Section 531. Similarly, it failed to consider that even the transfer of possession of the subject property occurred on 06.11.2000, which was also before the six-month period preceding the filing of the winding up petition. Clearly then, the Division Bench has erred in ignoring the time limit stipulated under Section 531 and holding that the transaction qualifies as a fraudulent preference. As noted supra, the same cannot be disregarded as it is crucial for ensuring commercial certainty for parties transacting with a company17.4 Further, we differ with the reasoning of the Division Bench that the Petitioner cannot avail benefit of Section 531 as the agreement to sell does not amount to a transfer. A bare reading of the provision shows that in addition to any transfer of property, it covers any other act relating to the property. These terms indicate that Section 531 is comprehensive and includes indirect transactions within its scope [see Manik Ratan Guin & Ors. v. Prokash Chandra Chattopadhyay, (1953-54) 58 CWN 545 (Cal)]. Thus, the Petitioner is not precluded from benefiting from Section 531 on account of non- fulfilment of the six-month condition17.5 Therefore, it is evident that the agreement to sell dated 17.02.2000 cannot be termed as a fraudulent preference under Section 53118. At this juncture, we would re-emphasize that our finding on fraudulent preference does not affect our conclusion that C.A. No. 1208 of 2002 is liable to be dismissed, as the non- compliance with Section 293(1) cannot be ignored. However, given our decision in support of revival of the winding up proceedings, we observe that even if the infirmity with respect to Section 293 is subsequently removed by KOFL, any execution of a sale deed in favour of the Petitioner in the future will be subject to the outcome of the winding up proceedings11.1 By order dated 05.12.2001, the learned Company Judge had directed the publication of C.P. No. 179 of 2001 in an English and Tamil daily as well as the Government Gazette. However, despite this order, no such advertisement was made. To this extent, we agree with the Division Bench that there has been a violation of the advertisement requirements under Rules 96, 99 and 24, which are mandatory in nature [see National Conduits (P) Ltd. v. S.S. Arora, AIR 1968 SC 279 ; Lt. Col. RK Saxena v. Imperial Forestry Corporation, 2001 CLC 1746].