Rajasthan High Court - Jaipur
Jaipur Spinning & Weaving Mills vs Podar Finance Pvt Ltd on 18 August, 2011
Author: Ajay Rastogi
Bench: Ajay Rastogi
In the High Court of Judicature for Rajasthan Jaipur Bench **
Company Application No.38/2011 in Company Petition No.10/1980 Official Liquidator of M/s Jaipur Spinning & Weaving Mils Ltd (In Liq.) Versus Poddar Finance (P) Ltd Date of Order ::: 18/08/2011 Hon'ble Mr. Justice Ajay Rastogi Mr. JP Bhatt, Senior Advocate with Mr. RC Joshi, for applicant-Poddar Finance Co.
Mr. GK Garg, Senior Advocate with Mr. Anuroop Singhi, for OL Before examining the question regarding status of appellant (M/s Poddar Finance (P) Ltd) as to whether it is contributory of M/s Jaipur Spinning & Weaving Mills Ltd (In liquidation) or not; as referred to by Division Bench vide order dt.05/07/2011, it would be appropriate to first take note of narration of relevant facts in brief.
Company Petition NO.10/1980 was filed seeking winding up of M/s Jaipur Spinning & Weaving Mills Ltd on 15/12/1980 and its winding up order was passed by the Court on 02/12/1983.
It is relevant to record that Shree Shakti Mills Ltd was a holding Company while M/s Jaipur Spinning & Weaving Mills Ltd was its subsidiary Company. Poddar Finance (P) Ltd (applicant) ("Poddar Company") is alleged to have acquired 1,65,010 equity shares each of Rs.10/- apart from 12,748 preference shares each of Rs.100/- upon a transaction of the transfer of shares of M/s Jaipur Spinning & Weaving Mills Ltd (In Liq.) ("Jaipur Company") by Shree Shakti Mills Ltd (In Liq.) ("Shree Shakti Company") for a total consideration of Rs.22,584.50p on 10/05/1979, when the Company petition seeking winding up of Shree Shakti Mills Ltd was pending before High Court of Bombay and was ordered to be wound up vide order dt.21/01/1981.
Based on transaction of transfer of shares (supra), Poddar Company (applicant) claimed that since it holds 65% shares of Jaipur Company (In Liq.), it is a contributory of Jaipur Company. However, question for consideration, as referred to by Division Bench to the Company Court, is as to whether on transfer of shares of Jaipur Company (In Liq.) by Shree Shakti Company (In Liq.) in favour of Poddar Company (applicant) on 10/05/1979, can it be considered to be a contributory of Jaipur Company (In Liq.).
It has come on record that list of contributories has not been finalised by the Official Liquidator appointed of Jaipur Co. (In Liq.) so far but the winding up order was passed by this Court way back on 02/12/1983 in Company Petition No.10/1980; in which Company Application No.4/2009 was filed by Poddar Finance Company having its registered office at Poddar Center, 85 Parel Post Office Lane, Mumbai, U/s 466 of Companies Act, 1956 ("Co. Act") read with Rr.147, 148, 149, 163 & 167 of Companies (Court) Rules, 1959 ("Co. Rules") seeking permanent stay of liquidation proceedings of Jaipur Company (In Liq.) and seeking further direction against the OL to furnish to Poddar Finance Co. (applicant) details & photo stat copies of the uninvited claims, if any, received by the OL in regard to Jaipur Company (In Liq.) apart from other prayers made therein.
However, after hearing the parties, Co. Application No.44/2009 was dismissed vide order dt.08/01/2010 - against which, Special Appeal (Co.) No.2/2010 was preferred but that also came to be dismissed vide order dt.25/10/2010 - against which, Special Leave to appeal (Civil) No. 3580/2011 was preferred before Apex Court and vide order dt.11/03/2011, the Apex Court remitted the matter on the issue as to whether Poddar Finance Company (applicant) was a contributory of Jaipur Company (In liq.) or not - pursuant to which, the matter came up before Division Bench for consideration apart from Misc. Application No.41/201 and vide order dt. 26/05/2011, the Division Bench considered it appropriate that exercise be first undertaken by the OL and the report with respect to Poddar Finance Co. (applicant) be filed before the Company Court.
After the report was prepared by the OL pursuant to order dt.26/05/2011, the Division Bench after going through the report and as agreed by the parties, vide order dt. 05/07/2011 in D.B. Civil Misc. Application No. 49/2011 in Special Appeal (Co.) No.2/2010, referred the matter to this Court for opinion on the issue and examining the report prepared by the OL after taking note of objections raised by Poddar Fin. Co. claiming status as of contributory of Jaipur Co. (In Liq.).
Report prepared by the OL pursuant to order dt.26/05/2011 (DB) was registered as S.B. Co. Application No.38/2011 wherein it has been averred that list of creditors (secured & unsecured) & workmen has been settled and the dividend has also been paid to them from sale proceeds of the plant & machineries owned by Jaipur Co. (In Liq.).
As per report of the OL (supra), the land & building of Jaipur Co. (In Liq.) is yet to be sold for payment to the creditors and in case of any surplus, if left after payment to the creditors/workmen in full in accordance with Co. (Court) Rules the return of capital to the contributories shall be considered at a later stage and list of contributories is yet to be settled.
As regards status of Poddar Finance Co. (applicant) as to whether it is a contributory of Jaipur Co. (In Liq.) or not, it has been averred by the OL in his report that Poddar Finance Co. (applicant) is claiming to be a contributory of Jaipur Co. (In Liq.) primarily on the premise that it acquired 1,65,010 equity shares on its face value each of Rs.10/- & 12,478 preference shares with a face value each of Rs.100/- for sale consideration of Rs. 22,854.50p., as per endorsement made on alleged share certificates in the name of Shree Shakti Mills Ltd about its transfer in the name of Poddar Finance Co. on 10/05/1979; and as averred in the report of OL, aforesaid shares were acquired by Poddar Finance Co. at a throw away price constituting 65% of the paid up capital of Jaipur Co. (In Liq.) which does not appear to be tenable.
After examining documentary evidence which the Poddar Finance Co. (applicant) furnished alongwith its submission, the OL in its report raised objections that the applicant company failed to furnish balance sheets ending on 31/03/1980 and 31/03/1982 which may disclose investments if made by applicant Company on 10/05/1979 and the copy of balance sheet for the years 1981 & 1983 furnished by applicant Company (Poddar) are not certified to be true copy by Registrar of Companies where its registered office is situated and which cannot be accepted as admissible in evidence within the meaning of S.610 of Co. Act and thus cannot be relied upon.
As regards subsequent balance sheets for years 1984 & onwards, the OL pointed out that the applicant Co. (Poddar) agreed in principle that it has not shown investments made in shares of Jaipur Co. (In Liq.). It has further been averred by the OL in the report that shares of Jaipur Co.(In Liq.) have not been transferred after due compliance of S.108-A, 108B & 108D of Co. Act, and without prior approval/intimation to the Central Government & the alleged shares though transfer but could not have been acquired and such acquisition of shares through transfer (supra) without prior approval of Central Government being prejudicial to the interest of Co. & public interest is not valid.
In the report, the OL averred that the shares have been acquired from the Company in same management (transferor Co. - Shree Shakti Mills Ltd (In liq.) - winding up whereof commenced as per provisions of S.441 (2) of Co. Act, from the date of filing of Co.Petition No. 308/78 from 25/04/1978, while the transfer of shares in question took place on 10/05/1979; that being so, transfer of shares (supra) was void against OL of the Co. (In Liq.) in terms of S.531 & 531A of Co. Act as well as sale of investment made by Shree Shakti Mills (In Liq.) without leave of the Court pursuant to S.536(1)(b) of Co. Act, being prejudicial to the interest of the Company & public interest, is void.
Further objection was raised by OL in his report that any transfer of shares after commencement of winding up proceedings of a Company without validation by the Court is void and indisputably, in instant case, shares were transferred by Shree Shakti Mills Ltd against provisions (supra) and that being void, does not give any right to the applicant (Poddar Finance Co.) (Purchaser) to the shares acquired from Shree Shakti Mills (In Liq.) unless statutory requirements of Co. Act being complied with and can not be held to be a contributory of Jaipur Co. (In Liq.).
During arguments, Counsel for OL of Jaipur Co. submits that applicant (Poddar Finance Co.) failed to submit any application either before High Court of Rajasthan or Bombay seeking validation of transfer of shares in question after winding up proceedings having commenced against the Company in liquidation (viz. Shree Shakti Mills) - in the absence whereof, such transfer of shares of Jaipur Co. (In Liq.) by Shree Shakti Mills (In Liq.) in favour of applicant (Poddar Finance Co.) is void and nullity in the eye of law.
Further correspondence of OL attached to High Court of Bombay (dt.02/08/2011) revealed that no sanction of validation of transfer of the shares as required U/s 536(2) of Co.Act has been obtained by applicant (Poddar Finance Co.); at the same time, the OL of Shree Shakti Mills, Bombay has filed Misfeasance Co.Appl.No.70/1986 before High Court of Bombay, claiming a deficit sum of Rs.17,08,069 from Ex-Directors of Shree Shakti Mills Ltd as being loss suffered by transfer of shares to M/s Podar Finance (P) Ltd being under-valued but it is still pending consideration.
In counter to the report of OL (supra), written objections have been filed by applicant (Poddar Co.) and in support whereof, photo stat copy of equity/preference share certificates along with balance sheets ending on 31/03/1981, 31/03/1983, 31/03/1984 & 31/03/2010 have also been placed.
Before taking note of objections raised by Counsel for Applicant (Poddar Co.), it would be relevant to record the prayer made in SB Co. Application No.44/2009 in para 11(a) ad infra:
11. The applicant therefore prays:
(a) That this Hon'ble Court be pleased to pass an order U/s 466 of the Companies Act, 1956 for the permanent stay of the liquidation proceedings of the Company (in liquidation).
Counsel for Applicant (Poddar Co.) informs to this Court that after taking instructions, the prayer (quoted supra) was given up and not pressed at this stage.
It has been contended by applicant-Co. that S.428 of Co.Act defines a "contributory", which includes holder of any shares including fully paid up shares and since applicant Company is holding fully paid up shares of Jaipur Co. (In Liq.), is a contributory.
It has further been contended that S.84(1) of Co. Act provides that a certificate under common seal of the Company specifying any shares held by any member, shall be a prima facie evidence of title of the member to such shares and thus share certificate is a declaration by the Company that the person in whose name, certificate is issued, is a share holder and the object of issuing the certificate is to enable the person to use it as proof of ownership of shares and also to enable others to act upon the certificate either for a sale/ transfer of shares which is the only documentary evidence of title in possession of share holders.
Counsel for applicant-Company (Poddar) contended that provisions of S.108A to S.108-H has no application in the instant case and at the relevant point of time, the provisions existing for transfer of shares are applied only to the Undertaking registered under MRTP Act and indisputably the transferor Co. was not governed by MRTP Act; as such S.108A to 108H of Co. Act has no bearing.
Counsel further contends that the transaction of transfer of shares acquired by applicant Co., cannot be questioned by the OL of Jaipur Company and at the best, OL of Transferor Co. could have complained regarding violation of provisions of the Co. Act if any, but OL of Jaipur Company has no locus to raise any objection regarding transfer of shares.
As regards contention of the OL about acquisition through transfer of shares by applicant-Co. being a fraudulent & in violation of S.531, 531A & 536 of Co. Act, Counsel for applicant Co. contended that the OL cannot go behind the records of the Company (In Liq.) or question its legality/validity of acquisition transaction under which the applicant Co. have purchased the shares; and so long as transfer in favour of applicant-Co. (Poddar) is not set aside by a Court of competent jurisdiction, the OL Jaipur-Co. cannot disregard it rather has to recognize the applicant-Co. as lawful owner/ transferee of the fully paid up shares and contributory of Jaipur Co. (In Liq.).
It has been contended in counter to the report of the OL that Ss.531, 531A & 536 of Co. Act can be invoked by the OL only if the property of Jaipur Co. (In Liq.) is alienated and the shares of applicant Co, (Poddar) held in Jaipur Co. (In Liq.) are not the property of the Jaipur Co. (In Liq.) but of Co. applicant (Poddar) on having acquired through transfer impugned much prior to the date of winding up order (02/12/1983) & date of commencement of winding up (12/12/1980) of the Jaipur Co. (In Liq.) and thus S.531, 531A & 536 of Co. Act has no application.
Taking note of (supra), Counsel for applicant-Co. contends that these alleged transaction can be questioned by the OL of Shree Shakti Mills and holding it fraudulent transfer being not made in good faith; while on the contrary, Co.Appl. (No.70/86) has been filed by OL of Shree Shakti Mills (In Liq.) before High Court of Bombay claiming alleged loss of Rs.17 lacs suffered on account of under-valuation of sale transaction between Shree Shakti Mills & applicant Co. (Poddar Finance Co.) and that is still pending; and OL of Jaipur Co. (In Liq.) cannot avoid such transfer transaction and has no locus to question transaction of transfer of shares by transferor Co. (Shree Shakti Mills) to transferee Co. (applicant-Poddar).
Counsel for applicant-Co. (Poddar) finally contended that once applicant-Co. held fully paid up shares of Jaipur Co. (In Liq.), it has to be declared as a contributory of Jaipur Co. for all practical purposes.
This Court has considered rival contentions of the parties and taken note of their objections and so also judgments on which either party has placed reliance. Foremost question necessarily to be addressed is :
Whether the transaction of transfer of shares acquired by applicant-Co. (Poddar) is affected by S.536, in particular, sub-section (2) of Co. Act ? And its effect, if any ?
The law is settled that in terms of S.441(2) of Co. Act, winding up proceedings are deemed to have commenced from the date of presentation of the petition seeking winding up of the Co.
It is not in dispute that company petition seeking winding up of Shree Shakti Mills Ltd was filed on 25/04/1978 - from which date, in terms of S.441(2) of Co. Act, winding up proceedings with respect to Shree Shakti Mills are deemed to have commenced; while shares of Jaipur Co. (In Liq.) were transferred by Shree Shakti Mills in favour of applicant Co. (Poddar) on 10/05/1979 and winding up of Shree Shakti Mills was ordered by High Court of Bombay on 21/01/1981.
At the same time, company petition seeking winding up of Jaipur Co. (In liq.) was presented on 15/12/1980 and its winding up order was passed by High Court of Rajasthan at Jaipur on 02/12/1983. It is also not in dispute that Shree Shakti Mills was a holding company and Jaipur Co. was 100% subsidiary company of Shree Shakti Mills and applicant-Co. (Poddar) is also under the same management, acquired 1,65,010 equity shares each of Rs.10/- & 12,748 preference shares each of Rs.100/- on transfer by Shree Shakti Mills on 10/05/1979 for sale consideration of Rs.22,584.50p., constituting 65% of paid up capital of Jaipur Co. (In Liq.).
Objection raised by the OL in the report that provisions of Ss.108-A to 108G of the Co.Act have not been complied with by applicant-Company (Poddar) while fully paid up shares were transferred during interregnum period pendente winding up proceedings, looking to the restrictions having been imposed U/s 108-H with reference to various other provisions of Ss.108-A to 108-G, may not hold good for the reason that after MRTP Act stands repealed, provisions of Ss.108-A to 108-G of Co. Act looses its legal force/compliance thereof; and in that regard, Ministry of Corporate Affairs has informed to all the Regional Directors & Registrar of Companies/ Official Liquidators vide Circular No.30/2011 dt.23/05/2011. Here this Court would like to record that Shri JJ Bhatt, Senior Counsel for applicant-Company has informed that transferor Co. (Shree Shakti Mills) was not a company registered under MRTP Act at relevant point of time while fully paid shares were transferred by transferor Co. in favour of applicant-Co.
S.531 of Co. Act relating to fraudulent preference, & S.531A relating to avoidance of voluntary transfer, being relevant for the issue, read ad infra:
531. FRAUDULENT PREFERENCE.-
(1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly :
Provided that in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months of a reference to three months.
(2) For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by the Tribunal, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual.
531A. AVOIDANCE OF VOLUNTARY TRANSFER.-
Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being the transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by Tribunal or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator.
From a perusal of S.531 (supra), it clearly emerges that any transfer of property, movable or immovable, taken or done against a Company within six months before commencement of its winding up will be deemed to be a fraudulent preference of its creditors and consequently, it is invalid. On the other hand, U/s 531A, any transfer of property, movable or immovable, not being a transfer or delivery made in ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration shall be void against the liquidator, if transfer of property both movable & immovable, is made within a period of one year before the presentation of petition seeking winding up of the Co., and the object behind it is very obvious to protect the interest of the creditors, workmen & of public interest; in that state of Co. affairs has to be protected and transfer of property movable/ immovable may not jeoparadise the interest of the company & such transaction by fiction of law, are deemed to be fraudulent.
At the same time, S.536(2) being relevant reads ad infra:
536. AVOIDANCE OF TRANSFERS, ETC., AFTER COMMENCEMENT OF WINDING UP:-
(2) In the case of a winding up by or subject to the supervision of 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.
From the provisions quoted (supra) it clearly emerges that any disposition of the property or transfer of shares in the Company shall be void unless the Tribunal/Court otherwise orders.
Ss.531 & 531A of Co. Act relates to the invalidation & avoidance of transactions having taken place prior to the winding up proceedings; but object of S.536 of Co. Act relates the avoidance of transfer etc., after commencement of winding up proceedings, so as to prevent improper disposition or dissipation of the property or transfer of shares of the Company otherwise available for distribution among creditors of Co. (In Liq.).
Basic principle is that assets of the Company are required to be made available for distribution pari passu among its creditors and no creditors should obtain advantage over his fellow creditors.
In Pankaj Mehra Vs. State of Maharashtra (2000 (Vol.100) Co.Cases 422) relied upon by Counsel for applicant-Co. (Poddar) in support of submission in regard to S.536(2) of Co. The question which arose for consideration before Apex Court was as to whether the Company can escape from penal liability U/s 138 of Negotiable Instruments Act ("NI Act") only on the premise that petition for winding up was pending at the relevant time when the alleged offence was committed. It was a case where criminal proceedings U/s 138 of NI Act were initiated and on the cheque being presented for its encashment, the drawee bank dishonoured it after commencement of winding up proceedings and the accused took defence that action being void in view of S.536(2) of Co. Act, the Magistrate was not justified in taking cognizance of offence and in continuing the process against them was bad in law. Taking note of totality of fact, it was observed that very transaction strictly cannot be held to be void but was voidable, since the provision itself shows that the word "void" is not employed peremptorily since the court has power to order otherwise. The Apex Court also observed that if any transaction is construed to be void in terms of S.536 (2) of Co. Act, in that eventuality any business would practically have to stopped if a petition was presented because it would be unsafe to dispose of any of the company's assets and that apart, any transaction having taken place in ordinary course of business and bona fide transaction carried out, would certainly hamper on being sanctioned by the Court U/s 536(2) considering it to be transaction being valid.
At the same time, it was also observed that in the matter of validating the transaction, the interest of the creditors as well as the Company would be kept uppermost in consideration and such disposition which could be validated, cannot be considered to be void transaction U/s 536(2) merely for the reason that such transaction has taken place during interregnum between the presentation of a petition for winding up and the passing of the order of winding up. In these circumstances, it was observed by Apex Court that if payment was not ab initio void, the Company cannot contend that it was legally forbidden from making payment of the cheque amount when the notice was issued by the payee regarding dishonour of the cheque. At the same time, it was observed that transaction/disposition might not be void ab initio but becomes void on passing of the order for winding up or upon appointment of provisional liquidator.
In the instant case, it has come on record that Shree Shakti Mills (Transferor Co.) was a holding company and Jaipur Company was its 100% subsidiary Co. and at the same time, applicant-Company (Poddar) are under same management and after presentation of petition for winding up of Shree Shakti Mills before High Court Bombay on 25/04/1978, transaction of transfer of 1,65,010 equity shares each of Rs. 10/- besides 12,748 preference shares each of Rs.100/- shares had taken place on 10/05/1979 - as a result whereof, applicant Co. (Poddar) held 65% of paid up capital of Jaipur Company (In Liq.). As considered by Apex Court, paramount consideration to be kept in mind is to ensure interest of creditors and of the Company which should not be defeated. In the opinion of this Court, transaction of transfer of shares impugned in same management by one Company to the other made on the under-valued price as would be evident from the fact that Co.Appl. No.70/1986 filed by OL of transferor Co., (Shree Shakti Mills) claiming alleged loss of Rs.17 lacs suffered on account of under-valuation of sale transaction, disposition during interregnum period unless validated of subject transaction of transfer of shares impugned having taken place pendente winding up proceedings U/s 536(2) of Co. Act being held by competent court of jurisdiction, applicant-Co. (Poddar) cannot claim to be contributory merely because it holds full paid up shares of Jaipur Company (In Liq.).
At this stage, Shri JJ Bhatt, learned Senior Counsel appearing for applicant-Co. (Poddar) contended that such an objection could have been raised by the OL of Shree Shakti Mils and is not available for being raised by OL of Jaipur Co. (In Liq.) in co-lateral proceedings. Such a contention does not hold good for the reason that if transaction of transfer of shares impugned has been made by Shree Shakti Mills pendente winding up proceedings, effect of S.536(2) of Co. Act can always be raised by the OL of Jaipur Co. (In Liq.).
Further objection raised by Shri JJ Bhatt that the OL of Transferor Co. (Shree Shakti Mils) has raised objections by way of filing Co.Appl.No.70/1986 before High Court of Bombay claiming alleged loss of Rs.17 lacs due to under-valuation of transferred shares, which is pending and in absence of the action being approved by High Court of Bombay regarding validation of action raised by OL of transferor Co., transfer of shares impugned in favour of applicant-Co. (Poddar) even made during interregnum period, cannot be held to be void U/s 536(2) of Co. Act, is of no substance for the reason that once subject transaction of transfer of shares made during interregnum period pendente petition for winding up and passing of the order for winding up before High Court of Bombay in the facts of the instant case (supra) unless being validated by the Court, applicant-Co. can not claim to be contributory of the Jaipur Company (Liq.).
In totality of facts of the case, in absence of transfer of fully paid up shares being validated by Court of competent jurisdiction having taken place during interregnum period pendente winding up proceedings U/s 536(2) of Co. Act, applicant Co. (Poddar) cannot be held to be contributory merely because it holds fully paid up shares in Jaipur Co. (In Liq.).
In the light of what has been observed (supra), S.B.Co.Appl.No.38/2011 stands disposed of and the matter be sent back to the Division Bench in compliance of its order dt.05/07/2011 passed in D.B. Civil Misc. Appl.No.49/2011 in Special Appeal (Co.) No.2/2010.
A copy of this order may be placed in Co. Petition No.10/1980, as well.
(Ajay Rastogi), J.
K.Khatri/p.21/ 38CoAppl2011-10CoPet1980Aug18Rsr.doc